Mental Models of Successful Business Owners | Part 1

How much more successful would you be if you had lunch once a week with insanely successful entrepreneurs who share their biggest secrets on how they think and achieve success? Grab your seat at the table, because this is business lunch with Roland Frazier and Ryan Deiss.

So one of the first and most important things I think, to think about when we're thinking about key models is that the map that we're using is not the territory. The map is not the territory. Here's what that means, is that we have in our heads and in our businesses, we've got maps of how we believe things are. And we do that because all of the details are too much to keep up with all the time. But the territory, the actual reality that exists in our business and in our customer and in the environment in which we're competing, is not the map. Right. The territory is very different. The reality is different than the things that we use to allow ourselves to think better. And one of the big examples of this is if you have a bunch of people in the dark or blind going up to an elephant that depending on where they touch the elephant, they are going to have a different idea. Their only experience with the elephant in the dark is that it's kind of like a snake. That's the trunk, that it's kind of like a fan. That's the ear, It's a spear. That's the tusk. It's a wall. That's the big part. The tail, it's like a rope. Right. We don't know what it is because we are bringing only the observations that we can have at any given time. But the reality is much, much bigger. The rest of the elephant is important for us to see where this shows up in our businesses in focus groups. So focus groups don't really give us an accurate picture of the reality. What gives us an accurate picture of the reality would be to run a validation test. A validation test would be a dry test where we actually offer to the market. We run the ads, we mail the emails, and we offer the product for sale and they buy it. They put it in the cart and they buy it. That tells us that they want to buy it. The focus group will tell us all the things that they think they want us to hear because they want us to feel good about it. And that's great. You know, it's an older way of doing things, but it wasn't the reality. The reality is the validation test. The map is given by the focus group. Another place you see it is with customer surveys. A customer survey where you're saying, what do you think this product will be like? What will you think if you like this or don't like this? That's not nearly as good as a review of the product. The review of the product is an actual buyer. That's why we like on Amazon, when we're looking to say, what are we going to do to create a product or to enhance a product or to come into a category, we look at the reviews first and we look at the verified purchaser reviews because these are people who've actually spent the money and are taking the time to give feedback. So we prefer the reality of the review of the person who's actually experienced, or the reality of the person who's actually paid for something in a validation test to a focus group or a customer survey. It's the same thing with finances, right? In our business, the map is the budget, the territory is the actual spend. How many times does actual vary from budget? Almost every single time. So it's really important to take a look at our actual spend, not just our budget. And then when we go and project out into the future, we do these things called proformis. But the actual results that we experience are always different from the pro formas, the. So how can we use this map and territory in our businesses to think more clearly? We have organizational charts that tell us the lines of communication that are supposed to happen and that there are these people and they direct report to these people. There's a span of control of the number of people under a person that is ideally somewhere between 5 and 7, depending on what surveys you read. But that organizational chart frequently doesn't represent the reality of how things get communicated in a company, because there are always back channels. And we have hypothesis when we. We have hypotheses when we do testing and we think about, you know, here's a new product we're going to do. Here's. We think that the customers are going to want this. We think this will be the headline that performs the best. And we think that this funnel with this order of offers arranged in this sequence will be the highest performing thing. But the only way that we ever really know is to conduct split tests. And then we have our SOPs that we put into our business that we say is the ideal way of doing something. But if we're not continually looking at the reality to know how it's actually being done, and then updating those SOPs, then they're going to be ineffective, out of date, and they're going to be incredibly inefficient for the new people that come in, either as a buyer if you sell your business, or as a new hire trying to follow the sops if they're not accurate. So this, this is important that throughout your business, as you are thinking about how can I scale impactfully, how can I really get to the next level? You need to be looking at the realities and not being dependent on the maps. The maps are helpful. You should have SOPs in your business. You should have pro formas, you should have budgets, you should have an org chart, you should make hypotheses, you should be talking to customers. But don't forget that that's just half. That's just half. You've got to have the other half. Okay? The second model is first principles reasoning. So this is something that is used by physicists and smart people, everyone from Archimedes to Aristotle to Richard Fenman, Thomas Edison, Nikolai Tesla, and Elon Musk. It's called first principles reasoning. And what Elon describes this as is you're boiling things down to their fundamental truths, and then you're reasoning up from there. And that most of our life, we're thinking about analogies again to help us, right? But we're just copying what other people did. And like a clone, each time that we make a copy of this model that we thought was good for them, we're always seeing tweaks. There's. It's the grapevine effect, right? If you have 50 people in a room and you whisper a message to somebody and each person passes it along, the end message is dramatically different from the message that started out. So the step to do this would be the very first thing we want to do is identify and define what our current assumptions are. So that's why we did that stuff at the beginning of this. Some of our assumptions might be serving us fine. Like, it's. It's. We're able to function with them, but what if. What if they could be a whole lot better? So a couple of examples. And this happens all the time. I can't tell you how many times I'll get in a consultation. And the whole challenge with the business is based around a faulty assumption, right? And they haven't gone back and thought like yesterday, the business was amazing. Business has grown from nothing to $12 million in sales in a couple of years. Had great profits at first, then had some faulty assumptions that caused it to go negative, and now we had to do a workout on that business, right? And the whole thing that we do is we say, okay, well, what are the things that got the business to where it is right now? This is what I want you to guys to be thinking about for yourselves too. And we'll do an exercise in a minute. What are the things that got the business into the place that it is right now and good and bad. And then what if we were going to do this again? We were going to scrap everything, we're going to go back to the first principles and say we're going to assume nothing and we're going to construct this business again using what we know now to be true. Because a lot of times