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- SFB Newsletter # 7
SFB Newsletter # 7
How to Build Products that Scale △
Hey 👋
As mentioned I’ll keep working my way through the pillars here in ‘The Systems for Business Newsletter.’ Our mission is to give you practical business wisdom you can use to scale up and create more wealth and freedom.
In the previous editions we’ve hit; the 6 pillars as a philosophy, mindset and sales. If you’re not up to date, you can always access the previous editions if you head to www.systemsforbusiness.xyz and click blog. 🙂
Today - we’re onto Product.
Product is a tricky one to speak to when it comes to systems: because what you sell, will be different to what I sell, or any of the other 25,000 people subscribed to the newsletter.
So today I’ll share some of the underlying philosophy I use to think about and create products.
1. The Difference Between Innovation and Optimisation
For your product: There is a continuum between innovation and optimisation.
Now I’ll guess you’re in business because you want to grow and develop yourself to the maximum possible level in your life. If you want to ‘master business,’ understand this…
Inside the 6 pillars, there are refined, high level aspects of each pillar. The strongest and most refined trait of them all is innovation.
If you want to become not just well off, or rich but truly wealthy, this trait has more to do with that than any other. I believe that over the long term, if you take entrepreneurship far enough, you’ll eventually be dealing constantly in innovation.
According to a BCG survey, 75% of business executives said innovation is among the top three priorities for their company.
So what’s the difference between the two…
Optimisation: Is taking a system that is working in some form, and tweaking it to attempt to improve your performance or yield.
95% of the products that businesses sell are optimisations.
When starting out, or even in the first 5-10 years of your business journey, I believe optimisation is a best place to start.
It’s a big mistake to start innovating right away unless you’re incredibly technical with code and also an incredible visionary (which is a very rare mix by the way.) I think it’s wiser to begin as a heavy optimiser vs. being an innovator.
I’m sure you’ve met the person who is always talking about ‘big grand ideas’ and has two ‘start-ups’ on the go at all times, but never actually gains any traction or sales. From my experience these people are experiencing some kind of ‘entrepreneurial identity’ crisis.
I feel the language of ‘start-up,’ and ‘founder’ doesn’t help this either. It’s much more empowering to think of yourself as a business owner.
The truth is that owning a boring low complexity business is probably the best place to start, before ‘launching that app.’ Once the boring one is producing cashflow - invest that into innovation.
Innovation: Is the creation of a new product or way of operating. It may borrow certain pieces from the past, but in principle it is a completely new way of operating.
For example if you just simply copy another persons business model, (which is super common in small business) you’re optimising, not innovating. If you run an agency, you’re optimising, because you’re using someone else’s product.
^ There is no problem with this by the way. It’s a perfect place to start, however ‘what got you to where you are won’t get you to where you’re going.’ If you want to keep growing, it’s wise to bring in some more innovation to your business.
It seems as though there is something inside of us that calls us to create new things, to push the boundary out and innovate things. This is what entrepreneurs are uniquely built for and certainly the most exciting and profitable area to innovate is in your product pillar.
Innovation is not solely about creation: The greatest living (perhaps ever) entrepreneurial innovator is Elon Musk: He’s the wealthiest person in modern history. He’s also regularly destroying rockets, amongst other things.
Optimisation and innovation isn’t a zero or a one. It’s a sliding scale. Start 99/1 optimisation/innovation - every $10K/month you create in cashflow, slide 5 points over to the innovation side until you hit 50/50.
Because the purpose of business is to create a customer, the business enterprise has two - and only two - basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs.
2. The Three Types of Work: Use Them to Create More Leverage
One of the most impactful books I’ve read in my life was ‘In Praise of Idleness’ by Bertrand Russell. The book is an essay on the relationship between work and life by one of the 20th centuries greatest thinkers.
Trust me when I say - you want to read this book, it’s tremendous! It’s in my top 5 most gifted and recommended books.
The reason I bring it up; In the book Russell says that there is only two types of work you can engage in. (Keep in mind the essay was written in 1935.)
You can move something from point A to point B
You can tell someone to move something from point A to point B
He makes a compelling argument that all ‘work’ is the about the ownership and movement of matter. When I first read this, I remember putting down the book, and thinking about it for a long time. It was one of the most simple yet insightful things I’d ever read about ‘work.’
Winner of the 1950, Nobel Prize for Literature, Bertrand Russell was jailed multiple times in his life for speaking out against war and the development of nuclear weapons.
I found it fascinating that more than 50% of our lives are dedicated to work - yet no where along the line, did anyone actually define it to me, nor did I realise I was missing it. 🤷♂️
Again it’s worth reading, that’s just the beginning, it’s honestly one of the most powerful, relevant, beautiful and insightful pieces of writing I’ve found.
One thing though: Even Bertrand Russell couldn’t have predicted the rise of the personal computer, arriving on the scene 40 years after he first published the book, and how much this innovation has changed our lives.
Today there is a new type of work. The creation of code based algorithms that can both, move things from point a to point b and tell people to do so!
I have also edited the second category to be called media - involving the influence over others by the internet, tv, print or any other leveraged form of delivery. Media in essence, is telling people to move things from point A to point B.
And lastly labour - the original from of work - moving things from point A to point B.
Each type of work has a higher level of leverage, and a lower average cost per deliverable unit. Typically the businesses who own and develop media or code assets will sell for a higher multiple.
Just as optimisation / innovation is a sliding scale, so is labour / media / code.
