Are you simply exchanging your time for money in your business?
The second of The Ten Reasons You're Not Making Enough Money in Your Business
Reason 2:
You don't know the value of what you provide
"John is a nice guy and I like him a lot. He does good work,
he is reliable, clean and trustworthy. So what's that worth too
me? A lot more than $37.50, that's for sure.
And what's more. I know John is not making enough
money to make ends meet in his handyman business."
This is the second episode in my weekly series called : The Ten Reasons You're not Making Enough Money in Your Business"
Here is the introduction to the series with an outline and the structure of the ten weeks.
Do you know what your product or services are really worth? I don't mean to ask what price you charge for your time or how much you sell your widgets for. Price is just an arbitrary number we pluck from the sky at some stage, based on what we feel comfortable with, what our competitors charge and what we think we can get away with. No, what is the actual value of what you offer?
No, what is the actual value of what you offer your clients?
The value of the Sistine Chapel ceiling
There is a story about Michelangelo, the famous Italian painter from the Renaissance, who painted the ceiling of the Sistine Chapel in the Vatican. When he completed the chapel ceiling after 4 years of work, he handed a bill for a hundred thousand florins to Pope Sixtus for painting the chapel ceiling. A phenomenal sum in those days. The Pope was shocked, sent the bill back to Michelangelo and asked him to itemise it. Michelangelo immediately did so and returned a new bill to the Pope with the following itemisations:
To the painting of Sistine Chapel ceiling:
- Cost of paint: FL 1,000.00
- Knowing where to put the paint: FL 99,900.00
Total cost: FL 100,000.00
To be honest, I doubt the absolute veracity of the story, I suspect Fake News even in the fifteenth century in Rome, but it's a fun story and it makes a valid point.
Value is a different animal to cost and price. If your product or service solves a problem a client has, then you could argue that the value you've provided that client is a proportion of the cost of that problem.
For example, if you are an accountant, and through your input with a client's tax return, the client obtains a tax refund of $10,000. The time it took you give the advice and to prepare the tax return may only have been 2 hrs. What is a reasonable fee to charge the client? Normally you might charge $300 per hour, so 2 hrs of work is worth $600, and that's the end of the matter.
But you may also consider that without your input and careful consideration, the client would not have received the $10,000 refund and hence your fee should be some percentage of that refund, maybe 25%? Or maybe more?
No Cure No Pay
Litigation lawyers as well as personal injury lawyers often do their work on the basis of Value, or "no cure no pay". They might take on a case and only get paid on success and then charge a third of the settlement or judgement as their fee. Similarly, if you're an artist and you sell a painting through a gallery, you will not have to pay a fee to the gallery unless and until you sell a painting, but then the fee will be a substantial portion of the sale price of the work.
In both examples, the fee of the lawyer as well as the gallery sale commission are based on a combination of the value they provide their clients, combined with the risk they take. (The risk that they may not get paid at all; the lawyer's client might lose the case and the artist might not sell anything at the exhibition)
In the case of the accountant above however, there is less risk for the accountant and you could maybe also argue that any accountant worth his or her salt could have achieved the same outcome for the client, and hence the value the accountant provides isn't worth such a large proportion of the tax refund.
The handyman who was too cheap
Here's an example I came across recently, where the business owner in question clearly ought to give greater weight to the value he provides.
I own a house that I rent out on short term executive contracts. Whenever a tenant moves out, I have to make sure I get the house ready for the next tenant in the shortest amount of time and with the least amount of hassle. I have a handyman, John, who helps me do the small repairs and maintenance between tenants. A few months ago, a tenant moved out and a bathroom exhaust fan was broken. I asked John to go and fix the fan for me, the day the tenant moved out, because another tenant was ready to move in the next day, and he did.
When I received John's bill I was shocked. I was shocked at how low the bill was. It turned out to be an easy fix. It had taken him half an hour to fix the fan and he charged me half of a single hourly rate, $37.50, because, he said, he was in the area anyway.
John is a nice guy and I like him a lot. He does good work, he is reliable, clean and trustworthy. What is that worth too me? The tenants pay me a significant weekly rent and they're people who expect a high level of service. The value John provided me that time, is a lot more than $37.50, that's for sure. What's more. I know John is not making enough money to make ends meet in his handyman business... I wonder why!!!
The concept of getting paid for the value you provide rather then the time you spent is called "The Value Based Pricing Model". It's not a simple formula, sadly, and every situation will be different and lead to different outcomes, but it's worth thinking about nevertheless, especially if you are in a service related business.
Simply exchanging your time for money is always going to constrain your earning potential, because there is an upper limit to the hourly rate you are able to charge. Nobody can get away with quadrupling the hourly rate the average practitioner of a profession charges. No mechanic I've come across will be able to charge $500 per hour, no solicitor is going to be able to charge $2000 per hour.
So if you're not making enough money in your business, ask yourself: What is the actual value of the service I provide for my clients and how can I communicate that better to them?
Next Steps:
Take some time to think about the value you provide your clients. The answer to the question always will be related to the Big Question of Small Business:
Why does your business exist, and why would anybody care about that?
Once you are clear about the value you provide, what the problem is that you solve for your customers better than anyone else; how might you change your language or your engagement model to reflect that?
Maybe next time someone asks you what you charge, you might answer something like this:
"What we charge is dependent on how we help you, so before I answer that question I want to get a better understanding of your situation and then I will prepare a proposal specifically for you with a fixed fee."
Give it a go, play with it, experiment and see how you can let go of your temptation to simply exchange your time for money all the time. It's a big step to Building your own Beautiful Business and Life... I promise you.
Next week: episode #3, You're competing on price