(Photo: Stuck in Customs)

For the last two years, one name has come up again and again when talking with A-class start-up investors: Pivotal Labs.

See, Pivotal Labs quietly helps dozens of the fastest-growing tech companies in the world, including freight trains like Groupon and Twitter. If your start-up needs to get good coding done quickly, as in lightning fast — or if new hires need to get good at coding quickly — top venture capitalists are likely to look over their shoulder and confide: “Call Pivotal Labs.”

I first met the Founder of Pivotal Labs, Rob Mee, when one of the start-ups I advise, TaskRabbit, began working with them.

One thing is immediately clear: Rob is obsessed with how to get obscenely high output. But that’s nothing new. Here’s the differentiator: he’s obsessed with how to get obscenely high output with sustainable effort. One of his first remarks to me was “3am with Jolt and pizza can be fun, but it’s a myth that it’s the fuel behind scalable success…”

My kinda guy.

I then posed a few questions:

How do you create a scalable, bullet-proof business? In this case, “bullet-proof” meaning that there’s no single point of failure — it won’t nose dive if any single player (like you) is taken out… or opts out.

What are the myths of tech product creation (software specifically, and entrepreneurship more broadly) that he’d like to expose?

This post contains his answers.

Think software doesn’t apply to you? If you’re in business, rest assured that at least a few principles of good software development most definitely apply to you. Translate them into your world and prosper.

Enter Rob Mee

Software development is a rapidly evolving field that got off to a very rocky start.

Conventional wisdom for many years was that software engineering should be like other types of engineering: design carefully, specify precisely, and then just build it – exactly to spec. Just like building a bridge, right? The problem with this approach is that software is just that. Soft. It’s endlessly malleable. You can change software pretty much any time you want, and people do. Also, since software can be used to model just about anything, the possibilities for what you can ask software developers to do are pretty much infinite. Want to simulate a circuit in software? Go ahead. Run a bank? No problem. Connect half a billion people to their friends? Why not, piece of cake. Not only that, but what we ask programmers to produce changes in the middle of the development, often in unpredictable ways.

This is not bridge-building.

Denying the reality of constant change doomed many software projects, for many decades, to either abject failure or huge budget overruns. So why did an entire industry hew to this conventional wisdom that flew in the face of all evidence? Hard to say. Finally, however, there has begun to emerge a new consensus: software development needs to respond well to change. In fact, it needs to be optimized for change. Nowhere is this embraced more than in today’s web start-up development community. So-called agile methods have gained currency, and the “lean start-up” movement calls for exceedingly rapid change, often automated and based on experimentation with the live system.

So we’re all good, right? Not so fast. In spite of the acceptance of more agile methods, there’s plenty of received wisdom hanging around… and most of it ought to be thrown out the window.

1. Myth: You have to hire “ninjas”.

The myth of the hero hacker is one of the most pervasive pathologies to be found in Silicon Valley start-ups: the idea that a lone programmer, fueled by pizza and caffeine, swaddled in headphones, works all hours of the night to build a complex system, all by himself. Time out. Software development, it turns out, is a team sport. All start-ups grow, if they experience any meaningful success. What works for a lone programmer will not work in a company of 10. And what’s worse, encouraging the hero mentality leads to corrosive dysfunction in software teams. Invariably the developers who do a yeoman’s 9-to-5, week after week, cranking out solid features that the business is built on, lose out to the grasping egomaniacs who stay up all night (usually just one night) looking to garner lavish praise. Rather than reward the hero, it’s better to cultivate a true esprit de corps.

2. Myth: Programmers need to work in quiet, without interruption.

This makes sense … if people are working on their own. Every interruption does indeed break concentration, and it takes a while to get back “in the zone”. Some well-known software companies even insist that each programmer have their own private office. That way they’ll never be interrupted, right? Except that modern-day interruptions have little to do with an actual person tapping you on the shoulder, and everything to do with instant messaging, mobile phones, Facebook and Twitter, email, and the music coming in through headphones that programmers swear helps them concentrate. The reality is that most programmers working on their own only spend a small fraction of their day actually programming: the interruptions are legion, and dropping in and out of a state of concentrated focus takes most of their day. There is a solution, however: pair program. Two programmers, one computer. No email, no Twitter, no phone calls (at least not unscheduled; you can take breaks at regular intervals to handle these things). If you do this, what you get is a full day of pure programming. And “getting in the zone” with someone else actually takes almost no time at all. It’s a completely different way of working, and I maintain that it is far more efficient than working alone ever can be. And in fact, with the current level of device-driven distraction in the workplace, I’d suggest it is the only way that software teams can operate at peak efficiency.

3. Myth: Start-ups run hot, so we’re just gonna have to burn everyone out.

Working crazy hours doesn’t get you there faster. In fact, it slows you down. Sure, you can do it for a week. But most start-ups plan to be around for a little longer than that, and developers will going to have to keep programming for months, if not years, to build a successful product. Many start-ups operate as if the pot of gold is just around the corner; if we only work a little harder, we’ll get there. Pretty soon developers burn out, and simply go through the motions of working long hours without any corresponding productivity. Working intensely, for shorter periods of time, is far more effective. Pivotal has helped hundreds of start-ups build systems, and has done it on a strict 40-hour week.

4. Myth: Looming deadlines necessitate shortcuts.

Many software teams use the excuse of a high-pressure market and the need to ship product right now as an excuse to do shoddy work. Writing tests goes by the wayside; careful design is forgotten in the rush of frenzied hacking. But software teams are no different than other teams we’re all familiar with, and the way high-performing teams succeed is not to lose their cool: on the contrary, when the pressure’s on, you stay frosty, and let your training carry you through. How many times have we heard stories of remarkable performance under unimaginable pressure – whether it be military, professional sports, or a pilot landing a plane on a river – and the explanation almost invariably involves the heroes saying, “We trained for this situation.”

5. Myth: Developers should take ownership of their code.

Ownership sounds good. As American as apple pie. Personal responsibility, right? But “ownership” in a software team implies that only one developer writes – and understands – each module of code. This leads to defensiveness on the part of the developer. It also creates risk for the business owner, since the loss of one person could slow the team, or potentially cripple the business if they were responsible for a particularly crucial part of the system. A much healthier process allows any developer to work on any code in the system. Pair programming facilitates this, because knowledge is passed from person to person. The so-called “bus count” (how many people in your team have to get hit by a bus before you’re all dead in the water) is a critical indicator of risk for the software start-up. And it’s not really a bus we’re talking about here – it’s your competitors, who would love to hire your best developers. The more people who understand the whole system, the stronger and more resilient your organization.

6. Myth: You need a quirky hiring process.

Would you hire an actor without an audition? You wouldn’t last long as a director if you did. But this is exactly what almost all companies who hire software developers do today. Usually the process involves talking through an applicant’s experience with them. And that’s all. Imagine asking an aspiring actor if they enjoyed their role as Hamlet. Did you play him well? Good. You’re hired! Many famous software companies propose brainteasers for their applicants. Some top companies even give candidates an IQ test. The best of them run candidates through a simulated software problem on a whiteboard. This is a sorry state of affairs. I’m going to state (what should be) the obvious: the only way to hire good programmers reliably is to program with them. I run programmers though a one-hour, rapid-fire, pair programming interview – and that’s just the start. Having done it over a thousand times, I can score developers relative to each other on a 100-point scale. What do I look for? Mental quickness, ability to think abstractly, algorithmic facility, problem-solving ability. And most importantly, empathy. Because collaboration is the most important thing we do, and it doesn’t matter how smart you are if you can’t relate to how other people think.

7. Myth: Specialization is essential.

Managers, quite naturally, want to attack problems by dividing and conquering. In software teams, this often manifests as an urge to force specialization. Front-end vs. back-end, database administrators, and so on. Brad Feld suggests in his blog that every team should have one “full-stack programmer”, someone who’s a true generalist. He’s right, but he’s not going far enough. Everyone, in every team, should know the full stack [Tim: read Carlos Bueno’s piece here]. Why? Because specialization makes a team fragile. Remember that bus count? Every specialist is a liability; if they leave, and you can’t replace them, you’re sunk. Not only that, but it makes a team sluggish. Specialists need to make their disparate parts of the system communicate through defined interfaces. In effect, they end up writing informal contracts with each other about how to do it. This leads to a lot of overhead, and often defensiveness or finger-pointing. At Pivotal, every developer works on every level of the system, from HTML and JavaScript, to Ruby, and down to the database. And the argument that specialists will be better at a particular layer of the system if they’re allowed to focus on it doesn’t really hold water. The state of software technology today is simply not that difficult. Programmers are better off knowing all layers and how they interoperate. By the way, another important implication of all this: you don’t need to hire for a particular technology. Ruby programmers in short supply? Fine, hire a Java programmer and train them in Ruby (pair programming works great for this). Someone defines themselves as a “server-side” programmer? No problem, make them do JavaScript, they’ll pick it up.