we thought things were going to happen and they didn't happen that right way. And ultimately it was a challenge. In the thing I did yesterday, the challenge was, was I need to have all of to expand rapidly. I need to own all of the underlying. But when we went through the process, we said, okay, let's go first principles on this. We found out that the truth was that it wasn't necessary to own all the stuff. And I've had that happen. I can think of three in the last year, significant eight figure businesses that I've gone and helped to look at where they are and why they're not farther along or way more profitable. And we've been able to find that there's, there's an assumption that's been made about the need to have certain resources that the company owns and we can actually create a business model that's completely different that accomplishes exactly the same thing with the ability to move way faster because there's not a huge need for capital expenditures or labor. Right. So this is really important to think about. So a couple of examples. Jerry is a person who is in one of our masterminds. And Jerry said, I am acquiring luxury real estate to Airbnb out. So I need to go buy a whole bunch of houses that are really nice and then I'm going to Airbnb them and ultimately rent them out for more than the cost of the mortgages on those. And that will enable me to ultimately have a bunch of paid for houses, but I need to go raise a bunch of money so that I can do this. Well, in raising the money, he's going to have to give up equity in the business, right. Or he's going to have to take on a whole bunch of debt. And so the question was, is there a way to maybe not have to take on the debt and not have to give up equity in the business? Does he actually need a fund? That's the first principle. Because the assumption he's making is he needs a fund to do this, but that's an assumption based on the assumption that he needs to own the houses, right, to get the income. So we have to go all the way back and scrap everything and then build from the beginning. Another gentleman, Chris, Dan, he had a cost. He was creating these mugs that were made out of baseball bats. And they're the unit cost, the unit economics. Like, how much does this cost? How much does it sell for? How much does a customer acquisition cost? How much is the cost of fulfillment? Is that greater than the lifetime customer value? We go through that formula and we is this going to work? Right? So he's got a 1350 cost. That is an assumption that that's the cost to create the piece of. Of inventory that he's going to sell. So our second step is that we want to question each one of these assumptions, right? So each of the assumptions that we make. So the first step is we've got to know what are the assumptions that we're making. I need a fund. I have to have a cost of this much money. And this allows you to break the problem down into its fundamental principles. So then for Jerry, it's well, is ownership actually required to achieve the core objective of having a bunch of houses that are super nice to rent out on Airbnb? Is a fund required to actually have ownership? That's another assumption, right? And then for Chris, it was, what are the actual material component costs of this thing that he's creating? What's the commoditized cost of the wood, the burn, the labor that goes into creating this thing? He wanted to create, because what he was doing was he was actually going to schools and getting the baseball bats that were used up that they were getting rid of, and he was cutting them up and turning them into mugs. And so that meant he had to go and find a relatively scarce resource, which was his ability to get raw materials was limited by the number of schools that he was able to contact and contract with to go and get the bats that they're getting rid of. Then he's got to cut that, burn a logo into it. He went out and licensed from most of the major baseball leagues, and then create this mug right from it. So what if instead that could be actually manufactured? What are the component costs of this thing that we can start with? Right? And then we're going to say, what are the new solutions that we can come up with based on having a clear idea of what these assumptions are and questioning each one of them and saying, can we do this different? Right? So Musk has done a great job of this with Tesla. When he first went in, the cost per kilowatt hour for a battery was $600. And he just said, okay, well it can't possibly cost $600 because this is just, this battery is just an assemblage of materials. So what's the commoditized cost of these materials if I was just to go out and buy each of them in bulk? And he was able, I don't know where he is now, but he was able pretty quickly to get from 600 a kilowatt hour down to $80 a kilowatt hour, which made the whole process of Tesla possible. So I think the occasional richest guy in the world, they're all fighting for that these days, right? But the occasional richest guy in the world or richest person in the world is a good person to look at. Same thing with SpaceX. He was like, the assumption at NASA is we create this rocket and then we send it up and then we start over and we leave the junk up in space, right? What if we just didn't junk that billion dollar thing and we reused it? That's a pretty basic fundamental assumption. And with payment, PayPal too, it was, what if we could actually make payments by email? These are really simple things, but they're new solutions that allowed them to create a completely new approach to the industry and solve giant problems like we can't possibly have a car because it costs way too much to get these batteries in place and then replace them. Okay? So that to me is really, really important as we go in. So for Jerry, we said, well, actually we could go and find an existing fund partner that can save all the time and cost and liability of a fund. We can just go out and partner with people that already have the funds and do joint ventures and those people can fund. And by the way, there are debt funds that are significantly less expensive than giving out equity. And there's an unlimited amount of capital that's out there chasing real estate and similar deals. He could also get a bank partner that's already got REOs, meaning repossessed real EST properties, to rent out those properties and turn a non productive asset into a productive asset. We also said, well, what if you go to luxury real estate brokers and say, why don't we approach your customers, Mr. Or Ms. Broker who have the luxury real estate and say, instead of selling the home, let us take over management of it. And that management can become a huge business. I just helped the company exit that did nothing but manage Airbnb and VRBO homes up and down the west coast. And it was a mid eight figure exit for them. So it's a huge business. Right. So thinking about these different business models and getting rid of these assumptions that Jerry had allows him to go way, way faster than if he had to go and get attorneys and then do a dog and pony show and figure out where he can go to get investors. And all the time that that took, he could have just partnered with people that already had what he wanted. Right. That's the thing, that's the key. And every time you go into yourself because think of yourself as a consultant to your business, you should be thinking about what are the different assumptions that the business is making that we could do completely different that will allow us to move significantly faster. For Chris, it was that maybe let's not get the raw materials from the bat and we go out and source the wood and the manufacturing and we could even do labor overseas. And then we reduce our cost of goods sold by 90%. So instead of costing 1350 to make this thing, it's only $1.35. Right? That is how we do this.

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