Billionaire Ray Dalio’s Unconventional Advice for Efficient Decision Making

Shane Melaugh: Hello and welcome to Episode 30 of the Active Growth Podcast. Today I wanna keep the intro very short and jump right into the content. So let me just quickly say that as always, you can find show notes that go along with this episode that
give you a bit of a summary of what we talk about, and we link to any books and
resources and so on that we mention during the episode on the show notes page.
Shane Melaugh: You can find the show notes of today's episode at ActiveGrowth.com/30. You can also go there to leave us a comment, and we always appreciate hearing back from you.
Shane Melaugh: So with that, let's get started with today's content right away.
Shane Melaugh: I am Shane Melaugh.
Hanne Vervaeck: And I am Hanne Vervaeck. And in this episode, I wanna ask you first of all a
question. If one of the richest self-made man of the world would give you some
business advice, would you take it, Shane? Would you?
Shane Melaugh: I mean I want to say yes but it feels like a trick question.
Hanne Vervaeck: Well, it will probably go against everything that you learned at school, and
everything that you're comfortable with. So would you still take it?
Shane Melaugh: Oh, yeah, now I'm actually ... I'm liking this more and more because I didn't
learn anything useful at school anyway, so that's ... I'm all ears.
Hanne Vervaeck: So I would too. And the reason that we're sharing this is because I believe that
this could really really help you, not only in deciding on your business idea, but
also on your marketing efforts. Now, the advice I wanna share comes from Ray
Dalio. And Ray Dali is the founder of Bridgewater, which is one of the biggest
hedge funds in the world. And it's one of the only firms that actually anticipated
the crash in 2008. And he states that approximation is one of the most
undervalued skills that someone can have. The reason for this is that being
imprecise will actually help you to make decisions quickly.
Shane Melaugh: That is quite unexpected, isn't it? From someone who does hedge funds, he's
basically managing huge amounts of other people's money, you would think
that he would be extra careful and stuff. And for sure he is like a very systematic
kind of person. But then hearing from him that one of his principles is be
imprecise really is surprising.
Hanne Vervaeck: Exactly. And the reason that he says to be imprecise is very interesting, because
we always talk about rapid implementation and this is exactly the reason why
he thinks that being imprecise and being good at approximations is so
important. Because you have a ton of decisions to make during a day, during a
week, whatever, and making them quickly and deciding quickly whether or not
it's worth going into details, is one of the most undervalued skills.
Hanne Vervaeck: And the reason that I was saying that this is something that probably goes
against everything that you learn, and everything that you hear about business,
is because ... Let's take school, so did your math teacher ever give you good
points for giving an approximate result?
Shane Melaugh: Oh, not at all. I mean for sure very much it's like there's one right answer and
you have to find the right answer and everything else is failure, right?
Hanne Vervaeck: Exactly. But if I ask you on the top of your head, like can you calculate 38 times
12?
Shane Melaugh: I mean I can but how long is this podcast gonna be?
Hanne Vervaeck: Whereas if you just take 40 times 10.
Shane Melaugh: Yeah, it's 400.
Hanne Vervaeck: Exactly, so you can give that answer immediately, whereas 38 times 12, it's like,
"Oh, wait, I'm not sure, let me get a calculator," and then like try to figure this
out. And 40 times 10 is 400, it's super quick, you can immediately calculate that
out of your head. You can see ... It's imprecise, it's approximate, but it's close
enough for many decisions to know whether or not you should go into more
detail on that decision.
Hanne Vervaeck: Now, yeah, the problem is that if you would've told your teacher that 38 times
12 was 400-
Shane Melaugh: It's about 400, right?
Hanne Vervaeck: It's about 400. Approximately 400. Then they would've given you zero. And so
everybody learnt that you needed to be super precise even if it took more time.
Shane Melaugh: Yeah. And it is interesting if you think about this like it does give you ballpark
that isn't that far off. So even though it's a multiplication and we're changing
both values, but still like 38 times 12 is actually 456, I mean it's a really rough
estimation, 40 times 10, 400, but it puts us in the right ballpark, it puts us
actually quite close to the correct number.
Hanne Vervaeck: Exactly. And in episode 29, we talked about how important it is to collide your
idea with reality and to do it quickly. And first of all, we talked about like
calculating the viability of your idea, and then getting really specific on what the
next step would be. And here about the approximation, this episode is talking
about how you can calculate the viability of your idea.