If they’re any good, that is.

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Read more about Pivotal Labs and find their collection of tech talks here. If you’re in SF or Boston, try TaskRabbit while you’re at it

Click here to browse this blog’s other Entrepreneurship posts (covering everything from Twitter and FUBU to selling companies and angel investing).

The post What's Your Start-up's "Bus Count"? 7 Myths of Entrepreneurship and Programming appeared first on The Blog of Author Tim Ferriss.

The Wilburns have created a multinational from their home.(Photo: Dana Smith)

“So, do you have any ideas?”

“Well, if we’re going to do something, it should be big. It should make people sit up and say OMFG. Make people actually do something,” I responded.

The conversation continued in front of the Thai restaurant, me pacing on my cell phone in San Francisco — foregoing food in excitement — and Tobi in his offices in Ottawa, Canada.

We decided in the subsequent 10 minutes to offer $100,000 cash as a bribe to you all. The overview?

* $100,000 for the grand winner

* $120,000 total in prizes

* 6 months starting January 1 but you can (and should) get started now

* Even if you don’t win the prizes, you should end up with a viable business at the end of 6 months

The details make it even better…

Background

Randy and Nicola Wilburn in the above photo, featured in BusinessWeek’s “Mom-and-Pop Multinationals“, are just two of the thousands of people in 35 countries who have used the steps in The 4-Hour Workweek as a basis to create near- or fully-automated businesses. The principles of automation have been equally applied within both Fortune and Inc. 500 companies.

The problem?

Some things just aren’t as simple in execution as they appear on paper. If there is one place where readers fail or give up, it is on such automated “muses”, as such automated businesses are called in book to abbreviate.

It’s most often due to lack of technical skills, lack of testing abilities, or — much more often — simple intimidation and failure to attempt it at all. The truth: it’s easier to continue in the predictable and comfortable mediocrity of the 9-to-5 than to start a business. It seems too big and there is little perceived incentive to change.

Let’s change that.

Tobi Lutke is the CEO of Shopify. Several months ago, I polled more than 50,000 Twitter users about e-commerce platforms, and the near-unanimous response was that Shopify offered the easiest-to-use full-service platform in existence. I’d never heard of them.

It seems I was late to the party.

From Pixar to Tesla, Pamela Anderson to Amnesty International, I saw slick design after slick design, all of which could be set up in minutes. Even Google Website Optimizer is built-in for testing. I was so surprised and impressed that I became an advisor upon meeting Tobi at RailsConf.

I want to give you a reason to finally take the jump with full confidence. Here’s what we’re doing:

The Competition – More Than One Winner

Shopify and I are running a 6-month “Build Your Business” competition. The store with the most revenue for two consecutive months (we’ll use your best two) wins $100,000.

There are other runner-up prizes, and there will be worthwhile surprises. To support you with the tools and skills you need, there will be expert tutorials on critical subjects (like Google Adwords testing, design, etc.) on a monthly basis at minimum, posts on this blog with real-life examples, and more.

The bullets:

* $100,000 for the grand winner

* $120,000 total in prizes

* 6 months starting January 1 but you can (and should) get started now. Even two weeks of practice will give you a massive advantage. I strongly suggest playing with it now.

* The best two consecutive months of sales count

* Even if you don’t win the prizes, you should end up with a viable business at the end of 6 months

* The steps and details in the new, expanded 4-Hour Workweek will be used as ground-zero for instructions

* Contest open — unfortunately — to US residents only. Please see “Afterword” below for why you should do it regardless. The tools and guidance will be available to all entrants.

Outside the US? Perhaps you should just incorporate a US company online? But – I’m no lawyer. Speak with a professional first and read the fine print. Be sure to read the FAQ, which opens up even more opportunities.

[Update: there is a new forum on Shopify for questions and feedback about the contest]

Tens of thousands of online stores have been created with Shopify: everything from Nerdbots to CrossFit.

Will you be next? I know a Fortune 500 company employee who’s quitting in 2010 because his Shopify store makes more than $1,000,000 per year. Not bad for a side gig!

If you’ve thought of starting a muse but have put it off or given up, here are two reasons to make 2010 the year that changes everything:

$100,000 and know-how guidance from experts. Though I’m an advisor, I receive no commission or payment whatsoever for this competition. It’s to get more people to pull the trigger.

If you decide not to pull the trigger, ask yourself “why not?” If not now, then when?

This competition is intended as a benevolent and encouraging kick in the ass. This stuff isn’t rocket science, but it does require stepping outside your comfort zone for a bit to realize: this isn’t that hard. It’s just unfamiliar. If you do it now, a lot of people will be in the same boat and you’ll take the trip together.

No more excuses. Click here to learn how simple it can be.

[Update: there is a new forum on Shopify for questions and feedback about the contest]

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Frequently Asked Questions with Tobi

[The most up-to-date FAQ is on the contest page here]

> Rachel: Can you sell a combination of affiliate products and your own products through Shopify?

Yes absolutely. In fact we highly encourage our customers to source extra products that round off the product offering. A lot of our customers started by selling just a single product and later on started cross selling related products between their stores for additional sales.

> BrianReid: Can we use a drop shipper like Doba for products?

Yes, Shopify even integrates directly with drop shippers and consignment warehouses such as Shipwire, Webgistix and Amazon fulfillment. These services are really the key to fully automate your online store because manual shipping is labor intensive. At Shopify we have something called the App Store (http://apps.shopify.com) which allows you to add extensions to your store (think a mix of wordpress plugins and facebook apps). I know there are a few developers currently working on Doba integration.

> Erica: I’m using 1ShoppingCart right now. Can I just move stuff over to Shopify and qualify, or does it have to be a new business?

The point of this competition is to encourage people to create new businesses. If you could simply move a million or multi million dollar business over to Shopify and take the pot then the entire thing would be fairly uninteresting. So in other words, moving an existing business over: no go. Creating a new, related business that you organically grow from the start without simply redirecting your old store: OK.

That being said, we would love to get your existing business on Shopify. If you want to talk more in depth about this, contact me at tobi[at]shopify.com.

> Erica: For the Shopify folks: Do you offer a 1-click post-sale upsell feature like Upsell Express from 1SC?

I’m not familiar with the 1-click post-sale product but marketing to prior clients is a big part of Shopify. We have great integration with Sendloop, Vertical Response, Campaign Monitor and all such services. Through the App Store that I mentioned earlier there are also some really exciting new apps being developed that help people find related products that go well with their current cart content. Shopify is a very flexible platform.

Afterword

Gross revenue and US residents only? A case study in technology and real-life lawyering…

First and foremost, the best prize we can offer is this: your own near-automated, cash-flow positive business at the end of six months. The $100,000 is just a catalyst, a push. The former is, as the proverb goes, teaching you to fish, whereas the latter is handing over a single fish.

No contest is perfect. Shopify can’t verify net profit (without private investigators proving margins), so revenue is used as the measuring stick, which is trackable. Does this handicap you if you sell comic books instead of race cars? Not necessarily. It just means you’ll need to sell more units. Important: the most any single transaction can be applied the contest is $5,000.

Life is a competition. The rules were the best we could put together without making it impossibly complicated.

But, what’s up with the “limited to US residents” and all that?

From a post on Etsy about their own contest challenges (the whole post is worth a read):

Etsy is an international site. We have buyers and sellers from all around the globe. And we love our community. To solely enable U.S. residents to participate in an aspect of our site did not sit well with me or with Etsy. So I called an attorney who specializes in contest law to find an alternative. Unfortunately, his response supported my disappointing findings. He explained that in order to hold an international contest, Etsy would need to consult a licensed attorney who specializes in contest law for each and every country eligible for the contest. And, in fact, for many countries a translator would have to draft the rules. “How much would this cost and how much time would it take?” I innocently asked the contest law attorney. His two-word answer was most discouraging: “a lot.”

Here is Tobi’s version, especially frustrating, considering that Shopify is based in Canada!