In truth your business will be like a weighted average chart. Your business, and your product will have elements of all of these. There is also a significant correlation between optimisation/innovation and the three types of work. As you move up the hierarchy, the likelihood of innovation increases dramatically.
Labour Business
A labour business is one who’s primary product and operation involves the movement of matter from point A to point B, or has a high labour or time component.
Examples of labour business: agencies, most service businesses, restaurants, gyms, local businesses.
A labour business will often have approximately the same cost to deliver the service to each new customer/client. Labour businesses will on average have a lower net profit percentage and be valued at only 1-3x the yearly profit.
Labour businesses are less scaleable, however the benefit of running these businesses; It’s easier to sell your product. Anyone that has tried to sell consulting vs agency could attest to this.
On of the keys to scale a labour business is to delegate the busy work so you can focus on the (new) media arm of your business. Use your time to write books, create newsletters, podcasts and youtube videos designed to sell new digital products. These products will be almost 100% profit, if you mix that in with your current margins (0-20% for most) you’ll be able to scale your profits up to 25-50%.
This is one of the most consistent pieces of advice I have for clients that run local businesses: ‘Use your business as a base and a hub for content creation. Transcend the geographic constraints and reach more people.’
Here is an example: Say you own a gym. Yes, it’s wise to want more members and to scale up the business locally. Do that. But you could also use the physical gym as a platform to launch a leveraged digital media business.
Create courses, content and other types of media that can transcend the geographic constraint of the business. You will have a completely different cost profile on this also. You’re already paying for the space which is likely empty for a period of the day. Use that time to create content and stand on the shoulders of everything you’ve built so far.
Media Business
A media business is involved in education or entertainment which is leveraged to reach more consumers. A media business will have a diminishing cost to deliver the product or service to each new customer/client.
For this reason they are on average much more profitable than labour businesses. Often 200% or more in terms of net profit percentage. Media business can be incredibly profitable if they reach scale, up to 80% in some cases. They can also be valued at 5-20x the yearly profit: depending on the scalability and the industry they are in.
Examples of a Media Business: Authors, coaching / consulting, speaking, newsletters, books, courses, sports teams, movies, traditional media companies.
One of the problems with media businesses is that they can be heavily reliant on one person. That person can ‘be the media,’ they are an ‘influencer.’ When this is the case - the business won’t hold much value as a saleable asset.
The key to transcend this is to build intellectual property and models to replace you as the influencer, or at least push yourself to the back while you build evergreen systems.
I also feel as though it’s wise today in the modern economy to make the leap into code based products and services. Just as media has been completely transformed over the past 20 years, code businesses are due for a similar disruption.
It will become faster, easier and more relevant than ever to create and sell software products. I’m encouraging all of my audience and my clients to start thinking about and investing into this now.
Code Business
A code based business is a business that uses proprietary systems to create outcomes for people. Examples of this are; Saas, software products and platforms, and fintech services.
Obviously businesses like Facebook, Twitter (X), even www.beehiiv.com - that I’m using to write and deliver this newsletter - are all examples of software platforms with the ability to read and write content onto.
A great way to think about this sort of business - can you invest some of your profit from your mastery of labour and media businesses into building a software that solves one of your biggest problems?
You don’t need to build the next billion dollar app, but could you get a high profit code based business to $1-2 million per year in revenue? If you can you may have a saleable asset worth more than $10 million.
Which Type or Work is Your Business Based On?Think specifically what you sell: your product. |
The Breakdown of the Top 10 Companies on Earth
The top 10 companies on earth based on Market Capitalisation.
Market Cap = ( $ ) Share Price x ( # ) Number of Shares.
Originally I planned to break down the top 100, but I’m running a little short on time, and I want to get the newsletter published. You can check out the link below if you want to do your own research.
** Referenced on www.companiesmarketcap.com
7 x Code Businesses (Apple, Microsoft, Alphabet, Amazon, Meta, Tesla)
2 x Media Businesses (Nvidia, Berkshire)
1 x Labour Business (Saudi Aramco)
Why This Principle is So Important For Scale
In short: The higher a business can make it into these two models, innovation vs optimisation and labour vs media vs code - the more valuable, scalable and sellable the business will be.
Because of this I think it’s wise to consider moving your primary focus through the three types of work every 5-10 years. In fact I could guarantee your first job was a labour business, so you may have already completed that phase.
Build on top of the previous layer. Make sure to build a team there to take care of the lower levels so you can free yourself up to tackle the higher levels of leverage.
Creating New Products
All of the biggest months I’ve had in my business have been on the back of creating new high leverage products. This is the real work of business.
Whether it’s in your 12 month goals or your quarterly goals - create a new product that creates more leverage in your business. Create a product that can reach more people than your business currently reaches, and has a higher profit percentage.
Business Breakthroughs
As you may notice, there is a common theme with every model and system I’ve shared with you so far. They are all about understanding what is higher and lower. It’s about hierarchies.
I’m simply trying to encourage you to focus on the higher and more refined aspects of business. If you continue to do that across the 6 pillars: You will undoubtedly scale your business, and even more importantly you’ll grow as an entrepreneur.
What’s next..?
Coming up next, I’m going to go deep into the marketing pillar over a 4 newsletter series. In fact, this will be the most in depth explanation I’ve ever given on marketing. New models are being designed as we speak!
I’ll be talking about the three different types of marketing:
Organic
Lead Generation
Sales Funnels
And how you can stack these together to build a high performance marketing machine for your business, that returns at least $10 for every $1 you invest into marketing.
Talk soon,
Ben Slater
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