Hanne Vervaeck: Now, in business and in marketing decisions, just being fast is so much more
important than being precise. Because in the end, you will never actually know
what will happen. If you decide that you're gonna sell whatever, 20 ebooks at 29
euros or 20 ebooks at 30 euros, it doesn't make any difference but you can
calculate it much easier. And you can get to a yes or a no on your idea, and
whether or not you should implement that idea, much quicker. And that is why
approximation is so important, and why it's the way to do this.
Hanne Vervaeck: Now, we're gonna have a look at some specific examples to use approximation
to validate your business idea or marketing strategy.
Hanne Vervaeck: So first of all, imagine that you wanna sell 50 ebooks a month. So 50 ebooks a
month, you have a sales page, how many people would you need to get to that
sale page? How much traffic would you need in order to sell 50 ebooks a
month?
Hanne Vervaeck: So here we would use the approximation of just 1% conversion rate on your
sales page. And then you would get to the result that you need to get 5,000
people to your sales page to sell 50 ebooks a month.
Hanne Vervaeck: Now, it's up to you to decide whether or not this is viable for you, if this is
possible to do. But it gives you this ballpark of traffic that you will need to sell
your ebook.
Shane Melaugh: This is all something where we can start to play around with numbers a little bit,
again, without needing precision yet. Because this 1% conversion rate, this is a
number we can play around with, and it can help us decide a few things. So it
can help us decide where to place a lever.
Shane Melaugh: So by playing with these numbers I can think about well, what do I need to
invest in? Do I do this and do I pursue larger traffic channels? Or do I do this and
do I try to change the lever of the 1% conversion rate, right?
Shane Melaugh: So maybe what I can do is I can change the price for example, price is a huge
conversion lever. And maybe if I lower the price I can increase my conversion
rate significantly, maybe that helps me reach my revenue goal, or maybe this
ebook is a loss leader anyway, and I basically wanna get leads, and again I can
think about how do I manipulate these numbers. Maybe I can adjust my target
of how many ebooks do I want to sell. Maybe I can adjust my target of how
many people do I need to get to the page, or maybe I can adjust my target of
how my conversion rate needs to change.
Shane Melaugh: And this is one of the things where this approximation then leads to action.
Because if I decide what I really need is a higher conversion rate on this page,
then I'm going to spend time running AB tests, price testing, and stuff like that.
Whereas if I decide what I really need is more traffic, then maybe I'll spend time
on search engine optimization, or paying for advertising, or outreach, influencer
marketing and so on.
Shane Melaugh: And so you can see that even based on just these estimations, we can decide
what direction to go in, and what to focus on.
Hanne Vervaeck: Now, this was a really simple example where you just set a goal for a number of
ebooks you wanna sell. But let's go into some more complicated examples. So
one example could be if you wanna guest-post. So let's imagine that you wanna
publish two guest posts a month.
Hanne Vervaeck: Now, first of all you will have to reach out to people to ask whether or not you
could guest-post on their blog. And on cold outreach emails, you can imagine
that you will get about a 4% response rate. Now from this 4% still you will not
have everybody accepting a guest-post. So let's say you have a 70% close rate
when somebody answered you. Now this actually means that in order to get
two guest posts, you will need three people to answer you. And in order to have
three people answer you through email, you will need to send 75 emails.
Hanne Vervaeck: So now this approximation can lead to a very specific goal where you have to
send 75 emails cold outreach emails to ask for a guest-post if you want to nail
two guest-posts a month.
Shane Melaugh: And what you might notice in this example is that it's fairly pessimistic, right?
We're assuming that we have to send 100 emails to get 4 replies. And you might
be thinking, "Well, can't I get more replies than that?" Maybe you can, but I
think it is useful to kind of low-ball these kinds of things, right? There's a lot of
uncertainty. And this is also something where you can think about if this 4%
reply rate is much too low, what you can think about is first of all well can I do
much better outreach? Can I do something to leverage my outreach? Or is it
acceptable to reach out to smaller players? Because a 4% reply rate is what I
would expect from reaching out to websites that basically don't need my guestpost,
right? And the type of person or website where they just have ... They're
basically an online celebrity or they're a huge business, and their inbox is
flooded with people who want to write for them, right?
