COPYRIGHT SALESPROCESS.IO 2019
The Scientific Method To Solving For Product-Market-Fit And Pocketing Your First Few Million In 3 Years or Less
Written By Nick Kozmin from Salesprocess.io – https://salesprocess.io/quiz
“Entrepreneurs fail not because they can’t build products, identify markets, market their products, or price their products properly, but because they conduct these activities in the wrong order and run out of money before they get traction.”
The Value Of The Business and The North Star
The purpose of running the business experiments is to identify and validate a profitable business unit case and a resulting model that duplicates that profitable unit case as quickly as possible.
The equity value of the business (# of shares * share price) = Enterprise Value + Cash – Debt.
The Enterprise Value can be determined by either by using the DCF method (discounted future cash flow method – the net present value of the unlevered free cash flow + terminal value), or it can be found by dividing the EBITDA by an accepted industry EBITDA multiple.
Both methods cut to the same chase – the profitability of the business, and the ability of the business to spit out free, unlevered cash flow in the future – in other words, turning cash or other assets into free cash flow streams greater than the value of the assets used to create these cash flows.
The job of the entrepreneur is to put cash or non-cash assets to work to produce free cash flows. If the entrepreneur can do this, value is created. If the entrepreneur cannot do this, value is destroyed and the assets used are best placed in someone else’s hands.
The Scientific Method explained in this training focuses on creating a profitable and cash-producing unit case in the quickest, most capital-efficient and time-efficient way possible.
I used this method to pocket my first few million after-tax and build an asset valued in the mid 8 figures in my mid-20s, and it only took a few years. I did this without co-founders, raising money or taking on any debt.
Customers of Salesprocess.io have achieved similar and better results than me using this method.
Below is a glimpse of our customer track record.
|Salesprocess.io||Bootstrapped||$0||$5M ARR||18 Months|
|AdvisorStream||< $1M||$0||$1M ARR||12 Months|
|AdvisorStream||$1M||$5M ARR||24 Months|
|CoPilot Advisor||< $1M||$0||$1M ARR||11 Months|
|Press Advantage||Bootstrapped||$0||$1M ARR||12 Months|
|Sourcewater||< $1M||$0||$1M ARR||10 Months|
|Seamless.ai||< $1M||$200k ARR||$3.5M ARR||11 Months|
|Truly.co||< $1M||$80k ARR||$2.5M ARR||12 Months|
|Effct.org||Bootstrapped||$6k MRR||$146k MRR||4 Months|
|VA Flow||< $1M||$0||$400k ARR||4 Months|
|Lead Engine Pro||Bootstrapped||$0||$1M ARR||4 Months|
|Vibo.io||Bootstrapped||$2k MRR||$25k MRR||12 Months|
My core concept is that entrepreneurs fail not because they can’t build products, identify markets, market their products, or price their products properly, but because they conduct these activities in the wrong order and run out of money before they get traction.
Defining The Problem and Variables
The Business Equation
Salesprocess.io and Salesprocess.io’s clients have been successful by looking at business through this lens:
The business is a function of the following variables.
Business (N, T, P, M, A).
Where N is the Niche – A specific group of people who have a specific problem and who are in specific circumstances.
Where T is the Transformation/Claim – The promise made to the niche.
Where P is the Price – The price that the niche is willing to pay to have the promised fulfilled, or the transformation realized.
Where M is the Mechanism – The mechanism used to deliver the promise or transformation.
Where A is the Access Channel – The traffic and conversion mechanism used to get the mechanism in the hands of the niche – also known as “distribution channel” in some texts.
An (N, T, P) solution makes up the market – meaning there is a group of people who desire a particular transformation and have the money to act on that desire.
An (N, T, P, M) solution validates a contribution-before-marketing value (helpful reference: https://corporatefinanceinstitute.com/resources/knowledge/accounting/contribution-margin-overview/) – meaning the mechanism delivers the transformation and the resulting contribution value (price – cost of goods sold) are revealed.
An (N, T, P, M, A) solution validates a contribution after marketing value (helpful reference: https://corporatefinanceinstitute.com/resources/knowledge/accounting/contribution-margin-after-marketing-cmam/) – meaning the cost to market and sell the mechanism via an access channel is less than the contribution created from the mechanism.
Relationships Between Variables and Solving Order
The relationships between the variables reveal the order in which the variables need to be solved.
The reason why most entrepreneurs fail is not that they are unable to find niches, create mechanisms, price products properly, or market, but because they are doing these activities in the wrong order and they run out of money before they get traction.
