1-Page Summary

In The Personal MBA, bestselling author Josh Kaufman offers a comprehensive overview of how businesses work. He argues that there are five key processes underpinning every business—creating value, marketing, selling, delivering value, and managing finances—and suggests ways to optimize them for successful results.

(Shortform note: The number of key processes underpinning every business is debatable. While management experts agree that Kaufman’s five processes are common to all businesses, they argue that different types of businesses rely on additional key processes depending on what they offer and their industry. For example, risk and compliance processes are essential for a business operating in a highly regulated industry, such as finance, but aren’t as necessary for businesses operating in less regulated industries, such as fashion. Understanding specific industry requirements will give you a clear idea of what additional key processes you need to manage to make your business a success.)

This guide discusses Kaufman’s advice for managing these five processes in four parts—we’ll explore his thoughts on managing the fifth process, finance, throughout the guide:

Part #1: Create Value That Satisfies Needs

According to Kaufman, the first process a successful business must focus on is providing something valuable to trade. In this first part of the guide, we’ll explain the five basic needs underlying all of the different things that people want. We’ll also clarify how people determine the value of products and services and the different ways businesses can provide services that seem valuable. Finally, we’ll discuss why it’s necessary to research the profitability of potential products and services before developing them.

People Want to Fulfill Their Basic Needs

While people appear to want many different things, Kaufman argues that they all make purchases in an attempt to fulfill five basic needs:

  1. To feel good about themselves: This includes enhancing their well-being, appearance, and status and satisfying sensory desires.
  2. To connect with others: This includes engaging in romantic, platonic, and professional interactions, both online and offline.
  3. To grow and learn: This includes increasing academic or professional knowledge and pursuing interests and hobbies.
  4. To feel safe: This includes protecting themselves, their loved ones, and their possessions from potential threats.
  5. To avoid effort: This includes eliminating tasks that take up too much time and energy or those that require specialized knowledge or resources.

Schools of Thought on What Motivates Us to Want Things

Kaufman’s discussion of needs doesn’t explain how we prioritize fulfilling them. According to psychologists and marketing specialists, this is essential to understanding the motivations and timing of underlying consumer decisions. Combined with Kaufman’s list of needs, the following four theories will help you understand two things: why we want the things we do and how we prioritize those needs and desires.

Alderfer’s ERG Theory

This theory groups our basic needs into three categories and prioritizes them as follows:

Maslow’s Hierarchy of Needs

This theory suggests that our needs fall into one of five levels and prioritizes them as follows:

Murray’s Psychogenic Needs

This theory divides basic needs into two categories: Primary needs concern our survival requirements and biological demands, such as the need for food and water. Secondary needs concern our psychological well-being—they fall into five categories: ambition, materialism, power, affection, and information.

Self-Determination Theory

This theory claims that there are three core needs underlying our desires: autonomy—the need to feel like we’re in control, competence—the need to feel like we’re doing well, and relatedness—the need to experience meaningful relationships with others.

How People Judge the Value of Products and Services

Kaufman argues that people’s needs shift according to their circumstances—they’re receptive to different offers at different times depending on how relevant these offers are to their situation. For example, someone who’s happily married is less likely to see the value in services that facilitate romantic connections and won’t be as receptive to these services as someone who’s just been through a divorce.

Further, Kaufman argues that even if people would like to improve or change their circumstances, they’ll only be receptive to offers that claim to help them if they’re uncomfortable with their current situation. This is because people are more motivated to move away from discomfort than they are to move toward comfort. So, if they're comfortable with their situation, they won’t feel compelled to introduce changes into their lives. However, if they’re uncomfortable, they’ll be motivated to seek solutions to find some relief.

For example, if the recent divorcee would like to date but is currently comfortable being single, she won’t be motivated to seek out a partner. As a result, she’ll be less receptive to dating services than someone who hates being single.

Even when people are receptive to your offer, they won’t consider purchasing it until they’ve assessed how valuable it is to them. According to Kaufman, people judge the value of products and services in two ways:

Various Factors Influence Receptivity and Perception of Value

While Kaufman’s ideas about motivation, receptivity, and value are valid, they offer only a partial, surface-level view of what influences people’s buying decisions. Marketing experts expand on his thoughts with a more in-depth explanation of what influences consumer decisions. They identify four influential factors to help you better understand how different people judge the value of different offers.

