Principles of Wealth #33* 

The entrepreneur’s five most important jobs are: (1) locating viable markets, (2) creating desirable products for those markets, (3) designing successful sales campaigns, (4) converting new buyers to multiple buyers, and (5) managing profits.

I once wrote a book called Ready, Fire, Aim: Zero to $100 Million in No Time Flat. It has had more success – not just in terms of copies sold but in the more important consideration of lives changed – than any of the other dozen-plus books I’ve written about business.

The purpose of Ready, Fire, Aim, was to set down the lessons I had learned about entrepreneurial businesses. The premise was that most of what was being written about entrepreneurship at the time was remarkably different from my experience.

But it wasn’t just that the advice was different that bothered me. Some of it seemed downright wrong. In many cases, these writers were advocating business practices I had tried myself and seen fail. And not just once, but repeatedly.

I’m talking, for example, about ideas on how to start a new business. Advice about researching the market, creating a business plan, forming a corporate structure, devising a corporate mission, etc.

What had worked for me was to focus 80% of my time and energy on the following:

Locating viable markets

What the business books were advising was to research the market you want to be in. If you want to sell hairbrushes, research the hairbrush industry. Study the demographics and psychographics of the market. Identify a need.

What we (my partners and I) did was slightly but critically different. We didn’t decide on the product first. We chose the market first. We would start with a market sector we felt we knew something about – say, selling information. Then we looked at various information markets to find those that were rapidly expanding. The thought behind this was both practical and humble. Rising tides raise all ships. We were practical enough not to care terribly about what part of the market we wanted to play in. And we were humble enough to know that as beginners we were starting with very small boats.

Once we located a fast-growing market, we studied it. But again, we didn’t rely on abstruse market analysis to figure out what sort of products to offer. We simply identified a half-dozen of the most successful companies in the market and looked at their bestselling products.

We then asked ourselves, “Can any of these products be improved on in some way?”

Creating desirable products 

The products we created were not revolutionary. Rather, they were variations of other products that were already in the market, products that were selling well. In other words, products for which there was a proven demand.

We didn’t replicate these products because we knew that would not work. Instead, we made them more efficient or easier to use or more attractive or cheaper.

We were not rocket scientists or social engineers trying to change the world. We were hardworking tinkers and testers and traders.

Designing successful sales campaigns 

We used the same commonsense approach to design our sales campaigns.

If the bestselling products were being sold mostly via newspaper ads, we’d use newspaper ads. If they were half-page formats, we used half-page formats. If they were priced in the $30 to $50 range, we priced ours in that range – preferably at or below $30.

And we always made it a point to demonstrate how ours were better (or cheaper) than the competition.

Converting new buyers to multiple buyers 

This was something we learned gradually, but it proved to be critical to generating the cash needed to make a start-up operation grow.

New buyers, we discovered, were generally enthusiastic buyers. Rather than waiting a while to sell them a second or third product, we found that the sooner we could pitch them after their first purchase, the more likely they were to buy.

Just as importantly, we discovered that when you have a group of, say, 100 new buyers that have just paid $50 for a product, 10% to 30% of them will be happy to pay $100 or more for an upgraded version of the same thing.

Managing profits 

Giving priority to those four tasks was the key to all our successful startups. It allowed us to create positive cash flow and build a critical mass of customers before our time, money, and patience ran out.

But that wasn’t enough to take the business through the $1 million revenue barrier… and then the $10 million barrier… and finally the $100 million barrier. To accomplish that, we had to learn how to manage our profits.

Profits are the lifeblood of real entrepreneurial businesses. Managing profits is about being very careful about how you spend them – how much you reinvest in marketing and new product development and employees and all the other costs of growing a business.

The advice I give to would-be entrepreneurs today is largely based on these five priorities. It’s fine to read about the business geniuses that take great risks and end up as billionaires. But if you want to increase your odds above 1-in-1000, I’d consider those stories fiction. For a reliable manual about what works the other 999 times, check out Ready, Fire, Aim.

* In this series of essays, I’m trying to make a book about wealth building that is based on the discoveries and observations I’ve made over the years: What wealth is, what it’s not, how it can be acquired, and how it is usually lost. 

Just One Thing: How to Negotiate in One Lesson 

JSN, my ex-boss/then partner, was, in most ways, a great negotiator. He was aggressive, highly intelligent, and charming. That very rare combination of assets allowed him to get pretty much whatever he wanted out of every deal.

BB, my client/partner, is not considered to be a great – or even good – negotiator. He doesn’t claim to be. He doesn’t like negotiating, but he occasionally does negotiate. And when he does, he proves himself to be equally as charming and intelligent as JSN. But he is not aggressive. In fact, a typical “negotiation” with him might sound something like this:

Him: What do you think it’s worth?

You: Thirty percent.

Him. That seems reasonable.

Or…

Him: What do you think it’s worth?

You: Sixty percent.

Him. Oh, I couldn’t afford that.

And that’s it. Done. In the first case, you have a deal. In the second case, you don’t. And don’t try to come back by lowering the “ask.” He isn’t interested.

I sat beside JSN at the negotiating table for 11 years, and beside BB twice that long. I can say that JSN deserved his reputation as a master negotiator – but in the realm BB operates in, he is actually better.

The difference depends on understanding that in business there are two fundamentally different kinds of negotiation: transactional and relational.

JSN looked at almost every deal he made as a transaction. He had something of value to buy or something to sell, and the goal of the negotiation was to somehow come out on top.

BB eschews transactional deals. If they must be done, he appoints someone else to do them. But he does negotiate relational deals. He looks at them as… how shall I put it? As first dates. A negotiation for BB is an opportunity to discover if he and the other person could be good business partners.

In other words, JSN viewed business as a series of individual transactions. Success to him depended on being the winner in as many of these transactions as possible.

BB views business as a complex series of relationships. Success to him is hooking up with the right sort of people.

I learned lots of tricks from JSN that I employ when I am negotiating a one-time transaction, such as buying a car or a painting or a house. But in business, I prefer BB’s approach.

When I negotiate BB’s way, I have a chance to find out if I am compatible with the person on the other side of the table – i.e., if their idea of fairness is the same as mine.

A fair deal in relational negotiation is one that works well for both sides, and not just immediately but also in the future. That means I can’t go into the negotiation with a fixed, pre-determined outcome in mind. I have to be prepared to accept a deal that works not only for me but also for the other person.

There have been many times when the other person was willing to accept a deal that favored me. When that happened, I insisted that we structure a deal that was better for them. Not out of altruism, but because I realized that what matters most is not the immediate transaction but the long-term relationship.

When you are negotiating relationships, you have to think this way. If you don’t, one of two things will happen: The deal will not be made because the other person will feel you are bullying them… or they will accept the deal but later on feel that they were cheated.

In either case, the opportunity to forge a potentially profitable relationship for years to come will have been lost.