💰 Discover true willingness to pay, how big is your pie, ...
This is the 40th edition of Best 3 Podcasts of the Week 🥉🥈🥇, featuring My First Million, This Week In Startups, and Lenny’s Podcast.
I’ll be taking a 2 week break to enjoy Christmas and New Years. I hope you have a great time off yourself. See you on the other side!
What you need to know
🃏 Rig the deck in your favor
🥧 How big is your pie?
💰 Discover true willingness to pay
🃏 Rig the deck in your favor
🥉 Third place (3 min read vs 1 hour 1 mins listening)
Tim Ferriss is one of the Founding Fathers of work-life balance. His first book The 4-Hour Work Week introduced the concept of passive income as a way to achieve financial independence and reduce the need to work traditional 9-to-5 jobs.
Shaan relived his offline chat with Tim where they discussed his new project, CØCKPUNCH, what motivated him to work on this project, and how he rigged the deck in his favor to win regardless of the financial outcome.
What they say
Shaan paraphrases Tim Ferriss
He was like… I go into a project thinking how do I win even if this fails? Sure there are things like does this become popular or does it become financially successful. I want to win even if those hard things don't happen.
He goes… I only pick projects if I know the creative process of doing it is going to be awesome, if the people I'm going to meet along the way are going to be awesome, and if the skills that I'm going to develop doing this are going to make me more awesome.
He goes… If I know that the skills, the knowledge, and the network that I acquire along the way is going to make it worth it for me then I don't have to stress about the the popularity or the financial income because I'm going to win in either case.
Shaan Puri
What I say
Why it matters: Many podcasts discuss the frameworks and stories behind building a business. That’s all well and good. But, if you don’t pick the right idea to begin with, you’re making an already hard task that much harder. That’s because you’re not setting yourself up for success even if you fail financially.
Between the lines: Tim’s advice is so much better than ‘Do what you love.’ Doing what you love may make the journey more enjoyable. It may increase your odds of success. But, it doesn’t offer you a win if your business fails to take off.
You can de-risk projects by thinking about the thing’s you’ll do, the people you’ll meet, and the skills you’ll develop along the way. That’s the approach I took with this newsletter. I enjoy the process, I’m meeting great people (you), and I’m learning as I go. The result? I have the staying power to keep going and amazing readers that help me to improve each post over time.
🥧 How big is your pie?
🥈 Second place (4 min read vs 51 mins listening)
What’s the size of the pie? Total addressable market (TAM) is one of the most tantalizing reasons to invest in a startup. Investors love a big TAM. However, entrepreneurs can be known to inflate this to improve their chances of funding.
Jason Calacanis argues the more you massage the data, the less likely you are to get an investment. In this episode, Jason and Molly discuss the benefits of rigorously measuring your TAM, SAM (serviceable addressable market) and SOM (serviceable obtainable market).
What they say
Why people underestimate TAM
You don't know what your TAM is. The market is going to tell you over time because there's a concept called induced traffic.
When they built the Golden Gate Bridge the number of people going from San Francisco up to Napa increased dramatically. Why? Because it was possible. You induce them to do so by the nature of building a bridge.
A lower price, more optionality and a better product can induce traffic.
Jason Calacanis
What Uber naysayers missed
Let's take Uber, a quintessential company that exceeded their predictable TAM.
When you look at Uber's TAM you'd say 'How many cabs and black cars are in the city?'
Then what is the SAM? Some people like having a rental car because they have a family and they have a bunch of luggage so we'll take those out.
But wait a second... that wasn't a cab. We went into rental cars. So, some rental car people might actually do Ubers instead?
Maybe the person who is spending 48 hours in San Francisco will just use Uber. They're not going to rent a car. It's completely impractical and it's $75 to park every night.
The case of Uber going up against rental cars, public transportation and car ownership was not obvious. That's where TAM can exceed your expectations.
Jason Calacanis
How to work out bottom-up TAM
Look at what is reality today. Let's say somebody is going to start a scooter company. They say the number of trips is equal to all the Ubers and Lyfts and cab rides that are under a mile. Let's just say the number of rides was a 1,000,000.
How many days a year is it rainy or cold? Let's say that's 20%. Now we're down to 800,000.
People of a certain age aren't interested in this. Let's say that's 50% so now we're down to 400,000.
People who have a disability literally can't. Let's say 5%. People who are obese is a third of the country and it's just too physically stressing.
Just off the top of our heads we narrowed 1,000,000 down to 200,000. That's where the intellectual honesty of the exercise comes in.