Solving for the variables in the correct order will result in a profitable unit case (contribution after marketing) as fast as possible with minimum resource waste.
The relationships between the variables are defined by this method as follows:
Relationships Between Business Variables
- T (N)
- P (T) -> P ( T( N)) -> P (T, N)
- M (P) -> M (P (T, N)) -> M (P, T, N)
- A (M) -> A (M (P, T ,N) -> A (P, T, N, M)
The niche is independent of all other variables.
The transformation is dependent on the niche, but independent of the price, the mechanism, and the access channel.
The price is dependent on the transformation, and therefore also dependent on the niche but independent of the mechanism and the access channel.
The mechanism is dependent on the price, and therefore also dependent on the niche and transformation but independent of the access channel.
The access channel is dependent on the mechanism, and therefore also dependent on the price, transformation, and niche.
Notice that because of the dependencies, the solving order is revealed:
The niche is solved first, then the transformation, then the price, then the mechanism and contribution, then the access channel.
What else can we infer?
The relationships above illustrate the importance of answering the “who are you helping?” question before anything else in the business is determined – meaning solving for a mechanism and access channel before solving for exactly who you are helping won’t work and will result in time and resource waste.
The price the market is willing to pay for the transformation is completely independent of the mechanism used to deliver the transformation (this is a key point that most entrepreneurs don’t fully understand) – in other words:
“The customer doesn’t care if the cat is black or white, he cares that it catches mice. In fact, he doesn’t even care if there is a cat involved at all”.
The technology used in the mechanism is bound by the price the customer is willing to pay for the solution – you wouldn’t use a rocketship to transport your kids to school – taxpayers won’t allow for that 🙂
The access channel is dependent on the mechanism and the resulting contribution value – meaning the contribution before marketing determines what access channel can be used – you wouldn’t use a $100k + direct sales team to sell fruits on the side of the street.
Market Identification and Validation (N, T, P) – Solving for the niche, transformation, and price.
Mechanism Validation (M) – Solving for the mechanism used to deliver the transformation and the resulting contribution.
Access Channel Validation (A) – Solving for the traffic-conversion mechanism combination that results in a profitable unit case – contribution after marketing.
The market is validated when a specific person has agreed to pay money for a specific transformation. The mechanism doesn’t even have to exist at this point.
The mechanism is validated when the promise is delivered and a positive contribution is realized – meaning the thing actually makes money.
The access channel is validated when the contribution-after-marketing value is determined to sustain a profitable business – meaning you can spend $1 and make more than $1 back (hopefully $4, or $5).
Consider the following scenarios:
Scenario 1 – Jim, a bright engineer, assumes there is a particular problem in the market for a specific group of persons; he tells his friends and family about his idea, and they cheer him on 🙂
Consequently, he invests 5 months into building a product.
Upon completion of the build, he starts “marketing” and trying to sell the product.
He spends 2-6 months trying to get his first 10 customers… but his message and offer are not resonating with anyone and his revenue is nil or close to it.
He tries giving the product away for free to “collect data”. A few people bite and “pity buy”.
He makes iterations and starts to “see” a revenue uptick.
1-2 years later the business is only at $2k MRR.
He decides to fold up shop and try something else.
In total, Jim spent 2 years and lost $50k of his savings.
Scenario 2 – Sarah, another bright engineer understands the market validation phase better than Jim, so before she starts building anything, she maps out her niche hypotheses and approaches the market using the discovery and report method (taught by Salesprocess.io).
She learns about her niche’s problems and ranks them based on relative urgency.
She then proposes to solve the niche’s most urgent problem, but before she builds anything she demands that the niche pays her a fee of $10k to solve it. (Sarah is one badass lady btw)
She uses a mock-up to prove to the prospect that she has the skills and intent to solve the problem. (This Mock-Up Method is taught by Salesprocess.io)
The prospect happily pays the fee since the pain of the problem is so acute, and Sarah gets to work building the mechanism promised in her mock-up.
Sarah takes 2 months to build and deliver the solution to the customer – she aims to become the BEST AND ONLY OPTION for the niche.
Consequently, the customer is happy with the results and decides to sign a 1-year contract with Sarah worth $50k.
Sarah validates the gross contribution number to be $40k ($50k – COGS) and collects her first case study.
She approaches a similar business in the same niche with a similar problem and presents her first case study.
A similar business happily signs a $50k deal and Sarah netted another $40k in contribution.
Sarah approaches investors with her 2 back-to-back case studies that net positive contribution.
The investors immediately give her money to duplicate what she already did with her first two customers.
