The Startup Report Getting the Value Equation Right

8/13/2019 The Startup Report Getting the Value Equation Right

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California Leadership 2013

MIND MONEY MEANING With Bryan Franklin &Jennifer Russell

THE STARTUP REPORTGetting The ValueEquation Right

With Bryan Franklin Jennifer Russell

MIND MONEY MEANING



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THE STARTUP REPORT

Getting The Value Equation Right

What Youll Get In This Report

A Detailed Description Of The Startup Value Equation A Method For Evaluating The Solution To Your Personal Value

Equation

Guidelines For Constructing A Well-Formed Offer A Script For Interviewing Potential Customers About What They

Value

Short-cuts To High Value Offers How To Calculate Your Costs Accurately (When Youre Not A Math

Wiz)

Ways To Avoid The Most Common Pitfalls Of Startup Entrepreneurs

Are You A Startup?

If youve started a business, but you havent yet reached a level ofprofitabilitiy that sustains a competitive personal income for you and anyother founders, you are in the Startup Phase.

The word Startup has been co-opted by Silicon Valley to refer to a specifictype of technology Startup that usually involves massive growthpredictions, a global product strategy, heavy backing from venture

capitalists, and a young founding team of super-genius technologists. Thatrepresents only about 10% of startups in the U.S.* The other 90% ofStartups are self-funded businesses based on an interest, a skill, or anopportunity that are trying to grow quickly and safely.

Similar to the infant phase in human development, the Startup Phaseinvolves vulnerability and requires special care and attention. Mistakeslike spending too much money and failing to set and meet customerexpectations can be fatal. You probably experience a lot of urgency around

growing your business as quickly as possible, but because you are



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managing so many variables, its not clear what you can do to make thathappen.

If youve already established a predictable and reliable method ofgenerating leads, converting those leads to customers and then fulfilling onthe promises you make, you are reallyin the Sustainable Phase and notthe Startup phase. Look for the Sustainability report, Creating a marketingcrank.

*Small Business Association, 2013

Getting The Value E quation Right

In Startup mode, you really have one incredible urgent job: To get out ofstartup mode! And the only way to transition from Start up mode tosustainability mode is to get the value equation right for your business.

The value equation determines the kind of business youll have, how easy itwill be to get new customers, and how fast youll grow. Youve gotten the

value equation right when your customers are happy to pay you more thanit costs you to deliver value to them, because the value they are getting ismuch greater than the price they are paying to you. Simply put,

VALUE > PRICE > COST

For example, if you are starting a wedding photography business, thesolution to your value equation is the value that people place on gettingtheir wedding pictures taken, say $5000, which is more than you charge

them to do the job. Thatsaround $2500, which in turn is more than it costsyou to take their pictures and deliver them in a manner that satisfies theirdesired value, say $1500.

$5000 > $2500 > $1500

Of course, its not enough to know how much a customer values weddingphotography. Your true value equation is based on how much your

customer values wedding photos taken by you. This is why everyentrepreneur must find their own value equation. You can follow general

guidelines created by the others in your field, but ultimately your valueequation is yours alone.


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Its like quora.com for plumbers but with ubers business model(this isnt even an offer what the heck is the customer getting?)

Write down your offer. Then read it back and compare it to the examplesof wellformed offers and poorly formed offers. Which group does it mostclosely resemble? Keep narrowing it down until it sounds and feels justlike the other well-formed offers.

Once youve settled on the promise and the process youre offering, you canstart to find out how customers value what youve got and how much it willcost you to provide it.

Now youre on a scavenger hunt, looking for all the different people whowant to take advantage of your offer, or ways that you could make good onthe promise, and all the different ways you could deliver it.

Fig. A Look For The Overlap

In each circle, there are things that do not overlap with the others.Customers are willing to pay for parking tickets even though they dontwant them. You can afford to offer a small bag of rocks to your customers,but they dont want to pay for that and they dont want it either.

There is also a world of things that customers want that they are not willing

to pay for. Most people want a full-time gourmet chef, but less than .01% ofthe people are willing to pay for it. Most people want to fly private jets


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rather than commercial. Most men want a movie theater in their home.Most women want a 1000 sq ft shoe closet. But again, very very few arewilling to pay for them. Even many of those who could technically afford

these things are unwilling to justify their costs.