Shane Melaugh: And of course there you can say, "Well, it might be much harder to get a reply
and to get a guest-post placed there, but it might be worth it because of the size
of the audience." But again, it gives us levers to play with. We can think about,
well, maybe this is too much, and maybe what I'll do is I will do like semiautomatic
outreach to smaller players where maybe I can get like 20% reply
rate. But then the guest-post will be published on websites that aren't very
prestigious.
Hanne Vervaeck: Indeed, as you can see, there are still a lot of things we can play around with.
But it will give you some kind of ballpark number to start from, and to start
focusing your action on. And in the end, that's what's really important.
Hanne Vervaeck: Now, let's go into an example that might be a little bit of a brain truster here.
This was actually an example that I saw somebody ask in a Facebook group. And
this was my exact answer to the question.
Hanne Vervaeck: So somebody was wondering if I want to have a membership site with 1,000
members, how many people would I have to get to my sales page?
Hanne Vervaeck: Now, I have to be honest, I was pretty lazy, I didn't calculate the whole thing,
but I did give some numbers that that person could use then to calculate.
Hanne Vervaeck: So first of all, let's start again with our 1% conversion rate on a sales page. The
reason for that is just it's easy to calculate and it's not that far off, especially for
a monthly recurring membership site. And the next thing that you have to think
about is when somebody is in a membership, and especially if it's like a monthly
recurring payment, not everybody is gonna stay in that membership. And here
you can imagine that you have a 30% churn rate.
Hanne Vervaeck: Now, what this means is that 30% of people will actually cancel their
subscription after one month, and then 30% on the second month, and 30%. So
month over month 30% of your members will actually cancel their membership.
Hanne Vervaeck: Now, let's see what this means. If on month one, you get 1,000 to your sales
page, this would mean that you get 10 signups or 10 customers for your
membership site, and that in the second month, 7 people would still stay in the
membership, so that's our 30% churn rate, right? 30% cancels.
Hanne Vervaeck: Now, you would get again, if you have 1,000 people to your sales page, 10 new
people who come in, which will then give you 17 people in month two in your
membership site.
Hanne Vervaeck: Now, 12 of those people would stay to month three, and then you would get 10
new people which gives you 22 people in your membership and so on and so on.
Hanne Vervaeck: So this, like I said, it's bit more of a complicated way of calculating, and I
couldn't do this on the top of my head. But again it will give you some
approximate numbers.
Shane Melaugh: And I think what's really important here is first of all, again, by just starting this
calculation we can get an idea of oh, this is gonna take longer than I thought.
And the churn rate is the thing that most people would neglect or
underestimate, right? They will think well, getting 1,000 members is kinda like
getting 1,000 customers, but that is not the same thing. And so I think that's
another thing where it's important to really look at the components is what's
happening here. And in this case, the most important component of our
calculation is this churn rate.
Shane Melaugh: Now, as you've seen, this is quite complicated, and it's not ... This is the kind of
calculation that you can't just do off the top of your head. So let's briefly talk
about tools.
Shane Melaugh: I wanna quickly mention something here, which is that over the years, I have
twice signed up for two different tools that were supposed to help you make
these kinds of projections and run these numbers. Basically, simulate your
business, right? And do these kinds of estimations. And I've forgotten what both
of them are called. I don't know if they even still exist, but it doesn't matter,
because they were both rubbish. So my recommendation is not to buy a tool to
do this essentially.
Shane Melaugh: They were rubbish because first of all, they were too time-consuming and too
complicated. Right? You had to learn how to use this thing and how to connect
the bits correctly to run the calculation. So it took too much time, which is
exactly what we're trying to not do, right? We're trying to not spend a ton of
time.
Shane Melaugh: And also they were trying to be too precise. And that was the main reason why I
stopped using them, they were trying to give you price results. And this is
misleading, especially if you have this tool that draws some nice charts and
stuff, it can then fool you into thinking that you have calculated the future,
which is not what we're doing, right? We're simply estimating.
Shane Melaugh: And so for those reasons, I stopped using those tools. So what kind of tools can
you use? For this kind of calculation that we've just gone through, I think an
Excel spreadsheet or a Google Docs spreadsheet is ideal. Because what you can
do is even without mastering the formula, you can basically run this calculation
a couple of times manually, then select the range and expand it, right?