Individual factors: This includes a person’s occupation, age, economic status, lifestyle, personality, and preferences. For example, the recent divorcee wants to find love but isn’t receptive to dating services because she’s worried about how much it will cost, believes that she’s too old, or would prefer to meet someone without using an intermediary.

Psychological factors: This includes their drive to meet a certain emotional need, such as comfort, how susceptible they are to external influence, how skilled and knowledgeable they are, their attitudes and beliefs, and their prior experience with similar products and services. For example, the recent divorcee might devalue and automatically ignore dating services because she doesn’t know anyone who’s successfully found love through them.

Social factors: This includes what their culture, social class, religion, family, or the type of people they want to associate with think about the products and services in question. For example, the recent divorcee might want to sign up for a dating service but fears how her family will judge her.

Cognitive factors: This includes how willing they are to expose themselves to new and relevant information so that they can think objectively. For example, the recent divorcee might assume that she’s right about how useless dating services are and choose not to proceed. Or, she might engage in research so that she can make a more informed decision.

Businesses Align Offers With What People Want

Now that you know the basic needs that motivate people to make purchasing decisions, let’s look at the many different ways businesses can provide services to meet these requirements. Kaufman suggests eight ways for businesses to fulfill one or more of these five basic needs.

  1. Create or buy products to sell: This involves creating or buying something tangible and keeping enough inventory to fulfill customer demand. For example, design and manufacture toys or purchase premade toys in bulk to distribute and sell.
  2. Offer services for a one-time fee: This involves providing specialized skills and abilities and often requires additional employees to fulfill customer demand. For example, charge a fee to edit a manuscript or repair an engine.
  3. Create an asset and charge for access: This involves creating a single shared resource that multiple people can benefit from at the same time. For example, build a cinema and charge multiple people to view one screen.
  4. Supply products and services for subscription fees: This involves building a customer base and providing ongoing benefits for a recurring fee. For example, offer regular pool maintenance for a pre-arranged monthly payment.
  5. Rent out physical property: This involves acquiring and maintaining an asset and charging people to use it for a set period of time. For example, lease your garage as storage space and charge for the length of the tenancy.
  6. Provide a brokerage service for commission: This involves acting as an intermediary between sellers and buyers and negotiating fees based on the value of the sale. For example, match employers with job seekers and charge a percentage-based fee of the hiring salary.
  7. Create and monetize attention: This involves creating value to attract the attention of an audience and then selling access to that audience to a third party. For example, attract attention to your blog by offering valuable information and then sell ad space for additional revenue.
  8. Lend money or offer insurance: This involves capitalizing on financial assets by offering funds or risk-protection in exchange for a fee. For example, offer financial loans and charge interest or offer credit or warranty options for your products and services.

How You Sell Depends on What You’re Selling and Who You’re Selling To

Alexander Osterwalder and Yves Pigneur (Business Model Generation) add context to Kaufman’s eight ways of providing value by explaining that business ideas fit into one of five different markets—each requiring a specific marketing and sales approach to achieve successful sales. However, there isn’t one set market for each business idea—it depends on the nature of the product or service you have to offer and what type of customers it appeals to.

Once you’ve decided which of Kaufman’s eight approaches are best for your business, consider which of the following five markets best suits your specific offer. Or, if you’re looking for a business idea, choose a market based on which strategy most appeals to you. Then, focus your research on products and services that fall into your chosen market.

Mass Market: You’re selling to one large customer base with similar needs—you need to appeal to and engage as many people as possible. For example, Colgate (a product-based business) benefits from advertising in the mainstream media because toothpaste is an essential, widely-used personal care product that everyone needs.

Niche Market: You’re selling to a small customer base with unique requirements—you need to target these specialized needs. For example, Lush (a product-based business) targets customers who care about vegetarian products and eco-friendly practices, so its social media strategy focuses on engaging “green” consumers.

Subdivided Market: You offer slightly different products and services, so you need to employ different approaches to meet customer needs. For example, an estate agent’s customers each have different budgets. The estate agent (a brokerage-based business) may spend more time and resources attracting and developing relationships with wealthy clients looking to buy and delegate management of lower-income renters to employees.

Diversified Market: You offer distinctly different products and services to unrelated customer groups, so you have to employ separate customer targeting strategies. For example, Johnson & Johnson (a product-based business) provides healthcare products to consumers as well as medical devices and equipment for hospitals—both groups have unique needs.