Based on this, it is not enough to ask a potential customer if they want whatyou have to offer. You also have to know if they value it enough to buy.

How Do You Measure What Someone Else Values?

Have you ever had a salesperson ask you How valuable would it be to you

to solve this problem? You probably have difficulty coming up with a good

answer to that question, because it causes a conflict in your mind.

Lets say you wanted to buy a cast for your broken arm. If the doctor asked

you, How valuable is it to you to be able to use your arm again? Of course,

its priceless! But does that mean you are willing to pay all the money you

have for that cast? No, of course not.

It can be challenging enough to discern exactly what value you place on

different products, services, and experiences. Add to that the differences in

how different people see the world and approach their lives and you can

imagine the challenge of understanding what someone else values.

So how can you measure it?

Customer Value Interview Script

There are a few questions that are easier to answer than the classic

salespersons approach and give you a lot better sense of how someone else


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values your offer. Talk to people who are qualified to be your customer and

explain your offer to them. Then ask them these questions:

1. Whats the main value you expect to get from my offer?2. What price would you not pay for this offer because its too high?3. What is the lowest price at which you would still rather keep your

money than get the benefit of the promise?

4. What would you expect to pay another company for a similaroffer?

5. Would you expect to pay more than that or less than that to me inexchange for my offer? (And why?)

6. What is the highest price at which buying this offer would occur toyou as a no brainer?

7. What are some ways I could change my offer to make its value toyou more tangible?

This can be a sobering conversation or an enlightening one, or both. We

recommend talking to at least 10 customers and recording the

conversation. The exact words the customer uses to talk about their

situation are valuable for marketing and copywriting key words and

phrases, and you often will hear important things when you play back the

recording that you may have missed in the moment.

Once youve interviewed 10 people who are qualified to be your customer

about what dollar figure they attatch to the kind of promise and process

you plan to offer, you will begin to see a patternfrom different people

saying the same kinds of numbers. The VALUE variable in the valueequation is the average of the answers to question number 3. The PRICE

variable in the value equation is somewhere between the average answer

to question number 4 and question number 6.

Change Your Offer To Lower Risk

Increasing the customers perception of the VALUE of your offer

dramatically increases your flexibility and chances of success. The higher


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the VALUE, the more options you have on the COST side and the more

freedom you have to charge higher PRICES.

During your 10 interviews, youll notice that changing something about theProcess often dramatically changes the perception of VALUE, even though

the promise hasnt changed.

Thats because customers automatically build in risk (or their assumptions

about the chances of success) into their own sense of value. For example,

which is more valuable, $100 cash or a lottery ticket with a chance to win

$100,000,000? You chose the cash (hopefully!) because you are

automatically building into your assumption the fact that the lottery ticket

isnt very likely to provide those winnings.

Your customers do the same thing when they consider your offer which is

whyit is that they value the same offer from different companies and

entrepreneurs so differently.

Think about how your customers view the chance of success with your

product or service. What are the things that you could do to change your

promise or process that would lower the risk of failure and increase the

chance of success, in the customers mind, before they purchase? Those

ideas are going to help you solve your value equation.

Short Cuts To High Value

There are certain universal factors that drive up value. There are dozens of

advanced short cuts to massive Value included in the Mind Money Meaning

System, butif you want a short cut to increasing the VALUE of your offers,there are some basic short-cuts to get you started in Fig. B. For now,

make changes to your offer to make it Higher Value or Highest Value.

Fig. B Short Cuts To High Value


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ForProcesses

ForBusiness

ForTransformation

ForDevices

HighestValue

Done-For-You Get MoreIncome

CustomRecommend-ations

Automated

HigherValue

Done-With-You

DiscountExpenses

EvaluationOr Assessment

Fashionable

Lower

Value

Do-It-Yourself

WithSupervision

Save

Time

Mental

Models Clever

LowestValue

Do-It-YourselfHandle

NecessitesInformation Functional

Calculating Your Costs: The Basics

Once you have arrived at the VALUE your customer gets from your offer,

youve anchored the solution to your value equation on one end.