Sarah hires a sales team to do outbound prospecting and determines the contribution-after-marketing-number to be $35k per year.
Within the first year, she hits $50k MRR and validated a contribution-after-marketing margin of 70%.
She learns paid traffic from Salesprocess.io and within the second year, she hits $100k MRR.
Sarah’s new business is valued at $10M by private equity investors who need to deploy their capital. Sarah sells half of her business and pockets $5M in 2 years 🙂 Yay.
In scenario 1, Jim makes the fatal mistake of building the mechanism before validating the market – he received a positive response from friends and family but doesn’t receive payment from a customer (fatal error).
Since this error was made and not corrected immediately, Jim ended up wasting 2 years of his life and lost $50k, plus opportunity cost.
At the end of the 2 years, he may or may not have realized the error. There is a good chance that he will try his method again and potentially waste another 2 years and more money 🙁 (I actually made this error, but corrected it. Jim = Nick)
In scenario 2, Sarah does not start building the mechanism until she is sure there is a market willing to pay to get the problem solved.
She uses the discovery method to determine the most urgent problem, the mock-up method to validate a price and transformation, then builds an MVP (a mechanism) to validate the gross contribution using the Engineering Method taught by Salesprocess.io.
Only after she validates the unit case and contribution in 2 independent environments, does she validate her first access channel – outbound prospecting and inside sales.
Once she validates the contribution after marketing, she approaches investors who happily pay her to duplicate what she is doing.
She then uses more scalable marketing tactics to scale up and create life-changing wealth in a relatively short period of time.
Key Point: If money is raised before a profitable unit case is determined, the entrepreneur risks entering the “death spiral” – scaling a machine that loses money at the unit level. This machine eats up cash and drives the business into the ground. It could also place the founders at risk of jail time or litigation – See Elizabeth Holmes
Also notice that in Sarah’s example, the case studies serve as the pillars of the “marketing” – she uses her first case study to get her second, then her first second to get the next 10. This simple relationship between marketing and case studies illustrates the relationship between marketing and product results/transformation – in other words, without any case studies or legitimate customer results, marketing won’t work.
Also, notice that Sarah aimed to be the BEST OR ONLY OPTION for solving the urgent problem for the respective niche. She did this because she understood the relationship between profits and competition.
Also notice that in Sarah’s example, she waits to strap on paid advertising before the contribution is validated. Paid advertising is expensive and time-consuming to test. It only makes sense to test the paid traffic channel once the contribution is validated and there are cash reserves in the bank account to handle “choppy waters”.
Sarah’s example above describes a perfect situation, however, in reality, there are often iterations and permutations the entrepreneur tries before a valid N, T, P, M, A solution is realized.
Let’s consider some of these permutations and use variables to keep organized:
- Variable 1: Niche = N1, N2, …
- Variable 2: Transformation/Claim = T1, T2, …
- Variable 3: Price = P1, P2, …
- Variable 4: Mechanism = M1, M2, …
- Variable 5: Access = A1, A2, …
Varying Access Channel
N1, T1, P1, M1, A1 -> N1, T1, P1, M1, A2
You have a SaaS product that produces a gross contribution of $10k and you are using conferences and outside sales to sell it, however, the cost to acquire a customer using the conference method is $12k, so the unit economics don’t work.
Before you vary the price and the mechanism, you experiment with Facebook Ads and Inside sales (another access channel). You realize that you can create leads on Facebook for $100 and an inside salesperson can close 1/20 which makes the cost to acquire a customer only $5k. The new access channel creates a positive contribution after marketing and you are back in business. This new access channel also allows you to scale much faster since you are not bound by the number of conferences per year.
In this example, the niche, transformation, price, and mechanism are defined and contribution is created, however, the access channel is not yielding a positive contribution-after-marketing value – meaning the cost to acquire a customer is more than the gross contribution and the business starts losing money.
The access channel is swapped out for a more efficient one, and the unit economics starts to work again.
N1, T1, P1, M1, A1 -> N1, T2, P2, M2, A2
You are selling portfolio management software to financial advisors and claiming that you can make them “20% more efficient in 30 days”, however, after speaking to customers, you realize that they have a more urgent problem – new business generation and they are not a whole lot concerned with saving 5 hours per month on portfolio management. You change your claim or transformation to “we can help you bring in 10 new qualified leads per month”.
The advisor immediately perks up and wants to pay you money for this transformation – lots more than before. You change your price, and you invent a mechanism that delivers this transformation. Once you validate that the mechanism works and contribution is created, you solve for the access channel and contribution-after-marketing value.