“When putting together the contest we really wanted to make it a contest for anyone, anywhere in the world. Throughout the planning I spent more hours on the phone with lawyers than I’d care to admit to anyone. Unfortunately, as time when on, it became clear that it would be impossible to hold the contest anywhere outside the US without fundamentally altering the original concept.

Without going into too much detail, the crux of the matter is the classification of the contest as a game of chance versus a game of skill. Apparently, being good at selling stuff online is considered chance by many agencies and therefore would be governed by Lottery laws, as silly as this sounds.

That being said, you can still participate in this contest wherever you are. The prize money is significant, but don’t forget the spirit of the contest: to give a kick in the pants to all those people who have wanted to start businesses but haven’t. The real prize is having a business of your own at the end of the six months. You’ll still have all the same resources and guides as everyone else: support from the Shopify team, help and guidance from Tim and other experts, and more control over your financial independence.”

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Elsewhere on the web:

Get the brand-new Expanded and Updated 4-Hour Workweek, published 12/15, which includes more than 50 new case studies (including families) of luxury lifestyle design, muse creation, and world travel.

The post No More Excuses – How to Make an Extra $100,000 in the Next 6 Months appeared first on The Blog of Author Tim Ferriss.

I have known Ramit Sethi for several years now, first through PBWiki, which he co-founded, and later as someone I turned to with questions about the world and workings of finance. In a world of gurus who promote one method of investing and then follow another, it was refreshing to talk with someone who was willing to share real numbers and case studies from their experiments.

Ramit and I have also able to share a bottle (OK, many bottles) of wine and laugh about the downstream effects of titles we’ve tested and chosen, as both of our book titles sound like scams to most people: The 4-Hour Workweek and I Will Teach You To Be Rich.

Despite this self-imposed handicap, Ramit’s blog and advice have been featured in media such as NPR, The New York Times, and Fortune magazine. I specifically asked him if I could excerpt a few of the diagrams and call scripts from his new book. He and I both share a love of templates that enable us (and others) to duplicate results without reinventing the wheel…

Enter Ramit.

The Psychology of Automation – by Ramit Sethi

Think about the 50+ money decisions you have to make today: Should you save more? What should you cut down on? What about investing — real estate or stocks or index funds? Pay off debt? Did you send in that Comcast bill on time? Is it time to rebalance your portfolio?

Faced with an overwhelming number of choices, most people respond in the same way: They do nothing. As Barry Schwartz wrote in The Paradox of Choice: Why More is Less,

“…as the number of mutual funds in a 401(k) plan offered to employees goes up, the likelihood that they will choose a fund — any fund — goes down. For every 10 funds added to the array of options, the rate of participation drops 2 percent. And for those who do invest, added fund options increase the chances that employees will invest in ultraconservative money-market funds.”

Why do so many people believe that personal finance is only about willpower? The idea goes like this: “If I just try harder, I’ll start saving more, pay off my debt, stop spending all that money, keep a budget, learn about investing, start investing, rebalance ever year…” Unlikely. In fact, go ask your friends if they’re taking full advantage of their employer’s 401(k) match. The vast majority of people are not — even though it’s literally free money. Their answer? “Yeah…I really should do that…”

It’s not about willpower. More than anything else, the psychology of automation is critical to successfully getting control of your finances.

In one study, researchers found that making 401(k) accounts opt-out instead of opt-in — in other words, making employees automatically participate, although they could stop at any time — raised contribution rates from less than 40% to nearly 100%.

Defaults matter. We’ve all read The Four Hour Workweek so you know about the benefits of doing less. Today, Tim’s given me the opportunity to show you the details of the personal-finance system I’ve built over the last five years. It’s a way to automate the day-to-day decisions you have to make — paying bills, investing, rebalancing, cutting down on spending, increasing spending on things you love — and focus on the things you care about.

Using “The Next $100” Principle, which I’ll show you below, your automated money flow will automatically route money where it needs to go — investments, paying bills, savings, and guilt-free spending.

And you can focus on the things that matter to you, instead of being a slave to your personal finances.

Case study: Michelle’s Automation System

To see how this will work, let’s use Michelle as an example:

Michelle gets paid once a month. Her employer deducts 5 percent of her pay automatically and puts it in her 401(k). The rest of Michelle’s paycheck goes to her checking account by direct deposit.

About a day later, her Automatic Money Flow begins transferring money out of her checking account. Her Roth IRA retirement account will pull 5 percent of her salary for itself. Her savings account will pull 5 percent, automatically breaking that money into chunks: 2 percent for a wedding sub-account, 2 percent to a house down-payment sub-account, and 1% for an upcoming vacation. (That takes care of her monthly savings goals.)

Her system also automatically pays her fixed costs like Netflix, cable, and insurance. She’s set it up so that most of her subscriptions and bills are paid by her credit card. Some of her bills can’t be put on credit cards—for example, utilities and loans—so they’re automatically paid out of her checking account. Finally, she’s automatically e-mailed a copy of her credit card bill for a monthly five-minute review. After she’s reviewed it, the bill is also paid from her checking account.

The money that remains in her account is used for guilt-free spending money.

To make sure she doesn’t overspend, she’s focused on two big wins: eating out and spending money on clothes.

She sets alerts in her Mint account if she goes over her spending goals, and she keeps a reserve of $500 in her checking account just in case. (The couple of times she went over her spending, she paid herself back using her “unexpected expenses” money from her sub-savings account.) To track spending more easily, she uses her credit card as much as possible to pay for all of her fun stuff. If she uses cash for cabs or coffee, she keeps the receipts and tries to enter them into Mint as often as possible.

In the middle of the month, Michelle’s calendar reminds her to check her Mint account to make sure she’s within her limits for her spending money. If she’s doing fine, she gets on with her life. If she’s over her limit, she decides what she needs to cut back on to stay on track for the month. Luckily, she has fifteen days to get it right, and by politely passing on an invitation to dine out she gets back on track.

By the end of the month, she’s spent less than two hours monitoring her finances, yet she’s invested 10 percent, saved 5 percent (in sub-buckets for her wedding and down payment), paid all of her bills on time, paid off her credit card in full, and spent exactly what she wanted to spend. She had to say “no” only once, and it was no big deal. In fact, none of it was.

Starting off: Scripts for negotiating with banks and credit cards

We’ll get to creating an automatic personal-finance system for you in a second. First, we need to iron out a few wrinkles to make sure your banks and credit cards aren’t screwing you.

The first steps are setting up the right financial accounts (saving, checking, investing), which I detail in chapters 1-3 of my book, but I’m just going to give you some core negotiation scripts to use against your financial institutions. With a customer-acquisition cost that’s typically between $300 and $1,500, financial companies don’t want to lose you — especially since most Americans are horrible negotiators and are afraid of using the phone. If you do it, you’re one of a select few who get preferential treatment.

First, I recommend you create a simple spreadsheet where you list all your accounts. Without it, you’ll activate a passive barrier that will make automation and negotiation far less likely to succeed. Download a spreadsheet here.

Next, I recommend you call up each account and negotiate like an Indian:

Script #1: Negotiating overdraft fees from your bank

You: “Hi, I just saw this bank charge for overdrafting and I’d like to have it waived.”

Bank rep: “I see that fee . . . hmm . . . Let me just see here. Unfortunately, sir, we’re not able to waive that fee. It was [some B.S. excuse about how it’s not waiveable].”

Bad Things to Say Here:

• “Are you sure?” (Don’t make it easy for the rep to say no to your request.)
• “Is there anything else I can do?” (Again, imagine if you were a customer-service rep and someone asked this. It would make your life easier to just say no. As a customer, don’t make it easy for companies to say no.)
• “Well, this Indian blogger dude told me I could.” (Nobody cares. But it would be cool if a thousand customers called their banks and said this.
• “Okay.” (Don’t give up here. Despite what you learned in sex ed, “no” does not mean “no” when it comes from a bank.)

Try this instead:

You: “Well, I see the fee here and I’d really like to get it waived. What else can you do to help me?”

(Repeat your complaint and ask them how to constructively fix it. At this point, about 85 percent of people will get their fees refunded. I have hundreds of comments from people on my blog who have taken this advice and saved thousands of dollars in fees. But in case the rep doesn’t budge, here’s what you can do.)

Bank rep: “I’m sorry, sir, we can’t refund that fee.”