Multi-Sided Market: You serve interdependent customer groups so your approach needs to appeal equally to both parties. For example, online marketplaces (an attention-based business) need to appeal to and accommodate both buyers and sellers to operate efficiently—they can’t serve one group without the other group’s active participation.

Evaluate Potential Products and Services Before Investing in Them

According to Kaufman, successful businesses engage in research and rigorously test the viability of potential products and services before they commit to developing them. This process helps them test their assumptions about how profitable the venture will be and prevents them from investing time and resources in projects that won’t pay off.

Kaufman suggests asking yourself five questions before developing potential products and services:

Question #1: How Much Will It Take to Get It Out There?

Consider how much time and money you’ll need to invest to create, market, and distribute your product or service. What resources will you need? How much research and development will it take to get it right? Estimate both your fixed costs, such as rent and salaries, and your variable costs, such as supplies and usage-based utilities.

Guidance on Assessing Your Resource Needs

If you’re unsure where to start on this question, Osterwalder and Pigneur (Business Model Generation) offer more in-depth guidance on assessing your resource needs. They suggest three steps:

First, outline all of the resources you need to create and deliver your offer to your customers. All resources fall into the following categories:

Second, define the resources that you don’t currently have and make a plan for acquiring them. Will you attempt to own, lease, or borrow them?

Third, once you have a clear idea of all of the resources your product or service requires, outline your expenses. Your expenses will include at least one of the following characteristics:

Additionally, all of your costs will fall into two categories: Direct costs—specific expenses related to your offer, such as paying to manufacture your product—and indirect costs—general costs that keep your business operating such as paying rent, utilities, and salaries. Knowing the difference between these costs will help you to identify your overall business expenses.

Question #2: How Will You Finance It?

Consider if you’ll need to borrow money and what risks this will involve. If you intend to seek out investors, how much control will you lose and how will this affect your business decisions?

The Pros and Cons of Seeking Loans and Investors

If you’re not sure what the benefits and risks are of borrowing money or seeking investors, the following advice from financial experts will tell you what you need to know about these two common sources of funding.

The advantages and disadvantages of taking out a loan: Loans offer three main benefits: They’re easy to apply for, the interest payments are tax-deductible, and they improve your credit score when you maintain repayments.

However, they also include many drawbacks: They require personal assets as collateral, you have to pay back the loan plus interest even if your business fails to generate revenue, and you’ll pay higher interest rate for each additional loan you take out—because the more money you owe, the lower your credit score and the riskier you appear to lenders.

The advantages and disadvantages of relying on investors: In addition to providing large amounts of capital, experienced investors offer three main benefits: They provide valuable support and advice, networking and collaboration opportunities, and publicity for your business.

However, finding investors is a long and difficult process. Further, managing to secure investors comes with costs: You have less control over your business decisions—the more money you raise, the more equity you have to share with your investors. You’ll also be under pressure to rapidly scale your business so that investors receive a return on their contribution. Moreover, you’ll have to follow complicated procedures, such as setting up a board of directors to govern your business.

Question #3: How Much Demand Is There?

Consider how many people would want your offer and how much they’d be willing to pay for it. Calculate how many sales it will take to recoup your investment and make a profit.

How to Research Market Demand

Marketing experts offer practical advice to help you come up with concrete answers to Kaufman’s question.

First, adopt the following three strategies to gather relevant data on market demand for your product or service:

Second, consider how demand for particular products and services can fluctuate according to various factors so that you can understand shifts in the data—for example, why interest in your offer peaks during certain months.

Question #4: How Much Competition Is There?

Consider how your product compares to what competitors are offering. The more competitors there are, the more you’ll need to differentiate your offer and battle for customer loyalty.

How to Analyze the Competition

Business experts expand on Kaufman’s ideas by explaining that you should specifically seek out your competitors’ strengths and weaknesses. They suggest four ways to learn more about the competition:

Use this information to refine your idea until it matches or outperforms what’s currently on the market. For example, if you notice that your competitor is slow to respond to customer concerns on social media, plan ways to strengthen your own social media approach so that you can provide better customer service.

Question #5: How Much Potential Is There to Expand Your Offer?

Consider if there are ways to build on your offer to generate future sales and profit from your investment. Can you adapt your offer or provide complementary products to fulfill additional needs?

