What up peeps!
I will never forget when I met a gentleman by the name of Henry Weinacker. Around a year after I started working for Cutco (I know,) I thought I was pretty good at sales.
I finished 1st out of 1,200 salespeople in my office, I had an average order size of $380 when the average was $200, and my closing ratio was at around 80% when the average was around 60%.
After a year at the company, I went to a conference somewhere. It was out of town, and I can’t remember what city or state I was in for the life of me but I remember the moment before Henry walked on stage vividly. There were a few thousand Cutco reps gathered in a large auditorium, and the MC announces him.
“And here is the guy that is shattering records left and right, Henry Weinacker!”
This wild-looking lanky guy with blowfish-style spiked hair (I learned later that he was literally using a full can of gel a day) steps on stage. He’s dressed very well, he has a lot of energy, and his passion is contagious.
Henry was a guy that was cold-calling previous Cutco clients, getting 90% to buy from him, with an average order size of $850. That was absolutely unheard of, and every single set of ears in that auditorium was focused on what he had to say.
Henry said some stuff that resonated with me, made me humble as ever, and drove me to believe anything is possible. This was a kid that was bullied growing up, had a poor childhood, and finally turned his insecurities into his strengths, and Henry became a young millionaire.
I met Henry for a few minutes later that day, and we kept in touch. That kid helped me eventually sell enough Cutco to hit the highest sales rank in the company before moving on.
What I learned from Henry was the value of creating value versus competing on price. While other reps were throwing in items to desperately close 60% at $200, Henry had clients flipping through his book, asking to add items to their orders!
The topic of creating value versus competing on price has been talked about by any serious entrepreneur with a blog. In my opinion, outside of marketing, value creation is the single most important factor as to whether your startup will thrive or die.
I could write a book on this, but for the purposes of this post, we’ll focus on three things:
- Why So Many New Entrepreneurs Race To The Bottom
- How To Create Value
- How To Back It Up
"It’s a very sobering feeling to be up in space and realize that one’s safety factor was determined by the lowest bidder on a government contract." – Alan Shepard
WHY SO MANY NEW ENTREPRENEURS RACE TO THE BOTTOM
There are products and services within certain industries where the lowest priced competent vendor will normally win the bid. Indeed, becoming the type of vendor that NASA looks to for parts requires an intense vetting process, quality control checks, and other things the typical business owner doesn’t have to worry about. To win in this case, you focus on creating processes that make product creation cheaper, better or more efficient.
Henry Ford did it by combining the conveyor belt, the assembly line, and the automobile. Henry invented none of these things, but he lowered the time in creating an automobile to 93 minutes. This process revolutionized the industry, which remained largely stagnant until battery tech finally caught up, and my idol Elon Musk created an electric car too good to be ignored.
But what do new entrepreneurs do? Well, we’re still people, so a lot of us are insecure about the quality of our offerings. We look at the established players in the market we’re entering, and on some level decide that they’re better than us, or that customers aren’t as attracted to us as they are to them. This can lead to many failed launch attempts.
Sadly, many people that do launch do it at a low price, because price is their advantage.
Let’s go over why pricing low is usually a terrible idea.
NEW ENTREPRENEURS USUALLY UNDERESTIMATE HOW EXPENSIVE BUSINESSES ARE
I’ve often said that the best way to write up the budget of a business plan is to write down every single item, write out how expensive it all is, add everything up, then multiply that number by 1.5. Many companies that are focused on pure revenue growth, with the desire to eventually get acquired or IPO don’t care about "unnecessary things like profit margins."
But us mere mortals without unicorn businesses need to focus on creating a business that can pay for itself if we want to have a good shot at being successful long-term.
Running a business is expensive. Things WILL come up, you need to have money to weather the storm, and dealing with a small margin for error due to slim margins could easily kill your business (and drive!)
PROSPECTS DON’T RESPECT CHEAP BUSINESSES
Imagine when you see a company that claims to offer the same service, or their product looks JUST LIKE competitors' products, but somehow they’re priced more cheaply. Unless the seller is a household name, I’m sure you wonder, what’s the catch?
Cheap pricing makes your prospects suspicious. Isn’t that a sobering thought?
That business now has to prove to their prospects why their product/service is as good as their competitor.
When looking at cheap stuff, I personally look a lot more carefully and pessimistically at reviews. If you do decide to purchase or utilize that company, if they make a mistake, you wonder why you were being cheap in the first place, and you resolve not to be stupid like that again.
When the price is more expensive, you think---well I'll give them the benefit of the doubt, I'm sure they're normally pretty good---this was just an uncommon misstep.
Again, a cheap business has to prove why their product/service is as good as their competitors to justify their low pricing.
Keep in mind that a cheap company usually isn't trying to show you why their actual product or service is actually better on merit. They’re just trying to exist. Their value is in the fact that they devalue themselves and what they're offering---willing to let us arbitrage that lower cost in order to win our business.
Don’t you think this is a less than ideal image you want to portray for your company? Yet, people do this all the time.
It’s usually a mistake.
Lower costs can give you an advantage when your company has refined some part of the process to such an extent that you can preserve the same margins while offering a similar or better offering than competitors. If your processes aren’t saving you money, either from more efficient systems or more efficient labor, you shouldn’t charge less money at the expense of your business.