If you're a founder listening to this you've got to be rigorous. You've got to put yourself on the other side of the table. The more thoughtful you are in a TAM discussion the more likely you are to get investment.
Jason Calacanis
What I say
Why it matters: Founders are ever the optimists. And that’s a good thing. You need positivity and belief when you’re being repeatedly punched in the face. You have to keep getting back up, put on a smile, and go again.
But too much optimism can be dangerous. Particularly, when estimating your market size and the opportunity ahead of you. There are often core assumptions that can make or break a business if they’re drastically wrong. You need to be prudent when calculating TAM, SAM and SOM to avoid setting yourself up for failure.
Between the lines: Human psychology dictates that we want to see the best possible outcome for ourselves. My advice? Recognize that and go into this process being aware of our human fallacies.
In a 40 year career, you only have 5 shots at building a company (assuming each company takes 8 years to start and exit). Time is our most valuable resource so be honest about your TAM and pick your market wisely!
💰 Discover true willingness to pay
🥇 First place (4 min read vs 1 hour 38 mins listening)
Many pricing strategies adopt a finger in the air approach. It’s meaningless to base your price on ‘How much would you pay for this product?’ You need more context to better assess price elasticity and the likelihood someone will buy.
Madhavan Ramanujam is a pricing consultant (apparently there’s a consultant for everything nowadays). Joking aside, I believe him when he says many companies get their pricing all wrong. His advice was both thought provoking and tangible, making this episode a must listen.
What they say
Prioritise willingness to pay (WTP)
I hope this is the biggest takeaway for your audience - you cannot prioritize a product roadmap without having a willingness to pay conversation.
I've learned from hundreds of companies that 20% of what you build drives 80% of the willingness to pay.
It's much better to find out what this 20% is so you can focus on it and nail it as opposed to not knowing what drives the willingness to pay and just trying to put everything out there.
Often, the 20% is the easiest thing to build. Companies often build it and give it away for free. Then they are chasing their tails building 80% of stuff that is driving 20% of value.
Madhavan Ramanujam
WTP question #1
Pitch the value of your product to your customers and then ask them 'What do you think is an acceptable price for this innovation?'
Let them give an answer. Then ask them 'What do you think is an expensive price?' Follow that with 'What do you think is a prohibitively expensive price?'
Acceptable prices are the prices where people not only love the product but they also love the price. If you're in true growth mode maybe you can price there. It's a no-brainer price to customers. There's no friction.
The expensive price tends to be the price that is value priced. They don't love you. They don't hate you. They would pay you but you know that's a neutral reaction.
Prohibitively expensive is the price they will laugh you out of the room.
If you do this at scale you'll start seeing cliffs in these kind of demand curves. Suddenly, when you cross from let's say $99 to $101, 30% might say it's prohibitively expensive.
Madhavan Ramanujam
WTP question #2
Ground them on a scale. Say 'On a scale of 1 to 5 would you buy it? 1 is I'm not at all interested, 3 is I'm neutral, and 5 is I would buy it for certain.'
What we've seen is if people say 5, you know they are only 30% to 50% sure about whether they will buy.
If they say 4 it's like 10% to 20% they will buy. If they say 3 and below they're never going to buy.
If someone says 3 for a certain price point then you can lower the price and see if they would move their rating to a 4 or a 5.
If you do this at scale you can come up with a demand curve and understand purchase probabilities.
Madhavan Ramanujam
What I say
Why it matters: Warning! The recent explosion of product led growth may lead you down the wrong path. It’s easy to be starstruck by freemium successes like Canva and Zapier, but the reality of pulling this off is slim.
Avoid being in a position where you give away the farm for free and then face an uphill battle trying to capture value from features that are nice to have. I echo Madhavan’s suggestion that most companies should reassess their product roadmap and ensure they’re capturing as much value as they’re creating.
Between the lines: The wrong pricing can kill your business. Just look at Gumroad. It’s a platform that helps creators sell digital goods and services online. They recently raised their prices 2-3X and received a relentless barrage of Twitter abuse for it. Gumroad has lost all trust from their customers… I wouldn’t be surprised if this leads to their demise in the next year or two.
Lesson: always check your customer’s willingness to pay. Without this insight, you’re running blind commercially.
Shoutouts
When I find newsletters, podcasts, or books worth sharing, I’ll feature them here:
An honorable mention goes out to this episode of MFM. It’s pure, unadulterated business entertainment:
Note, these quotes were pulled at different points of the episode. Some sentences were left out to make the narrative clearer and more concise. Podup is not associated or affiliated with any podcast (unless otherwise stated). All roundups are independently written and do not imply any sponsorship or endorsement by the podcast.