KNOWN VALUE > PRICE ? > COST ?

The next area to investigate is your cost. For your business to be

successful, include all the expenses that are required to deliver value to the

customers according to your offer.

There are a few different categories of cost, which well cover in order of

most obvious first.

Direct Costs expenses that you pay out of pocket in order to deliver the

value of your offer. If you own a restaurant, the cost of all the ingredients

that went into making the meal that the customer bought are direct costs.

If you run a carpet cleaning business, then the hourly wage of the employee

while they are on the jobsite with the customer is a direct cost. Direct costs


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are variable, because they go up when you have more customers. Some

businesses, like coaching, have no direct costs at all.

Allocated Costs expenses that are related to your business but arentdirect. Overhead expenses such as your accountant, equipment leases, and

printer paper are often allocated costs.

As the name suggests, in order to figure out how much it costs you to

provide your service, you have to allocate some portion of those costs to

each customer. This can be a bit tricky, especially at the beginning, because

its hard to know how many customers you are going to have.

If a software company spends $25 million developing its software, andexpects to have 25 million customers, then it can allocate $1 per customer

in Allocated Costs. But if they guess wrong and end up with only 100,000

customers, suddenly they have $250 in allocated cost per customer, which

is deadly when you were counting on only $1.

In the beginning, assume a 50% utilization rate and calculate your allocated

costs based on that assumption. If you are a massage therapist, the

maximium number of clients you can take is likely 3-4 massages per day, 5

days a week: 20 massages. per week. That would be 100% utilization. 50%

utilization would be half of that, or 10 massages per week. Now, you can

add up all your allocated expenses for the year, say $10,000. If you work 40

weeks per year, thats 400 massages. $10,000 per year divided by 400

massages is $25. That means you have $25 per massage in Allocated Costs.

Heres the formula one more time:

Total Yearly Allocated Costs / (Max Per Week x 50% ) x Work Weeks

Now you have Direct Costs and Allocated Costs, but there is a third

category of costs which is the most important and the most often

overlooked. In fact, it is this third category of costs that is most often

responsible for the faiure of a business.


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You Messed Up Your Numbers: Miscalculating Cost

The third category of costs are Hidden Costs, which are almost never

calculated by Startup entrepreneurs, leading to miscalculating cost and

getting the value equation wrong.

Hidden Costs are the costs that it would take to run the business without

you, your assets, and your special relationships. They are not paid in cash,

which is why they are so often missed. The largest cost for most Startups is

the Hidden Costs of the salary of the founder. Since the founder rarely

takes a salary, its easy to miss, but you dont want to go without a salary

forever, and if your value equation breaks when you add in the cost of whatyou want to get paid, then youll never get out of the Startup phase.

Thats how some businesses that have been around for decades are still in

the Startup phase they havent calculated the hidden costs, so the founder

is still working at way below market rate for his/her contribution to the

business.

If you imagine having to pay someone else to do your job, how much would

you have to pay to insure that you could get someone who is capable ofdoing a good job? If your business relies on the fact that you own land, or

your brother is doing you a favor, or that cousin Phil is willing to work for

nothing, its very important you count those hidden costs, allocate them if

they are also indirect, and add them into your value equation.

To finalize the COST variable in your value equation, add the direct costs,

then figure out how much Allocated Cost to attribute to each customer,

and then calculate your replacement salary and the rest of your HiddenCosts. Add the three together and you have the true picture of what it costs

to deliver your value to the customer.

In a Web Design business, you might have a direct cost of $1800 to getsomeone to help build your client's website, and allocated costs of $300 foryour equipment and overhead.

Let's calculate hidden cost: It might cost you $90,000 to $150,00 per year

to hire enough staff to run the business completely without you, dependingon where you live and the types of clients that you attract. If you assume


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max utilization is 10 websites per month, then half of that is 5 websites permonth, or 60 websites per year. $90,000 to $150,000 devided by 60websites is $1,500 to $2,500.

