SPEAKER_01 0:16

Okay, today, men, I want to talk about the value pillar. In fact, we're going to talk about the value pillar over the coming few couple of months to really do a deep dive on that pillar, and then of course we'll discuss all the other, the remaining three pillars as well. And today, men, I want to talk about firing bullets before you fire cannonballs, which is a term that Jim Collins uses in good to great. And the idea really is test a product, test a process before you fully commit to it. And the idea is that you do many tests and iterate until you find exactly the right answer, and then you can fire cannonballs, which means really put all economic, human, and all resources behind it to really scale a business. And we'll give you some examples today to sort of bring home that point. But I don't know if anyone listening watches Shark Tank, the show, it's a US-based show, and I think there's an Australian version as well. And Dragon's Den, I think, is what they call the UK version. Anyway, it just really surprises me that, you know, people come on, obviously. So if you don't know what Shark Tank is, it's entrepreneurs coming in to pitch for, excuse me, investment. And typically the panel of, you know, five or so people have, you know, already millionaires or billionaires. They've got plenty of money behind them and they're successful business people in their own right. So anyway, they have to pitch for, you know, to sell a certain percentage of their business for a certain amount. And it really surprises me that, you know, sometimes people come on that show where they've got no proof. You know, there's really just an idea, you know, when it comes to the question, okay, that's a good product, but how much have you sold, how much profit have you made, they turn around and go, well, zero, because we haven't even, you know, kind of pre-revenue. And to my mind, it's kind of crazy because you don't really have a business until you can actually prove that someone's going to pay the price you need them to pay for whatever product or service that you're offering. And the problem with sort of making those decisions in a vacuum, you know, talking to your friends or doing a survey or thinking, you know, your idea is the best idea since sliced bread. Unfortunately, that's sort of just based on ego sometimes or people just wanting to be kind. You know, there's a big difference between asking the question, would you pay me $3,000 for this product, versus actually me reaching into my pocket and giving you $3,000 for the product. Big difference between those two things. So that's what Maina and I want to talk about today. So take you through a process, you're giving you some examples of how you fire bullets before cannonballs. And, you know, it's really important that we build an evidence-based approach, which we talk about, you know, a lot in our business, and it certainly applies to business decisions.

SPEAKER_00 3:07

Thanks, Drew. And I think that Shark Tank example is actually pretty relevant to this podcast because we see it all the time. If someone has an idea and they're really emotionally attached to it, they think that it can really take off. But without actually any evidence, there's no distinction between if you can actually convert that product into a sale at a reasonable expected price for you to actually make a profit. And a lot of people, for example, would go to their close cohort and say, Look, I've got this idea and I think it's a great business. And you'll generally get a lot of compliments from those people around you, but it's not really evidence. It's just enthusiasm. You really need to be upfront and honest with those people. Will they actually put their hands in their pockets and pay that price for that product or service? And what I call an early adopter trap, the first people that you always pitch to that are really keen on the uptake, I'll call very trigger happy. They're not people that will necessarily come to you recurring or be repeat business for you. So building your growth case is like judging a restaurant by popularity. At the start, there's a lot of restaurant uh the a new hype around the restaurant. There's a lot of, you know, people, cues hard to get in and so forth. But that quickly fizzles if you can't keep it up, if the value proposition isn't there. So the real hard question to ask yourself is is someone actually paying for your product or service on a recurring basis without you having to discount it? If you are, then it's a great value proposition and you might have a business there. But if you're constantly discounting your product or service just to get cash through the door, not that's not a viable business. So then the question then lies is if you don't have the value proposition, what's the diagnosis? If the offer isn't landing, where exactly is it breaking?