HOW TO CREATE VALUE
If you have actually improved something by refining things internally to make things cheaper for you, then you have already created value. You found a way to be as or more profitable while offering a competent product or service at a lower rate. This is a feat that many major companies have achieved over and over again, and the ability to do that allows them to stay in business for generations. You’ll often see a large company strategically acquire a smaller company that is able to do this, as it’s an incredibly dangerous thing to compete against.
If you must create value in a different way, you just need to be a bit creative.
When you think about it, the entire premise of effective marketing is the ability to create value, so I can’t possibly cover it all in this post (as I’m still learning a lot myself) but there are two important things you can do to consistently provide value over and over again.
1. CHOOSE THE RIGHT PROSPECTS
Different audiences prioritize different things. You need to narrow down your audience to focus on the people you can speak to more directly. One way to do this is to create a set of 3 or 4 archetype clients, then create marketing materials that speak to them.
Why do you create archetypes?
Honda released a series of ads a few years ago for their Honda civic. This car has been very popular for a long time, but they serve so many people that there are subsets of people that use a civic in different ways.
So Honda decided to offer multiple completely different versions of the car. One of the cars is more traditional, focused on the young, smart decision-making newer family. They talked about the safety features, made the car a 4 door sedan, and showed an archetypal couple in their ad. They built a hybrid version for all the earth-friendly people that appreciate the good mileage on a smaller car. Then there’s the cool kids with “souped up” cars. They made a sporty coupe, the SI, and played dubstep music, and showed the car doing a bunch of trick jumps.
Honda learned who their audience was, broke their audience into segments, tailored their marketing to each archetype and sold to each one of them.
What are archetypes anyway?
In a business sense, archetypes are specific profiles of the types of people that you have figured would give your company money. A profile may look like:
- 42 years old
- Loves comic con
Again, if you create 3 or 4 profiles, and are specific without narrowing your market too much, you can design branding and ads to market to these people. When you speak to people directly, they connect with you. If your chosen demographic has previously proven to be interested in what you’re selling, and you figure out a way to speak to them, your archetypes will respond by giving you their cold, hard, cash.
2. BELIEVE IN YOUR BRAND
Confidence and passion are contagious. If you don’t believe in your brand 100%, every aspect of your business will be affected. You’ll second guess your pricing, you’ll tweak your site before you have reliable data to figure out if your design works---vision without confidence is an engine without fuel.
But when you’re passionate and confident in your vision, your entire company will benefit. Needless to say, your employees will be more committed to your vision, your salespeople will echo your passion, and everything down to the copy on your website will be better.
On the customer side, I firmly believe that subliminally, people can sense when a brand is cohesive and together. They can also sense when it’s not. There was an article on Forbes that touches upon the benefits of taking things even further. In it, the author mentions Pepsi’s “Pepsi Refresh” program, which the beverage giant invested 20 million dollars into. While the initiative, which was awarding grants towards good causes, was great for increasing social likes and shares, that social media activity didn’t translate to profit.
Pepsi actually lost market share.
The author then goes into a story about how a guy named Saul Kaplan spent 20 years in an industry and took his lifelong passion and work and translated it into a flourishing company. Saul’s company was able to grow, because the initiatives his company took had a lot to do with the overall brand identity of his company.
Pepsi isn’t normally associated with grants to charitable causes, so the loyalty they were looking for wasn’t there. Of course, they donate money and people know it---but their approach here was inauthentic---and people knew it.
The lesson here is that if you believe in what you offer, and you have a true belief that what you offer is beneficial, your prospects will see that, and you won’t need to do things that don’t make sense to attract prospects that don’t connect with your brand.
So you’ve priced your offer appropriately, leaving a good margin to stay profitable. You’ve created value. You’ve created a brand that you believe in. Now what? How do you build a sustainable company long-term?
HOW TO BACK IT UP (VALUE THAT IS)
Customer service excellence.
Your best prospect is a current client. Read that again.
Your current client has already shown that they are likely a good fit for your brand by giving you their business. Also, it’s more economical to focus on retaining clients. It can cost up to 7x as much to acquire a new client as it costs to simply retain your current ones. So make your current clients happy, and find new ones that match the archetype(s) of your current clients.
Again, your job is to get your customers to stick around, and the easiest way to do this is by providing a great customer experience.
...but a repeat client is not necessarily a loyal client. According to Gallup, three traits must be present in order for a customer to be truly loyal to your company.
- A high degree of overall satisfaction
- A strong willingness or desire to repurchase
- A desire to recommend your company to others
Without these three traits, you haven’t truly won a long-term customer. Of course, having one of these traits is better than having none, and you’ll see many companies force a repeat sale (like a 12-month cable TV contract.) That same article on Gallup confirms that by far, the best way to ensure a loyal customer is to provide great human interaction with your clients, as evidenced by the image below.
In the image above, you’ll see the relative importance of product, ads and people in whether a person becomes loyal to a brand. Also interesting to note; the price of the offering was of negligible importance.
Loyal clients keep you in business, and you gain that loyalty by selling value instead of winning the price war.
- Don’t underprice your offering
- Create value by understanding your audience and speaking to them
- Create value by executing on your ideas with passion and confidence
- Retain customers and make them loyal by providing an amazing customer experience
I hope you enjoyed this post!
If you enjoyed this post, feel free to take a look at my profile. I built a 7 figure company, sold it, and am teaching others how to do it.