Hanne Vervaeck: Exactly. One thing that's fun in Excel is that you can just put in like 1%, and it will
calculate, and you're like, "Oh, what happens if I put this at 2%?" Without
having to redo the whole thing.
Shane Melaugh: Exactly. So that's something where you could use Excel for sure. But in most
cases when I do calculations like this, I don't even use Excel, I just use a simple
document, or I just open a text document, or a Notepad, and just jot down the
numbers there. And that's basically just to assist me, because I can't really
calculate very well in my head. Or I mean literally on the back of a napkin, right?
You just jot down a couple of numbers, and these are the tools that I would
recommend.
Shane Melaugh: In fact, I would recommend them in reverse order. I would say back of napkin,
simple document or text file, and Excel, in that order. Because again, we want to
get to an estimation quickly, we want to take action quickly, and so the less
complicated the tool, the less time we're gonna spend, the more we're gonna
stay focused in just getting that ballpark and taking action.
Hanne Vervaeck: I mean every phone has a calculator these days, so you can simply use your
phone to make this to make these calculations, and then jot it down on the back
of a napkin [inaudible 00:17:21] you're saying. Especially, yeah, don't waste time
learning new tools. This is absolutely not the time that you wanna be learning a
new tool.
Hanne Vervaeck: Now, let's go into some more examples, shall we? So one of the things that
people often wanna do is sell from webinars. So what does this mean? This
means that you need to get people to a sign up page for your webinar. So we
can imagine that 40% of the people would sign up on that sign up page. Then
people actually have to show up to the webinar, which is again another point
where people can actually drop off.
Hanne Vervaeck: And let's imagine that 30% of the people who actually signed up will also show
on your webinar. And then of those people who actually show up and follow the
webinar, 10% of them could buy your coaching package. So here this would
mean that in order to be able to sell 5 of your coaching packages, you would
need 400 people to your signup page, which would mean 160 sign ups, and that
would give you 50 show-ups, which then would give you, with the 10%
conversion rate, 5 people who can sign up to your coaching package.
Hanne Vervaeck: Or maybe you're still in the stage where you're offering the free coaching calls,
like we suggest that you start out with when you start your online business. And
in that case, you can try to set a goal for a number of free coaching goals that
you wanna conduct every month.
Hanne Vervaeck: So if you offer the signup somewhere on an opt-in form on your website, so
people can sign up from maybe a slide-in that's in your website or something,
you can imagine that you will have a 2% conversion rate on that form. So people
who sign up for the coaching call.
Hanne Vervaeck: But then if you do free coaching calls, you will notice that some people will just
not show up. So in order to calculate this into your realistic number, you would
need a little bit more people to actually sign up in order to have your 10 free
coaching goals a month. So let's imagine that 20% of people who signs up
actually don't show.
Hanne Vervaeck: Now, in this case, that would mean that you need 650 views on your signup
form which will then give you 13 sign ups for your free coaching call, which
would give you 10 people who actually show up.
Hanne Vervaeck: And then one [inaudible 00:19:46] example if you're trying to get consultant
clients. So imagine that you want a new paid consultant gig a week. Now, for
this you will have to send cold outreach emails. And in this case, we can imagine
that 10% of the people that you reach out to will ask for a proposal, and from
that proposal, 50% of those people will actually take you up on this offer. So in
this case it will mean that you have to send 20 emails, 20 cold outreach emails,
to targeted clients, in order to get one new consultant gig.
Shane Melaugh: Now, you might be listening to this and thinking, "Well, where do we get all
these numbers from, right? 2%, 10%, whatever, like how do we get this?" And I
think there are two important factors here. One is that you basically, again,
we're not trying the exact right answer, and the right answer is basically
unknown, all we want is an estimate. And so one way of thinking about this is to
essentially do fuzzy thinking instead of sharp thinking, right? To get away from
wanting to know what the exact right answer, and instead just thinking in
basically probabilities rather than right or wrong.
Shane Melaugh: So if we take this here ... If we say, "Okay, 10% reply rate from cold outreach."
Instead of thinking, "Well, is that the right amount," we can think about well,
how likely is that to be correct? And that's one of the things we can use to reach
an approximation, because right away ... I mean it has to be something between
0 and 100%, right?
Shane Melaugh: A 100%, how likely is it to get 100% reply rate from cold outreach?