In this example, the niche is held constant, but the transformation is varied as a result of determining a more urgent and acute problem. Due to the dependencies of the transformation, the price, the mechanism, and the access channel are changed to produce positive yield.
N1, T1, P1, M1, A1 -> N1, T1, P2, M2, A2
You have a b2b SaaS solution and your current price is $5k, but you realize, after doing an ROI justification and niche analysis that your market is willing to pay at least $50k to get the problem solved.
You increase your price to $50k. This $50k price requires you to improve the mechanism such that you can deliver the transformation with more certainty and become the best or only option for the respective niche. Once the contribution is validated at the $50k price point, you change access channel to outbound prospecting + inside sales since you have much more contribution to “play with”.
In this example, the niche and transformation are held constant, but the price changes as a result of market insights. Because of the price change, the mechanism changes to deliver on the promise. Since the price and mechanism combination produces a new contribution value, new access channels open up as options.
N1, T1, P1, M1, A1 -> N1, T1, P1, M2, A2
A legal consultant is helping law firms increase their profitability with a service and consulting offer, however this mechanism of delivering the transformation doesn’t scale and the contribution is not as high as he wants – he’s capping out at only $200k per year and his wife is complaining about not going on 3 vacations a year 🙁
He decides that he’s going to deliver the transformation via an online program and software (a new mechanism). He builds the new mechanism and validates that the contribution is greater than that of the service. He then changes the access channel as a result of the new contribution value – starts marketing with Facebook ads and Inside sales and scales the business to $2M per year in 12 months.
In this example, the niche, transformation and the prices are held constant, however, a technology that was not previously available to him, which is now available, has made it possible for him to deliver the transformation using a new, more efficient and scalable mechanism (online programs and software).
As a result of using a new mechanism, the gross contribution value has changed as well as the scalability of the solution which makes it easier to validate a new paid traffic channel.
N1, T1, P1, M1, A1 -> N2, T2, P2, M2, A2
Sally, a geophysicist builds a SaaS tool targeting geophysicists that help track oil and gas trucks using topological satellite images.
She gets a few paying customers via her friends and family network, but, the geophysicists consider the tool a nice-to-have and not a need-to-have. The price she was charging to the geophysicists was low and there wasn’t much contribution created.
However, one day, a hedge fund analyst comes through her funnel and buys at full price without any hesitation. According to him (the hedge fund guy), this information helps him better predict market movements since he can correlate the truck data with the price of oil.
Sally recognizes that the value created for the analyst was greater than that of the geophysicist, so she pivots her niche. She comes up with a new transformation or claim – Use truck data to predict the price of oil. She tests a new price – 5X what she was charging the geophysicists. The hedge fund analysts sign up without any hesitation. She tweaks her mechanism to deliver on the promise she made to the analysts and solves for contribution.
The contribution is 7X greater than that of the geophysicists. With this new contribution value, she solves for an access channel (outbound prospecting and inside sales – using the Salesprocess.io method). She’s now well on her way to $1M ARR with a 90% contribution margin and a 30% EBITDA value and a Porsche 911.
In this example, Sally pivots her niche after encountering what is called a “fringe case” – an unintended instance in which someone on the fringe of the niche receives value from the solution. In the situation above, the fringe case proved to be more profitable than the original niche for Sally, so it made sense for Sally to pivot her niche, and as a result, the transformation, the price, the mechanism, and the access channel changed.
Timing, Budget, Skills Needed, Level Of Difficulty
Market and Niche Identification and Validation
With the proper techniques, it should take you no more than 2 months to identify a market – you could do it in a matter of weeks using the methods taught in this training.
Not much money is not needed during this phase since nothing is being built. You are in research mode – your only expenses are personal expenses, opportunity costs, and mockup costs.
The skills needed in this phase include outbound prospecting skills, sales and interview skills, design skills, listening skills, problem-solving skills, and research skills.
When using the proper techniques this step can be completed without much difficulty.
2-8 iterations of the market, transformation, price combination are usually needed to arrive at a solution that uncovers a thirsty and valuable market.
Emotional challenges often reveal themselves in this stage:
In some cases, the entrepreneur has invested years and sometimes millions of dollars into mechanism development, then realizes after going through market validation method that the product and the thesis don’t align to a market need, which means that the time, money, and energy expended are sunk. This is difficult to accept and often leads to founder depression.
