Saturday, 26 May 2012

How to increase profit by creating value

How to increase profit by creating value: by Jason Li 2012 ©

Many times in the past I come across businesses owners who say I just need to find a way to increase profits. This is a natural thing for all businesses, because let’s face it, who’s working 12 hours a day or more for free (unless you don’t need the money)? The thing is, most of the people saying this really do need more profit to survive. But you can’t create money without creating value.
I have heard all sorts of ways people try to earn more profit. Here are a few snippets. Cut the cost of the materials/service/producing the product/service for customers. Many have gone down the route of reducing the quantity of expensive/quality ingredients involved in making the product/service and substituted with cheaper/lower quality. Examples include a web company using a less skilled web site designer to create the web site, or a cafe substituting good bread for cheaper low quality budget bread for customers.
Who earns profit in your market
In the short run, if you cut costs, then, yes you might see an increase in profit because it’s obvious - same turnover but less cost equals more profit.
But what is the impact on profit in the long run? Usually less profits. Why is that? As the quality of your product or service declines, you become more of an undifferentiated product.
In other words, you become a low budget low cost commodity like any other. This moves your business from the quality market to the minimal quality market. By doing this, the consumer just goes for the lowest price in the minimal quality or commodity market; and in this market, there is always someone out there willing to work for virtually no profit who will take your customers. Meanwhile, your quality competitors will also take your customers who pay for quality too.
So we can clearly see, yes cost is important to both the business and customer. But more importantly, quality makes a difference to the customer when they choose. More quality in most cases means more customers. More customers leads to more profit in the long run.
Business Link, Chamber of Commerce or Federation of Small Business (fsb)
Let’s look at the three leading business advice agencies. All three offer a service for businesses. fsb is more towards the smaller end. Business Link is a free government funded services. The Chamber of Commerce is a membership service like the Federation of Small Business but caters for all size of business.
Which is the one that your business would use regularly? The answer will likely be the only the one that provides your business the most value. In the UK, Business Link is generally free, and the biggest government business service. So why pay for business advice? The answer is that it’s likely that the other business advisory services have something of value that contributes to businesses enough that’s worth paying for.
Creating value
Possibly the number one way to immediately increase profit which also is lasting is by creating value. Creating value is both creating something unique, or better, and of a maximum benefit to the consumer.
Imagine a restaurant on a street with ten other restaurants. Each is different in food styles such as Chinese, Italian, French, Indian, English. They all operate the same in that they have the usual tables, chairs, menus and a waiter. They all want more profit and insist they are doing all the right things. So how does one restaurant create maximum value for the customer to increase profit?
 Think like a customer. A customer is waiting to spend their money on a benefit. Most average restaurants will stick to the trusted formula of good food and a warm safe environment as sufficient. “But what else can you offer me to make me spend?” is what the customer is thinking. Why not pause yourself here and write somethings down on a note pad on what you would do to create more value.
Okay, well here is an example. I went to a restaurant in London which had tables on a balcony so you can see over the restaurant floor in your own little booths. The reason for this is that every evening there is a fun performance on at night. People queue out of the door to get a table. To increase value further, the prices were only slightly more than other restaurants in the area for a three course meal.
Now imagine one of these restaurants on the street of ten creating a new way to eat, be entertained, with possibly even prices at an extra two pounds per person for a meal. Could this restaurant make more profit? Or should it stick to the formula used by many businesses to just take the easy route by doing what everyone else does, or just do the usual cut quality and cut costs?
Value is not budget
Value is not budget, or own brand, like you see in the supermarkets such as Tesco’s. Supermarkets are experts at confusion marketing. Using the word value is taking the above marketing version of value and putting a slant on it to associate with cost in accounting terms, such as the value or the valuation is £10 or £1. This is not creating value.
How to create value
In marketing, there are tools to make your business of more value such as unique selling propositions (USP’s), differentiation, competitive advantage, value chain and more.
Focus on value
In order to create value, you must look at what you do without considering profit first. Yes it’s a strange thing to do, something a university professor might say to a business person. But in this case, just thinking about profit will stop you being able to create maximum value.
You have to have a vision; a new way to do things that you can feel will make customers really take notice about what you can offer. You have to think like Steve Jobs or Richard Branson by creating a new vision that disrupts your industry. Then with your new offering which has more value, start to look at what it will be priced at for the customer – even if it is a little bit more, and how you can achieve this at whatever cost you figure. Without the vision of maximum benefit, you won’t know what customer pricing to work to, or costings to create your offering.
As an example, let’s say you can create a part of your pub a VIP football lounge. It’s a section that has the best view of a big screen, rows of seats with leg room like a terrace, good food served in trays, bar maid/waiters on hand all the time, no big queue at the bar, copies of football magazines to read, and is by far the best place in your town for watching the big game, but the entry is £3 per person. On non football days, it’s open business as usual. I’m not saying this is the formula for pubs which works. But I have walked past enough bars where they can hold possibly 100 people and there are only about ten people in watching a big game. Then there is another bar in the area with a bit more added value which is pretty full.
Is it the bar that’s got it wrong, or the people who have gone to the wrong bar?
But what if people have no money
If you are in a market that is in genuine decline, or people have no money, or you cannot add value then there are two real alternatives:
Firstly, can you create more value and reinvent the market? If you can then there is a chance of making more profit.
Secondly, if not then you must consider the cost/benefit of leaving the market. An example would be if you are a distributor of video tapes or video recorders. You can cut costs/quality of components, or even repackage or add value, but there is no market for this. It’s not money that’s the problem, as there’s plenty of people with a budget for watching and recording TV programmes. Sky, DVDs, online saas have created more value than video and video cannot compete.
Examples of businesses creating value and winning
Apple and Samsung – nice looking premium gadgets, lots of functionality, easy to use. Who lost out – Nokia, Sony Ericsson, Sagem.
Facebook, LinkedIn – nicely organised social websites with more functionality. Who lost out – MySpace and Friends Reunited.
Nike, Adidas and Puma – Create premium clothing, technology, products and brands which worldwide consumers enjoy using. Who lost out – Slazenger, Dunlop, British Knights.
Not everyone wants maximum value
Believe it or not, possibly 99% of people want better value and a better life – so they will pay more if you can offer it. But you will come across the odd customer who will take sitting outside in the rain in the cold at the restaurant next door if it saves 50p. We all have our reasons for doing things, so please don’t judge. Below is how to work out which type of customer you have with QPD.
As mentioned above, people just looking for lowest costs will find a lower cost supplier; it is not an easy game to win. But create better value than your competitors for your customers, and they will come to you as their supplier.

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