Revolutionizing Capital Efficiency: The Art of Dynamic Sales Letters

Below is a thesis about Dynamic Sales Letters and how to leverage them to optimize Capital Efficiency in your business.

Creating a Simple Framework

Assumption:

A business is like a machine that produces more than it consumes (measured in money or energy, which can be exchanged for money at any nearby place).

First, we create a system based on current techniques that considers the value of a business over time.

The true value of a business at a specific time, t, or I(t) can be calculated by:

I(t) = Business Worth(t) + Assets(t) - Debts(t)

Where:

Business Worth(t) = DCF(t) + T0(t)

Here, DCF(t) is the value of the money a business will make in the future (usually up to 5 years) as of today:

DCF(t) = ∫(FV(t) / (1 + r(t))) dt from 0 to t0

FV(t) is the amount of cash the business generates after considering its expenses:

FV(t) = EBITDA(t) - Capex(t) - ChangesInWorkingCapital(t) - Taxes(t) - Interest(t)

t0 is the end of the time period when an investor feels confident in predicting the business's cash flow based on available information.

r(t) is the return rate an investor gives up to invest in the company, usually around 9% or the average return rate of the S&P 500 or local inflation rate.

T0(t) is the value of the money the business will make after t0, assuming it continues to make money forever:

T0(t) = FV(t0) * (1 + g(t0)) / (r(t) - g(t0))

g(t0) is the growth rate at the end of the projection period and is usually the long-term rate or inflation rate at t0 or the proposed GDP growth rate for the area where the investors are located.

Assets(t), Liabilities(t), Capex(t), Interest(t), and taxes(t) are all values at the time of evaluation that can change over time (not fixed).

The Resource Function, R(t)

We define a resource function, R(t), that depends on time, input resources (both human and financial), and technology that can be used by the people managing the business, I(t):

R(t, tech(t), Capital)

Operator Function, O(t)

We introduce an Operator function, O(t), that represents how people use resources to carry out activities.

People use resources to do things and manage the business: O(t, R(t)).

Limits of I(t)

The value of I(t) is determined by the activities of its operators, represented by O(t), and the resources available at time t, R(t). The more efficiently operators use resources, the more value they create.

∫I(t) dt = ∫O(R(t)) dt from 0 to t

Measuring Success

If operators produce more than they consume, then:

∫O(R(t)) dt / ∫R(t) dt > 1 from 0 to t

If operators produce less than they consume, then:

∫O(R(t)) dt / ∫R(t) dt < 1 from 0 to t

Units of I(t) - Conserving Energy

The units of I(t), R(t), O(t), Capital, and tech(t) are Joules, which is a unit of energy.

In simple terms, operators use energy (in the form of calories and money) over time to rearrange physical things by taking advantage of technology. In a closed system where both the operators and the things they work with exist, energy is conserved.

Capital can be converted to Joules through an energy exchange (like at a gas station), and fitness (the unit of advantage defined by biology or Hamilton's Rule) can be converted to Joules through a process that changes reproductive potential into calories.

Technology is the outcome of someone (or a group) using energy at some point in time to work with materials and discover cause-and-effect relationships (a basic definition of science).

tech(t) = ResourcesToCreateTech(t, mass(t), techCapital(t))

Where mass(t) is the material the technologist worked with, and techCapital(t) is the energy needed for the transformation.

Elements of I(t)

In practical terms, I(t) "works" with a group of customers to offer a benefit or change for a price that someone in the group pays in exchange for the benefit, delivered through a mechanism or multiple mechanisms.

A customer learns about the mechanism, its cost, and participates in the transaction through a certain channel (the distribution channel).

We can represent it as:

I(t) = I(N(t), T(t), P(t), M(t), A(t))

Where N(t) is the niche vector representing an individual or a group of similar people in a market segment at a specific time.

Its characteristics include: market size, location, behaviors, capital levels, external forces, genes, and ingrained beliefs (memes). All of these factors change over time.

T(t) is the benefit vector that represents a promise (or potential advantage) offered to the niche, N(t). We can define a problem as the lack of a benefit, and the absence of a problem as a benefit from the niche's perspective.

It changes over time because the needs, expectations, and problems of the niche, N(t), change along with time and environment. We can define a benefit as a change in fitness, as described by evolutionary biology, in relation to the niche due to the use of a mechanism through I(t). It can be positive or negative. Abstractly, N(t)'s awareness of T(t) creates interest and demand.

P(t) is a vector representing the price the customer group or segment, N(t), is willing to pay to receive the benefit, T(t), through the mechanism, M(t) (where M is defined below). It depends on the benefit vector, T(t), and the niche's ability to pay or resource levels. It is measured in dollars or the currency used in the system. It also changes over time (meaning the price relative to a customer group can change over time). The price is affected by the value of the currency in which it is expressed.