However, the depression is often short-lived since smart founders recognize that by going through the market validation method properly and cutting losses as quickly as possible, it saves them years of time and millions of dollars. Often the technology breakthroughs made when solving for the wrong combination can be applied to helping the new niche, so not all costs are sunk 🙂
(Customers Only) – The Report Method: How To Validate A Niche can be found here.
(Customers Only) – The Mock-Up Method: How To Validate A Transformation and Price can be found here.
If you need help solving for the N, T, P Combination (i.e. an acute and urgent problem for a niche with the ability to pay for a solution), then please book a call here to speak to someone on our team.
The mechanism validation starts once the hypotheses are stated and the market is validated.
It could take you 1 month – years to validate your mechanism and resulting contribution value.
The time and money required to validate the mechanism depends on the complexity of the problem you are solving and amount of capital needed to solve it:
For example, if you are building a rocket ship, it could take you 4 years and a few hundred million to validate the mechanism.
If you are building a simple SaaS tool, it could take you only 2-4 months and only $2k to validate the mechanism – if of course, you are a developer.
The skills needed in this phase include engineering skills, design skills, experimental and data analytics skills, and general business skills.
The more skills you have in-house, the faster, easier, and cheaper it will be to validate the mechanism.
(Customers Only) – Engineering Methods: How To Solve For Your Mechanism can be found here.
If you need help going through the engineering process and solving for the contribution value of your mechanism, then please book a call here to speak to someone on our team.
Access Channel Validation
The access channel is validated once the mechanism and contribution value is validated.
It could take you 1-2 months to validate the access channel (traffic channel and conversion channel) using the techniques taught by Salesprocess.io.
This phase requires marketing and sales skills, data analytics skills, and some courage – a good marketer can validate the access channel in a matter of days and with only a few thousand dollars in ad spend or a few cold emails.
2-8 iterations are often required to find the appropriate access channel that leads to a positive contribution after marketing value.
Access Channel validation techniques are covered in the Salesprocess.io documents.
The Niche Explained
A niche is an ultra-specific group of people in specific circumstances with a specific problem.
These circumstances can include a role, vertical, cash or credit deployment abilities, current metrics, activities and tools, and desired outcome.
A niche is used to identify people and to answer these questions:
“Who is your customer?”
“What is their current and desired state?”
“What are the problems preventing them from getting to the desired state?”
“How much money do they have available to achieve the transformation?”
If you can answer these questions, you have the necessary information to identify a transformation and price.
Benefits of Starting With a Niche
Zero Competition = Profits
Consider this Reference:
One of the points made by Peter Theil in his book, “Zero To One”, was that profits are a function of X, Y – where X is the value created in the market and Y is the % of X captured – in other words, the business or entrepreneur creates X amount of value and captures Y% of it. Where X and Y are independent variables.
Building upon Peter’s insight, we can propose that X (the value created) is a function of the transformation provided to the niche and Y is a function of the mechanism efficiency and the competitors in the market.
Profits = AX * BY – where X is the value created (transformation value) and Y is the % captured of X
Where A and B are constants defined by the particular market.
Y = e(1-C) – where e is the mechanism efficiency (%) and C is the market share owned by the competitors (%)
We can rewrite this expression:
Profits = AX * B*e*(1-C)
By exploring the limits of Profits, we can determine that Profit is maximized by being a monopoly in the market – the best or only option – when relative market share owned by a competitor approaches 0 (C0) – this is exactly what Peter suggests in his book.
We can also determine that Profit reaches a maximum when mechanism efficiency (e) approaches 1 or 100% (1) – meaning maximum profits are realized if you can capture 100% of the value created.
We can also see that when X approaches ∞ (the value created approaches infinity), Profit approaches infinity.
The value of the search engine is extremely high (X is high), the efficiency of the search engine is extremely high (is high since Google uses a network to deliver the value), and there are almost no competitors in the market (Cis low – the competitors make up less than 20% of the market), therefore Google collects monopoly profits and the market cap is over $800B.
This lens is also used to explain why almost all airlines don’t make any money over the long term – the value is extremely high (X is high – as determined by revenue collected by customers), the mechanism efficiency is low (is low) and there are many competitors (Cis high) in the market.
When you are creating your solution, you want to become the best or only option in the market.
The time and energy needed to build the best and only option for a specific group of people or small segments are achievable by a startup if the niche is small and the competitive landscape is bare.
A startup cannot afford to validate a mechanism that is the best or only option for multiple niches simultaneously.
Getting to your first 1000 customers requires that you get to your first 10 customers, then 100, then 500, etc.. It’s much easier to get your first 10 if you are focused on one niche with zero competition than it is focussing on multiple niches simultaneously.
