6. The Flywheel

And so now a key question, how are yougoing to grow? Because if you don't grow, you can't pay back your investors fortheir time or their money. If you don't grow well, then all you've done is bookyourself a job. How are you going to grow? Well, we're looking for a flywheel.A flywheel is a heavy device that might take a little while to get it spinning,but once you started spinning, it keeps spinning.

[00:00:39] And that's the goal. The goal isto create something for a group of people so that you can build a vibrantentity serving those you seek to serve without every day being a life or deathsales mission. So there are several ways to approach this. Let me take youthrough a few of them.

[00:01:03] The first one is pretty common.You figure out who your thing is for. You figured out how much it costs to sellone new customer. And as long as it costs you less to get a customer, then thatcustomer is worth. You can do it again. That's why so many people have lifeinsurance, life insurance involves a life insurance company hiring a sales rep.

[00:01:26] The sales rep largely gets paidon commission. The more they sell, the more they make. If they sell something,the insurance company makes a profit that profit can be used to recruit moresalespeople. And so we went from having, I don't know, a hundred or a thousandinsurance salespeople in this country, 150 years ago to having a real largenumber of them today because it's a very simple model.

[00:01:53] It's a form of direct marketing.You can measure it and as you make money doing it, you can do it more. So. Ifwe look at the meteoric rise of Google ads, this is proof that this can work.If it is worth $8, to get someone to click on your website. And in a minute,I'll explain how we figured out $8. Then you should be willing to pay $5 forthat click.

[00:02:21] So if Google has got a spotwhere you can pay $5, a click. And those clicks are worth $8 each. You shouldbuy them all buy as many as you can handle because every time you buy moreattention, you get more sales. It's very straightforward. Now it's easier totalk about than it is to do, but first you need to understand how it's done.

[00:02:42] So let's. Take a minute to gothrough website math, because many of you are working on projects where someonecomes to a website, see something they want and buys it. So how does it work?Well, let's say a hundred people come to your website in a given day and ofthose hundred people. Let's say 20 of them, click on the, find out more button.

[00:03:06] And of those 20 people, let'ssay 10, sign up for your email newsletter. And of those 10 people, let's sayone ends up being a customer. And let's say a customer makes a profit for youof $800. You've got a spreadsheet in front of you. You could figure out everyone of those steps, a customer at the end of the funnel, it's called a funnel.

[00:03:30] Is worth $800. How many peopledid you have to put at the top of the funnel to get one customer? The answer isa hundred, which means every time you get a hundred customers, it's worth $800,which is $8 a person at the top. Now Google comes along and Facebook comesalong and they say, we'll bring you people at the top for $2 or $3 or $4.

[00:03:53] And they auction those peopleoff. And that is why those companies are worth billions of dollars. It's thatsimple. There are folks who are buying attention from them, throwing them atsomething like a website and hoping that by the time people get to the bottom,they will be customers. Now, if that is your business, then early in theprocess and all along the way, your job is to make it better.

[00:04:20] Your job is to figure outexactly who is the kind of person that if they hear about what you do will behappy to hear about it. Your job is to find salespeople who are reaching out tothe right sort of customers with the right sort of message. So that thosepeople are happy to hear from you. Your job is to be really specific aboutwho's it for, and what's it for so that the cost of each sale is lower.

[00:04:44] Then what that sale generates inprofit. Okay. This seems very straightforward. Now we can make it a little bitmore interesting

[00:04:56] because some of those customerscome back in some businesses. They come back for 50 years. This is the model ofGillette, the razor company, the Gillette razor company. It's happy to spendbillions of dollars on ads. And give away razors at cost or less. So you willget hooked on buying a Gillette razor blade every week for the rest of yourlife.

[00:05:20] So what we need to know is notjust how much does it cost to get a new customer. We need to know what's thelifetime value of that customer. And this is where raising money comes in,because let's say it costs you 50 bucks to get a new customer, but over twoyears, The customer's worth $200. Well, you're going to need somebody to put upa bunch of 50 bucks so that those 50 bucks customers become $200 customers.

[00:05:46] And that is the promise you'remaking to your investors. You need some proof, you need some examples. You needsome heroes to show that it can be done, but that is the model. And so when welook on the internet, we'll see plenty of examples of venture back companies orfast growing startups that have figured out.

[00:06:05] This method, but it's not justfamous companies and it's not just companies on the internet. It turns out thatif you sell to elementary school teachers and you know, that elementary schoolteachers have a budget and you know how to hire salespeople and you know howmuch it's worth for an elementary school teacher to buy a bunch of coloringbooks or crayons or instructional AIDS from you.