SPEAKER_01 4:47

Exactly right, Mania. You've got to work out why the offer isn't really working. And unfortunately a lot of founders don't do that. Instead, they tend to sort of throw more marketing dollars or effort towards it, which is, you know, just a waste of potentially time and money. Well, not potentially, it's a complete waste of time and money, unless you really work out why the offer is failing. So it can be because the segment or target customer is wrong. It could be the offer itself is failing, or maybe it's the messaging. And typically it falls into one of those uh three categories. So segment really and target market really talks about or refers to you're targeting the wrong potential customers. And Segway, you know, those sort of things that you stand on and drive around. Segway, when they launched, you know, it was an amazing technology. They received a lot of press and public attention. You know, really the launch process was fantastic, but there wasn't a lot of take up of the product. You know, people couldn't really work out, okay, that looks fun and it's interesting, but you know, how do I use it? And it wasn't until they found some commercial applications. So police patrols, warehouse operations, tourism companies using the product. So they eventually found their segment where they needed to target or where their core business is. Now, of course, there's gonna be one or two just people just driving riding segues around, but that's not their core market. So it's a good example of really understanding who's gonna use your product. You might have a fantastic product, but if you're pitching it to the wrong audience or your audience is too broad, so it doesn't cut through, of course, you're always gonna have a challenge in that regard. The next one was is an offer problem. So that's where the your offer doesn't really meet the market, either because of pricing or because of the value that you're delivering. So a good example, and you probably haven't heard of it, is a business called Quibi. They launched in 2020. It was a short video messaging service. So, you know, think like Snapchat, for example, they raised nearly 2 billion US dollars. And wait for it, their business only lasted six months. And the reason it didn't work is because they were they were offering a subscription, so there was no free option, and it only worked on phone. So people were sort of left wondering, well, what what are what are they offering that YouTube, TikTok, Snapchat, and so forth offer for free? And so their offer really didn't land and it really didn't find a target audience. Or it could be a messaging problem. And this is particularly relevant where you've got a new product or service or business. You know, you're mapping out kind of a new space because of course, if it's a traditional industry or traditional product or service, you probably don't have a messaging problem. People probably already know, you know, what you're selling. So I remember this being an issue when I started ProSolution back in 2002 on the Eastern Seaboard, you know, no one really knew what a mortgage broker did. And you had to really explain, well, why would you go to a mortgage broker? What are the benefits? It's et cetera, et cetera. You don't have to do that today. Another example is Dropbox. You know, when they launched, they really struggled to get traction because, you know, people didn't really know at that stage what cloud storage was. They didn't, I mean, at that stage, people didn't even know what cloud meant, let alone how that they would need to use it or how they could use it in their day-to-day application, whether personal or business, and the advantages of using it. And so Dropbox tried to explain this in a sort of traditional format, you know, on a website with text. And it wasn't until they recorded a video that went viral that people then really got it and really understood how Dropbox was able to use. So, of course, these three different challenges messaging, offer, and customer cohort or segment require three different solutions. So that's why it's so important to really nail down to understand where it's not working. And this is by the way, this whole today's episode isn't about if you've got a business, product, or service segment that's completely failing. It's also about optimizing as well. So you might have, you know, your messaging, your offer, your customer segment might be 80% right, but how do you get it 100% right? How do you really get that cut through? Mina, how do we drill down if we identify or to help us identify what is causing the problem, which of these three elements is not right, or maybe it could be all three, unfortunately. How do we drill down and find out what's causing the lack of traction in the market?

SPEAKER_00 9:32

Sometimes it's a hard truth, I think. It's sometimes you need to be quite honest with yourself that the value proposition actually isn't there. It could just be a market segment issue as well. So, for example, it could be just the message of what you're trying to offer. Product the product could genuinely be good, but you're not marketing it well. Or the value, the value of that product or service is just materially not right compared to your competitors out there. So you really need to understand the mechanics of the offer and what you're trying to achieve. Now, some business owners might, for example, think that scaling is the issue, or scaling will fix the issue, I should say. So, for example, you could have a website that generates leads, but it's actually not converting. You're only getting getting conversion once you actually spend the time to sit with someone and actually convert them there and then. Now, that I call is a messaging issue because what ends up happening is you're not explaining it well enough on the website for you to actually convert the sale or product service there and then. Now, if you're in a service-based business, probably pretty common for you to need to spend the time first to actually convert that product or service sale. But if you're in a product-based business and you need to sit there explaining the benefits of your product every time you make a sale, then that's a message signal issue. So that's something you really need to focus on. Now, as we said in the last podcast, it's not about trying to fix four issues at once. It's understanding which bucket you land in and fix that fast and cheaply. Guessing for another six months or trying to fix all at once is an expensive option.