Competitors understand that if they are going to compete with you, they want a chance of winning. The likelihood of them winning is low if they are competing with someone who’s sole focus is delivering the transformation to a specific nice. They will jump in to compete with you if you validated a business model profitable enough to warrant abandoning their current niche, however, at that point, you will have a lead.
When you offer better performance for a specific niche (X value is higher), you can charge a higher price than a competitor who offers lower performance.
Better Mechanisms – Better Products and Solutions – Better Case Studies
By only focusing on one person and one transformation, engineering efforts are more likely to create niche-specific mechanisms that deliver the transformation better than competitors – higher performance, and better value. Ways to improve the efficiency of the mechanism are found, which create higher contribution and higher margins.
Higher Market-Message Resonance, Higher Return On Marketing
The resonance of the marketing is a function of your transformation/claim, evidence that the claim is true (case studies), and specificity.
With the best niche-specific case studies, your marketing message will achieve higher resonance than competitor messages with worse case studies. This will lower CPL (cost per lead), CAC (the cost to acquire a customer) and increase ROI on marketing.
Higher Converting Sales Process
Learnings from previous sales are recycled and used to refine the current sales process. Sales reps’ conversion rates increase when they are only selling to one niche – they can converge to over 40%.
Your marketing funnel effectivity is improved over time as you are using the bottom of the funnel data to improve the mid-funnel content and top of funnel strategy.
All aspects of the funnel “tighten up” and the unit economics improve over time.
When you are focused on a specific vertical, problem, age group, role, etc.. targeting becomes accurate.
You can mine data/scrape data from social platforms and you can use the targeting features inside the ad products to create extremely specific audiences.
You can also use a strategy called “linking” or “mushrooming” – where you use the current momentum from the names and logos you are collecting to attract others who recognize the names and logs. This creates a chain reaction and “mushroom effect” that improves conversion rate.
Market-message resonance is dependant on audience quality. When you “niche down”, you have a higher likelihood of finding an audience that will respond to a specific message than if you didn’t “niche down”.
Not all niche, transformation, price, mechanism, access combinations will bare fruit. Multiple experiments in quick succession are needed to determine a combination that creates the highest yield.
Without organizing your experiments into N, T, P, M, A permutations, you are less likely to conclude an experiment with acceptable certainty. More data is needed to validate a large audience than is needed to validate a small audience. This results in false negatives and longer-than-necessary experiment timelines.
Committing to one niche at a time requires discipline.
Founders often find it difficult to be laser-focused on one niche.
It is common for founders to change their niche before they conclude their experiment. This can result in a false negative.
False positives can occur by running one experiment, once – the scientific method requires that the experiment results be duplicated in independent environments back-to-back-to-back, etc..
When do you expand niches?
When you exhaust your current niche and you hit a point of diminishing returns with your marketing spend – the rate of new customers entering the market is equal to the rate of new customers being absorbed by businesses – steady state.
At this point, the incremental increase in marketing and sales spending has little to no effect on the sales of the particular offer.
When this happens, don’t jump to a totally different niche, you stay as close as possible to your original niche and change your angle of attack by 10 degrees to open up a new green field. This will allow you to recycle learnings and development work and leverage your previous track record in the new niche.
Example: Facebook started at Harvard and achieved approx. 60% market share in 10 days, then they jumped to other Ivy league schools. Only after they completely dominated the market and experienced saturation, did they expand into other markets. Their expansion was always in an adjacent field.
The Components Of A Niche
Location – The physical or virtual location of the person.
Vertical/Industry – The industry in which the person is operating.
Role – The role or title the with which the person identifies.
Size/Income Level – Number of employees or revenue amount.
Current State – Current tools, metrics, and activities.
Desired State – Desired metrics and outcomes.
Problems – Hurdles or blockages preventing the person from achieving the desired state.
- VP sales (Role) at IT companies (Vertical) over $5M (Income) in USA (Location). Current Metric – CPA > $10k, but desires CPA < $5k. Paid traffic channel is not working. Outbound prospecting demo booking rates < 1% (problems).
- CEO of bootstrapped SaaS companies between $10k-$500k per month In Free Trade Countries. Current MRR < $40k, Desired MRR > $100k, Problem = unable to duplicate unit case with paid traffic and inside sales team.
- Director Of Talent Acquisition at Construction Company >$30M, current employee hiring quality is less than acceptable, too expensive desire situation = bring on high-quality candidates for the right price, problem = unable to locate and attract high-quality candidates.
The exact steps and tactics used to determine your niche hypotheses are covered in the niche validation method.
