Market selection and opportunity evaluation

From: alexhormozi

Warren Buffett once told a story about his closest friend from Columbia Business School who was incredibly smart, hardworking, and ethical, yet their life outcomes were dramatically different. While his friend went into the steel business and earned a modestly good living, Buffett started his first private partnership, which eventually became Berkshire Hathaway [00:00:00]. This led Buffett to conclude, “it’s not as important how hard you row, but what boat you are in” [00:00:43]. This anecdote highlights the core idea behind market selection and opportunity evaluation in entrepreneurship.

Level Seven Entrepreneurship: Appraising Opportunity

The concept of “Level Seven Entrepreneurship” is about rising above the businesses to see them as products that can increase personal net worth [00:01:02]. It’s about assessing and appraising opportunity itself [00:01:12].

The Power of Time Allocation and Leverage

Material success is fundamentally tied to time allocation. Mastering time leads to mastering material success, though not necessarily happiness [00:09:53]. Money is viewed as the “denomination of time,” an IOU from society for future goods and services, or “other people’s time for value that we provide” [00:11:37].

The key multiplier on time is leverage, and the size of opportunities pursued (strategic decisions) is directly proportional to the amount of leverage that can be employed [00:12:11].

“It’s harder to build a small business than a big business because level 10 talent is only attracted to big opportunities” [00:13:18].

“Small goals and big goals are equally difficult. You have to spend time to achieve either of them, so you might as well make them big” [00:13:38].

This leads to the importance of applying leverage through four key frameworks: scaling the entrepreneur, scaling the market, scaling the deliverable, and scaling the business [00:14:01].

The “Boat” You Are In: Market Selection

The speaker realized that the difference between his income and that of other successful entrepreneurs often came down to one thing: “They picked better markets” [00:28:37].

A good analogy for market selection is a hot dog stand: if you could have one competitive advantage, it would be a “starving crowd” [00:30:18]. Even with a bad location or poor-quality hot dogs, a starving crowd guarantees sales [00:30:20].

Attributes of an Ideal Market

When identifying a business idea using the three Ps framework, four attributes define an ideal market:

1. Pain: The market must not just want but desperately need what you sell [00:30:43].
2. Affordability: The target customers must be able to afford the product or service [00:30:49]. For example, helping people improve resumes to get jobs is difficult if they have no money to pay for the service [00:30:54].
3. Tactical Targetability: The market should be easy to target [00:31:05]. If finding your ideal customer is too hard, it’s a disadvantage [00:31:14].
4. Growing: It’s advantageous to choose a market with a tailwind, one that is naturally growing [00:31:22]. Selling to a shrinking market, like newspapers, makes growth inherently difficult [00:31:26].

A venture capitalist saying highlights this: “Great entrepreneur poor market, market wins. Poor entrepreneur great market, market wins” [00:32:56]. The market itself is a dominant factor.

Scaling a Market

Once a market is selected, there are five ways to scale within it:

1. Up Market: Target multi-location owners, chains, or franchises [00:34:02].
2. Down Market: Target individuals who will eventually become your ideal customer, e.g., hair stylists who may one day own salons [00:34:09].
3. Adjacent Market: Move into similar markets with comparable core customer desires, such as lashes and nails if your primary market is salons [00:34:15].
4. Broader Market: Expand to an even wider range of related services, like med spas or massage businesses [00:34:25].
5. Deeper in Existing Market: This is often the favorite strategy, involving acquiring competitors, finding new platforms, or increasing ad budget to do more of what’s already working [00:34:36].

Scaling the Deliverable: Levels of Leverage

When evaluating or improving opportunities, scaling the deliverable to increase profit margins is crucial [00:35:37]. This can be understood through four “C’s” of leverage:

1. Labor: The oldest form of leverage, relying on other people’s work, but requires permission (paying people) [00:35:47].
2. Capital: Leveraging other people’s money to build fortunes, also requires permission [00:36:09].
3. Code: Permissionless leverage. Software can be duplicated at no cost, allowing for massive scale [00:36:34].
4. Content/Media: Also permissionless leverage, with zero cost of replication, as seen with podcasts or digital products [00:36:48].

The highest fortunes are built by combining all four, especially with permissionless leverage (code and content), as seen with companies like Amazon or Meta [00:37:21].

The speaker’s own career progression demonstrates these jumps in leverage:

• Employee (other’s labor) → Four figures/month [00:37:56]
• Trainer (own labor) → Five figures/month [00:38:06]
• Gym Owner (leveraging labor) → Six figures/month [00:38:13]
• Licensor (labor + media/content) → One million/month (income) [00:38:25]
• Acquisition.com (labor + media + capital) → Eight figures/month (revenue) [00:38:49]

The Delivery Cube: Optimizing Offerings

The “Delivery Cube” offers a framework for assessing and optimizing a business’s offerings [00:39:50]:

1. Setting: Can the offering be delivered one-on-one, in a small group, or one-to-many? Pricing can be adjusted accordingly [00:40:01].
2. Involvement: Is it a “Do It Yourself” (DIY), “Done With You,” or “Done For You” solution? Moving along this spectrum can optimize profits [00:40:11].
3. Support Level: What level of support is offered (tech, chat, email, phone, Zoom)? Different levels can be tied to different pricing tiers [00:40:20].
4. Consumption: If licensing material, how is it packaged (written, live, audio, video)? [00:40:41]
5. Speed and Convenience: How fast is the response time or service delivery (24/7, 9-5, minutes, days)? These variables increase or decrease perceived value and margin [00:40:55].
6. Value-Price Matrix:
   • 10x Price: Imagine charging 10x your current price. What would you deliver to justify that? [00:41:29]
   • 1/10 Price: If you had to deliver more value but for 1/10 the price, what would you need to build that costs nothing to replicate? [00:41:50]
   • Customer-Driven Growth: If new customers could only come from existing customers (no marketing), how would your client experience change? [00:42:29] This emphasizes the importance of word-of-mouth and customer satisfaction [00:42:41].

Six Base Units of What You Can Sell

All offerings can be broken down into six base units, each with physical and digital components [00:43:14]:

1. Products: E.g., dog bones (physical), a course (digital) [00:43:47].
2. Services: E.g., a massage (physical), marketing (digital) [00:43:56].
3. Access: E.g., event entry (physical), a virtual recording (digital) [00:44:03].
4. Media: E.g., a billboard (physical), digital media (digital) [00:44:17].
5. Risk: E.g., building insurance (physical), cyber attack insurance (digital) [00:44:23].
6. Money: E.g., physical currency (physical), cryptocurrency (digital) [00:44:29].

Thinking about these base units can help identify new components to add to an existing offer stack without significant operational burden, thereby adding value [00:44:36]. For example, an ad agency could license winning ad creatives as a digital product for additional profit margin [00:45:31].

By consciously choosing the right “boat” (market) and strategically leveraging different aspects of the “deliverable,” entrepreneurs can significantly accelerate their path to success. This strategic approach to entrepreneurship and selling strategies is crucial for growth.