I have always been drawn to startups, even as a young child. In fact, I’m involved in three for-profit startups currently, and almost every nonprofit I am a part of, I joined in their startup phase. Whether that’s Eagle Ranch, Davar Partners International, Northpoint Church, ReThink and Orange Conference. But the question is, why am I drawn to them? We’ll get back to that.
The purpose of any business is to create value for their customer. What every customer wants is a good value. Don’t we all want a good value for our hard-earned money? And value equals what you get divided by what you pay.
It’s that simple and that profound all at the same time. What most businesses do when they want to create more value is focus on the denominator – they reduce what people pay. And I’ve always thought if the greatest idea I had at Chick-fil-A was to sell a 99 cent sandwich, a kindergartner could have come up with that idea. So, in that case, why would they need to hire somebody with a college education if their best idea is just to take something off the price to create value? And it begs the question, why do people focus on price reduction?
I’ll tell you why they do it: it works. If Chick-fil-A suddenly sold 99 cent sandwiches, people would be beating down the door. Secondly, you can prove to the CFO it worked because you can count, weigh, and measure how many people came in as a result. And so it works, it’s immediate in the way it works, and you can prove it to the CFO.
But what’s the problem with that? Well, a business also needs to be profitable. And if all you do is keep reducing what people pay, you reduce what you earn as well, and you undermine the trust of the customer. The alternative is to focus on the numerator – increase the value a customer receives. If I’m going to charge them the same amount, but I want them to get a better value, I have to increase what they get. Most people don’t choose that method because it’s hard and it takes a long time. It may not pay off in the short run and you may not be able to prove to the CFO the impact because you can’t always count, weigh, and measure it. But it works, and it works sustainably.
Let me illustrate this for you. If we have a $4 sandwich, what’s the most value I can ever create for you as a customer if I just reduce what you pay? $4. The most value I can ever create with a $4 sandwich is $4. But if I work on what you get, I can create value well beyond $4. Let me give you a classic example: what would you pay me for a sheet of paper? If you’re being generous, you might say a penny. Let’s fast forward to February 14. A lot of people are going to walk into a store and buy a folded piece of paper that’s called a Valentine’s Day card. What are they going to pay for that piece of paper? $5-$6. And what happened to that piece of paper? They added 3-4 cents worth of ink, but they also attached emotion. I’m a big Disney fan. If that piece of paper had Walt Disney’s autograph, what would I be willing to pay? You see where I’m going with this. Nothing of monetary value happened on that piece of paper, but the emotional connection to it increased. I’ve got some pieces of paper with notes from my children – now, suddenly, the value of a piece of paper is priceless. So, we’ve gone from something worth a penny to priceless by attaching a lot of emotion to it – by adding value to that piece of paper.
Well, the same thing is true in business. In addition to emotional connection, there are a number of creative ways to add value to what a customer receives, such as increased efficiency, reducing the pain of doing business with you, saving people time, etc. How does all that go back to startups? Well, startups are not in the business of reducing what you pay. They’re in the business of increasing what you get. They’re creating new things that the world has never seen before. Almost inherently, they’re in the value creation business, not the price reduction business.
Some of you may be involved in a startup, and I often hear people in your shoes asking for advice. Here’s what I would say: some startups are launched as a “get-rich” scheme, which we’ve talked about many times. But I think the best startups are all about a “be-rich” scheme. They’re trying to create for the world something that didn’t exist. In his book Good to Great, Jim Collins said that “true greatness comes in direct proportion to passionate pursuit of a purpose beyond money.” All businesses exist to make money. No exception. But not all businesses have a purpose beyond money for which they exist. And the great businesses, and the great startups, all have a purpose beyond money for which they exist. If a startup is totally focused on making money, that may be the recipe for failure. Great startups always have a purpose beyond money, so money becomes the fruit, not the object, of what they’re doing.
The beauty of a startup is they have the opportunity to create something the world is missing and a value that didn’t exist before. And they’re going to use gray matter (mind) and red matter (heart), not green matter (money), to create that. That’s what I love about startups, because in their purest form, they have to focus on creating value for their customer. Many big corporations get to the point where they think they can solve everything by writing big checks and throwing a bunch of money at the problem rather than using the power of their mind and heart. While startups may be low on cash, they’re big on mind and heart, which is what you need in order to create value – even if the customer may not exist yet.
Big corporations can be guilty of losing sight of the value creation side of the equation because now they have a bunch of customers that do exist and they feel like the best way to create more value is to reduce what those customers pay. What I would challenge big companies with is to take that off the list. Instead, be an intrapreneur. There is an 80,000 square foot innovation center at Chick-fil-A headquarters, and if I were to walk you through that facility, you would see that, to my knowledge, there’s not one thing they’re working on designed to get you to spend one dime more. It is 80,000 square feet of innovation, all designed to give you more value for the hard-earned money you’re already spending. It’s all designed to work on what you get.
The problem with value is, the customer wants value to be disproportionately in their favor. They want an inequality between what they get and what they pay… in their favor. The same is true for the business. The best way you can do that and be fair to the business and be profitable is to focus on value creation, not price reduction. Because the minute you focus on price reduction, you’ve reduced what the customer pays, and you’ve reduced what you get, and that can’t be sustainable. Here’s the other thing: the minute you sell a $4 sandwich for 99 cents, the next time the customer has to pay $4, guess how they feel? Deceived. Because you just essentially told them, “I can afford to sell it to you for 99 cents, but I’m choosing to sell it to you for $4.” And that undermines trust… the foundation of all great business relationships!
Startups are the organizations I see doing the best work to eliminate price reduction as an option. They focus all their time and effort on increasing what the customer gets. If you’re a larger organization such as Chick-fil-A, what is your version of the 80,000 square foot innovation center that’s solely focused on the intrapreneurial task of creating more value for the customer?
Going up on price should be your last resort. Our job, every day and every week, should be strategizing and implementing around value creation. When we focus on the most beneficial side of this equation, by increasing value for customers without charging them a penny more, we create raving fan customers that sustain our organizations for decades to come.
