Among all the financial terminology, are two words that stand above the rest. Two words that should guide all final investment decisions and if used improperly, can cost you major sales.
Cost and worth are two very different things that impact every investing level — from consumer to small business owner. Read to find out why you should know the difference.
Confusing cost and worth results in underselling as a small business owner and overspending as an investor. As your financial gurus, Flagship cannot allow this. So, let's bring it back to basics with the help of Merriam-Webster.
Cost is an objective number. It equates to the time and materials spent on producing and maintaining a business, property, or product. Expenses like raw materials, direct labor, employee salaries, and building operations (i.e. lighting, heating, etc.) can all be umbrellaed under this term.
Cost can be influenced by market tendencies and global events, for example, a supply chain crisis. Last fall, we saw a shortage of products and massive delays in shipping that drove up business costs across the nation. Because costs cut away at profits, we also saw a raise in prices.
Worth is subjective. It's an intangible sense of value placed on an object or property that is influenced by human characteristics and emotions. If cost is what a company spends on a product, then worth is what the product pays to the customer. Ultimately, that value is the deciding factor on whether or not the product, business, or property is worth the price.
Depending on the savviness of the entrepreneur, worth and cost do not always align, which can increase or decrease your cash flow. For example, a $130 massage has a perceived higher value than what it costs in materials and labor. Because of this, the masseuse walks away with a higher profit, and the customer walks away feeling priceless.
Now that you understand the importance placed on worth in the customer buying process, it is time to understand how to capitalize on it in your marketing and search efforts.
Tap into motivations behind customer's purchases. One of the biggest challenges entrepreneurs face is trying to gain an understanding of customer's needs and solving their biggest problems. "Empathy" if you will. What are your customers really after when they buy your product? The best way to find out is engaging them with surveys, emails, and conversation (both in-person and online). Every chat = a new insight. Every insight = a better understanding of your target customer's buying motivations. Every understanding = a new opportunity for a sale.
Prices should be set based on cost PLUS perceived worth. The only sustainable strategy for entrepreneurs is finding that perfect price point that encompasses what you've incurred in costs and what value your customer places on (fill in the blank). Similar to the massage example above, a high worth should be factored into your price points. Because whether it be property or products, price correlates to profit.
Communicate the value of your business. People bring their own opinions and experiences into the calculation of worth. So why not use the opinions and experiences from previous customers to communicate to prospective customers for you? The best way to communicate your business value is sharing the stories from other customers who already get it. Customer testimonials and online reviews tap into the tried and true sales strategy of referrals, which according to Nielsen, has a 4x higher success rate than marketing to customers without a referral.
In addition to already utilizing the powerful outsourced resources just at your fingertips, reflect on and revamp your current internal promotion. How's your website? Are you neglecting branding materials like packaging, in-store experience, and online presence? A customer buys your brand before they buy your product. Make sure that brand reflects the true value of your business.
As an investor, find companies and real estate that are on sale for less than their true worth. A daunting task. The only simple solution to this is doing your research by any means necessary — books, podcasts, rental comps, you name it. Another strategy proposed by Phil Town at Forbes when evaluating a business to invest in is the Four Ms Standards: Meaning, Moat, Management, and Margin of Safety. 1.) The business you invest in should have meaning to you. 2.) The company has something that makes it difficult for competitors to carve away part of their market share. 3.) Company management is talented and trustworthy. 4.) There is a level of confidence that you won't lose money on the purchase of shares and will make a suitable return — there's a formula for this. Any company that meets the previous three criteria and are priced at or below the Margin of Safety ratio are worth the final investment decision and purchase.
Talk to one of our experienced lenders about how you should be leveraging cost and worth to guide final investment decisions, establish a strong business, and make the profits you deserve.