[00:06:27] And you know how often they'regonna come back again and again, now you can figure out how much to pay yoursalespeople. And if that number is big enough that you can hire moresalespeople than one by one, you can add more and more schools to your list ofcustomers

[00:06:48] because that's number one,repeat customer. Number two, after you get a customer, then what do they do? Dothey tell the others? I want to talk about two ways that your ideas can spread.One of them is called the network effect. And the other one is the magic thatcomes from when people simply choose to talk about what you're doing.

[00:07:12] Okay. So the network effect, thenetwork effect says there are some products and services that work better whenmy friends and colleagues are using them as well. It is in my selfish interestto tell the others. So let's think about the fax machine. They're almost allgone, but they're still around. And I'm assuming, you know, what a fax machineis.

[00:07:37] Here's the question. When faxmachines first came out and they cost a lot of money, thousands of dollars. Howon earth did fax machines become popular? We don't even know the names of thecompanies that launched the first fax machines. We don't know anybody who hadthe first fax machine. Why would you buy.

[00:07:55] The first fax machine. Whoexactly are you going to send a fax to? No one else has one. If you try to senda fax to yourself, you'll get a busy signal. No, there had to be a reason thefax machine spread. And the reason as you've probably guessed is that once youhave a fax machine, you call your accountant.

[00:08:16] You call your lawyer, you callpeople around you and you say, You got to go get a fax machine because ifpeople go and get a fax machine, your, a fax machine works better. This iscalled Metcalf's law. Metcalf's law says the power of a network is the squareof the power of the people on it. It goes up exponentially.

[00:08:35] And so if someone told you aboutTwitter, it probably wasn't the Twitter corporation. It was someone who wantedyou to follow them on Twitter, because if you follow them on Twitter, theirlife gets better. Lots of people. Entrepreneurs have tried to build apps forthe app store and they have failed. There are more than a million apps in theapp store and almost all of them have failed.

[00:08:58] Why? Because if you come up witha really cool app, like here, this will tell you the weather in our town. Thereare plenty of people who say, yeah, I'd like to know the weather in our town,but you don't have enough time and you don't have enough money. To reach all ofthose people. You need the people who use the app to tell the others.

[00:09:19] And generally with only oneexception I can think of they didn't, they don't because one weather app is alot like another weather app and my life. Isn't better. If I interrupt your dayto tell you to go get a weather app. Okay. So the network effect, which we cantalk about forever, because it's so rich and powerful.

[00:09:40] If you can figure out how tobuild it into the thing you are making, you cannot add it afterwards. Thenetwork effect can lead to lock-in have logged in as the other side of thenetwork.

[00:09:56] Lock-in says now that people inmy circle. Are using this item. It's too expensive for me to switch. So ifyou're still using Microsoft word, this is the reason why, if you're stillgoing to the same trade show, this is the reason why it doesn't pay. To switchbecause if you switch, you'll be all alone. And the whole reason you signed upfor it is not to be alone.

[00:10:24] Lock-in permits organizations,companies that build something that is the center of a network to stay therefor a long time, too. If they're smart, continually improve their product orservice, keep connecting people ever more deeper, building more and morereasons why people want. To stick with you. On the other hand, if you become aselfish narcissistic monopolist, he'll just torture the people who are stuckwith you and the minute they can leave, they will, and both options areavailable.

[00:10:57] I hope you'll know which one topick.

[00:11:02] And then the next one, which isfar more common. Much more gentle, much less predictable, harder to build in.And it's this people talk about what you do with their peers, because it makesthem happy. I call this a purple cow, a purple cow is something we markable andall remarkable means is that it's worth remarking about.

[00:11:28] It gives you status or pleasureto tell other people. So when Sai made the Gangnam style video, it was seen bymore than 2 billion people. It's hard to believe given the number of people onearth, but let's say people saw it two or three times. It's still more than 500million people. How did that happen?

[00:11:48] Your life isn't better becauseeveryone else is watching the video. No, but telling your friends first gaveyou pleasure. Put a smile on your face sharing. It was good for you, or let'sdo the case study of Tom's shoes. Blake started a company and the idea was buyone, give one, if you buy a pair of Toms shoes, espadrilles mostly for women.

[00:12:12] If you buy a pair, they willgive it a similar pair of shoes to someone who doesn't have shoes. It was verysimple. Why did it grow? Why did it grow to a company that was at one pointworth more than half a billion dollars? Here's the story. If you are the kindof person who's wearing a pair of Toms shoes, and we'll talk soon about thiswhole idea of kind of person, but if you're somebody who is wearing a pair ofToms shoes, you do not get as much satisfaction from wearing them.

