Advice on Choosing a Target Customer

The Strategy

Elon Musk said you can either do a lot of good for a small amount of people or a little good for a large amount of people. It's way harder to do a little good for a lot of people than a lot of good for a small amount of people. Tesla started at the top, selling the $250,000 Roadster to rich people. Then, they gradually went down-market with the $100,000 Model S, the Model X, and finally, the mass-market Model 3. Each step required significant infrastructure and resources.

If we have the ability to decide what we are going to sell and to whom, we might as well stack the deck. This means Selling to the Right People. Value derived from clients depends on their inherent worth, not just the service provided. For example, the Conversion Rate Optimization (CRO) for a high-revenue business yields significantly higher fees than for a low-revenue business for the same work:

• $1,000,000 Per Year E-commerce Business:
  • 10% Increase = $100,000 per year
  • You charge $36,000 per year to do that.
• $100,000,000 Per Year E-commerce Business:
  • 10% Increase = $10,000,000 per year
  • You charge $3,600,000 per year.

You make 100 times more money for the same work. So, how do you go about Finding the Right Customer Segment? Here are some criteria to consider:

1. Target markets with significant pain points:

   • Choose markets where the potential customers have clear and urgent problems that need solving.

2. Make sure they have the purchasing power:

   • Example: The huge marketplace of unemployed people and the service to help with CVs and job applications. Although the need is significant, the purchasing power might be lacking. Ensure your target market can afford your services.

3. Ensure they are easy to find and are growing:

   • If the target audience isn't aggregated somewhere (e.g., associations, groups, lists, channels), it will be challenging to reach them. For example, if you are trying to reach rich doctors, but your ads go to nurses, your offers will fall on deaf ears. You need to be able to find them easily. This is a tactical point.

4. Choose a growing market:

   • Use Warren Buffet's analogy: It’s not about how hard you row, but the boat you’re in. Opt for markets that are expanding. For example, newspapers are a shrinking market, which makes them a poor choice compared to growing industries.

   • Warren Buffet example: His friend entered the steel business, which faced a decline, whereas Buffet chose investing, which allowed him to become highly successful. This demonstrates the importance of being in the right "boat."

By targeting the right customer segment, you can ensure that your efforts yield the highest possible returns, leveraging the inherent value of the market and its growth potential.

Value-Based Selling

If you want to sell based on low cost, you need to build the infrastructure for massive demand. Companies like Walmart and Amazon win on efficiency, offering low prices by maintaining a culture of extreme cost-saving.

Amazon Prime has such absurd value. How are you going to beat Prime at $99 a year where you get basically all Netflix with Prime video you also have next day shipping with anything that you want to buy.

Consider how incredible the concept of Netflix is: you pay around $14 a month, and in return, Netflix creates movies and shows, spends millions of dollars on production, and signs top comedians. This illustrates the immense value you must provide to attract and retain customers in a mass market.

You're usually going to have to put a ton of money in for a long period of time because you have to have that infrastructure upfront to deal with that volume to have such a crazy value discrepancy that someone who has no money still never wants to cancel.

To someone who only has $10,000 when they pay you$100 they pay you 10% of their net worth their expectations of what they're going to get for that $100 is the same as a rich person giving you 10 million of their$100 million. The expectations are the same. It is easier to solve rich person problems because they're willing to pay more in an absolute sense for lower relative value. With that extra profit or gross margin you can absolutely over deliver for them and still make money and not have to do all these things with infrastructure. You need infrastructure to handle vast volumes, making it a hard business to enter.

Premium Niche Market

Sell premium services to wealthy individuals. Focus on a niche where you can do a lot of good for a small segment of the market. This way, you don't have to compete against everyone and can still make money with inefficiencies.

Once you've made enough money, you can either continue serving this niche or expand to serve a larger audience. For example, Netflix offers incredible value for $14 a month, requiring vast infrastructure and capital.

Value Equation for Selling to Rich People

Rich people pay for time above all else. Easiest hack is just do what someone else is doing, do it in half the time and charge twice the price. They will pay for it.

• Outcome: Ensure they want the outcome you promise.
• Risk: Minimize the perceived risk of not achieving the desired outcome when they buy.
• Time Delay: Reduce the time between purchase and delivery.
• Effort and Sacrifice: Provide high-touch, white-glove services to minimize their effort. They are willing to pay for it. The incremental increase in cost is small to them.

Working with Wealthy Clients

Rich clients are willing to pay a premium for high-value services. For instance, you can have five clients paying $5,000 a month and make a great income while delivering excellent service. Wealthy clients value time and efficiency more than cost savings.

Value Equation for Selling to Rich People

• Outcome: Ensure they want the outcome you promise.
• Risk: Minimize the perceived risk of not achieving the desired outcome.
• Time Delay: Reduce the time between purchase and delivery.
• Effort and Sacrifice: Provide high-touch, white-glove services to minimize their effort.

Examples from Alex Hormozi

• Acquisition.com: My premium brand investing in companies worth $100 million or more, making very rich people even wealthier.
• Skool: A platform for people starting out, requiring years of development and millions in investment to offer immense value at a low cost. Lost money for the first 5 years and continues to lose money.

Start with rich clients, build your resources, and then consider expanding to serve a broader audience. Only go down market if you have the infrastructure to support huge amounts of volume and the capital to front it. This strategy ensures sustainable growth and profitability.

Conclusion

Be clear about who you serve. Either build for volume and win on efficiency, like Amazon or Walmart, or build for a premium niche, solving specific problems for wealthy clients. This approach allows you to make significant profits and deliver exceptional value.

Resources:

• 13 Years Of Brutally Honest Business Advice in 90 Mins (opens in a new tab)
• This video will make you more money than anything else on the Internet (opens in a new tab)