PDF Summary:The Personal MBA, by Josh Kaufman

In The Personal MBA, bestselling author and entrepreneur Josh Kaufman offers a comprehensive overview of how businesses work. He argues that there are five key processes underpinning every business and suggests ways to optimize them for successful results. You’ll come away knowing how to identify profitable opportunities and make informed decisions to ensure business success.

In this guide, we’ll discuss these five key processes and present Kaufman’s advice for managing them to create business success. Additionally, we’ll clarify his ideas with complementary research from management professionals and we’ll suggest actionable strategies to help you apply these concepts to your business.

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• Seasonal—some products and services experience demand during certain times of the year. For example, people only tend to search for tinsel and baubles during the Christmas period.

• Economic and natural events—unexpected downturns or natural disasters impact the popularity of certain products and services. For example, restaurants experience less demand when people have to self-isolate due to a pandemic.

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:

• Attend professional conferences and trade shows: Visit competitors’ booths to see what they offer and how they interact with customers.

• Analyze their website and SEO strategy: In addition to visiting competitors’ websites, use SEO tools to analyze the keywords and Adwords they’re buying, their site traffic, and website ranking.

• Examine their social media presence: Find out what platform they use, what type of content they post and how often they share it, how many followers they have, and how responsive they are to customer queries and concerns.

• Sign up for their newsletter: This will give you in-depth knowledge of their email marketing strategy—what kind of content they send and how often.

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.

• For example, there’s no point in promoting a vegan recipe book to someone who’s recently purchased a book about offal. But it is worth promoting it to someone who bought a raw food recipe book since it complements their interests.

(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.

• First, they incorporate limitations into their offer—either by limiting the availability of the product or service or setting an expiration date on a discounted price. These tactics make offers appear more valuable by suggesting that potential customers will “lose out” if they don’t immediately hand over their money.
• Second, businesses offer money-back guarantees to establish trust and alleviate remaining concerns about whether or not the offer is worth paying for.

(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:

• 63 percent of consumers consider moving to a competitor after a single bad experience.

• It can cost five times more to acquire a new customer than to retain an existing customer.

• The success rate for selling to new customers is 5 to 20 percent, whereas the success rate for selling to existing customers is 60 to 70 percent.

• 93 percent of consumers base their purchasing decisions on online reviews.

• 80 percent of consumers won’t buy from businesses with negative reviews.

• A 5 percent increase in customer retention can yield higher profits ranging from 25 to 95percent.

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:

• Create it: This includes designing, manufacturing, and ensuring quality control.
• Market it: This includes your branding and media campaigns.
• Process orders: This varies depending on whether you deal directly with your customers or use intermediaries to handle your orders.
• Deliver it: This depends on the nature of your product or service and whether you’re reliant on distribution channels to fulfill your orders.
• Follow up on it: This includes providing customer support and troubleshooting problems.

(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:

• Streamline them: This might include automating some of the tasks or eliminating unnecessary tasks.
• Cut costs while maintaining quality: This might include cutting intermediaries out or changing suppliers.
• Improve them: This might include investing in resources such as equipment or more employees.

(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: