Monday Dec 16, 2019
EP14: Parker Brothers Gave Me My MBA
If you want to dominate your market, here’s an inexpensive tip: Head down to your local Goodwill and buy a used version of the classic board game Risk… It seems that you don’t need AI, Machine Learning sims, or dozens of third-party load-tested and validated forecast models to predict how your business will perform in the next 24 months. Sometimes you just need to remember how you played a game that many of you probably haven’t picked up since you were 12.
Risk was a board game that taught many of us about basic market dominance…each player sits and views a map of the world where each player has a finite number of armies placed randomly in a territory. The goal is to budget – and risk – your armies to conquer your neighbor’s landmass – while also leaving some troops to defend the territories you already have won from attacks that soon come on other fronts. The player who conquers all the armies on the map is the winner.
No less of a result than we’ve talked about on these episodes.
Consider that at the outset of every turn you simply ask yourself, “What am I going to risk in order to boot somebody out of a territory, so that I can dominate it from which I can launch another campaign when I'm strong enough to dominate and adjacent territory?”
It’s the same theory in business – except deploying real dollars and resources vs placing your surplus of plastic pieces in Greenland (never a good idea).
If you and your leadership team just played Risk all day long, I guarantee you will see traits and ideas and lessons to be applied to your current business.
Because this math and exercise in risk and reward – and you’ve really got to do that kind of fundamental math if you haven’t already done so – is kind of like the game theory of business that must be done before we can figure out the real role of sales.
So let’s jump right into this episode of the Market Dominance Guys entitled – Parker Brothers gave me my MBA.
Market Dominance Guys is produced by ConnectAndSell and UncommonPro
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The complete transcript of this episode is below:
Corey Frank (03:24):
Two states of a company that you were talking about is either they're dominating at least one market or they're dominating none, which is very binary or they're in the process of dominating one or dominating none. But I think it would be helpful today maybe to spend a little time talking about, "How do I do a reset? I'm not dominating my market. I'm getting my ass kicked. Is it time to hang up the spurs because I already lost? Or is this an irreversible condition? Is this a reversible condition? What are the steps that I would have to take as a business to start my path back to market dominance? Or is it the company that if they do this correctly, who are dominant, will never have any ankle biters again?" But what's a company to do that finds themselves asleep at the wheel, wakes up after their C round and realizes that, I'm only going to grow by 12% this year.
IEB does only going to grow by about 4% this year. I'm in this purgatory, where, what do I do? Do I double down? Do I re-engineer my sales department? Do I re-engineer my marketing department? Do I introduce new products? Do I try to look for a strategic M and A record and pull the plug? So we'll be talking about that because as in session four and five, we talked a lot about discovery and how discovery is a destination strategy and it's just a step to get to the next step. And that reps need to believe in this discovery meeting in and of itself. And which is also an interesting point Chris, is that most sales methodology is actually, I take that back. Most sales organizations, sales managers, if you're a new rep, the teaching that I give you performing the discovery meeting is to get me the answer to these four questions.
Chris Beall (05:20):
Corey Frank (05:21):
I don't care how you do it, but get me the answer to these four questions. So they're not even taught that this should be a benefit to the prospect, they're taught that this is you're a blood letter and you need to extract this blood at any cost, and I need these four pieces of who besides yourself makes the decision, when you make a decision, as you had said.
I'm only asking questions here to get the buyer into this cul-de-sac that they know they're trying to be shuffled into and they're playing the game, and who's to say that they're going to give you honest information. So we can talk a little bit about that too in addition to how do you reverse it? Why are people, why are managers trying to teach this way that this isn't a discovery meeting, that you only need these four pieces of information and the job of the discovery call isn't necessarily a sale it's market dominance to talk about?
So in and of itself, the mindset has to shift for the sales reps, where that is a product that has value inherit in and of itself. Even if you don't get the sale, you've moved the needle to helping raise awareness, increase information, increase a market branding in the market itself even if you don't get the sale. That's a tough equation for a lot of sales reps to solve in the binary world of did you get the sale or did you not? But even if you didn't get it today, you may get it later. So I think those are three broad topics we could cover today if you're game.
Chris Beall (06:49):
Sure. We could probably get a book out of each one of us. That's a really, each one is pretty big.
Corey Frank (06:55):
Where would you like to start? How to reverse the effects of aging and as a terminal? Why or how do we better coach as leaders our team besides just extracting the form bloodletting questions and how do you square the circle that this is a product in and of itself that says value inherent in and of itself, even if I don't get the sale.
Chris Beall (07:16):
Yeah, let's start with the big one, which is how do you reverse the effects of aging? That's very near and dear to my heart right now. Actually has been for about the last 25 years. So I like, for instance, I actually ran all the way to the Seattle sailing club yesterday, just because if you go out and run for a few hours every day, you will reverse some of the effects of aging. It's actually a pretty good example. It's a simple process. You run it every day, you run it long enough and it has an effect, and I think it's very similar to the issues around your aging position in a market. So I think most companies find themselves in exactly the situation you were talking about, which is they don't dominate any market, but they can't be sure.
I think step one in the question of market dominance is, you need to discover the truth about whether you might be currently dominating market. It's easy to forget what a market is and a market is a set, which means it can always be expressed as a list of those companies that for your offering are inter-referencing.
That is if you sell to one, you will lower your cost and risk associated with selling to all others in that set, that's the nature of a market. I don't know, markets are naturally bounded because you get to the edge where you find a company that will not be influenced by the sale of your offering to anybody in the set. That's the natural boundary. So it's entirely possible that you actually do dominate a market and you just don't know it. So that's number one is you've got to go find out what your current status actually is.
Given that the relationship between the markets as natural entities, that is if you do the research and the analysis and ask yourself that inter referencing question, you get a list and who you actually sold to in the past. It's often somewhat rather coincidental mostly because sales itself is the means by which markets are dominated, and sales is very rarely aligned with markets, natural markets, real markets. And so what you do is you find yourself in three or four or seven or 31 markets or whatever, and if you were to make that list, which is a good exercise, what are all the markets oriented? What's the rule?
Well, market is a list of those companies that are into referencing and you do it in a rigorous way so that you're not fooling yourself like, "Oh yes, of course," because Harry the pencil manufacturer bought from us then George, the grocer certainly is more likely to. That's the sales person's fantasy. But a proper analysis will show you generally that there is one market that you dominate.
It's a funny situation. There's a reason you're still in business. I mean, you can actually flip the reasoning around. If you're still in business after a while you probably dominate a market, but you may not know what it is. You may not have been explicit about what it is. So step one is go make those lists and find out if you dominate a market because if you do-
Corey Frank (10:26):
If there's something that you're still good news, step one, you're still alive.
Chris Beall (10:30):
And if you want to reverse aging, the first thing you have to determine is that you're alive and aging. If you're not alive and aging, you probably can't do very much about your aging.
Corey Frank (10:40):
So we will create an algorithm and then if statement for all of this. I love that.
Chris Beall (10:45):
So that's step one, because, and the reason that's such an important step is, in the likely case where you'd find a market that may be small, that you dominate, you should ask yourself the question does the gross profit flow from that market support the entire overhead of the company.
This is one of the glories of actually having a P and L that's set up correctly. Is that you can really go to your P and L and you're not allowed to cheat here. You can go in and be realistic. That is if your P and L has below the line expense items that properly are allocated to the sales function, or maybe this marketing function, or maybe marketing and specific product within market for this list support function.
You can do some work there and say, okay here's my true overhead, but whatever your true overhead is, you have to ask yourself, the question, does the gross profit flow from my current dominated market, allow me to be a company of the size that I am? So having done that, you get an answer to that question, which is almost always no, because you bloated your overhead over time.
By the way, if you have ventured in finance, you actually deliberately blooded you overhead like crazy because that's what venture capitalists ask you to do is just spend their money. They call it putting it to work because they have no more evidence that the money is doing a good thing. Other than that, it's going somewhere else. It's not stay here, and we certainly didn't give it to this company to have it sit in the bank. [inaudible 00:12:19] banks checking account offering is not what venture capitalists are looking to fill.
They're hoping that money goes to work. It's actually a little bit of a silly idea, but it has some soundness to it. But anyway, it's how they work, and therefore venture finance companies tend to take on a lot of overhead and the answer is always, no, even if we dominate a market, we can't cover our overhead, but that's okay, because our marketing includes future venture capital.
So you're on a path and the path is a different path where you say, well, I'm going to get this D round or this E round or whatever. But at some point that ends up being a below threshold question that is here. You have to either sell the company, which is actually the plan, or you have to shrink your overhead to match the gross profit flow from the markets that you are confident in, which always includes every market that you dominate. You got to do that math. It's the fundamental math the business must be done before we can figure out the future role of sales. This step is I would say this step is never done.
Chris Beall (14:12):
I mean, it's an obvious step, but it doesn't seem connected in folks' heads that you have to do this first because they see all the revenue as being reliable. But in fact, their revenues divided in two and therefore the gross profit flow is divided into two basic sets.
One is the set of all profits from markets I dominated and therefore I can comfortably predict the future. I can forecast. So there's a relationship between market dominance and forecasting that's interesting. The entire sales forecasting process when carried out or the revenue forecasting process, not sales, but revenue forecasting process when carried out a year or more actually has a hidden assumption and that is that that revenue is forecastable. But non-market dominant revenue is not forecastable fundamentally because after all, you could have the dominant player decide to play a game in that market and throw you out.
One of the reasons that you want to be the dominant player is it opens up a whole bunch of games such as, "Hey, we'll reduce our gross profit flow in here a little bit and price crush everybody else in this market, and then when they're gone, we'll enjoy it a little bit more." To the victor, will go the spoils.
The fundamental nature of fighting when you spend in order to fight and you take risks. But when you do it from a dominant position, when I've got the aircraft carrier and you have the whatever it is, a little destroyer over there or whatever, I often will choose to fight just to get rid of you. I prefer to have an ocean that doesn't include you and your stupid destroyer. You can't do anything about it. This is the point.
The point is when you're not the dominant player, if dominant player decides that you are a threat and they decide to spend the energy time, money, whatever, to attack you, they have a play they can run that you can't play unless your pockets are infinitely deep.
So let's ignore infinitely deep pockets which I call non businesses. Those aren't businesses at all. Those are companies perhaps like venture finance companies, but they're not businesses.
A business actually lives and grows off its net profit flow, and therefore must have a gross profit flow, and therefore it has to have, in order to plan, has to forecast ability across profit flow and therefore must dominate at least one market because that's when they can play this [game 00:16:36]. They can choose to attenuate their gross profit flow in order to increase their hold on a market. Generally, for the purpose of being able to go launch themselves into another one. That's why you do it.
I don't know, this is tough for this book because most people I think of an age to read this might not have ever played the game Risk. Risk is the game that those of us of a certain age grew up on that taught us about market dominance.
The way you play risk is you decide at the margin, what am I going to risk in order to boot somebody out of a territory so that I can dominate it from which I can launch another campaign when I'm strong enough to dominate and adjacent territory.
I mean, if you just played Risk all day long, I just applied it to your business. You do really well because it the ultimate simple game and it had chance in it and everything, which is true. There's a lot of chance out there. Your product might not be as great as you think, or technology might change out from under you. Secular changes could occur in the economy. You can end up, if you're in the real estate business and the economy turns upside down with regard to real estate. Well, the market you dominated is no longer such a wonderful thing to dominate. Now, that sucks to be in there.
Corey Frank (17:56):
That's a great analogy Chris, because you think about the risk board if when you get the random assignments of your countries with the cards at the beginning of the game, and you may look down and say, Holy cow, I got three of the five territories in South America. I think I'm going to start dominating there first to get your beachhead. Then if the other folks, there's always one guy in the group that puts all their armies in Russia and thinking I'm going to start there and I'm not going to have all these little satellite, little armies. I'm going to start there and then invariably what happens, the little ankle biters start nipping at the peripheral of this big guy and he doesn't have a big army anymore because he has no beachhead to expand off of that and that's very, very compelling.
Chris Beall (18:43):
Yeah, this is funny. I've thought about this before. That'd be interesting to hold a one week seminar in which all people do is play Risk for about two or three hours, and then you talk about what you learned and you actually have the game recorded and analyzed. It's like what are you trying to do here? Because it is the game that matches the challenges that we find around market dominance.
The funny thing is, and this is, I think what folks don't get, I'm going to jump to the other topic for a moment, is the duty cycle, the core act of market dominance is acquisition of one net new customer gain market. And the impact is all of the gross profit flow that will happen not from that customer alone, but from that customer and the increased opportunity to take other customers and put them in your portfolio because of the reference ability impact from that first customer.
So this is why there's a bunch of other elements to this equation that are really interesting, and we don't have to get into all of them. But for instance, time to value is a big element, because time to value can affect time to reference-ability and the act of reference of being reference able or the state of being reference able is the state you're trying to put a majority of that market into. So you're trying to get a book. I call it rolling a boulder downhill. You're pushing the boulder up hill, up hill, up hill but you're spending energy trying to get enough of this market that the boulder starts to roll down hill and all boulders that roll downhill get to the bottom of the hill. They just do. It's the nature of boulders and the nature of hills.
It's a really simple idea, but you have to, if you think about it, if I'm rolling a boulder up this hill and every once in a while, I run away from it and I go over and I roll a boulder near the bottom of another hill and I forget to get this one all the way up over the hill to where I dominate, I get a bunch of boulders when I'm pushing up hill. That's all I get. It never gets easy.
The great rule of business is, there's a point where it gets easy and the point where it gets easy, if you make a list of all those companies for whom you could make a next sale pretty easily, that's the rest of the market that you're dominating.
So, once you identify a market that you dominate, you actually don't have to go gather the rest of it. You can use the rest of that market as a financing vehicle so that it turns into it a different thing. You'd have to be careful of threats, your Russia situation. You have to be careful of threats, but then aware of them, but not obsessed with them because you're done. You got extra plays. You can run, but be aware of them. You have to be aware of secular forces, which you can only deal with with financial buffers. So that's why we keep cash in the bank because there may well be something that happens we don't predict, and we have to weather a storm.
Those things could happen in a business, but we should not at this point simply say, "Oh, I got to get the rest of this market." The purpose of the rest of that market for your business is to provide you with the flow of gross profit that doesn't cost you much to acquire, including future sales in that market.
So you can take that money in excess of the buffer that you need and choose another market of the right size that you can afford to go after and now go roll another boulder up the hill because this one's rolling down the hill. Time to go put some effort into your business, and this is not done. It should always be done once you identify one. So this is the opposite of what everybody thinks. So what everybody thinks is, "Oh my God, I got to go find one to dominate." It's almost always the case that if you're in business, you dominate one market. You just don't know it. It's pretty small.
Well, it's just what you think and you just have to be realistic and go. This is the one I'm sure of, how much excess gross profit flow can I extract out of it without hurting my reputation. You've got to provide good service and because otherwise your reference ability goes down. With bad service, you can turn around and push the boulder back up over the hill. That's a really bad idea.
You have to monitor whether folks are still reference able, whether they're still getting value, that kind of stuff. But the conservative play is to say, I just want this one, and they will ensure your survival right up until the point where the secular forces of the world, either competition or change in the economy cause you to suddenly not be able to forecast properly up to two years. And when you can't forecast properly, then you have a problem because you can't rely on that gross profit loss. What have we dominated market looks like as a venture capitalist? Who is providing or a bank, who's providing you with money at a very, very favorable rate?
Corey Frank (23:48):
So these equations that we've been taught in business school and marketing for a while, or these types of graphs here cost five to 10 X more to acquire a new customer. We've all seen the box where you have the four quadrants in the lower right quadrant is it's five X easier to get those. You know what I'm talking about. It sounds like it's missing a piece. It's not just go getting any customer. It's getting a customer in that existing market that you're trying to dominate. That's what makes it easier. Not just any random customer, an existing customer at all. They have to be in that marketplace. That's how you're going to move this boulder much easier.
