When owners of small businesses want me to coach them to grow and expand their business, I often find that they are have reached a ceiling in selling their goods (products and services) and have run out of ideas for moving forward.
As I talk to them about how they currently add value to their customers' lives and to their company's assets, I find that few of them actually understand what value is. Memorably, Warren Buffett (CEO of Hathaway) said in 1999, "Price is what you pay when you buy an asset, value is what you receive for your money".
Revenue - Cost = Value added
Accountants say that value is the residue left when costs are subtracted from revenues. As a simple equation, this hides more meaning than it reveals.
In greater detail, successful business leaders recognise that after the clients cash has moved into their bank account, and they have paid for the materials that they used, there is money left over and this added value represents a growth in their business assets.
Types of value - with examples
At a deeper level, I see there are four types of business activities that affect value:
1. Value Transfer is when I pay for your products or services - including access rights, knowledge, expertise or personal advice. In the transfer, we transfer equivalent values of goods and money so there is no overall growth.
2. Value Increase arises when I pay for something that is cost-less for you - possibly service brochures, product lists, serving suggestions, residual materials or by-products. In this transaction, you offer goods that have a low or nil cost to you and I pay money for them.
3. Value Creation occurs when I pay for your novel idea - such as packaging complementary products, putting current goods to more uses or identifying different consumption models. Here your ideas create a wholely new arrangement of products and services and I am willing to pay for the resultant intangible (productivity, beauty, entertainment, progress, fashion etc).
4. Trading is where we bargain so we both add value - perhaps through relationships, networking or referrals. The trader buys plentiful goods and takes them to where they are scarce and swaps them for goods that are plentiful there. Then the trader carries these goods to trade where they too are scarce. The value arises from the sequence of trades.
Further practical ideas
Applying these ideas to your business, ask yourself:
- Beyond your main products and services, what other goods might your customer buy that would improve their use of their purchases?
- Given that the by-products and waste from your production processes can often attract a
disposal cost, how could you package them or further process them so that people would pay for them?
- Where do you have static stock (and dead money) which you could liquidate and turn into
revenue?
- Which of your buildings and machines are partially used and how could you rent them out (or sell them off)?
- Which processes produce waste and how could you adjust your materials and processes to
avoid this shrinkage in value?
- Where could you train your staff and where can you invest in product design and production processes to create new opportunities in your market?
- What intellectual assets (such as designs, patents, staff suggestions) have you that are
dormant and unused?
Adrian Pepper coaches people through business and personal difficulties, helping companies figure out what to do, how to move forward and what to get organised. You can contact him through Help4You Ltd, through his website at http://www.help4you.ltd.uk or by phone +44-7773-380133. At http://feeds.feedburner.com/help4you, you can listen to his podcast for small businesses.