M(t) is a vector that represents the mechanism with respect to time. It is the tangible or intangible item or set of items that provide the benefit, T(t), for the price, P(t), all in relation to the niche, N(t), put together by operators. Its attributes include: Technology used by the operator to deliver the benefit, T(t), tech(t) (defined in the resource function), the costs needed to use that technology, and the costs required to deliver the mechanism physically or digitally to a customer in the group, N(t). These factors all change over time, but we won't delve into all of them here. In a traditional context, it represents the result of engineering capacity within I(t).

A(t) is a vector representing the pathway through which the niche, N(t), learns about all the other variables and buys the mechanism, M(t). We can call it the access channel vector. Its attributes include: The channel used to reach the niche (traffic channel), the cost to successfully use the channel (dependent on the cost of attracting attention and the efficiency of the funnel), and the technology employed to do so. These factors are also time-dependent. In a traditional context, the output of sales and marketing represents A(t).

In general:

∫O(R(t)) dt = ∫I(N(t), T(t), P(t), M(t), A(t)) dt from 0 to t

The Theoretical Solution Sequence - Dependencies

Logically, you can't have a benefit or change without a group of customers (a benefit in relation to whom?), you can't set a price without a benefit or change for the relevant customers (what are we charging for?), you can't have a mechanism without a price or benefit (what are the limits for our engineering team and what task does the item need to accomplish?), and you can't have an access channel without a mechanism, a price, and a customer group, since you can't calculate the net contribution from marketing to establish the access channel's boundaries (how much can we spend to communicate with these people, and who are we talking to?).

As a result, operators first determine the customer group, N(t), then the benefit, T(t), then the price, P(t), then the mechanism, M(t), and finally the access channel, A(t).

In practice, if you are the operator, you first choose someone to help, then define a fitness benefit and price for that person, then use a technology through a mechanism to deliver the benefit at a cost, P(t), much lower than the cost the customer paid to receive the benefit, T(t). Then, you distribute it on a large scale through A(t) for a cost such that:

P(t) >> cost to build (inside M) + cost to sell (inside A)

Since all the variables of I(t) depend on N(t), we can simply say that I(t) relies on the input variables of N(t), which include the customer group's size, location, behaviors, capital levels, external forces, genes, and ingrained beliefs (memes), as well as the operators' ability to apply resources - O(R(t)), and resources.

In other words, I(t) is the intersection of the operator's ability to use resources in an environment (O(t)), the resources and technology available to operators (R(t)), the environment that holds the customer group and the forces that affect that group (N(t)), and time (t).

Defining Productivity and the Ideal State of I(t), B(t) - Product-Market-Fit State

With a coordinate system in place, we can now describe our goals within that system.

Let's define the ideal state of I(t) as B(t), and call it the B state - the theoretical most productive state or the product-market-fit state.

In this state, operators achieve the highest return in the shortest amount of time, considering their environment and the resources available to them, in comparison to the customer group they serve and their competitors targeting a similar group.

In the "B state", the return, 0tO(R(t))*dt /0tR(t)*dt, is maximized.

In the B state, specific to a customer group, N(t), and within the environment, the addressed benefit, T(t), is most urgent; marketing costs approach zero or physical minimum; sales cycle lengths approach zero or physical minimum; COGs (cost of goods sold) approach the physical minimum allowed by the current technology used in the mechanism, M(t); the price reaches the theoretical maximum (what a monopoly would charge if it existed in the market); and cash accumulates rapidly in a checking account.

When I is in the B state:

IB(t) = B(t)

B represents the maximum yield operators can achieve within the limits of their input resources:

0tOB(R(t))*dt = 0tB(t)

Here, OB(R(t)) is defined as the operators operating in the B state and IB(t) as a business in the B state.

The longer the period in which operators operate in the B state, the more durable we consider I(t) to be, and the more value is captured by I(t)'s operators and shareholders.

The lower the cost/resources, R(t), required to operate in the B state, the greater the return on capital for I(t)'s operators and shareholders.

The shorter the time it takes to reach B, the better the return for the shareholders.

Relative "Bness" - To achieve a high return, operators don't need to be in the B state absolutely; they simply need to be closer to the B state than their competitors in relation to a customer segment, N(t).

Solving For The B State: Defining A Few Problems The Solution Needs To Overcome

Timing Problem

Since the market: N, T, and tech are dynamic, the order in which businesses are built relative to the entire market is significant. Operators need to successfully intersect: tech, awareness, resources, engineering, and time. Poor timing is a result of not building fast enough, building the wrong thing, not having enough awareness, not using the right tech, or not having focus.

Focus and Limited Resources Problem

The solution to B(t) needs to ensure operators don’t run out of money as they are building and also that the operators stay focused to achieve the B state. Drifting from focus often results in failure. Here’s why:

Solving for multiple B states (starting or running more than one business) or segments simultaneously is really complex:

For example: Solving for B(t) in two independent environments implies operators are solving a 10 variable problem in a dynamic system instead of a 5 variable problem (which could be much harder than just twice as hard as solving for a 5 variable problem).

For three independent environments, operators are solving a 15 variable problem in a dynamic system instead of a 5 variable problem. The more environments, the less likely operators are to get to a solution to B(t) for either of the environments. It is therefore very silly to start or operate more than one business at a time, especially when resources are constrained.