You: “I understand it’s difficult, but take a look at my history. I’ve been a customer for more than three years, and I’d like to keep the relationship going. Now, I’d like to get this waived—it was a mistake and it won’t happen again. What can you do to help?”

You: “Hmm, one second, please. I see that you’re a really good customer. . . . I’m going to check with my supervisor. Can you hold for a second?”

(Being a long-term customer increases your value to them, which is one reason you want to pick a bank you can stick with for the long term. And the fact that you didn’t back down at the first “no” makes you different from 99 percent of other customers.)

Bank rep: “Sir, I was able to check with my supervisor and waive the fee. Is there anything else I can help you with today?”

Script #2: Negotiate your credit card APR

Your APR, or annual percentage rate, is the interest rate your credit card company charges you. The average APR is 14 percent, which makes it extremely expensive if you carry a balance on your card. Put another way, since you can make an average of about 8 percent in the stock market over the long term, your credit card is getting a great deal by lending you money.

So, call your credit card company and ask them to lower your APR. If they ask why, tell them you’ve been paying the full amount of your bill on time for the last few months, and you know there are a number of credit cards offering better rates than you’re currently getting. In my experience, this works about half the time. It’s important to note that your APR doesn’t technically matter if you’re paying your bills in full every month—you could have a 2 percent APR or 80 percent APR and it would be irrelevant, since you don’t pay interest if you pay your total bill in each month. But this is a quick and easy way to pick the low-hanging fruit with one phone call.

Script #3: Get your monthly/annual fees waived (credit cards and all bank accounts)

You: “Hi, I’d like to confirm that I’m not paying any fees on my credit card.”

Credit Card rep: “Well, it looks like you have an annual fee of $50. That’s actually one of our better rates.”

You: “I’d rather pay no fees. Which card can you switch me to that doesn’t charge fees? I’d like to make sure my credit score isn’t affected by closing this account, too. Can you confirm?”

The vast majority of people don’t need to pay any annual fees on their credit cards, and because free credit cards are so competitive now, you rarely need to pay for the privilege of using your card. The only exception is if you spend enough to justify the extra rewards a fee-charging account offers. If you do pay an annual fee, do a break-even analysis to see if it’s worth it. Hundreds of my readers have either (1) had their annual fee refunded, or (2) switched to a no-fee card.

Script #4: What to do if you miss a credit card payment

You: “Hi, I noticed I missed a payment, and I wanted to confirm that this won’t affect my credit score.”

Credit Card rep: “Let me check on that. No, the late fee will be applied, but it won’t affect your credit score.”

(If you pay within a few days of your missed bill, it usually won’t be reported to the credit agencies. Call them to be sure.)

You: “Thank you! I’m really happy to hear that. Now, about that fee…I understand I was late, but I’d like to have it waived.”

Credit Card rep: “Why?”

You: “It was a mistake and it won’t happen again, so I’d like to have the fee removed.”

(Always end your sentence with strength. Don’t say, “Can you remove this?” Say, “I’d like to have this removed.” At this point, you have a better-than-50-percent chance of getting the fee credited to your account. But just in case you get an especially tough rep, here’s what to say.)

Credit Card rep: “I’m very sorry, but we can’t refund that fee. I can try to get you our latest blah blah marketing pitch blah blah…”

You: “I’m sorry, but I’ve been a customer for four years and I’d hate for this one fee to drive me away from your service. What can you do to remove the late fee?”

Credit Card rep: “Hmm . . . Let me check on that. . . . Yes, I was able to remove the fee this time. It’s been credited to your account.”

You don’t believe me that it can be so simple? It is. Anyone can do it.

There are other advanced negotiating strategies and tactics, including optimizing your debt-to-credit ratio, but I’ll leave those for another day.

Finally, if you decide to switch accounts, which ones should you use? I cover this in detail in the book, but here’s what I use ING Direct for savings and Schwab Investor Checking, where I earn interest and get 100% of ATM fees refunded from anywhere.

• • *“The Next $100” Principle Applied: Automating your Finances

Too many people try to save money on 50 things and end up saving 5% on everything — and causing themselves a huge amount of stress that makes them give up entirely. Instead, I prefer focusing on my top two discretionary expenses (for me, eating out and going out), and cutting 25%-33% off over a period of six months. This generates hundreds of dollars of extra cash flow that I re-route to investing and travel.

To show you how automating your accounts works, I’ve prepared a 12-minute video that shows you how to build a personal-finance infrastructure that automates your money so you can spend less than 1 hour per week monitoring your money. Everything will be done automatically — investment, savings, bills paid. Everything.

Ramit’s 12-Minute Guide to Automating Your Finances

First, you’ll need to log in to each account and link your accounts together so you can set up automatic transfers from one account to another. When you log in to any of your accounts, you’ll usually find an option called something like “Link Accounts,” “Transfer,” or “Set Up Payments.”

These are the links you need to make:

Examples: Your 401(k) should be connected to your checking account via direct deposit (talk to your HR rep about setting this up — it takes 10 minutes to fill out a form). Then log into your Roth IRA, savings account, and credit card, where you can link your checking account to them. Finally, there are some bills that can’t be paid through your checking account, like your rent. For those, use your checking account’s free bill-pay feature so they automatically issue your landlord a check on the precise date it’s due. Now, you never have to manually write a check again.

Set up automatic transfers

Now that all your accounts are linked, it’s time to go back into your accounts and automate all transfers and payments. This is really simple: It’s just a matter of working with each individual account’s website to make sure your payment or transfer is set up for the amount you want and on the date you want.

Most people neglect one thing when automating: dates. If you set automatic transfers at weird times, it will inevitably necessitate more work, which will make you resent and eventually ignore your personal-finance infrastructure. For example, if your credit card is due on the 1st of the month, but you don’t get paid until the 15th, how does that work? If you don’t synchronize all your bills, you’ll have to pay things at different times and that will require you to reconcile accounts. Which you won’t do.

The easiest way to avoid this is to get all your bills on the same schedule. To accomplish this, get all your bills together, call the companies, and ask them to switch your billing dates. Most of these will take five minutes each to do. There may be a couple of months of odd billing as your accounts adjust, but it will smooth itself out after that. If you’re paid on the 1st of the month, I suggest switching all your bills to arrive on or around that time, too.

Call and say this: “Hi, I’m currently being billed on the 17th of each month, and I’d like to change that to the 1st of the month. Do I need to do anything besides ask right here on the phone?” Of course, depending on your situation, you can request any billing date that will be easy for you.

Now that you’ve got everything coming at the beginning of the month, it’s time to actually go in and set up your transfers. Here’s how to arrange your Automatic Money Flow, assuming you get paid on the 1st of the month.

2nd of the month: Part of your paycheck is automatically sent to your 401(k). The remainder (your “take-home pay”) is direct-deposited into your checking account. Even though you’re paid on the 1st, the money may not show up in your account until the 2nd, so be sure to account for that.

Remember, you’re treating your checking account like your e-mail inbox— first, everything goes there, then it’s filtered away to the appropriate place. Note: The first time you set this up, leave a buffer amount of money—I recommend $500—in your checking account just in case a transfer doesn’t go right. And don’t worry: If something does go wrong, use the negotiation tips above to get any overdraft fees waived.

5th of the month: Automatic transfer to your savings account. Log in to your savings account and set up an automatic transfer from your checking account to your savings account on the 5th of every month. Waiting until the 5th of the month gives you some leeway. If, for some reason, your paycheck doesn’t show up on the 1st of the month, you’ll have four days to correct things or cancel that month’s automatic transfer.

Don’t just set up the transfer. Remember to set the amount, too. Use the percentage of your monthly income that you established for savings in your Conscious Spending Plan (from Chapter 4 of my book; typically 5 to 10 percent). But if you can’t afford that much right now, don’t worry—just set up an automatic transfer for $5 to prove to yourself that it works. The amount is important: $5 won’t be missed, but once you see how it’s all working together, it’s much easier to add to that amount.

5th of the month: Automatic transfer to your Roth IRA. To set this up, log in to your investment account and create an automatic transfer from your checking account to your investment account. Refer to your Conscious Spending Plan to calculate the amount of the transfer. It should be approximately 10 percent of your take-home pay, minus the amount you send to your 401(k).

7th of the month: Auto-pay for any monthly bills you have. Log in to any regular payments you have, like cable, utilities, car payments, or student loans, and set up automatic payments to occur on the 7th of each month. I prefer to pay my bills using my credit card, because I earn points, I get automatic consumer protection and little-known benefits, and I can easily track my spending on online sites like Mint, Quicken, or Wesabe.

