Building Value

Mo Money: Building Value Written by Nathan Redelfs

How to build value in your services and how it relates to credibility and reputation.

A common practice in small businesses - especially new ones - is using low prices and faux discounts to attract customers and undercut competition. The problem with this method is two-fold: one, it’s easy to inadvertently set a precedent that is hard to escape, and two, changing the perceived value of your services. Let’s take a look at why building value is the best way to sustain and grow your business even if you’re a newcomer on the block.

Reputation and Credibility

Before diving into building value, it’s important to understand the foundation that leads to success in pricing and sales. Reputation grows from credibility, and having a great reputation while building credibility with your customer makes it easier to ask for higher prices.

The Credibility Theory explains how different stages of a social interaction establish your credibility with the potential customer. Credibility is broken into three distinct stages: initial, derived, and terminal.

Initial credibility is gained through anything that influences the customer prior to a social interaction. In business, this means branding, advertising, logo, word-of-mouth, and so on. An easy way to think of it: imagine you bought tickets to hear a motivational speaker. What led you to trust the speaker enough to purchase a ticket? Do you trust the speaker, or are you going because you are skeptical and want to be convinced? Either way, you’ve assigned a level of credibility prior to hearing the presentation.

Derived credibility is any credibility gained or lost during the course of the social interaction, usually in our case a sales presentation. The goal is to be professional and courteous, and look for ways to find common ground with the customer. Aligning social identities is a powerful way to gain trust.

Terminal credibility reflects how you treat the customer after you’ve left. This could be follow ups, the job itself, and any feedback that occurs.

The goal is to create strong credibility coming into the sales call, and maintain or gain throughout the interaction. Reputation is important because it sets the customer’s expectations. If you are professional, knowledgeable, and have high credibility, the customer is likely to trust your opinion and listen to your advice when it comes to the exterior of their home. Consumers are also less likely to balk at prices if they trust you and accept you as the expert.

Empathy is Key

Offering valuable service is easier when stepping into your customer’s shoes. Part of connecting with your customer is to let them know that you understand their situation. Dirty siding, roof, concrete, gutters, or windows can be frustrating for customers. Let them know that you get it, and you’re there to help. The goal is to orient yourself on THEIR side. It’s you and them against the problem, not them against you and the problem.

This is closely related to the social circles mentioned in the previous section. Aligning your social identities subconsciously helps the consumer trust you. This is explained by the Social Identity Theory. People self-identify based on the social circles of which they are a part. These can be anything from being a hunter or fisherman, to landscaping and gardening. Look for ways to bridge the gap and become more personable.

Price vs. Value

What’s the difference between price and value, and how does that shift based on reputation? “Price” is the actual monetary amount you’re asking for your services. “Value” is subjective based on point of view. For example, you may believe the customer is getting value because you have the best gear and equipment, or you’ve been doing the job for 10 plus years. The perceived value is the value that the consumer associates with your services, and correlates with how much they trust you and your company.

The closer these figures are to each other, the easier it is to make sales, upsell, and collect payment. So where is the starting point?

Pricing for Success

Always start with pricing. Your price, if done properly, reflects what you need to make to cover overhead, payroll, and profits. Ideally, it should be an even ratio of 33:33:33. If you discover that one category is out performing the others, it’s time to take a look at why. Here is one way to calculate the three categories.

Step 1: Expenses

The first step is to list out your expenses for running a business per month. All of them. Be sure to include the big stuff - like lease payments, equipment payments, building rental - and the smaller stuff like phone lines, internet, electric and water.

Step 2: Payroll

Including yourself, your payroll per month should be equal to your expenses per month. If you’re a one-man operation, calculate how much the business is paying you per hour and use this as a reference.

Step 3: Profit

The only way for a business to succeed is to ensure that a portion of revenue is put toward growing the business. Funds in the profit section can be drawn on, or used to invest in the business for things like marketing, or to bridge a gap after a growth period.

After you’ve calculated your monthly expenses, payroll, and profit, which should come out to 33-33-33, calculate cost per hour. The most accurate way to do this is to multiply your figure by 12 (months in a year), then divide by 52 (weeks in a year), then again by 40 (hours in a week). That will give you a number that you should be making per hour.

For example, if my expenses are $3200 a month, I should be payrolling out $3200 and charging another $3200 for profit. $3200 x 3 is $9600. $9600 x 12 is $115,200, divided by 52 is $2,215, divided by 40 is $50.

This method of pricing is also service dependent, as pressure washing and soft washing units cost more to operate than a window washing unit.

Education Creates Value

Passion and knowledge only go so far. Clearly communicating and educating the customer is one of the best ways to build value. Consumers look to be consulted, not sold. They want to be advised on how to proceed, and educating them not only helps them understand what you do, it sets you up as the expert and builds credibility. Higher credibility means higher trust, and they will be more inclined to listen to your suggestions. Never forget: you are the expert and the professional. Maintain your credibility and build value in your services, and closing the deal will be easier than ever.

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