The Startup Report Getting The Value Equation Right

MIND MONEY MEANING
With Bryan Franklin & Jennifer Russell
MIND MONEY MEANING
THE STARTUP REPORTGetting The Value
Equation Right
California Leadership 2013 2013 California Leadership
MIND MONEY MEANING
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 of profitabilitiy that sustains a competitive personal income for you and any other founders, you are in the Startup Phase. The word Startup has been co-opted by Silicon Valley to refer to a specific type of technology Startup that usually involves massive growth predictions, a global product strategy, heavy backing from venture capitalists, and a young founding team of super-genius technologists. That represents only about 10% of startups in the U.S.* The other 90% of Startups are self-funded businesses based on an interest, a skill, or an opportunity that are trying to grow quickly and safely. Similar to the infant phase in human development, the Startup Phase involves vulnerability and requires special care and attention. Mistakes like spending too much money and failing to set and meet customer expectations 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 that happen. If youve already established a predictable and reliable method of generating leads, converting those leads to customers and then fulfilling on the promises you make, you are reallyin the Sustainable Phase and not the Startup phase. Look for the Sustainability report, Creating a marketing crank.
*Small Business Association, 2013
Getting The Value E quation Right

In Startup mode, you really have one incredible urgent job: To get out of startup mode! And the only way to transition from Start up mode to sustainability mode is to get the value equation right for your business. The value equation determines the kind of business youll have, how easy it will 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 than it costs you to deliver value to them, because the value they are getting is much greater than the price they are paying to you. Simply put, VALUE > PRICE > COST For example, if you are starting a wedding photography business, the solution to your value equation is the value that people place on getting their 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 costs you to take their pictures and deliver them in a manner that satisfies their desired value, say $1500. $5000 > $2500 > $1500 Of course, its not enough to know how much a customer values wedding photography. Your true value equation is based on how much your customer values wedding photos taken by you. This is why every entrepreneur must find their own value equation. You can follow general guidelines created by the others in your field, but ultimately your value equation is yours alone.
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(If You Dont Know) Where To Begin

If you have no idea what the solution to your value equation is, start with thinking of an offer that you could make to a customer. For now, focus on just two parts of an offer: the benefit or promise and the method or process. Examples of well-formed offers: I will help you lose weight (promise) by offering telephone coaching. (process) I will save you time in your email inbox (promise) by offering you software that organizes it automatically. (process) I will offer you low-cost alternative energy (promise) by leasing solar panels for your roof. (promise) I will give you an alternative to radiation therapy (promise) by giving you rare herbal mixtures with healing properties. (process) Notice that weve removed all the superlatives and marketing hype here. These offers are specific, easy to understand, and easy to relate to. For the purposes of understanding your value equation, you avoid offers like these. Examples of poorly formed offers: I will facilitate transformational experience of whole new possibilities (too vague!) I will help you get to the next level in your business (better, but still too vague) I will offer you a suit that will make women love you (exaggeration!) I will add $100k to your profits by making sure your website doesnt break. (Process not credible to keep promise!) I offer a completely different kind of coaching that nobody else does (Theres no promise, only a process!)
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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 examples of wellformed offers and poorly formed offers. Which group does it most closely resemble? Keep narrowing it down until it sounds and feels just like the other well-formed offers. Once youve settled on the promise and the process youre offering, you can start to find out how customers value what youve got and how much it will cost you to provide it. Now youre on a scavenger hunt, looking for all the different people who want to take advantage of your offer, or ways that you could make good on the 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 dont want 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% of the 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 are willing 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 what you 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. 2. 3.
4.
5.
6.
7.
Whats the main value you expect to get from my offer? What price would you not pay for this offer because its too high? What is the lowest price at which you would still rather keep your money than get the benefit of the promise? What would you expect to pay another company for a similar offer? Would you expect to pay more than that or less than that to me in exchange for my offer? (And why?) What is the highest price at which buying this offer would occur to you as a no brainer? What are some ways I could change my offer to make its value to you 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 value equation 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 the Process 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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For Processes Highest Value Done-For-You
For Business Get More Income
For Transformation Custom Recommendations Evaluation Or Assessment
For Devices Automated
Higher Value
Done-WithYou Do-It-Yourself With Supervision
Discount Expenses
Fashionable
Lower Value
Save Time
Mental Models
Clever
Lowest Value
Do-It-Yourself
Handle Necessites
Information
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 arent direct. 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, and expects 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 what you 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 of doing 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 Hidden Costs. 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 get someone to help build your client's website, and allocated costs of $300 for your 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, depending on 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 per month, or 60 websites per year. $90,000 to $150,000 devided by 60 websites 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 you are 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 Mind Money 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. All other things being equal, the more you charge for your product, the more profit 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 corporate world, a $250,000 consulting project could take dozens of hours in exploratory meetings over the course of 6 months to turn from an idea into a sale, whereas a $3,000 strategic software purchase can be approved in a 30-minute phone call. How many 30-minute phone calls could you have in 6 months? It would only take 14 calls per month selling the $3,000 software to be more profitable than the $250,000 consulting project. Thats because of sales velocity. Lowering your price doesnt always increase sales velocity, but it often does. Experiment with different pricing models and learn pricing strategies like the ones taught in the Mind Money Meaning System to balance getting the most profit you can with the least resistence from potential 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 in what 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 you downloaded 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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MIND MONEY MEANING

With Bryan Franklin & Jennifer Russell

MIND MONEY MEANING