But if your merchant doesn’t accept credit cards, they should let you pay the bill directly from your checking account, so set up an automatic payment from there if needed.

7th of the month: Automatic transfer to pay off your credit card. Log in to your credit card account and instruct it to draw money from your checking account and pay the credit card bill on the 7th of every month— in full. (Because your bill arrived on the 1st of the month, you’ll never incur late fees using this system.) If you have credit card debt and you can’t pay the bill in full, don’t worry. You can still set up an automatic payment; just make it for the monthly minimum or any other amount of your choice. (Incidentally, paying your bills on time is the one of the top factors in determining and improving your credit score.)

By the way, while you’re logged in to your credit card account, also set up an e-mail notification (this is typically under “Notifications” or “Bills”) to send you a monthly link to your bill, so you can review it before the money is automatically transferred out of your checking account. This is helpful in case your bill unexpectedly exceeds the amount available in your checking account—that way you can adjust the amount you pay that month.

Tweaking Your System: Freelancers, irregular income, and unexpected expenses

That’s the basic Automatic Money Flow schedule, but you may not be paid on a straight once-a-month schedule. That’s not a problem. You can just adjust the above system to match your payment schedule.

If you’re paid twice a month: I suggest replicating the above system on the 1st and the 15th—with half the money each time. This is easy enough, but the one thing to watch with this is paying your bills. If the second payment (on the 15th) will miss the due dates for any of your bills, be sure that you set it so that those bills are paid in full during the payment on the 1st. Another way to work your system is to do half the payments with one paycheck (retirement, fixed costs) and half the payments with the second paycheck (savings, guilt-free spending), but that can get clunky.

If you have irregular income: Irregular incomes, like those of freelancers,

are difficult to plan for. Some months you might earn close to nothing, others you’re flush with cash. This situation calls for some changes to your spending and savings. First—and this is different from the Conscious Spending Plan—you’ll need to figure out how much you need to survive on each month. This is the bare minimum: rent, utilities, food, loan payments—just the basics. Those are your bare-bones monthly necessities.

Now, back to the Conscious Spending Plan. Add a savings goal of three months of bare-bones income before you do any investing. For example, if you need at least $1,500/month to live on, you’ll need to have $4,500 in a savings buffer, which you can use to smooth out months where you don’t generate much income. The buffer should exist as a sub-account in your savings account. To fund it, use money from two places:

1. Forget about investing while you’re setting up the buffer, and instead take any money you would have invested and send it to your savings account.
2. In good months, any extra dollar you make should go into your buffer savings.

Here’s an example of how I set up my sub-savings accounts:

Once you’ve saved up three months of money as a cushion, congratulations! Now go back to a normal Conscious Spending Plan where you send money to investing accounts. Because you’re self- employed, you probably don’t have access to a traditional 401(k), but you should look into a Solo 401(k) and SEP-IRA, which are great alternatives.

Just keep in mind that it’s probably wise to sock away a little more into your savings account in good months to make up for the less profitable ones.

If you have an irregular income, I highly recommend using YouNeedABudget as a planning tool. It uses a forward-looking system that’s very helpful if you don’t know what you’re going to make next month.

Your money is now automatic

Congratulations! Your money management is now on autopilot. Not only are your bills paid automatically and on time, but you’re actually saving and investing money each month. The beauty of this system is that it works without your involvement and it’s flexible enough to add or remove accounts any time. You’re accumulating money by default.

Most importantly, whenever you’re eating out, or you decide to buy a new pair of shoes or fly out to visit your friends or get the “Pro” version of that web app you’ve been eyeing, you won’t feel guilty because you’ll KNOW that your finances are being handled — automatically.

Excerpts from Ramit Sethi’s new book, I Will Teach You To Be Rich. Used with permission.

The post The Psychology of Automation: Building a Bulletproof Personal-Finance System appeared first on The Blog of Author Tim Ferriss.

For English subtitles, choose “Danish” from the “Choose Language…” drop-down.

There is a misconception that lifestyle design is just for entrepreneurs or CEOs.

In reality, the principles — borrowed from economics and behavioral psychology — can be applied within organizations and groups with even more dramatic effects.

Just watch the 25-minute segment above from the Danish equivalent of the BBC (DR1), where lifestyle design is tested by both an employee at insurance giant Codan and by the CEO of a fast-growing microbrewery. For English subtitles, choose “Danish” from the “Choose Language…” drop-down.

Who made more progress? The boss or the person with a boss? The results might surprise you…

Group Dynamics: Leverage for Good or Evil

Whether you’re a three-person start-up or Google (I’ve spoken there twice), whether you’re a receptionist or the President, Bill Gates’ following observation applies to implementing behavioral change in groups. The brackets are mine and what I feel can be removed:

The first rule of any [technology used in a] business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency.

Even if you are a low-level employee, it’s important to your personal life and future to understand what this means.

From Chapter 8 of 4HWW:

Principle number one: refine rules and processes before adding people. Using people to leverage a refined process multiplies production; using people as a solution to a poor process multiplies problems.

This applies as much to excessive CC’ing people on personal e-mail as it does to large-scale operations.

If the processes are wasteful (inefficient), performance will decrease when you attempt to scale. The more people involved, the more severe the decrease. If the processes–including prioritization and workflow optimization–are lean (efficient), performance will increase. Combined with other people following the same lean processes, performance can increase in an exponential vs. linear fashion (For any exponentially growing quantity, the larger the quantity gets, the faster it grows).

Most important, just as with Best Buy, where 24-year old Cali Ressler started the ROWE (Results-Only Work Environment) experiment, huge changes can be initiated from the bottom up.

It just takes some lateral thinking and a willingness to test small.

Inside one brand-name public company in Silicon Valley: the new rules in one engineering group.

Case Studies

The Gazette in Colorado Springs published a great overview of several local companies that have implemented 4HWW training for all employees. I encourage those interested to read the entire 2-page article, but here are a few excerpts from one of the case studies:

The changes at Sandoval’s office are evident. A few months ago, Sandoval [the CEO of an advertising and design firm] said he would not have had time to sit down and talk about a book.

Now, three months after restructuring his daily routine and asking his nine employees to buy into the same process, piles of files and papers have disappeared from Sandoval’s desk because the work is done. His four computers, along with his BlackBerry, no longer demand immediate attention. He trusts employees to do their jobs without constant monitoring.

Moreover, Sandoval and other local business owners who are following some of the book’s advice claim it’s helped them improve relationships with clients, increase business and streamline operations.

…

“We added up what it cost us to have weekly meetings, roughly $50,000 a year in salaries, so we combined them into twice a month. We also have an agenda, and we get more done,” Neubacher [owner of a 12-person SMB tech support firm] said. “We’re working smarter versus harder.”

DublinBlue’s Shinn has had similar success. “We’ve removed many of the normally accepted distractions that detract from productivity,” he said. “It’s not so easy to just pop your head into someone’s office for a ‘quick’ question. You start to see the true cost of those little interruptions, and you modify your approach. Our efficiency has increased, so we have been able to take on more work without adding employees.”

The Checklist and a Call to Experimentation

CEO Bernard Sandoval developed a 5-page 4HWW guide as required reading for his employees called “Being More Productive” that you can download here.

I encourage you to share it with friends and those you work with. It’s a great starter kit for a few of the concepts in the book and it’s all presented in an easy-to-digest checklist that anyone can review each morning.

One CEO added the following in an e-mail to me:

As a result, I can now pull in 35% more work and not have to add staff. Think of what that could do nationally.

Lifestyle design is a portfolio of lateral approaches for producing precise results and measuring outputs instead of hours. Experiment with implementing the principles — as temporary experiments to improve workflow — within groups and larger organizations, as that is where the most dramatic results can be seen.

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Odds and Ends: Seeking mothers, and thanks to reader Christian Bang Marxen!

Seeking mothers for major TV and media: Are you a mother who’s used the principles in the 4HWW somehow in your life? If you’re interested in being featured on major TV programs and other media, please put a 1-3 minute video on YouTube that describes some of the changes in your life. Be sure to put “4hww mother” in the “tags” field so producers can find it! Deadline: Sept 3, but earlier is better.

Thanks to Christian Marxen: Special huge thanks to Danish reader Christian Bang Marxen for translating the above DR1 video into English subtitles. Christian, you rock! Please keep an eye on your e-mail, as I have a special gift for you.