Hanne Vervaeck: Mad. Not very likely.
Shane Melaugh: Exactly. That's not going to happen, right? So we adjust downwards how likely is
it to get 50%? Is every other person gonna reply? Again, it's very unlikely, our
outreach would have to be amazing, and we can just think about that from our
own experiences. Well, it's like, how many emails do we get that we don't even
open? So we can keep adjusting downwards, and then if we go ... At some point
we get so low, it's like 2%, we're like hold on, I mean if I'm gonna spend some
time researching these people, I'm gonna send personalized outreach messages,
I'm going to follow up if they don't reply within a few days and stuff like that. I
can probably get more than 1 or 2% of them to reply, right? This is likely.
Shane Melaugh: And that's how we end up ... Basically you can kind of approach this, a likely
number, by eliminating the extremes. So right away, we know it has to be more
than like 2%, it has to be less than like 25%, right? And that's how we arrive at
something like, okay, I'm gonna use 10% for my calculation.
Shane Melaugh: Another factor here is that it's good to do this estimation and then give it a try
and adjust your numbers if needed. Because what I can do right away is if I
assume a 10% reply rate, I can go ahead and send like 20 or 30 emails, and if I
get only one reply, then I can go back and adjust my numbers and adjust my
calculation. And if I send the 30 emails and I get more than the expected 3
replies, I get 5 or 6, or 7 replies, again, I can go back and adjust my estimation.
Because again an important factor here is that we want to get to action as
quickly as possible.
Shane Melaugh: Now, let's run through the numbers of another example. So let's basically take
this a bit further. And let's imagine that we have a course, let's say a fitness
course, and I wanna sell this using Facebook ads. So I know that I have to spend
money for clicks and I wanna basically calculate how much can I spend on this,
or how much do I need to earn for this to work.
Shane Melaugh: And here we could use our numbers from ... We could find some numbers of
our Facebook advertising, or maybe if we have some experience with it, we can
go back and look at these numbers to get estimates, and we could say, "Okay,
maybe what's realistic is on the ads, a 1% click-through rate." So out of 100
people who see the ad, 1 person will click. And I have an average cost per click
of maybe $2. And I have a sales page that converts at 2%. So with those basic
numbers ... Another important number is how much money am I making per
sale. So my profit margin per sale, let's say I'm earning $90 for every person who
buys this course. So I know that if I spend $200 a get 100 clicks, and out of 100
clicks I will get two sales. And that makes $180. Right?
Shane Melaugh: So I know that if spend $200 I only make $180. Or another way to put that is my
cost per click is $2, but my average earnings per click is $1.80, so that's a $90
sale value, and a %2 conversion rate, that makes an EPC, an earnings per click of
1.80.
Shane Melaugh: So in this case, I can basically run this estimation, and see this is probably not
gonna work out. I have to change something here, I have to improve my
conversion rate, or lower my cost per click or something, in order to be
profitable here.
Shane Melaugh: So one way we can do that is we can add an upsell. We can say, "Okay, so I get a
bunch of people to buy my thing and I add an upsell." Maybe like an elite
premium membership, or maybe it's a fitness course, and I sell some
supplement, or maybe it's even like a cross promotion, right? Maybe I'm
promoting as an affiliate some product that is relevant to people who bought
my product.
Shane Melaugh: So let's say I have an opportunity to add a $100 upsell. So everyone who buys
my initial product for $90, will then see okay, here's another offer for another
thing, that's $100.
Shane Melaugh: And here I can calculate that if I get a 10% conversion rate on this, so if 1 in 10
customers takes me up on this upsell offer, that would be enough to break
even. And the calculation here is really simple, right? We have $90 per sale, and
if 10% of those people give me another $100 that basically changes my frontend
profit to $100 per sale, and my front-end EPC, on a 2% conversion rate, to
$2, right? That's how I make up that difference that meant before that I was not
profitable.
Shane Melaugh: So I can get this very simple estimate of adding $100 upsell with a 10%
conversion rate is what I need to break even, knowing all these numbers.
Shane Melaugh: Another thing that I haven't mentioned yet is at the beginning I said we have a
1% click-through rate, and this again can help us estimate what's going to
happen with this proposed plan of using it for Facebook ads. Because it means
that if I have a 1% click-through rate, it means that I have to reach 10,000
people in order to earn those $180 on the front end or $200 in total, right?
