value max theory

Building a successful business in any industry can be reduced to solving just one problem: maximizing the value you provide to others 1

successful business=max⁡(value provided to others)\text{successful business} = \max (\text{value provided to others})

how do we define value?

level 1: value of what your business offers customers

The value a business provides it's customers can be defined as2

Valueoffer=Dream Outcome×Percieved Likelihood of AchievementTime Delay×Efforts & Sacrifice\text{Value}_{\text{offer}} = \frac{\text{Dream Outcome} \times \text{Percieved Likelihood of Achievement}}{\text{Time Delay} \times \text{Efforts \& Sacrifice}}

where

Valueoffer>Price\text{Value}_{\text{offer}} > \text{Price}

For example, if you run a B2C SaaS to help students write better essays, the variables can be defined as follows:

Overall, the value the app provides seems pretty high and would be worth a lot of the customer's time and money.

level 2: value of business as a whole

The value of a SaaS business (< $1m ARR)3

ValueSaaS=(MRR−monthly costs)×12× 4\text{Value}_{\text{SaaS}} = (\text{MRR} - \text{monthly costs}) \times 12 \times ~4

The value of an e-commerce business

Valuee-commerce=annual profit× 3\text{Value}_{\text{e-commerce}} = \text{annual profit} \times ~3

The value of an agency business

ValueAgency=annual profit× 3\text{Value}_{\text{Agency}} = \text{annual profit} \times ~3

The value of a marketplace, social app, or your own personal network

Valuenetwork=Metcalfes Law=(# nodes in network)2\text{Value}_{\text{network}} = \text{Metcalfes Law} = (\text{\# nodes in network})^2

These are just rough estimates, the actual numbers vary based on many factors.

For example, if you run a SaaS business that does $10k MRR and costs $1k / mo to operate, you have ~$432,000 of value locked in your business.

ValueSaaS=($10k−$1k)×12× 4=$432,000\text{Value}_{\text{SaaS}} = (\text{\$10k} - \text{\$1k}) \times 12 \times ~4 = \text{\$432,000}

great. math equations... how does this help me make money?

the real fun happens when you learn to change things in the real world resulting in the value you provide others to go up.

i notice that it's directly correlated to customers getting happier, and also your own bank balance going up.

everyone just wins using this mental framework.

just to be clear - i've not invented anything new here. just connected important concepts from different fields to construct a mental framework for how to operate an effective business.

how can i start value maxxing?

1. Theoretical Understanding (10-50 hrs)

2. Practical Experience (varies per person, but if you're focused maybe 1-5 years? hard to predict.)

you need hands on experience providing value to others. you cant study your way through this one. theres no way around this.

here are the best ways to get practical experience ranked in order of effectiveness from most effective to least effective (based on my own experience)

  1. get 1:1 direct mentorship from someone a few steps ahead of you
  2. build something yourself
  3. build something with a friend
  4. learn from an internship
  5. learn from a job

there's no shortcut here. do the work. this part is the hardest.

what next?

this is just a theory.

i'll be testing this theory and reporting back with results in my own life.

there's a ton of nuance missing but the above equations convey the overall theory

ill add more nuance as time goes on, but if you already vibe with the theory, please open a PR on github to add more details!

if you have evidence to support or reject this theory, please let me know on github.

- dillion

Footnotes

  1. There is also an element of value capture for the business which is ommitted since value capture will likely take care of itself as long as you provide enough value to others. ↩

  2. Based on the value equation by Alex Hormozi. Discussed extensively in his book $100m Offers ↩

  3. Median valuation multiples are subject to change based on market conditions and should be used as a guideline rather than a strict rule. Using median valuation multiples taken from acquire.com 2024 business acquisition report. ↩