The post The Fortune 500 4-Hour Workweek: Multiplying Output in Groups (Plus: Downloadable Checklists) appeared first on The Blog of Author Tim Ferriss.

All push and no pull doesn’t work in personal or professional life. (Photo: markal)

Preface: This is a guest post from Michael Port on standardizing business processes–or personal productivity–to minimize excessive trial-and-error.

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Waste is a constraint. Reducing waste in your organization is one the easiest ways of reducing constraints.

And here’s a surprise—waste in offices is usually greater than in factories, especially because it’s easy to hide waste in cumbersome or non-existent processes. Creating unnecessary information inventory is another common waste in offices. Doing too many tasks “in anticipation” of a possible client, for example…

One way to think about waste is in terms of push and pull systems. A push system, like much of traditional manufacturing, produces as much product as the company can and/or wants to produce and then gets it out to the customer. The result is usually large inventories.

A pull system only produces what a customer needs and has asked for. You want to have as much “pull” in your systems as you can. Toyota has very little excess inventory. That’s why when the Prius was so unexpectedly popular, people found themselves on waiting lists for the car. Seems like a problem, but Toyota is much more profitable as a result of being so lean. You might also hear this concept referred to as “just-in-time production” or JIT (remember?—it came from the supermarkets).

I think of it this way—there’s a place for everything and everything in its place. No more. No less.

Here’s a story on how to reduce waste (figuratively and literally), by integrating people and process in a pull system. My Aikido dojo is on the top floor of a barn on a lavender farm with a view of a lake. It’s as extraordinary as it sounds. We don’t have a conventional toilet.

Instead, there is an incinerator toilet. You first press a button to start the heating system and then put a special purpose coated paper bowl liner (like a coffee filter, but don’t try using one for this purpose it won’t work) down between two sloping pieces of steel (sort of like a toilet bowl liner). You do “your business” into the paper filter, step onto a lever, and wave goodbye to your waste and any toilet paper. The toilet incinerates the filter and extra donations from you at a very high temperature, somewhere around 7,000 degrees Fahrenheit or the surface temperature of the sun, whichever is hotter. It’s a great way to eliminate waste. However, you can’t use the toilet without these special purpose coated paper bowl liners—they’re needed to keep the steel clean while also aiding in the incineration process. Many have tried and got a good scolding for it.

My teacher and his wife have implemented a very simple “pull system” so that we always have just the right number of liners. Not too many, which ties up money and takes up extra space with excess inventory. Not too little which can shut down the incinerator if it’s overburdened by non-regulation uses.

Over time my teacher and his wife have determined just how many boxes of this paper to keep on hand, based on the frequency of use. It happens to be four boxes. These boxes are then stacked on a specific shelf (the one closest to the toilet, not down the hall, which would create a different kind of production problem, but right where you need them—and can reach them).

On the bottom box is written—when you open this box tell George or Patti. You do tell them because it’s built into the culture of the dojo and you are part of the smooth functioning of the system. They then order 4 more boxes—and have determined, through learning by doing, just how long it takes to receive a shipment of 4 new boxes. It’s a very simple pull system that, in this case, only produces the right kind of waste.

As you can tell, there are a number of keys to success in this process.

Everything about this process is clearly visible and apparent to everybody involved in the process. If the box marked when you open this box tell George or Patti was inside a dark, hard to reach, cabinet, or it was written on the bottom of the box instead of on the flap that you have to open to get at the liners, it might not get noticed. The process relies on this visual indicator. Visual indicators or management charts, or checklists, etc. allow for communication and sharing. You can create standardized work sheets, but if you don’t have a way of seeing them, and the process, as if it were in a glass box, it’s likely that the standard practice won’t be followed and breakdown and waste will occur.

Problems have a way of bubbling up to the surface. The longer you let them simmer the bigger the problem will be when it surfaces. Our goal is to create standardized work processes that bring issues and problems to the surface, using visual indicators so no problems are hidden, at the earliest possible moment. People are stimulated by the visual, tactile and audible. People are part of the process.

Remember, we’re integrating. So it stands to reason that being able to see everything you manage is a balanced and harmonious way of creating flow in your work.

The Importance of Documentation

Early on in my business, I had a team member who would not document her processes, no matter how many times I asked, begged, and pleaded.

I spent hours coaching her on how to do it. I offered to hire someone to walk her through the process and essentially create the system for her. All to no avail. She eventually admitted to me that she thought that if she documented what she did, then I would just let her go. She seemed to think that standardizing might render her useless, as if it were somehow like mechanizing her job. Or maybe she thought that if I saw what she really did I wouldn’t think she was doing a good job. I told her that I wanted to standardize her tasks so her job would be easier and improve workflow throughout the organization. And furthermore, at this point, if she didn’t document and standardize her tasks I would be forced to hire someone to fill her shoes. Sadly, she didn’t come around and we parted ways.

Of course, this was ultimately my responsibility for not making documentation of process a standard procedure during the hiring process.

I know better now and have built into the hiring process a system of testing the ability of potential new hires to document a number of tasks. That way I can assess in advance of hiring them if they can and will do it.

Postscript from the Comments: The 7 Wastes of Toyota

Jeffrey K. Liker, author of The Toyota Way, says that Toyota has identified seven primary types of non value-adding waste in its business: over-production, motion (of operator or machine), waiting (of operator or machine), conveyance, processing itself, inventory (raw material), and correction (rework and scrap). Liker included an 8th waste (a personal favorite)—untapped employee creativity.

I have adapted Toyota and Liker’s lists for our purposes. So that they relate, not to a manufacturing process, but to a service business:

• Overstaffing—hiring people for whom there is not enough work.

• Overproduction—producing items (work) for which there are no clients or orders.

• Waiting—for information, resources, supplies, anything that slows down flow and creates waste.

• Over-processing or incorrect processing—activity, conversations, or processes that are not necessary or are incorrectly executed.

• Unused employee creativity—not enlisting and empowering your team, both intellectually and emotionally, in a continuous process of improvement.

In manufacturing, it’s often argued that overproduction is the greatest of all waste, since it causes most of the other wastes. I think the same could hold true for a service-based business. Not only overproduction of your services, but doing too much of everything that is not valuable to the internal or external customer. Overproduction waste, as Liker points out, “…leads to other suboptimal behavior, like reducing your motivation to continuously improve your operations.”

…

Typical business processes might be 90% waste and only 10% value-added work. Your objective is to create continuous flow in information processes and service processes. No one produces anything before it is needed by the next person or for the next step in the process.

Nothing should ever sit around waiting; except maybe things like cash savings in the bank for security and protection. Shortening the elapsed time from start of process to finished good or service will lead to best quality, lowest cost and shortest delivery time. There are at least two customers in this process—you and your paying customers at the other end of the process. Ensuring the best quality service benefits your paying customers and it’s also the best marketing. Ensuring the lowest cost benefits you as customer. Achieving the shortest delivery time might serve both you and your paying customer. But it might not. What’s the value of each of these objectives and where is it being created?

You might not have the best service, lowest cost and shortest delivery time. You might, however, find the optimal balance between the three. That’s the objective of all your processes.

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The above is a combination of two excerpts from Beyond Booked Solid, authored by Michael Port, who has been featured in the Wall Street Journal and on The Big Idea for his exploration of concepts ranging from Toyota’s best practices to standardized management of virtual assistants.

The post Push vs. Pull Processes appeared first on The Blog of Author Tim Ferriss.

Profitability often requires better rules and speed, not more time. (Photo: Jetta Girl)

I wrote this “margin manifesto” several months ago and somehow neglected to post it. Your requests for more content on start-up economics and processes reminded me.

These are the principles I review whenever facing operational overwhelm or declining/stagnating profits. Hope you find them useful.

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The financial goal of a start-up should be simple: profit in the least time with the least effort. Not more customers, not more revenue, not more offices or more employees: more profit.

Based on my interviews with high-performing (using profit-per-employee metrics) CEOs in more than a dozen countries, here are the 11 basic tenets of the “Margin Manifesto”… a return-to-basics call that gives permission to do the uncommon to achieve the uncommon: consistent profitability (or doubling of it) in 3 months or less.

