Discover Value | Create Options | Start Pricing
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In this episode, Ron Baker and I continue with Part 2 of the What Matters series. If profit does not matter, then what should replace it? Cash planning and budgeting. This is a huge opportunity for accountants and consultants because you can equip your customer to make stronger business decisions. Will you seize it?
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In this episode, Dr. Reginald Tomas Lee explains why cash and profit are not the same. Cash is the life blood of a business. It drives daily operational decisions. Profit, on the other hand, is a relative metric (not measurement), dependent on the cost formula chosen. Executives and managers need to understand the difference and when to use each one.
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In this episode, Joe Woodard and I conduct an After Action Review on Scaling New Heights 2018. The conference was held in June 2018. This episode was recorded a couple of weeks later. Joe is very forthright about what went well, what did not, and what he learned for next time.
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In this episode, Jody Padar and I discuss the impact technology has had on the accounting industry. And ironically, we conclude it is not really about the technology. It is simply forcing the profession to move in the direction it is should go anyway.
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In this episode, Hector Garcia and I discuss the impact creating videos for YouTube has had on his business. If you go to any popular accounting conference, Hector is probably speaking on marketing with YouTube. We explore why video, why YouTube, and the things he has learned through marketing with video.
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In this episode, Joe Woodard and I explore the impact technology has on the value you create for your customer. Joe explains why, although you cannot ignore technology, it is only a tool to achieve the desired outcome for your customer. Then, we explore the theme Rise of the Machines for Scaling New Heights 2017.
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In this episode, Michelle Golden and I discuss her experience pursuing the adoption of value pricing at KCoe Isom. Our conversation covers the “better way” of pricing, the advantage of options and the “add-on” strategy. We conclude with the impact of value pricing on new employees.
[Read more…]Mike Michalowicz has created three multi-million dollar companies and is the author of four published books including Profit First and Surge. His is a former columnist for the Wall Street Journal. One of his unique skills is using mnemonics to memorizes his keynote speeches. I (Kirk) was recently a guest on his podcast, Grow My Accounting Practice.
In this episode, Mike and I discuss his book Profit First. The thesis of the book is profit should be taken out of your revenue first, before expenses, instead of after. Mike used this strategy to rebuild his business after losing his first fortune.
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What is the most important thing you can share about pricing?
You have to address the biggest critic of your pricing, which is you. Mike goes through an exercise where he quadruples the price of a product. Then he creates value to match the price. Next, he cuts the price of the product by half. The result is the value increases 4x and price increases 2x. He has addressed the value conversation first and the price conversation second.
The purpose of Mike's company is to “irradiate entrepreneurial poverty.” It is the motivation behind the book Profit First, which grew from Mike's financial failure. Once you and your team have a clear picture of your mission, selling becomes a form of serving.
Why is “profit first” important?
Entrepreneurial poverty is when the business makes money, but the owner(s) does not take money out of the business. Mike's original solution was to sell more. However, expenses always seemed to increase in proportion to revenue.
Then Mike found a study that said 83% of small businesses in the US exist check to check. Meaning, if they do not receive the next check in time, they will not be able to cover payroll and expenses. Are entrepreneurs really smart enough to earn revenue and yet not take home a profit?
Mike discovered a behavioral theorem called Parkinson's Law, which states that based upon the availability of an item or resource, our behavior will change to match its supply. For example, we adjust the amount of toothpaste we use based on how much is left in the tube.
Profit First leverages Parkinson's Law by taking profit out of the business first. The remainder is for expenses, which forces the business to be frugal and innovative. Profit First is the discipline to reverse engineer profit in your business.
What is the formula you use to calculate profit?
The traditional formula is:
Sales – Expenses = Profit
The traditional formula is based on the logic of accounting. Whatever is left over after expenses is profit. The problem is profit is the last priority.
The Profit First formula is:
Sales – Profit = Expenses
The Profit First formula is based on human behavior. It makes profit a higher priority than expenses. It forces the business to spend only what is left after profit.
Profit is not an event that occurs at the end of the year. It is a daily practice in your business. By depositing profit into a separate bank account, before any expenses are paid, you enforce the discipline of Profit First.
What principle is shared by Profit First and the Total Money Makeover by Dave Ramsey?
“Pay yourself first” is the most effective saving principle. It was part of the book The Richest Man in Babylon. When you reserve money and hide it from yourself, your mind is incredibly resourceful to work with what is left. As more money flows into the business, the tendency is to take the easy path rather than be innovative.
A common example is the 401K, the most successful employee savings option in US history. It takes your gross pay, deducts a set percentage, and places it into a separate bank account. You then adjust your lifestyle to your net pay. Meanwhile, your 401K earns compounding interest to create wealth.