(Shortform note: Business experts offer additional insights into why you should start planning ways to expand your offer. Your current business idea is likely to appeal to one type of consumer with specific needs. If you offer variations or complementary products and services, you’ll inevitably attract a wider range of consumers. This will increase your overall sales, provide financial stability, and allow you to compete more strongly in your industry.)

Overestimate the Risks of Proceeding With Your Idea

According to Kaufman, when you’ve come up with a product or service that you’re excited about, it’s often difficult to think about it objectively. This is because your eagerness for it to work prompts you to gloss over the five questions and unintentionally ignore any information that doesn’t support its success. As a result, you underestimate the risks involved and find yourself unprepared to turn your idea into a profitable venture.

However, Kaufman notes, if you intentionally look for reasons why your idea won’t work—by overestimating the requirements and risks of proceeding with it—you’ll be able to make more accurate plans that help you to succeed.

(Shortform note: Disaster avoidance experts suggest a practical way to withhold your excitement, objectively assess all relevant information, and identify potential risks: Imagine that your business idea has already failed and that you’re thinking about it retrospectively. Write out all of the plausible reasons for this failure. For example, the product was defective or the marketing department failed to attract attention. Then, brainstorm ways to solve these potential problems and integrate your solutions into your current business strategy.)

Part #2: Entice Attention

Once a business has something to offer, the second process it needs to focus on is attracting attention and appealing to potential customers. In this section of the guide, we’ll touch on why it’s important to tailor your marketing approach to people who’ve already expressed an interest in your offer. Then, we’ll discuss how to make your offer as appealing as possible.

Identify People Who Might Be Interested in Your Offer

Kaufman argues that people are busy and their minds are always preoccupied with something. With so many demands competing for their attention, they tend to make quick decisions about what’s relevant to them and worth their time. This means that they automatically ignore unsolicited advertisements related to products and services they have no interest in purchasing.

(Shortform note: Charles Duhigg (The Power of Habit) sheds light on why people make quick decisions about what advertisements are relevant to them. Your brain seeks out ways to avoid information overload so that it can function efficiently. It achieves this by creating automatic routines and decisions based on what you do or pay attention to most often. These stored patterns allow you to get through your day without having to pause and consciously think about everything you do—they account for more than 40 percent of your daily decisions and behaviors, including what advertisements you pay attention to.)

So how can businesses get people to notice what they’re offering? According to Kaufman, successful businesses don’t waste time or resources trying to get attention from people who have no interest in what they have to offer. Instead, they target people who’ve already expressed an interest in similar offers and focus their marketing efforts on converting these people into paying customers.

(Shortform note: Osterwalder and Pigneur (Business Model Generation) suggest an alternative approach to targeting potential customers: Define the customers you intend to target before you work on developing your offer. This way, instead of developing an offer and hoping you’ll find interested customers, you can design your offer around customers with specific needs and simultaneously develop your marketing and sales strategies to effectively target them.)

Persuade Them to Want What You’re Offering

After identifying people who might be interested in the product or service, successful businesses focus on making their offer as attractive as possible to these potential customers. Kaufman suggests four ways to achieve this.

Keep your message short and direct: Just because people are interested in your offer doesn’t mean they have unlimited attention to devote to your content. If your marketing message doesn’t get to the point, people will lose interest.

(Shortform note: Research backs up the necessity of getting to the point in your marketing: The average attention span is just 8.25 seconds—if you don’t engage people’s attention within this time, they’ll automatically switch their attention to something else and you’ll lose your chance of appealing to them.)

Pay attention to when potential customers are susceptible to your offer: Even if people are interested in what you have to offer, they’ll only pay attention to your content when it suits them. For example, they may willingly engage in your content when they’re shopping online but might block your content if you spam their browser with advertisements while they’re working.

(Shortform note: How can you find out when your customers want to hear from you? Management experts suggest that you can achieve this by tracking, collecting, and integrating data—such as demographic, psychographic, or clickstream—about potential customers and the circumstances in which they make purchases of similar products and services. This will help you to tailor your offer to suit the preferences of individual customers.)

Provoke a positive emotional response by clarifying the benefits: Clearly demonstrating the benefits of your offer encourages people to imagine how good their lives will be after accepting the offer. It also makes them feel like they’re missing out as long as they don’t have it. One way to do this is to offer free samples or trial periods so that potential customers can directly experience the benefits of your offer.