1. Niche is the New Big — The Lavish Dwarf Entertainment Rule:

Several years ago, an investment banker was jailed for trade violations. He was caught partly due to his lavish parties on yachts, often featuring hired dwarves. The owner of the dwarf rental company, Danny Black, was quoted in the Wall Street Journal as saying: “Some people are just into lavish dwarf entertainment.” Niche in the new big. But here’s the secret: it’s possible to niche market and mass sell. iPod commercials don’t feature dancing 50-year olds, they feature hip and fit 20-30-somethings, but everyone and his grandmother wants to feel youthful and hip, so they strap on Nanos and call themselves Apple converts. Who you portray in your marketing isn’t necessarily the only demographic who buys your product — it’s often the demographic that most people want to identify with or belong to. The target isn’t the market. No one aspires to be the bland average, so don’t water down messaging to appeal to everyone–it will end up appealing to no one.

2. Revisit Drucker — What Gets Measured Gets Managed:

Measure compulsively, for as Peter Drucker stated: what gets measured gets managed. Useful metrics to track, besides the usual operational stats, include CPO (“Cost-Per-Order,” which includes advertising, fulfillment and expected returns, chargebacks, and bad debt), ad allowable (the maximum you can spend on an advertisement and expect breakeven), MER (media efficiency ratio), and projected lifetime value (LV) given return rates and reorder %. Consider applying direct response advertising metrics to your business.

3. Pricing before Product – Plan Distribution First:

Is your pricing scalable? Many companies will sell direct-to-consumer by necessity in early stages, only to realize that their margins can’t accommodate resellers and distributors when they come knocking. If you have a 40% profit margin and a distributor needs a 70% discount to sell into wholesale accounts, you’re forever limited to direct-to-consumer… unless you increase your pricing and margins. It’s best to do this beforehand if possible – otherwise, you’ll need to launch new or “premium” products — so plan distribution before setting pricing. Test assumptions and find hidden costs by interviewing those who have done it: will you need to pay for co-op advertising, offer rebates for bulk purchases, or pay for shelfspace or featured placement? I know one former CEO of a national brand who had to sell his company to one of the world’s largest soft drink manufacturers before he could access front-of-store shelving in top retailers. Test your assumptions and do your homework before setting pricing.

4. Less is More – Limiting Distribution to Increase Profit:

Is more distribution automatically better? No. Uncontrolled distribution leads to all manner of head-ache and profit-bleeding, most often related to rogue discounters. Reseller A lowers pricing to compete with online discounter B, and the price cutting continues until neither is making sufficient profit on the product and both stop reordering. This requires you to launch a new product, as price erosion is almost always irreversible. Avoid this scenario and consider partnering with one or two key distributors instead, using that exclusivity to negotiate better terms: less discounting, prepayment, preferred placement and marketing support, etc. From iPods to Rolex and Estee Lauder, sustainable high-profit brands usually begin with controlled distribution. Remember, more customers isn’t the goal; more profit is.

5. Net-0 — Create Demand vs. Offering Terms:

Focus on creating end-user demand so you can dictate terms. Often one trade publication advertisment, bought at discount remnant rates, will be enough to provide this leverage. Outside of science and law, most “rules” are just common practice. Just because everyone in your industry offers terms doesn’t mean you have to, and offering terms is the most consistent ingredient in start-up failure. Cite start-up economics and the ever-so-useful “company policy” as reasons for prepayment and apologize, but don’t make exceptions. Net-30 becomes net-60, which become net-120. Time is the most expensive asset a start-up has, and chasing delinquent accounts will prevent you from generating more sales. If customers are asking for your product, resellers and distributors will need to buy. It’s that simple. Put funds and time into strategic marketing and PR to tip the scales in your favor.

6. Repetition is Usually Redundant — Good Advertising Works the First Time:

Use direct response advertising (call-to-action to a phone number or website) that is uniquely trackable – fully accountable advertising — instead of image advertising, unless others are prepurchasing to offset the cost (e.g. “If you prepurchase 288 units, we’ll feature your store/URL/phone exclusively in a full-page ad in….”). Don’t listen to advertising salespeople who tell you that 3, 7, or 27 exposures are needed before someone will act on an advertisement. Well-designed and well-targeted advertising works the first time. If something works partially well (e.g., high response with low percentage conversion to sales, low response with high conversion, etc.), indicating that a strong ROI might be possible with small changes, tweak one controlled variable and micro-test once more. Cancel anything that cannot be justified with a trackable ROI.

7. Limit Downside to Ensure Upside — Sacrifice Margin for Safety:

Don’t manufacture product in large quantities to increase margin unless your product and marketing are tested and ready for roll-out without changes. If a limited number of prototypes cost $10 per piece to manufacture and sell for $11 each, that’s fine for the initial testing period, and essential for limiting downside. Sacrifice margin temporarily for the testing phase, if need be, and avoid potentially fatal upfront overcommitments.

8. Negotiate Late — Make Others Negotiate Against Themselves:

Never make a first offer when purchasing. Flinch after the first offer (“$3,000!” followed by pure silence, which uncomfortable salespeople fill by dropping the price once), let people negotiate against themselves (“Is that really the best you can offer?” elicits at least one additional drop in price), then “bracket”. If they end up at $2,000 and you want to pay $1,500, offer $1,250. They’ll counter with approximately $1,750, to which you respond: “I’ll tell you what — let’s just split the difference. I’ll overnight FedEx you a check, and we can call it a day.” The end result? Exactly what you wanted: $1,500.

9. Hyperactivity vs. Productivity — 80/20 and Pareto’s Law:

Being busy is not the same as being productive. Forget about the start-up overwork ethic that people wear as a badge of honor–get analytical. The 80/20 principle, also known as Pareto’s Law, dictates that 80% of your desired outcomes are the result of 20% of your activities or inputs. Once per week, stop putting out fires for an afternoon and run the numbers to ensure you’re placing effort in high-yield areas: What 20% of customers/products/regions are producing 80% of the profit? What are the factors that could account for this? Invest in duplicating your few strong areas instead of fixing all of your weaknesses.

10. The Customer is Not Always Right — “Fire” High-Maintenance Customers:

Not all customers are created equal. Apply the 80/20 principle to time consumption: What 20% of people are consuming 80% of your time? Put high-maintenance, low-profit customers on auto-pilot–process orders but don’t pursue them or check up on them–and “fire” high-maintenance, high-profit customers by sending a memo detailing how a change in business model requires a few new policies: how often and how to communicate, standardized pricing and order process, etc. Indicate that, for those clients whose needs are incompatible with these new policies, you are happy to introduce other providers. “But what if my largest customer consumes all of my time?” Recognize that 1) without time, you cannot scale your company (and, oftentimes, life) beyond that customer, and 2) people, even good people, will unknowingly abuse your time to the extent that you let them. Set good rules for all involved to minimize back-and-forth and meaningless communication.

11. Deadlines over Details – Test Reliability Before Capability:

Skills are overrated. Perfect products delivered past deadline kill companies faster than decent products delivered on-time. Test someone’s ability to deliver on a specific and tight deadline before hiring them based on a dazzling portfolio. Products can be fixed as long as you have cash-flow, and bugs are forgiven, but missing deadlines is often fatal. Calvin Coolidge once said that nothing is more common than unsuccessful men with talent; I would add that the second most common is smart people who think their IQ or resume justifies delivering late.

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Michael Gerber, the E-Myth evangelist.

Michael Gerber’s name should sound familiar.

I recommend his bestseller, The E-Myth Revisited, as the must-read classic on automation. It brief, it discusses how to create scalable businesses that are based on rules and not outstanding employees; and how to become an owner instead of constant micromanager.

Michael also had a enormous influence on me as a first-time writer. His words to me were simple during our first lunch:

“If you’re going to write a book, write a f*ing book.”

Don’t hedge and don’t think small. I didn’t hold back material for a sequel, I aimed for the top of the top, and I credit Michael’s advice as, in part, responsible for the subsequent success of the 4HWW. It was that recalibration of ambition that made it all possible.

His latest book, Awakening the Entrepreneur Within, examines how to recalibrate the scale of objectives and other facets of the core entrepreneurial experience, which we recently sat down to discuss…

1. Michael, having counseled more than 50,000 post-corporate entrepreneurs caught in what you call the “entrepreneurial seizure,” can you explain this phenomenon and how to avoid it?

The “entrepreneurial seizure” lies at the heart of most failures in judgment when someone decides to leave his or her job to go out on their own.

The excitement of independence associated with getting rid of the boss is almost always fueled by a flawed understanding of what being on your own means. Most small businesses are started by technicians rather than by true entrepreneurs.