Shane Melaugh: So I have to reach ... Because if 1% of people click, right? I have to show the ad
to 100 people to get 1 click, a 1,000 people to get 10, 10,000 people to get 100
clicks.
Shane Melaugh: And this is important because when I'm building my audience in Facebook, it
shows me an estimate of how many people I can reach in this audience. So if I
have to narrow down my audience to let's say 40 or 50,000 people in order to
get a low enough cost per click, and a high enough conversion rate, then again I
know that I can basically abandon this plan, because I'm only gonna make a few
hundred dollars at best, and then I'm gonna run out of people.
Hanne Vervaeck: We already gave you some points, but let's look at how we can make good
approximations.
Hanne Vervaeck: So the very first thing that you have to do is you have to break down the process
in points of conversion. Now, what does this mean? It means that you start from
the end of the goal. So you start from whatever you wanna reach, and then you
look back to what has to happen, and every time that there can be a drop off in
people, you will need to find a number for that.
Hanne Vervaeck: So exactly like we calculated before with our sales for example. Well, people
coming to a sales page, that's a conversion point. Because a lot of people will
drop off. Not every visitor will become a customer.
Hanne Vervaeck: So each time that you have this type of drop off, you need to try to find
estimate numbers. That's why when we looked at our webinar for example, we
looked at how many people will actually show, how many people will actually
buy, how many people will actually sign up on the sign up page. And that will
give you the right numbers to calculate.
Hanne Vervaeck: Now, the thing that you can do to get those approximate numbers is first of all,
like Shane already explained, you can try to imagine what would be realistic, but
you can also use Google for this, and go to find average industry numbers.
Because for example, I had absolutely no idea what the click-through rate was
on an ad in fitness, and what the average cost per click is in that industry, but a
simple Google search gave those numbers.
Hanne Vervaeck: Now, something else that you can do of course is if you know somebody who's
already doing it, just call them up and ask them if you know somebody who
does cold outreach emails to get proposals, even if it's not in your industry, talk
to them and ask them like, "Oh, how many emails do you actually have to send,
how many people answer?" And this will give you that ballpark number that you
are looking for.
Shane Melaugh: Another tool that can be useful if you're kind of grasping in the dark for
numbers, is that actually in Google Analytics if you go to your audience, the
audience menu, there's a benchmarking item there. And the benchmarking is
basically it shows you your numbers, your traffic and bounce rate and so on,
compared to numbers in your industry or in other industries. So just averages
from other people using Google Analytics.
Shane Melaugh: So that's also something where let's say you have an ecommerce store, you
have a low-priced product or something, like I don't know what the conversion
rate ... what conversion rate can I expect. Well, you can look at these
benchmarking numbers to get an idea of that as well.
Hanne Vervaeck: And many tools will give you those benchmarking numbers. I know for sure that
for example, MailChimp has this option also that it shows you if you're doing
better or worse than the benchmark in your industry. So this is really ... Google
it, look it up, there are a lot of benchmarking numbers that you can actually
find.
Hanne Vervaeck: Now, 93% of drivers think that they drive better than the average person on the
road, there's kind of a problem with that. Right?
Shane Melaugh: They're naïve. I mean it's terrible. I mean I am obviously a better driver than
most people, but clearly all those other peopleHanne
Vervaeck: Exactly. So the reason I'm bringing this up is because you will always think that
you can better than average. You will look at those numbers and be like, "What?
A 1% click-through rate on Facebook ads, oh, my ads will get 10% click-through
rate, right?"
Shane Melaugh: It's so good. My stuff is so good.
Hanne Vervaeck: Exactly. But what will be important here is like try to error on the pessimistic
side. Because if your idea ... If your business idea or your marketing idea, or
whatever, is still a go, even using those pessimistic numbers, you can only do
better, right?
Shane Melaugh: Yeah. And another way to think of that is that basically it's great to strive for
excellence, and it's great to get an excellent result, but if your business plan,
must have a 10% sales conversion rate in order to survive, then that's a
problem. Because that's a real stretch call, it's really hard to get that kind of
conversion rate, right? So it's much better to haveHanne
Vervaeck: I would love to get to a 10% conversion rate on our sales pages.