The niche hypotheses can be organized in this document: The Foundational Spreadsheet
The niche and transformation can be visualized using this diagram.
The niche can be found using this document: (Salesprocess.io Customers Only) The Report Method: Determining A Valuable Niche
The Island Example
Consider a man stranded on a deserted island (Island 1). Island 1 is small, there is no food, no clean drinking water, and no shelter or shade.
Imagine that there is a second Island 5 miles from Island one. On Island 2, there is the man’s family, a house, food for everyone, clean drinking water, his parents, and his friends waiting to welcome him back. The man on Island 1 desperately wants to get to Island 2. The desire is clear and there is strong motivation to make the transformation.
Let’s pretend that a salesperson comes to Island 1 and offers the stranded man a boat to Island 2.
Think about this for a minute. Does stranded man care about the specific type of wood from which the boat was made, or how many seats it has, or how much leather was used in the seating area?
No, the man on Island 1 only cares that the boat will successfully get him to Island 2. The man will be willing to pay any amount to solve his problem and achieve the transformation (Island 1 to Island 2).
The example above illustrates a transformation – the stranded man doesn’t care at all if it’s a boat that delivers the transformation – it could be a rocket ship, it could be a wormhole, it could be a magic pill that gets him to Island 2. He doesn’t care – in other words, the vehicle/mechanism used to achieve the transformation doesn’t matter to the stranded man. He’s looking for the path of least resistance – the cheapest, fastest, easiest vehicle to achieve the transformation.
When you are building your solution, you are looking for the best or only way to help your customer travel from Island 1 to Island 2.
The state 1 to state 2 change is called the transformation. This can also be thought as the promise or claim.
State 1 – The current situation (Island 1)
State 2 – The desired situation (Island 2)
Timeframe – The time in which the transformation happens (3 days)
The job of the entrepreneur is to provide a transformation at a price that the market is willing to pay using a mechanism that creates contribution.
Transformation and Promise Examples:
- CPA from $10k+ to less than $5k in 3 months.
- $10k MRR to $100k MRR in 12 months.
- Hire the best talent in the industry for 1/x the price in 2 months or less.
The exact steps and method to determine the transformation, price, and product hypotheses can be found here: (Salesprocess.io Customers Only) Mock-Up Method: Determining Transformation and Price
The price is the amount of money the customer is willing to pay for the transformation.
It is a function of the value created (value of the transformation), the amount of certainty the customer can attribute to the outcome that the transformation, and the competitors in the market offering the same transformation.
P (Transformation, Certainty, Competitors)
John creates a solution for construction companies over $10M in annual sales that if implemented correctly can save them at least 40 hours per month in administrative time. His customers agree that each hour of administrative time is valued at $40. The value created from his solution per month can be determined to be $1,600 ($40*40).
The yearly value created from his solution is approximated to be $19,200. However, this assumes that the client has a 100% probability of realizing this value. John ran an analysis using his customer data and concluded that only 80% of the clients are realizing the the 40 hour per month savings. He then assigns a probability value of 80% to the outcome for new customers and calculates a yearly expected value of $15,360 (80%*$19,200). He then prices his product at 1/10th the expected value – $1,536 per year. The customer agrees with John’s assumptions and buys without thinking.
In the example above, the metric John affected (administrative time) was translated to real dollars using customer-accepted assumptions.
The outcome’s probability value was found using real, historical customer data.
The outcome value and the respective probability was used to determine an expected value.
The price was then chosen to be 1/10th the expected value.
Charging 1/10th the expected value makes the buying decision a “no-brainer”.
It is difficult to find anything else that yields a 10X return.
The price is also affected by the competitors in the market.
Using the example above – John’s product creates $15,360 in expected value and he is pricing it at $1,536, however, imagine Mary, a competitor enters the market with a new technology that allows her to offer the same transformation with the same 80% certainty value as John for only $800 per year. The customer choses Mary’s solution over John’s since the expected values are the same, but the price to achieve the outcome values are different and the ROI is 2x when Mary’s solution is compared to John’s.
However, if Mary’s track record and customer results are worse than John’s – pretend that Mary can only offer 25% certainty, then her expected value is only $4,800 (25%*19,200), then the customer is likely to go with John’s more expensive solution since the ROI is greater than Mary’s.
This example illustrates the relationship between price, expected value and competition. Notice that the customer just cares about the expected value.
The expected value can increase over time with continuous improvement of the mechanism.