(Shortform note: While it’s true that free samples and trial periods offer a way to experience the benefits of your offer, people are unlikely to feel emotionally engaged or sign up for these free trials unless they feel like they need those benefits. To provoke this feeling of need, the authors of Positioning suggest over-simplifying the value you intend to offer so that your customers can immediately understand the benefits they’ll receive. For example, if you offer a professional cleaning service, focus on a simple benefit your customers get from using your service—they get to come home and relax knowing that all of the chores have been taken care of.)

Make use of endorsements to establish trust: When people see someone they like or respect advocating your offer, they automatically take notice. Additionally, they subconsciously transfer their positive feelings about this person to your offer: “If so and so’s representing this, it must be good.”

(Shortform note: Because they help to establish customer trust, endorsements also increase a company’s sales by an average of 4 percent. Marketing experts suggest that effective endorsements hinge on two factors: First, how well you know your potential customers’ interests—this guides your decisions about what type of endorser to look for. For example, if you know that your customers care about the environment, you’ll look for someone who has already expressed an interest in similar issues. Second, how authentic the endorsement seems—the easier it is for people to believe that the endorser actually uses your product or service, the more authentic and appealing it will be.)

Part #3: Encourage Transactions

After appealing to potential customers, the third process businesses must focus on is securing sales so that they can recoup their investment and make a profit. In this third part of the guide, we’ll first explore tactics businesses use to encourage sales. Then, we’ll discuss different strategies for determining your prices.

Customers Feel No Sense of Urgency to Hand Over Their Money

Once a business has caught the attention of potential customers, it’s in their interest to complete transactions as quickly as possible. Otherwise, short attention spans coupled with the desire to keep options open influence these people to drift away. However, while businesses want to make sales as quickly as possible, Kaufman argues that customers don’t feel this same sense of urgency. They often have a range of alternatives to explore and want to take time to ensure they’re getting the best value for their money.

(Shortform note: Research clarifies why people prefer to keep their options open instead of completing transactions. Browsing for products online or window shopping involves anticipating what it would be like to have all of these different things in your life. This process releases dopamine (the hormone that makes you feel good) into your bloodstream and increases your desire to seek out even more things that make you feel good. However, this dopamine hit stops the moment you stop imagining multiple possibilities and commit to one possibility. In other words, it feels more pleasurable to think about buying things than to actually buy them.)

So how do businesses encourage people to hand over their money before they lose interest? According to Kaufman, they achieve this in two ways.

(Shortform note: As an online shopper, you’ve probably noticed and fallen prey to three additional tactics employed by businesses seeking immediate transactions: using words that imply urgency, such as “subject to stock,” simplifying the purchasing process to make it as easy as possible—for example, Amazon’s “buy with 1-click” button, and suggesting that you can pay in installments—which makes their offer appear more affordable.)

How to Price Your Offer

When pricing offers, businesses need to strike a balance between providing a fair price to customers and making a profit. Kaufman suggests four different ways to achieve this balance and determine the price of your offer:

Manufacturing cost + profit: Work out how much your offer costs to produce and add on how much profit you want to make per sale. For example, your product costs $20 to create and you want to make a 10 percent profit for every sale so you set the price as $22 ($20 + 10%).

Comparative pricing: Work out the average price that offers similar to yours are selling for and set your price accordingly. Setting a lower than average price attracts more customers but it may also signal that your product or service doesn’t offer as many benefits as what’s currently on the market. Alternatively, setting a higher than average price signals that you're offering something superior to what’s currently on the market. This approach attracts fewer customers but results in more profit per sale.

Price based on long-term value: If you’re selling an asset that will produce ongoing income for your purchaser, set the price according to how much you expect this asset to earn over a set period of time. For example, you’re selling a franchise and expect it to earn $3,000 a month over a period of 10 years. You set your asking price for $360,000 ($3,000 x 12 months x 10 years).

Price based on subjective value: People value products and services in different ways depending on their specific requirements and how beneficial the offer appears to be—the more an offer appears to meet their specific needs, the more people are willing to pay. Determining how much your offer is worth to the people who value it the most will allow you to set higher prices. For example, a seasoned marathon runner will value high-grade running shoes more than someone who only goes for occasional runs.