Shane Melaugh: Yeah. It would be fantastic. But also I think for some products and some
industries, this is not impossible. I'm sure there are businesses out there who
are nailing that kind of goal, but it is the extreme exception, and it's much better
to have a business that could survive on a 1 or 2% sales conversion rate, but still
get a 5, or 6, or 7, or 10% conversion rate. That's where you wanna be. You
don't wanna depend on a miracle to make your business work.
Shane Melaugh: Another thing to keep in mind here is to account for the unknown. So there's
always stuff that we don't know. And in certain estimations, we basically wanna
kind of leave a gap for just here's the stuff that I can't calculate or can't
estimate. This is especially important for estimating time, right? People are
notoriously bad at estimating how long it will take them to do something.
Shane Melaugh: So as an example, let's say I wanna create an online course, and I've planned out
my course, I know there's 20 lessons in this course. And I know that I can finish
one lesson in one day. Here it would be a mistake to say, "Well, in that case, I
can finish the course in 20 days." Because that assumes that I have a perfect run
for 20 days, right? But realisticallyHanne
Vervaeck: I absolutely made that mistake once, and I lost my voice halfway trough. The
problem was that I already sold the course, so people were waiting for it, and I
can tell you that yeah, some of those videos were kinda made talking this, trying
to force my voice to still do this course.
Shane Melaugh: Exactly. So that's actually a great example of something that can go wrong that
you can't know. And from my experience, it's just like anything like if you're
working on a thing for 20 days, like stuff is going to go wrong, right? It's like your
microphone is gonna break, or your computer is gonna crash, and you have to
reinstall Windows, yeah, you're gonna lose your voice or something is gonna go
wrong or you're gonna do something and realize, "Oh, I have to redo these
three lessons." Whatever, right? It's not going to be a flawless run.
Shane Melaugh: And that is in general, like don't assume, and don't calculate based on a flawless
run.
Shane Melaugh: So in this case, you basically wanna say okay, I know that in an ideal world with
everything going right, I can get this done in 20 days, but I'm going to estimate
maybe 25 or 26 days because of unknowns, and I'm not defining what that is. I
don't know what it is. I just know that probably some stuff is gonna go wrong.
And another point about this is that this is kind of a delicate balance, because if I
am pre-selling my course for example, then I would want to have this slightly
pessimistic view and say, "Okay, let's say 30 days from now, I'm gonna release
this course." But when I'm setting a deadline to keep myself productive, or to
keep my team productive, then I wanna tighten that belt a bit again. I still don't
wanna set a deadline that assumes a perfect run, 'cause that's unmotivating,
right? It just makes people feel bad for something that's totally natural, which is
stuff going wrong.
Shane Melaugh: But I also don't wanna give too much leeway and basically give people the
license, again, whether that's myself or people I work with. I don't wanna give
people the license to slack off, right? Because ah, whatever, it's 30 days, right?
Shane Melaugh: So there I would basically try to find a balance and say I would tell my customers
in 30 days it's ready, and I would tell myself or my team, this is got to be ready
in 24 days.
Shane Melaugh: The great advantage of this type of estimation is that it can help us turn lag
indicators into lead indicators. Now, we've talked about this before on episode
nine of the podcast, and we also have a post on the Active Growth blog that
talks about personal KPI tracking tools which also goes into lead indicators
versus lag indicators, but let me quickly summarize what this is about.
Shane Melaugh: We have certain things, and usually the results that we're after in our business
are lag indicators. So I want to sell a certain amount of books. Well, that's a lag
indicator of a lot of stuff that comes before, because I have to create a sales
page, I have to get traffic to that sales page, I have to get conversions, I have to
do all kinds of stuff before I get to that result, of having sold a book.
Shane Melaugh: So another way to think of this is that people have to go through many steps
before I get my result, right? They have to learn about me, and that I even exist,
and that I have a website, they have to find their way to my website. If they find
their way to my website, maybe they read one of my blog posts, or they watch a
video, then they still have to find their way to learn about I'm selling a book.
They have to be interested enough and maybe that take some trust-building,
right? Maybe they have to watch several videos before they go, "Oh, okay,
maybe I should check out this product he keeps talking about." Then they need
to find the sales page, the sales pages needs to convince them, then they need
to get out their money, and so on.