Mike chooses financial advisors as the niche and a transformation/promise of – “add an extra 7 high-net-worth clients per year.” He calculates that the gross contribution per year of a client for a financial advisor is $20k. The outcome value is then determined to be $140k per year (not too shabby). However, Mike doesn’t have a product yet and hasn’t yet validated his mechanism – this means that the probability of Mike actually pulling off the transformation is relatively low. Mike approaches a few beta customers with the transformation and the beta customers assign a 10% probability that Mike will actually pull of the transformation. The expected value of the transformation is determined to be $14k (10%*140k). Mike charges $5k to pilot the solution with his first beta customer. This transaction makes sense to the beta since $5k < $14k and the beta customer achieved a 2x ROI. After working on his solution for a year, Mike delivers the transformation and the probability of the outcome (7 clients per year) increases. Mike approaches another customer who is willing to assign a 25% probability to the outcome that Mike will pull of the transformation, making the expected value $35k. Mike pushes his prices up to $10k per year. This price increase continues as the certainty value increases.
The example above shows how prices can increase as the solution improves and the track record gets stronger.
With each new case study, Mike is increasing the certainty value or the probability of the outcome happening, which increases the expected value, which increases the price. The price will continue to increase until a competitor offers the same expected value for a cheaper price.
The mechanism is the vehicle used to deliver the transformation – remember the man on Island 1 doesn’t care if it’s a rocket ship, a boat or a magic beans that get him to Island 2.
In other words the vehicle used to achieve the transformation (mechanism) is independent of the transformation.
In order to create a profitable unit case or create contribution, the mechanism needs to be efficient – which means the cost to create the mechanism is less than the price you are charging.
Below are a few examples of technologies used in mechanisms and their relative efficiency values:
SaaS or Software
The marginal cost of a SaaS product is extremely low – meaning if the jobs to be done are carried out by a computer and software, the cost to deliver the transformation to one customer, could be similar to the cost to deliver the transformation to 5,000 customers.
Networks are incredibly efficient and they also have a unique attribute that makes them more valuable to each customer for every new customer who joins.
Networks are hard to start, but they are extremely valuable to the customer and the owner once they gain momentum.
Multi-Sided Platforms and Marketplaces
Founders who create networks, often start out with a SaaS offer – their product first aims to solve one problem for one person. Once there is a large customer base, they transition to a network that makes the customer experience even better.
Adding network effects to your business can significantly increase the durability, efficiency and value.
Standardizing a process or job and training others will unlock efficiency.
This method of efficiency is as old as the ancient Egyptians – when the Egyptians wanted their buildings made, they coordinated large groups of people towards a common goal with training and processes.
Training smart people to become consultants and leverage a process.
Training service providers to perform a series of “jobs to be done” that delivers the transformation.
This requires that the founder be versed at writing instruction manuals and standardizing processes.
Information Products and Training
The marginal cost to deliver an online training program is relatively low compared to the cost to deliver the training in person or live.
Instead of providing the consulting service in person or over the phone, the consultant can deliver the information via online videos, templates, and training programs.
This mechanism is more effective for delivering the transformation than in-person since the customers can rewatch videos and use phone calls for Q and A.
Online video training
Workbooks and instruction manuals
Support mechanisms like Facebook groups or Slack Groups
Coaching and Support Staff
Creating training products and coaching products will require you to be versed in training and presenting.
Engineering methods for solving for mechanism and contribution value can be found here (Customers Only).
Access Channels Explained
The access channel can be broken down into two components (traffic and conversion mechanism).
The traffic channel is the way you get eyeballs to the page and generate leads, and the conversion mechanism is the way you turn leads into customers.
Traffic Channels Examples
- Social Paid Ads – FB, Instagram, YouTube, LinkedIn, GDN
- Social Organic – FB, Instagram, YouTube, LinkedIn
- Organic Content – Blog Syndication and SEO
- Channel Partners – Other people who own the audience
- Outbound Prospecting – Cold calling, cold emailing, cold social
- Search Ads – Google Search and Ad Network
- Organic In-Person – Conferences and Networking
Conversion Mechanism Examples
- Automated Funnels – sales pages, order forms, upsell pages
- Inside Sales – Salespeople selling over the phone
- Outside Sales – Salespeople selling in person
Examples Of Combinations
- Paid ads + inside sales
- Paid ads + automated funnel
- Outbound prospecting + inside sales
- Outbound prospecting + outside sales
- Channel partner + automated funnel
- Channel partner + inside sales
- Organic In-Person + Outside Sales
- Search + Automated Funnel
- Organic Content + Automated Funnel
Below are some explanations of the access channels.