The technician believes in the fatal assumption that because he or she knows how to do the work — whether graphic design, engineering, cooking a great dinner, repairing an automobile, snow boarding, or otherwise — they can turn that capability into a business that frees them from the boss. The graphic designer creates a graphic design business. The technologist creates a technology-based business. The cook creates a restaurant. The mechanic creates an auto repair business. The snow boarder creates a snow boarding business.

But instead of freeing themselves from the boss, they have become their own boss, and they’re now — with absolutely no understanding about how it happened — working for a lunatic and doing what they know how to do but in greater volume than before.

True entrepreneurs make the transition from working for someone else to working on their own much differently. Entrepreneurs invent businesses that work without them. Technicians create businesses that work because of them. The entrepreneur is liberated from what I call the “tyranny of routine,” and the technician becomes a slave to it. In the entrepreneur’s case, the business works. In the technician’s case, the technician works. And that’s why most of the 500,000 new businesses that are started every month in the U.S.A. will fail. According to a recent study done by the Kauffman Foundation, 81% of all businesses in the US employ no people besides the owner. They’re sole proprietorships. True entrepreneurs are never sole proprietors.

2. Much of the model you laid out in The E-Myth Revisited has to do with the importance of systems in building a scalable business. What is the shape of the process and the practical steps for business development in your model?

As I’ve said before, and as AT&T has been quoted: the system is the solution.

The system I’m talking about is the core operating system of your business. It comprises three essential functions that must work in a completely integrated way. These are lead generation, lead conversion and client fulfillment. Whether the business is McDonalds or Starbucks, FedEx or Dell Computer, these three systems are critical to the success of that company. Building these systems then is the process we teach at E-Myth. They are really arranged in a very simple three-step approach. Step one: intentional dreaming (the dream, the vision, the purpose and the mission). Step two: intentional organization (conceiving, building and perfecting the automated client fulfillment systems that comprise the operating reality of the company). Step three: intentional growth (conceiving, building and perfecting the lead generation and lead conversion operating systems of the company). Every business under the sun is conceived, built and perfected in identically the same way, using identically the same processes.

3. Has the Internet really fundamentally changed the game for small business?

The internet era has, of course, changed the game for small business, but not as dramatically as most would profess.

After all is said and done, the internet is simply a medium through which the business of business is transacted, a conduit through which one can communicate and deliver the results one has set out to deliver. As many or more companies fail on the internet as anywhere else, and many more businesses (especially sole proprietors) stumble along without every making an impact on anyone, and most without selling anything to anyone.

In short, if an internet business fails to follow the three-step development process I just outlined, it will fail just like any other business will. So, I must say frankly that I am not a great believer in the internet as the be all and end all of business opportunity that others see it to be. Maybe I’m simply too old, but I think not. In short, I think that, given my experience of internet entrepreneurs as being very much the same as any other types of entrepreneurs, if they are absent the entrepreneurial fundamentals that are absolutely essential for any new company to grow, the result will be the same: lack of direction, lack of intention, lack of execution, diminished results.

4. In your new book you write–very counter-intuitively to most–that the reason most small businesses fail is not that they dream too big, but that they dream too small to create a truly thriving enterprise. Can you elaborate?

By “dreaming big” I mean conceptualizing a result greater than anything you have ever experienced. When I started my first company, now E-Myth Worldwide, I had absolutely no business experience. All I had was an idea bigger than life itself. My idea, my dream, was to transform small business worldwide.

That dream was the energizer for everything that was to follow. That dream for me was the realization of a picture I had formed in my mind of the typical small business I walked into every day, where the owner lived for sweat equity, worked 18-hour days, and had no idea that his or her life could be any different than the overwhelming life he experienced, and that all of his or her peers experienced in the day-to-day hell of doing it, doing it, and doing it some more. I just knew, don’t ask me how, it didn’t have to be that way.

Then I saw McDonalds and the impression I walked away with was huge. I suddenly realized exactly how the tragic condition of small business could be turned on its ear. All I had to do was to McDonald-ize every small business by teaching the owner how to think like Ray Kroc, the founder of McDonalds, did. That led to the invention of E-Myth worldwide.

That’s what I mean when I say dream big. Dream about great results. Dream about a world that works, rather than one that doesn’t. Think of one thing you wish to transform and than go to work ON it, rather than IN it, which quickly became my E-Myth mantra. The result of that will be something bigger than you ever imagined. Dreaming small is not dreaming at all. Dreaming small, which is what most small business owners do, is really the act of shrinking yourself to live a life that you can imagine because it fits your perception of what you know and are able to do. There is no imagination in that. And a life without imagination is already dead. In my new book, I am focused on awakening the soul of my reader to enable him or her to discover the entrepreneur within. And, once discovered, to put his or her imagination to work to invent a new life beyond anything he or she has ever done before. Just like I have done. Just like you have done, Tim. Just like every entrepreneur does.

5. It’s interesting to me that in your view of a truly awakened entrepreneur, they would not ever buy in to a franchise. I think people often confuse designing a scalable business that could be franchised with become a franchisee. Two fundamentally different objectives, right?

Right. The truly awakening entrepreneur wouldn’t buy a franchise. Why would they? The franchise is someone else’s dream. Not the entrepreneur’s. The entrepreneur is the one who invents a franchise company, not the one who buys a franchise. If the entrepreneur were to buy the franchise, he would immediately set about the task of taking it apart and turning it into something else. And, in the process, he would destroy the franchise.

No, the one who buys a franchise is either the technician – he buys a system that works and then he works it – or a manager – he buys a system that works and than manages it. And that’s the way it ought to be.

6. My readers are interested in the intersection of business and lifestyle design. Does an “awakened entrepreneur” seek some form of balance, or is it something else? I’m a big proponent of work-life “separation” vs. balance, as you know.

An awakened entrepreneur isn’t interested in balance of the typical sense. An awakening entrepreneur is passionate about creating. Creating is, by its very nature, unbalanced. But, to the creator, it doesn’t at all feel that way. It feels like the optimal flow of life. Creating is a power all its own. It takes you where it wants to take you, and the creator simply follows where it takes him.

Just like joy. Joy is not balanced either. Joy is explosive, it is the intense experience of life’s purpose all happening at once. So, if you want balance, don’t become Walt Disney. Don’t become Michael Dell. Don’t become anyone who seeks the unknown. Balance is a figment of our known reality. Balance has never been something that people who are disinterested in control ever pursue. The only people who crave balance are people who are desperately out of balance. When you’re living the creative life, you achieve a natural balance all its own.

7. After 30 years of working with entrepreneurs, do you see a fundamental change in entrepreneurship today? If so, what is different now and why?

Actually, no. I don’t see a fundamental difference between the entrepreneurs of 30 years ago and the entrepreneurs I meet today. Other than this: today’s entrepreneur is more likely to be interested in meaning rather than money. Not that he’s not interested in money; he obviously is. But money that comes with the absence of meaning is too big a price to pay for the new entrepreneur I’m engaging today.

Understand, I’m not saying that everyone I meet today has the question of meaning in mind. But, when I begin the conversation about meaning, more people I meet today are interested in having the conversation than ever before. So, there’s something going on today in the world of the entrepreneur. And that’s why I call it “the age of the new entrepreneur.” Something interesting is beginning to wake up, not only in the people I’m talking to, but in me as well.

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Odds and Ends: Tim Upcoming Speaking and Two Favors

I don’t do much speaking, just as I’ve never done any formal book tours or signings, but there are two coming up soon:

E-Tech in San Diego, CA – I’ve giving the closing keynote on March 6th

SXSW in Austin, TX – I’m speaking at the following from March 7-11:

-Fri. 3:30pm “How to Rawk SXSW: The Basics”

-Sat. 3:30pm “The Art of Speed: Conversations with Monster Makers”

-Sat. 5pm Book Signing (Day Stage Cafe, Level 4)

TWO FAVORS, PULEEZE:

1. I’m putting together a group of Lifestyle Design 101 posts. Which 3-5 posts on this blog would you recommend for first-time visitors who want to learn some basics?

2. What questions would you ask the panelists on the “Art of Speed” panel? Please put in your top 2 or 3 in the comments and I’ll try and make them happen. Please keep them relevant! (i.e. no “how does a sonic boom happen?”)

Speaking to Google management at an offsite in Marina del Rey

The post Escaping the Entrepreneurial Seizure: Interview with Michael Gerber (Plus: Tim Speaking) appeared first on The Blog of Author Tim Ferriss.