The best ROI activities are always at the limits, the riskiest parts, of any given system.
This is why tech companies are so profitable and older established industries like gas stations aren’t. It’s not that risky to start a gas station. You pretty much know all the variables – how many cars are in a given area and their demand for gas. There’s a lot more unknown variables for tech startups and consequently most fail. The system as a whole generates more wealth than gas stations, it’s just concentrated in the hands of a much smaller group.
In markets, a sliding scale between risk and ROI naturally evolves. Higher risk activities also have higher ROI and the multiple of ROI tends to be greater as you get riskier and riskier since humans loss averse. People would generally rather take a safer option that’s more certain even with lower expected returns.
As technology improves faster and faster and the rate of change accelerates, two things are happening.
- There are more limits, more unknowns. It’s increasingly difficult to predict what’s going to happen. That means for companies or individuals working at the limits, there’s more and more opportunity for testing those limits and identifying good opportunities.
- It’s cheaper than ever before to test the limits. While there were limits to the steel industry 100 years ago, you needed a lot of capital to test those. Today, it’s remarkable how many markets you can test the limit in with a laptop and a couple of web applications.
3D printing is a perfect example of both these thing. It opens up a dramatic number of limits and possibilities and it’s making it cheaper than ever before in history to test those.
The more of your resources you can utilize to test the limits, the more profitable you’ll be in the long run because you can identify more positive Black Swans. The majority of your tests will fail, but the ROI on those that succeed will far outweigh all the failures combined.
The problem with this is that for people or companies chasing black swans, it’s always darkest just before the dawn.
Angry Birds was the 39th app in the App Store by that development group. They’d been probing at that limit trying to build a black swan for a while.
That’s why it’s so important to not die.
So the question becomes how can you maximize the amount of resources you’re spending on testing the limits looking for black swan opportunities while not running out of either money or morale (ie. not dying).
A new business is always testing some limit. Even gas stations have some built in assumptions that they won’t know about for sure until they open. If a new business avoids dying (by refusing to quit and not running out of money), then given a long enough time frame they’ll eventually pivot into something that’s profitable and succeed.
Rip, Pivot, Jam – Business Ideas For Beginners
That’s why the Rip, Pivot, and Jam model works for bootstrapped business ideas for beginners. You “rip” a business model that’s already successful, get to ramen profitable as quickly as possible, and then you’re able to start throwing resources (your time) at testing the limits until you find the right pivot, the black swan opportunity.
Because you “rip” initially, you’re able to put something together that already has the 2nd and 3rd order consequences built into the system. The market has already demonstrated that it’s willing to pay for that solution. It lets you establish cash flow faster and get the morale boost from knowing you’re at least doing something that some people are willing to pay for.
That can sustain you to enough to get to the important part, testing for new opportunities and figuring out the proper pivot.
The other reason rip, pivot, and jam is a good framework is because it helps you understand where the limits actually are and make better, more informed guesses at what the right pivot might be, where that black swan could be.
If you have a solution that the market has already demonstrated that it wants, you’re able to get into higher quality conversations much faster. Those conversations with customers will let you make more informed guesses at the most profitable pivots are.
Once you find a pivot that gets traction, you can jam out and make it happen.
It was a successful product because we’ve been talking to our customers for 5 years.
Part of the reason we’ve been talking to our customers for five years is because we’ve avoided dying for that long.
Another part of it though is that we are better positioned to make intelligent guesses at good pivots. Even if we’d magically had unlimited cash and never lost morale and spent the last 5 years in a room trying to build a revolutionary new podium 5 years ago, we wouldn’t have had near the same market intelligence to make informed guesses.
When people are already paying you money, they’re invested in you. This seems to be especially true in business to business since their livelihood is linked to yours.
The fact that they’re paying us money incentivizes them to talk to us which makes it a lot easier to figure out what they want in new products. So instead of sitting around designing valet podiums for 5 years guessing at what the market wanted, we gave them something that hey had already demonstrated they wanted then used that to start conversations that let us test the limits and figure out where we could get better ROI.
Outsource Micro Limit Testing.
You can also double down on what’s working by outsourcing it and letting contractors test micro limits in your business.
If you know that paid advertising is a profitable marketing channel, you can outsource it to someone who can take little bets with an already positive cash flow process to make it more profitable. This is a better use of resources since you can focus your internal resources on the biggest limits of your business instead of on more micro ones.
The advantage to us for working with Dave Huss from Ecommerce Double on our paid traffic channels is the value he’s able to bring by identifying and defining profitable paid marketing channels before the rest of the market does.
There’s always a delay in terms of when people adopt technology and if you can identify profitable ones early when they’re still complex and ill-defined, you can get much better ROI than after they’ve become known commodities.
If you look at Google Adwords or SEO, those are both prime examples. Businesses that identified those channels 10 years ago were able to be highly profitable because a lot of people were using Google to find products they wanted and relatively few business owners realized that.
It’s more profitable for a contractor to identify these new channels because he can then apply them to all the businesses he’s working on. It would take us the same amount of resources to identify them in house, but since it’s only a small piece of our business, there isn’t as much upside.
As more and more niche service businesses arise, there’s more opportunity to do this.
Right now we’re outsourcing our SEO to Supremacy SEO, Paid advertising to Growth Scout, and podcast editing to Authority Engine. Without exception, they’re all doing it more effectively than we were in house.
Rip, Pivot, Jam.
Last Updated on July 30, 2019 by Taylor Pearson