A lesson from business school that I'll never forget is simple: customers want your product or service to be free, perfect, and now. That's it. Simple.
And if I'm honest with myself, that's exactly what I want:
- the lowest price/effort possible,
- for the highest quality possible,
- as soon as possible.
But here's the thing: I typically only get to pick two.
For example, let's say I want to buy my dream house. I will either save up a large down payment over many years, or get it now with a large loan payment. Or, if I'm willing to give up my dream house… dream, I can buy a different house now - in a cheaper location, in worse condition, or in a smaller size - to keep the payments low.
I run into this choice regularly with contractors. Usually, quality is fixed, which means I trade off on price and timing. My default is to be flexible on timing so I can get a better price, but sometimes, a property emergency forces me to pay top dollar to solve a problem immediately.
Keeping these trade-offs in mind helps me make smarter purchasing decisions.
The Business Side
I also find the business side of this framework fascinating. In general, your offering needs to be at least 2X better than their alternative in at least one of those dimensions to get customers to switch.
For example, I target a return for my investors that's 2X better than an alternative investment. And, I guarantee a minimum return that's inherently much better than the stock market.
That's the trick for seeing companies grow: can they offer a 2X or even a 10X improvement? And can they do it in more than one dimension?
Think about when Netflix started streaming movies and shows. They solved for "now," which was 100X better than going to a video store. By setting a fixed monthly price, they also got closer to free than anyone else. The trade-off, at first, was a small A-list catalog, but they solved that too by producing their own shows and buying more streaming rights. It's no wonder they're worth $270 billion!
When Amazon started, it focused on books. You could buy any book cheaply, but you had to wait for it to ship. And, famously, Amazon solved the shipping problem to the point that it's borderline more convenient to order something from Amazon than go to a store (which may or may not have what you want).
So, if you're starting a business, ask yourself how you can be at least 2X better on price, speed, or quality. If you can achieve that, you have the start of a compelling offer.
If you're considering investing in a business, try to understand how it's at least 2X better on one of those dimensions than their customer's best alternative (and how sustainable that advantage is). If you only invest in those businesses, your wealth will grow quickly.