The less heterogeneous the customer set on which the operators operate, the more variables are introduced to the problem and the more complex it is to solve.

For example: Consider a M(t) that satisfies B(t) for both N1(t) and N2(t). M(t) also needs to satisfy B(t) with inputs: T1(t), T2(t), P1(t), P2(t) A1(t), A2(t).B(t)is a 9 variable problem instead of 5.

For N1(t), N2(t), N3(t), M(t) needs to satisfyB(t) with inputs: T1(t), T2(t), T3(t), P1(t), P2(t) P3(t), A1(t), A2(t), A3(t). This is a 13 variable problem instead of a 5.

Addressing multiple segments with a single mechanism before solving B(t) relative to a single segment, N(t) is also silly or very hard.

Speed - Moving Target Problem

Since B(t) changes with time, to achieve B(t) operators need to observe/get awareness and understand the market N(t), and build M(t) fast enough so that M(t) is still the solution to B(t) by the time M(t) is built - M(t) is a moving target.

The rate at which operators get awareness, understand a market, and build determines the odds of their business satisfying the B state and capturing any value.

If the rate of change N(t) or T(t) is greater than the rate operators can adapt M(t), B(t) will not be satisfied and capital will not be efficiently used.

The Most Effective Solution

The solution to B(t) is a dynamic sales letter, SL(t), put together by operators employing a resource-efficient, dynamic process, Assembly(t), that leverages one or more technologies, technology(t).

Operators invest capital, energy, time, and technology. Through the assembly process, they generate an increased amount of capital.

Dynamic Sales Letter, SL(t)

The dynamic sales letter is a single dynamic document that defines and discriminates for the market segment, N(t), proposes the benefit/s, T(t), and the price P(t).

It defines the protocol for which the mechanism/product/offer, M(t) is designed. The protocol is a more efficient method to get to benefit, T(t) than what already exists relative to the market segment, N(t).

The sales letter is or is part of the access channel, A(t), where the conduit that the market segment, N(t) learns of the other variables is either the screen or paper on which it is printed*

The method by which it propagates is word of mouth driven by the utility, which is the result of the readers learning of the protocol for which the mechanism is designed*

If it goes viral, the cost to market (cost to generate a lead) approaches zero.

It causes sales, pre-orders, or signups that fund the building and/or maintenance of M(t) or proves demand on which an investment thesis is built, sets the engineering constraints on the COGs (cost of goods sold of the mechanism), and determines the technology that needs to be invented or recruited to satisfy the benefit, T(t) for the theoretical minimum cost.

It collapses all additional marketing activities down to only the transposition of a single argument to other modes (examples: websites, YouTube content) and the distribution of those transpositions through other media - the website is the html, css, javascript expression of the sales letter, so website designers just transpose the letter.

Salespeople (if they are required to sell the offer) simply read the sales letter and provide feedback to the author so that the sales letter is updated. They also need to communicate the sales letter effectively to the prospect and utilize closing technicals to achieve the highest sustainable closing rate. In the limit, salespeople will not be needed to complete the transaction.

It's quite possible that in the future, all businesses will converge to a single sales letter accompanied by a single product that is automatically assembled by someone or something other than the operators who designed it (Eric Shmit eluded to this technology in an interview where he stated something along the lines of AI inventing new tech at a rate not even possible by humans).

The product and operations team expand and contract based on the lead flow and customer flow created by the resonance and success of the sales letter. This creates a “just-in-time” effect on product and operations.

The sales letter changes with time to meet the market N(t) - which can be thought of chasing the market around until the benefit, T(t) “bluntens” or the return on capital forces the business to expand further. At this point, P(t) and M(t) no longer satisfy B(t). At this point, T(t) is updated, along with the other variables to achieve B(t).

As sales letters approach B state, cash is accumulating, operators need to expand operations to achieve a reasonable return on capital accumulated, which means they need to change the sales letter.

At this point, operators don’t have a choice but to either address additional N vectors, which requires mechanisms to expand in complexity and robustness to meet multiple B states and preserve returns, or address another segment completely using learnings and capital gleaned from achieving the prior B state/s through a sales letter update.

Example:

Btc whitepaper -> other crypto protocols

Dynamic Capital-Efficient Assembly Process

The process of gaining market and technology awareness, synthesizing insights, and applying those insights to create a dynamic sales letter and corresponding mechanism using technology can be infinitely complex and costly in theory.

Assuming there is a set of tasks necessary for assembling a sales letter, there would be an optimal order for executing these tasks and ideal methods for doing so (framework).

When resources are limited and operators compete against others, the assembly process must be productive, fast, efficient, or "good enough" to approach the B state or at least come closer to it than competitors. The process also needs to ensure capital efficiency, which depends on the amount of capital operators can access.

Moreover, methods for gathering awareness and constructing things are constantly evolving, making the assembly process dynamic as well. It must account for the challenges of speed and moving targets.

These variables are addressed through a loop.

Thesis written by Nick Kozmin & Lex Rivera