Shane Melaugh: So there are many steps between someone not knowing about it at all, and
someone having bought my book. And this is important because even if I do
everything right, I will not get the result immediately. Even if I've set a fantastic
funnel, and I have all this content that people can discover and that they can get
to know me, and I have all this promotions, all this stuff, I've done it all right, but
it doesn't mean I'm gonna get sales right away, because people have to go
through this process still.
Shane Melaugh: And that means this is a lag indicator. The number of sales that I make is a lag
indicator, it lags behind the actions I take. And I think about well, what are my
lead indicators? What is the input that will lead to that result?
Shane Melaugh: And inputs that lead to that result are things like improving my sales copy,
creating more content for people to discover, advertising my book throughout
my website in my contents, like the work that I put in that will eventually lead to
people buying my product.
Shane Melaugh: And that's important to focus on, because focusing on the lag indicator can be
very unmotivating, sometimes we have to put a lot of work into our business
upfront, before we start seeing the payoff. And it's much better to know these
are my lead indicators, and to basically know based on my estimations, if I reach
out to 10 people every day, if I publish a new blog post every week. If I spend
this much on paid advertising and I keep calling my ads, AB testing my landing
pages and so on. These are all lead indicators. If I do these actions consistently,
based on my estimation, I will get to this result.
Shane Melaugh: And that's really important, we want to have these lead indicators, we want to
know am I doing the work that will likely lead to the result. And this is what
these estimations can be good for. It can help us figure out what actions to take
in order to get the result we want.
Hanne Vervaeck: Try it out, start from your goal, work backwards to get to those actions, and
don't spend hours. Simply use approximations to see if you should spend your
time, if this is realistic idea or not. And if you have any trouble, we'll happily
help you out. So you can leave in the comments your approximations and we'll
see if we think you're on the right track.
Shane Melaugh: And that wraps up our episode about approximation. A skill that, I guess, I've
never encountered before, I've never really seen anyone talk about this as this is
such an important skill, and I was genuinely surprised when Hanne told me
about this, that Ray Dalio calls this one of the most undervalued skills. It's really
surprising. But as you saw, we walked through a bunch of examples, and I hope
you found those helpful to kind of guide you in your own approximations and
estimations.
Shane Melaugh: And so I did realize that this is something that I have been doing for a long time,
and I did realize that it's important, but it's one of those things that I would
never have thought of, "Oh, this is the thing that makes a difference, right?" It's
just not one of those things that stands out.
Shane Melaugh: And with that, it's kind of the perfect thing to cover in the Active Growth
Podcast. I like to think that our content is a bit different from the typical show
that interviews a different guest every week, where it's always like okay, tell us
your origin story, and how did you come successful, what are you three most
important tips, blah blah blah, right?
Shane Melaugh: I mean that can be great, okay? Some interviewers are good and I like to listen
to those kinds of podcasts sometimes as well, but I do feel like one of the
problems they have is that you tend to hear the same things over and over
again. And this kind of stuff that we've been talking about on today's episode,
on the previous episodes, it kind of goes into the nitty-gritty of things that are
maybe not quite as exciting as tell us your origin story, and not quite as exciting
as here's the most important thing that caused a dramatic turn around. But
more the day-to-day, what does it actually take to build and run a business as a
startup entrepreneur?
Shane Melaugh: I hope that you agree with me, and that you are enjoying this content, and
getting use out of it. We really appreciate hearing from our listeners, and you
can let us know if you have any questions, or feedback, or suggestions of what
we should talk about. You can do that by going to ActiveGrowth.com/30, and
you'll find the show notes and you can also leave a voice message, or a written
comment with any questions or feedback you have.
Shane Melaugh: You can also tweet us your questions if you send a question to @ActiGrow on
Twitter, and some of the questions occasionally we answer. We pick out a
questions and answer it on the show as well.
Shane Melaugh: In whatever way suits you, we love hearing from you, and it's very important for
us to get feedback from you, we've talked about this as well on previous
episodes, and we practice what we preach here, right? We talk about how
important it is to be in touch with your audience and to really know what's
relevant to them? To ask questions, to know what's going on with your audience
and not just like sit in your own echo chamber. That's why very often at the end
of the episode, you hear me talking about come and leave a comment, come
and have a chat with us, because it really helps us make content better as well.
Shane Melaugh: All right. And that's it. That is all I have for today's episode. As always. Thank you
very much for listening, and I'll catch you in the next one.