SPEAKER_01 11:02

Thanks, man. And now let's talk about some ways of sort of testing the market and how you can gather that data. So you don't need to do a full product build-out necessarily, and you don't necessarily need to spend a lot of money and time. You just want to try and test the market as efficiently and as cost-effectively as possible. So you can do a small trial like a Kickstarter campaign. For example, Pebble Smart Watch, they launched a Kickstarter and, you know, they raised over $10 million in one month. You know, there's these unicorns out there, but they didn't even build the watch. You know, they just communicated what they wanted to build and, you know, what the price would be, what the specific promise was. And all they asked is for people to sort of pay for just one unit to get it. So it's not really about, you know, go and run a crowdfunding campaign. That's not what I'm saying. It's really about just trying to test the market as fast as possible, as cheaply as possible. Pebble watch, smartwatches, by the way, now turn over $230 million US or something like that. So it's certainly, you know, you can certainly see how the Kickstarter campaign demonstrated there was a strong level of demand for the product at that price point. Otherwise, you can run a small pilot with existing customers. I know a financial services business in Melbourne and they wanted to really understand how they could help their clients with cash flow management. And so what they did is they picked sort of 20 clients. They worked with them for two years. I think they charged them something like $6,000 in total, so $3,000 a year. And they worked with them to really find out how they can help people with their cash flow. You know, I think it was like a 50-50 proposition that 10 clients didn't actually do anything. You know, they were probably in a worse-off situation. Well, certainly worse off since of paying the fees. And 10 clients really engaged in the process. And I think the founder of that business was telling me three people ended up getting divorced. So I don't know if you call that success or not, probably not. But what they learned, though, from that exercise was really valuable. They really understood, you know, what's preventing people from being able to manage cash flow better. And so, you know, and what sort of tools people used and how to reduce friction in that process and so forth. But that pilot gave them absolutely invaluable information. And I think, yes, they charged fees, but I think the amount of time they spent on it, it wasn't a profit-making venture, but it certainly gave them enough information to be able to build. Ultimately, what they're doing is now building a technology product around helping people manage cash flow better. The third thing you can do is testing price, you know, and the the pricing, we've talked about this in the podcast many times. Pricing is an incredibly important decision. And it's not really what you are most comfortable charging, it's really what is most economical. Now, you know, it's not about ripping people off either. Of course, it's about a fair exchange of value. But if I, the customer, are seeing, say, $10,000 worth of value and I'm absolutely convinced, there's no point charging me $2,000 for the product because you're just undervaluing what you're doing. And of course, it's it's also linked to making sure you've got the right cohort too, which is, you know, the segment problem, because there's no point building a message to people that only see $1,000 worth of value because they're not going to pay you $2,000. You're better off to message those people that see a lot more value. But mucking around with price and testing price is incredibly important. It's something that Netflix has done, you know, substantially. So what they do is they play with their prices in different markets, different geographical markets, different tiers, and they measure sort of conversion rates and churn. And they do that over time and then they find the right price point. And I guess the right price point for them is, you know, what's going to generate the most aggregate value of dollars, of course, because they'd rather have, you know, a million subscribers at a high price point than two million subscribers at a very low price point. Now it's easy for them to do that as an online business, really easy. They've got a big data set. But as smaller businesses, we can certainly do that as well in terms of pricing and find that sort of price discovery process to find where is that, where is that perfect point, depending on the cohort and the type of product that you're delivering. So, in order to do this, it's really about taking a discipline approach. You want to try and test a market as efficiently and as fast as possible. So, you know, think about kind of a testing window. It doesn't need to be a year, doesn't need to be like a two-year trial like that financial services business. It could literally be just a couple of months. And just change one thing at a time. Don't change, obviously, lots of different variables. And then also identify, you know, what are the metrics that you need to measure to be able to test, you know, whether that variable made a difference or not. But this is the thing. I mean, a lot of small businesses go on gut feel or experience or founder experience. And the problem with that is that desires and preferences and so forth tend to change over time as markets change, as technology evolves, as uh customer demands or desires evolve. So using evidence and building evidence and doing these tests and finding where you can really, I mean, sometimes if you can end up sort of improving your top line revenue growth by, say, 10 or 20%, it drops to the bottom line, it has a huge impact on the profitability of a business.