[00:12:40] If no one knows what you'vedone, then if people do. And so Blake put a little logo on the back of the shoenow think really hard about fancy women's shoes. It's really hard to imagineones with a logo on them. Tom's had a logo on them. And so your friends wouldsay, Hey Betty, Hey Veronica, where the sup with those shoes and you wouldsmile and say, these are Tom's shoes and I'm doing philanthropy because inaddition to being beautiful, I'm supporting someone who doesn't have a pair ofshoes.

[00:13:12] That conversation was why theperson bought the shoes. Because every single person who has ever purchased apair of time shoes already had shoes. That's not what he was selling. What Tomshoes sells is the story. You get to tell other people. And so the more youtell the story, the happier you are, and the more times is able to do its work.

[00:13:39] That's the purple cow, a purplecow is not funky or weird or edgy. It is simply remarkable and remarkable isnot up to you. It is up to the person who decides to talk about you. And sothere's a bakery in Paris and ruder sheriffs movie called pull them the thirdgeneration Baker who runs it. Now Appolonia makes a remarkable loaf of bread.

[00:14:05] They don't make begets. Theywon't sell you. One that in itself is sort of remarkable for a bakery in Paris.But the bread they do make the bread. They do make stands for something. It isbig enough to share it is worth talking about. It is something that people fromall over the world enjoy and want to talk about as something that represents anidea for them.

[00:14:27] That's not easy to do. It's noteasy to say I'm going to be Tom's or Poulin, but it is worth seeking outbecause if you can figure out how to create something that is remarkable. Theninstead of paying Google all your profits, instead of figuring out how to getenough salespeople, you have a different option.

[00:14:47] The option is to so delight thegroup you seek to serve that day. We'll tell the others,

[00:14:58] this leads to the idea of thesmallest viable audience. You're probably tempted to serve everyone. You knowwhat you're doing, you're passionate. You're skilled. Go make something foreveryone. If you do that, it is extremely unlikely that you will make somethingremarkable because the whole world doesn't want anything.

[00:15:19] The whole world is tooamorphous, too different, too confused, but there are groups of people. Thereare groups of people that want something. Something specific something thatmakes their lives better, but other people might not get the joke. And it'sthose people, if you can select them, if you can imagine them, if you canoptimize what you make for them, it's those people in the smallest viableaudience that will tell the others.

[00:15:47] And so the smallest viableaudience is not about saying I'm going to run a small business, not at allname, almost any super successful big company. Whether it's Adobe or HarleyDavidson, I don't care. They didn't set out to serve everyone. They set out toserve someone at the beginning of Adobe. It was only 3000 graphic designers whohad a Mac, 3000 of them.

[00:16:14] That's all you needed. If youcould amaze and delight those 3000 designers. They would insist that theircolleagues get some software as well. Harley Davidson, hundreds, or thousandsof customers, not millions, but if you can plant the seeds for an idea tomatter to those people, they will spread it. And so we have this opportunityand the opportunity is to dig deep and say, if it's not for you, it's not foryou.

[00:16:45] But if it is for you, this isexactly. What you were waiting for?

[00:16:54] Like all of the principals we'vespoken of so far, it takes three or four books to cover this adequately. Mygoal here was to help you realize the decisions that lie ahead, you should notbuild an entrepreneurial venture, unless you can describe your flywheel. It'sinsufficient to say I'm going to make a very good product because that's thehard part.

[00:17:18] The thing is it's insufficient.It didn't used to be insufficient. If you were the best blacksmith or saddlemaker in town, you were fine. A good saddle was enough, but now town is thewhole world. You are competing against everyone. What that means is that good?Isn't going to get you a return on all of your effort and time and money.

[00:17:42] You have to figure out how to bespecial, how to be one. We couldn't live without how to be the alternative thatwhen we hear about it, we can't wait. To engage with it. The opportunity youhave is either to find a niche that people haven't found before, and to come upwith a direct marketing approach where every time you reach out to someone, itcosts you less than you make in lifetime value, or you need to find the networkeffect.

[00:18:11] That earns you lock-in or youneed to create something so remarkable for the smallest viable audience thatthe people who care about what you do will not be able to go to bed tonightwithout telling other people. So here are the three questions that will let youknow you're on the path. Question one.

[00:18:32] Can you show me your directmarketing funnel. Can you show me that you can buy ads, hire salespeople, comeup with some other way to be in the world that costs you less than you make.Number two, the people you seek to serve. If they tell other people, what willthey say, what will they say about that thing you are offering?

[00:18:54] And number three, why will theysay it? What's in it for them? Cause if they don't care about you and they onlycare about themselves, there needs to be something in it for them. If you havethe answer to all three of those questions, you're in really good shape. If youdon't it's time to make some difficult decisions.