That means your hidden costs are between $1,500 and $2,500. Add that to

your direct and allocated costs and you get $3,600 to $4,600 per website

total cost. If you can charge at lest $4,600 or more per website, then you

have found the solution to your value equation.

Direct Cost Per Customer

+ Allocated Cost (Total Divided By 50% of Max Utilization)

+ Hidden Costs (Total Divided By 50% of Max Utilization)

= Total Costs

Sadly, most entrepreneurs dont make this calcluation. It would be an easy

mistake to think It costs me $1,800 to get the website done. If I charge

$3,000 Im making good money on each one. Thats true until you take

into account your hidden costs, and then you realize that in fact you are

losing money on each site, not making good money at all. The money youare losing is the difference between the money you can pay yourself and

the money youd have to pay someone else to take over. Thats why a bad

value equation can trap entrepreneurs in their own businesses.

More than likely, the first time you calculate your costs they are going to

come out higher than your price. Almost every business in the Startup

Phase starts that way. You can temporarily make the business work by

taking less money for yourself, but over time that strategy will take its toll

on you, and youll start to feel imprisoned by the fact that you never solved

your value equation.

That means you have to innovate and iterate over time to drive your costs

down and the value you are providing up. Thats why the most important

focus you can have in a Startup business is understanding the value

equation and getting it right.


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The further you can pry the two apart, driving value up and costs down, the

better business you will create, the more quickly it will grow, and the more

value it will generate for customers and the more cash for you.

The Price Is Right, Isnt It?

Once you know the VALUE and the COST, then you can place your PRICE

point anywhere in between and be safe. But how do you know where in

between to place your price?

Pricing is as much an art as a science, and depending on your industry

there are at least 6 major pricing strategies covered in depth in the MindMoney Meaning System, but to get started, consider profit margin versus

sales velocity.

Profit margin is how much money you make in profit on every sale. Allother things being equal, the more you charge for your product, the moreprofit you make.

But all other things are not equal, and one of them is sales velocity, which is

the speed at which you meet and convert new customers. In the corporateworld, a $250,000 consulting project could take dozens of hours inexploratory meetings over the course of 6 months to turn from an idea intoa sale, whereas a $3,000 strategic software purchase can be approved in a30-minute phone call. How many 30-minute phone calls could you have in6 months? It would only take 14 calls per month selling the $3,000software to be more profitable than the $250,000 consulting project. Thatsbecause of sales velocity.

Lowering your price doesnt always increase sales velocity, but it often

does. Experiment with different pricing models and learn pricingstrategies like the ones taught in the Mind Money Meaning System tobalance getting the most profit you can with the least resistence frompotential customers.

Cash Always Tells The Truth

Your customer may not know what they would buy and what they wouldnt

buy until the time arises to do so. They also may know but not wish to

share. Interviewing potential customers is crucial to getting your value


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equation right, but pay more attention to what customers say with their

time and money than what they say with their mouths.

Your customers spending habits will tell you what they really value and inwhat proportion. Thats why youre not out of the Startup Phase and into

Sustainability until youve not just theorized the solution to your value

equation, but youve demonstrated it.

How? when you have 10-20 customers who have all bought roughly the

same thing from you for roughly the same price, and they are ecstatically

happy with the value theyve received from your products and services.

Cash Always Tells The Truth

Theres a lot of information in this report about what to do in Startup Phase

and how to think about and calculate the solution to your value equation.

If you arent using the Mind Money Meaning System to help you sequence

these steps properly, get a mentor or role model who has been through the

Startup Phase successfully and go over this report with them. Then ask

them to help you focus on what you should do next. Then go step-by-step

in the sequence they recommend until youre safely out of the Startup

Phase.

And perhaps most importantly, ignore the strategies, tactics, ideas, and

approaches that are for businesses that are in the Sustainability phase or

the Scalable phase. Until youve solved your value equation, they will be

distracting at best and detrimental to your success at worst.

If you found this report useful, be sure to share the page where youdownloaded it with entrepreneurs who you believe in and want to see be

successful. Then comment so we can start to become better acquainted

and more fully understand each others businesses, aspirations, desires,

and capabilities.

To your continued success,

Bryan and Jennifer


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The Startup Report Getting the Value Equation Right

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