SPEAKER_00 16:36

So it's a bit of an honesty problem that you got to have with yourself. Founders are the worst judges of their own business or their own offer. You're too emotionally invested to see it clearly. It's like almost asking a parent objectively to rank their kids' talent performance against other kids' performances in schools. It's not, it's not, it's too hard for a parent to be objective about that. So you really got to segment the signals within your business and be really truthful with yourself. Understand whether you have the wrong or right audience with no urgency. So whether they are coming to your business and willing to spend that money, put their hands in their pockets and actually spend money for your product or service. If there's a long decision cycle in your business, then that's a bit of a problem because your conversion cycle is very quite slow and you might have already committed resources and committed time to that product or service and you can't get the cash through the door. Or it could be an offer problem where the deal itself doesn't stack up. And this also relates to things such as customizing your offer just to appease the person or the customer in front of you. Now, if you're always going to customize your offer and you can't get any sort of scale in there, then you're going to end up with a team that have misaligned values or misaligned messages, and you're going to impact your margins, you're going to impact the offering because it's always going to be compromised and you can't actually convert the cycle. It's almost like a restaurant, like I've mentioned in previous podcasts, offering too many offers on the menu just to appease everyone. That's not a good offering. It's a business that will quickly die. Now, lastly, it comes down to message as well. Are you messaging the right people? Do you have the right to offer for the right cohort of people that you're trying to target? But what scaling can do is just photocopy it and it can create a real big cash flow issue for you if you're not getting the right margins in the business. So, for example, a business that isn't converting leads well at a small scale might hire a few people to fix that issue and double up an ad spend. But now what's happening is you're just burning cash, just acquiring more resources and trying to improve your reach. However, you actually haven't fixed the core issue of your value proposition. You haven't actually fixed the message behind whether your product or service works at the price point that you're offering. You need to sit with yourself and have a hard conversation and understand whether you're just too emotionally attached to the product or service for you to actually make a right call on whether this it will actually work or is a viable business for you to proceed with. So once you know which bucket you fall in, which pillar you need to work on, the fix should be fast and cheap. It shouldn't be another six months of throwing resources at it or throwing ad campaigns or anything like that. It should be quick and easy for you to fix and for you to actually improve your cash conversion cycle.

SPEAKER_01 19:14

So, really to sum up, what we wanted to communicate today was really we shouldn't put another dollar into reach. So marketing headcount in terms of people or delivery capacity, in terms of building out our operational capacity until we have enough evidence that demonstrates that our target customers want to pay our target price and we're able to deliver that product or service at our target margin. We're not trying to measure interest. We're not trying to measure, you know, whether customers will buy at a discount. Remember, we really want that target price. And really, if you can't convert a small group of target customers at that price and deliver at that margin, then you really need to go back to your business strategy and kind of reinterrogate it, if you like. And we can see this work in real life. If you think about Amazon again, Amazon ran at a loss for a long time, but Jeff Bezos proved the economic engine. And so we've talked about Jim Collins's flywheel and how Amazon did that. It was more offerings at lower prices. That increased customer visits to the website. That customer traffic attracted more third-party sellers, which then allowed them to expand their store, then their number of products and their distribution. And so more products, more revenue, then meant we've got more income to cover fixed costs. And therefore, because we've got leverage and scale, we can offer more products at lower prices. Again, more customer visits, more third-party sellers, greater product suite or product offering builds more leverage into the business. And around and round the flywheel went. But the important thing is that Bezos proved that strategy. Is to, it's not about only dealing with failed products or services, or it's really about optimizing. And I think it's something that it's not something that necessary businesses need to do at the start, only at the start. It's something that is worthwhile reinterrogating as your business grows and scales to really optimize the outcomes. So to leave you with, you know, something to really think about or reflect on your business, what what tests could you run in your business that might give you better insight into customer behavior, pricing, these sorts of things? Maybe pick a customer segment or a product that you think isn't gelling perfectly right. Decide on a finite time timeline and then run those tests and see what you get. Remember, you have to optimize value before reach and reach before engine because of course, value before reach because there's no point going out marketing if you don't have the right customer promise. And then reach before engine because there's no point building out your engine if you can't feed more prospective clients in there. And engine before team, because again, there's no you don't need team members until you've got an engine for them to run. So hopefully, as we build out this vert fly wheel methodology with you over the coming weeks and months, hopefully we'll be able to help you. We'll certainly be able to share tools and practical tools to help you improve your business. So there we go. That's about don't scale until you actually have the evidence. Or as Jim Collins puts it, fire bullets before cannonballs. Until next week, bye for now.