Other Factors to Consider Before Pricing Your Offer

According to Osterwalder and Pigneur (Business Model Generation), before applying one of Kaufman’s four pricing methods, you first need to consider two important factors that will have a massive impact on your profit structure: What type of transactions you’ll apply and whether you’ll offer fixed or variable prices.

They explain that there are two ways to make a profit: single transactions (selling a house) and subscriptions (leasing a house). You can apply both profit sources in the same business—for example, earning an income from renting and selling properties.

If you decide to focus on single transactions, you’ll want to set a high price to maximize your profits—because you won’t know when you’ll make your next sale. If you decide to focus on subscriptions, you’ll want to set a lower price to attract more subscribers—because this will help build your customer base and provide a regular source of income. If you choose to apply both profit sources to the same business, you’ll have more flexibility setting your prices—because regular income from your subscriptions will make up for lower profits on your single transactions.

Next, you’ll need to decide if you're setting fixed or variable prices for your products and services—for example, setting a universal rental rate or charging extra for tenants with additional demands such as pets or extra storage space.

You can apply any one of Kaufman’s four methods if you choose to set fixed prices in combination with single transactions or subscriptions. If you choose to build variations into your pricing structure, you’ll need to determine the subjective value of your offer to set your prices.

How to Increase Profits Without Raising Your Prices

Since businesses rely on profits from their sales to continue running, they often raise prices in an attempt to quickly generate more revenue. However, this isn’t the only way to increase your profits. According to Kaufman, there are three other ways to increase your sales revenue:

1) Complete single transactions with more customers: This involves attracting and converting more potential customers into paying customers for a single product or service.

(Shortform note: The most effective way to complete more single transactions is to expand your marketing, sales, and distribution network. This increases your online presence and allows you to cover more geographical locations—thus attracting a wider range of customers. Since many businesses don’t have the resources to expand their network, they often partner with external marketing agencies, vendors, and distributors to manage customer relationships on their behalf.)

2) Increase the size of each transaction: This involves convincing customers to pay more by purchasing additional products and services. For example, customers buy a mobile phone (the main product) and accessories, such as headphones and a case (the additional products).

(Shortform note: Sales experts suggest that you can increase transaction amounts by bundling products and services and marketing them as a set. For example, presenting the phone, the accessories, and the line rental subscription as a package deal. Alternatively, you could present your products and services separately and offer a discount to customers who choose to make multiple purchases at one time.)

3) Sell more often to existing customers: This involves encouraging customers to increase the frequency of their transactions. For example, customers who buy printer ink once a month generate more long-term profit than those who buy the same product once every six weeks.

(Shortform note: Customer retention experts suggest an effective way to encourage more frequent transactions: Send reminders based on past purchases. This involves tracking your customers’ previous purchases and sending reminders to restock. For example, the printer ink business reminds customers to purchase ink four weeks after their last order.)

Part #4: Fulfill Expectations

After making a sale, the fourth process businesses must focus on is ensuring that customers are satisfied with their purchases. In this section of the guide, we’ll first clarify why prioritizing customer satisfaction is essential to business success. Then we’ll explain how optimizing your resources and procedures ensures customer satisfaction and allows your business to thrive.

Satisfied Customers Are the Key to Long-Term Success

Kaufman argues that successful businesses pay as much attention to meeting or surpassing customer expectations after a sale as they do on attracting new customers. This is because satisfied customers often become repeat customers and offer a reliable source of long-term revenue. They also give positive reviews that bolster your reputation—thus attracting even more customers free of charge.

(Shortform note: In addition to offering a reliable source of revenue and bolstering your reputation, satisfied customers provide two benefits: First, they’re more likely to offer feedback and a deeper understanding of their motivations, which will help you to create better products and services. Second, they’re more likely to test or become early adopters of your newest products and services.)

On the other hand, businesses that fail to meet customer expectations create disappointed customers. According to Kaufman, disappointed customers abandon you for your competitors and leave bad reviews that undermine your reputation. This damages your business in multiple ways: It repels possible customers and forces you to allocate resources to repair your reputation and acquire new customers. These extra expenses eat into any profits you do manage to make and get in the way of your success.