Chris Beall (24:28):
The big issue I'll call it the impedance mismatch that makes companies operate chaotically when it comes to engaging the outside world, not just the world of potential customers is how sales is organized and how sales is operated. So sales is organized according to territories or whatever, but tends not to be tightly organized around markets, real markets, which have these inter referencing capability. That is a sale is a sale, is a sale is a sale. Although we all know it's not, we all know there are customers we love and when we go, wow we got that one, isn't that great? And customers that when we bring one in, we can feel it. It's like the sales person asked for extra whatever.
The first thing they ask for is discounts that don't make sense. Everybody goes, why are we doing this? And the answer is because the sales person wants the commission and they don't want to lose their job. Why does the manager let them do it? Because the manager doesn't want to lose their job. I mean, it's really simple. It's a cascade of conservative fear-driven behavior that drives out this rationality of saying no, no, these are the good customers, and these are the non-customers and says, but wait, wait, wait it's revenue.
But wait, what's being ignored is, that revenue could actually have negative value. Even after you look at it on a P and L and you go there's the gross profit flow. It could have huge positive value. Does it represent a legitimate beachhead in a new market? But using luck or the desire of a salesperson for a commission or the fact that Joe knows Mary, using those as the ways of identifying your next market is truly insane.
You're putting the whole business at risk in order to make a salesperson happy as you can't figure out another way to motivate them. I mean, it's really rather strange. And I'll go all the way back to, this is what I'll call the conundrum of capitalism.
Capitalism taught us something about sales that has not been widely recognized. Capitalism taught us that sales has a purpose. Dispose of the inventory to generate gross profit flow. It was the push out of the factory that organized all of sales because the factory is going to keep making stuff, and we got to get rid of it. And since we can't keep making it at the margin, we may as well just keep making it unless the market gets saturated in such a way that it starts spitting it back, vomiting it back on us. That tends not to happen in most markets.
So we learned how to organize sales and operate sales. According to the principle of get rid of the inventory, which is why we discount. In the modern world of digital products, there is no inventory. You discount because you're afraid that if you don't make the sale, you're not going to cover your overhead. The discounting and sales competes with your pool of capital. Your pool of capital if you've had a pool of capital would also allow you to say, you know what, I don't have to worry about this little issue of whether we have enough money flowing in. I've got my pool of capital and I'm going to focus tightly on making sure I dominate a market because that's-
Corey Frank (27:44):
But I don't have inventory, but I have overhead in costs. I spent X amount of dollars on ad-words. I spent Y amount on SDRs Z amount on my marketing stack. So it's ironic that it's inverted. Before I had this big factory with a warehouse full of hale bales that I needed to get out of there. Now I don't have that, but I have all this other costs that gets the Hale bales off the door. That's where that panic sets in to discount or to get. I got to cover my net for the month. I got to be profitable for the month.
Chris Beall (28:14):
And many times, those that you just described are all above the line. There they are. They're all actually accounted for as cost to goods.
Corey Frank (28:23):
Chris Beall (28:24):
But you just pointed out that they're not. They're the equivalent of a factory that's sitting there producing nothing, but when it produces, it produces a weird thing, which is revenue.
But from running a business perspective, it's really producing gross profit. But what it does within a dominated market and outside of one are radically different with regard to the future gross profit, which is what you really care about unless you're going out of business tomorrow.
This is actually the fundamental reason we need capital in modern companies is not to have a factory, is to have a buffer against uncertainty when we decide to either fight within market, you got to have the ammo to fight. I want to throw somebody out. I want to expand into an adjacent market. So I know that's going to cost me money because those initial sales aren't pushing a boulder up the hill. I don't have the reference ability and I got to break force my way in there. And all of this is confounded by another factor, which is the one that's I think the hardest for people to think of. The replacement cycle for most products in B2B is three years, therefore only eight point five-
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