What bank accounts do you recommend for the Profit First system?
The first account is the income account. Any revenue you earn in your business is deposited into this account. However, you never pay a bill from the income account.
Setup four more bank accounts: profit, owner's pay, taxes, and operating expenses. Twice a month, deposit a specific percentage of the income account into the four other accounts. The income account goes back to zero.
The purpose of the profit account is to distribute money to the equity owners of the business on a quarterly business. Never reinvest profit in the business. It is your reward for taking the risk of starting a business. Owner's pay is your salary for working in the business.
The first step (baby step) may be to deposit 1% into the profit account. The most important thing is to start. Chip and Dan Health conducted a fitness study applying the same principle. One-hundred people were 80% likely to continue exercising after 6 months if they started by standing while watching TV. Gradually they progressed from standing to marching to walking and then to running.
What is the most common mistake entrepreneurs make with money?
Entrepreneurs do not value money the way they should. It is the lifeblood of the business. Money is an amplifier. It can amplify bad habits, like the traditional accounting formula, or good habits, like the Profit First formula. You first need to be profitable. Then use the money to amplify it.
According to Suze Orman, to eradicate debt, you must get more satisfaction from saving money than spending money. As an entrepreneur, you have to be proud of spending less on expenses than more. Find ways to discuss how you save money.
What is the link between getting 2X results and Profit First?
Better questions produce better answers. A better question is how can I double revenue? Even better, how can I double revenue with half the expenses? Another example, instead of “How much does it cost to acquire a customer?”, ask “How much do we get paid to acquire a customer?” Learn to ask better questions.
Paul Kennedy is a co-founder and partner at O'Byrne & Kennedy (OBK), a chartered accounting firm in the United Kingdom. He is also a Practicing Fellow at VeraSage. In this episode, we explore the OBK journey to value pricing. In the first segment, Paul explains how OBK transitioned to value pricing over a 5-6 year period. During the second segment, Paul discusses the influence of value pricing on their customers and services.
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What is the most important thing you can share about pricing?
Pricing is worthy of the attention of every business owner. Even a small change in price can have a disproportionate impact on profitability. However, few service professionals give it the consideration it deserves. This is the pricing paradox.
What was your first exposure to value pricing?
Paul Kenney went to an Accounting Bootcamp taught by Paul Dunn and Rick Payne. They taught that accountants could offer more value if they simply did what their clients needed. Paul K. came back and started focusing on creating value for clients.
Later his business partner, Paul O'Byrne, went on a speaking tour with Ron Baker. Due to Ron's influence, O'Byrne & Kennedy stopped tracking time in their accounting practice. They came to refer to their business as the “Ron Baker laboratory”.
O'Byrne & Kennedy learned value pricing in three stages.
What advice would you give to a firm that is ready to make the transition?
How has the CitizenM Hotel avoided the commodity trap?
The hotel selected a target market they call “mobile.” They tailored the value they create specifically for those travelers. The room key is delivered from a kiosk. The rooms are small, with high-quality mattresses, blackout shades, and free wifi. The lobby is a large open area with a 24-hour coffee bar. They only offer services their guests truly want. (Disruptive Business Models by Paul K.)
Why do you advocate firing the customer every year?
At the end of each contract, the client is technically no longer a customer. OBK asks the client if they delivered the value that was expected. They also ask the client what they could do better in the future. OBK does not assume the client will remain a customer.
What is the OBK MBA?
OBK targets business owners who believe they can do something extraordinary with their business. OBK found these individuals were very aware of their personal development. They created an educational framework to teach their customers what they need to operate a successful business called the OBK MBA.
How do you approach the value conversation with a customer?
Paul has a very candid conversation with the customer about their goals and how OBK can help achieve them. Occasionally, he has to be sensitive that now is not the right time for a conversation. Ultimately, he wants to provide the services the client truly needs and those can only be uncovered through a value conversation.
What is the state of value pricing in the United Kingdom?
It is common for professional firms to offer fixed prices. However, it is market driven. Value pricing is not very well understood.
What is one of your best stories about creating value for a customer?
If you help two customers create 1-million dollars in value, their perception of the value is not the same. It depends on the context of each customer and their view of your contribution to creating the value. The customer is always the hero in the collaboration.
At times, value pricing can seem complex. However, if you boil it down to the core elements it is listening to the customer, discovering the impact and then creating options. Matthew Tol is passionate about the fundamentals and believes you should expand discovery to include the meaning and feeling to the customer to fully understand the value landscape.
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Matthew is the founder of MTA Optima. He's a chartered accountant and a fellow Fellow at VeraSage. His most proud accomplishment is that he is a husband and the father of a pre-teen daughter. He loves competitive rowing, competing when he was younger and is now a coach. He is also a sports car enthusiast.