It Costs More to Acquire New Customers

Customer acquisition and marketing research backs up Kaufman’s claim that disappointed customers damage businesses in various ways. The following statistics clarify exactly how much it costs to repair this damage—proving that it pays more to invest in making your existing customers happy:

Optimize Systems and Procedures to Ensure Satisfaction

Kaufman argues that the best way to ensure customer satisfaction is to make sure that your business operations are as efficient and reliable as possible. The more efficient your operations, the more time and money you save running your business. This leaves you in a better position to provide a high-quality service that outdoes your competitors—resulting in more sales, increased profits, and long-term success.

(Shortform note: Management experts Ken Blanchard and Sheldon Bowles (Raving Fans) clarify why efficient operations are the key to customer satisfaction. Customers form expectations based on their past transactions with a business—and they expect future transactions to be just as good, if not better. This means that businesses must set processes in place that allow them to provide a consistent and reliable service—otherwise, they risk disappointing and losing their customers.)

To optimize your operations, you first need to understand all of the tasks that your business relies on. Consider your product or service and write down all of the steps it takes to:

(Shortform note: Business strategy experts suggest creating a more thorough outline in order to fully understand your operations. In addition to all of the steps each task involves, note down the people responsible for carrying out each step, what triggers them to take action, and what they specifically do. Interviewing the people involved in each task will help you to gather all of the necessary information.)

Once you’ve outlined all of the tasks involved in running your business, consider how you can make incremental improvements to save time, effort, and money. Kaufman suggests considering ways to:

(Shortform note: Osterwalder and Pigneur (Business Model Generation) offer practical advice to help you streamline your processes, cut costs, and optimize your operations: Use the Strengths, Weaknesses, Opportunities, and Threats (SWOT) analysis to evaluate the effectiveness of each of your processes, as well as your overall business strategy. The SWOT analysis examines both internal and external factors—things you can control and things you can’t, provides a clear indication of your strengths and weaknesses, and reveals opportunities to improve your current operations.)

Prioritize Improvements That Will Make the Most Impact

As you work through this optimization process, you’ll come up with a long list of both minor and major improvements that you can make. Kaufman suggests prioritizing those improvements that will make the biggest difference to your efficiency and profits. Consider impact and possible consequences to determine how much difference an improvement will make.

Impact: Each improvement, even the simplest ones, will require additional resources to implement, but some will have a much larger impact than others. For example, negotiating rates for ad-hoc office supplies will probably take the same amount of time and effort as negotiating rates for your manufacturing facilities. Both tasks require your resources but only one of them is going to make a significant impact on your bottom line.

Possible consequences: By their nature, business operations are interdependent. Changes introduced to improve one operation often create consequences for multiple operations. For example, redesigning your packaging materials impacts your marketing department—because they have to spend extra resources updating their content to reflect the new design.

Kaufman suggests separating your list of improvements into two groups: Those that will massively improve your efficiency or profits (your priority list) and those that won’t. Before proceeding with an improvement on your priority list, consider all of the possible consequences it will have on the rest of your operations. Paying attention to these two factors will help you plan ahead and allocate the necessary resources to successfully implement the change.

Shortform Commentary: Use a Prioritization Matrix to Assess and Rank Your List of Improvements

Project management experts suggest using a prioritization matrix to assess and rank your list of improvements. This business analysis tool helps you objectively rate and compare your choices according to the criteria you choose, such as how much value they’ll generate for your business, how easy they’ll be to implement, how many other processes they’ll affect, or which ones have the best chances of success.

Let’s examine how this works if you assess and rank three different improvements (A, B, and C) according to Kaufman’s two criteria—impact and possible consequences.

First, rank each improvement, from one to five, according to how much it will positively impact your business. For example: A = 5, B = 1, and C = 3.

Second, rank each improvement, from one to five, according to how many consequences it will create and how difficult it will be to manage these consequences. For example, A = 5, B = 0, and C = 1.

Finally, place your improvements into your matrix so that you can compare the rankings against each other and define your priorities. Here’s an example of what that would look like:

personal_mba_prioritization_matrix.png

Exercise: Does Your Offer Align With What People Want?

According to Kaufman, successful businesses offer products and services that fulfill people’s basic needs. This exercise will help you think about how potential customers might judge the value of your offer.

Exercise: Optimize Your Systems and Procedures

Kaufman argues that successful businesses ensure that their operations are as efficient and reliable as possible, so as to keep customers satisfied. This exercise will help you consider ways to make incremental improvements to save time, effort, and money.