How to Measure Value in Business
As I write this article in late summer 2022, we are experiencing record levels of inflation all across the country. The price of almost everything is up – fuel, food, raw materials, rent, subscription costs, medical costs, and labor costs. Here at Country Fried Creative, we reluctantly had to increase our prices slightly this past spring to cover our increased costs of doing business. Although it was our first price increase in ten years (and a modest one at that), I was surprised at some of the reactions – which fell in two extremes. Most of our clients didn’t care and expected it – in fact, one customer told me I didn’t increase our prices enough! A few of our clients, most of whom were already on discounted plans, were upset and assumed they were locked into a guaranteed fix rate forever – yes, one client actually told me that!
The whole topic of inflation, prices, and costs got me thinking about the broader subject of value – specifically, value in business. So what is value? A dictionary will tell you that value is “importance, worth, or usefulness” (Merriam-Webster). In business, value is sometimes more narrowly defined as the “monetary, material, or assessed worth of something” (Barron’s/WSJ).
How do you measure value in business? As a business leader, it’s my job to assess the value of our of business operations in order to make sound business decisions. Specifically, I try to be mindful of the following general things:
1. STAFF –
Our most important resource is our team. As a professional services company, payroll is our biggest business expense – but it’s also our most valuable resource. Over the past year, I have given the staff two pay raises in order to combat the real effects of inflation. Our staff is very loyal, and we’ve been fortunate to not have a high turnover -or- staffing problems. Despite my attempts to keep ahead of the economy, I don’t pay them enough. It’s my top priority to grow our business more in order to take care of our people. Their value, quite frankly, is immeasurable.
2. CLIENTS –
Second only to our staff, our next most value resource are our clients. The reason we exist as a company is to serve our clients. Although we have standard pricing for all of our services, we also have flexibility in putting together service offerings that are highly customized based on client needs. In general, we try to break-even on non-profit clients and make a modest profit on services for our for-profit clients. We can best help our clients and equip ourselves to serve them best by being on a retainer arrangement. The bulk of our clients are on retainer, which ensures that we’re equipped to best help meet our client’s needs.
We have three pricing tiers for most of our services so that we can help the smallest of organizations as well as very large organizations. In general, this model has worked well for all concerned as we continue to grow our business. It’s hard to put a value on our clients – but we can quantify it somewhat by the revenue generated for each account. Moreover, many of our clients have been great sources of referrals, which is extremely valuable to us (thank you to each and every one of you who send us referrals).
3. SOFTWARE / SERVICES –
As a business, we use the best tools we can find in order to serve our clients. On average, we’ve seen our software subscription prices increase more than 25% over the past year. In placing a value on these tools, I try to be mindful of the cost vs. the benefits of using those tools. Software allows us to handle support tickets, project management, graphic design, social media management, analytics, SEO optimization, digital advertising management, website hosting, website security, website functionality, invoicing, payment processing, and the list goes on. We can’t run our business without our software tools, so you can say that the value is high and that all of our tools provide a high Return on Investment (ROI) in reduced labor expenses and time saved.
4. OTHER BUSINESS EXPENSES –
Like every other business out there, we also have other business expenses like taxes, fees, licenses, rent, insurance, utilities, marketing (yes, we “take our own medicine” and have marketing expenses too), etc. We don’t have a lot of raw material or supply chain expenses like some of our clients do, since we’re a service company. The value of these expenses? Well, some are very valuable (like marketing) and some aren’t valuable at all but really aren’t optional (like taxes).
It’s hard to measure value in business. Defining it is elusive, and there’s no universally accepted way to do it across the board. Here’s a few way’s people typically asses value:
FINANCIAL – VALUE = BENEFITS / COST –
In short, the benefits should outweigh the costs. There are more formal ways to calculate financial value (NPV, IRR, ROI, etc.) but we’ll keep it simple for now. Assessing financial value is easier when benefits are quantifiable and costs are known.
Simply put, the market value is what something can be sold (or paid for) in the marketplace. It’s the “going rate” – typically applied to real estate, salaries, investments, and other market-driven things. Market valuation is both an art and science, and typically fluctuates with the economy.
This is typically (but not always) a subjective assessment of something’s future worth. Sometimes it’s a “fixer upper” in real estate, or perhaps it’s an investment in something one thinks is going to grow in the future. A “gut instinct” often drives decisions around potential value.
This is perhaps the most vague definition of value, especially value in business. Simply put, it’s whatever importance you want to place on something. What’s worth a lot to some people (like a fancy brand item or a fancy dinner) may not be worth much to someone else. This is very subjective and fluctuate wildly depending upon the person assessing the value.
When I evaluate potential business investments (employees, clients, services, etc.), I try to use all four methods of valuation above to make a more well-balanced decision. Doing so, ensures that I’m not just making a short-term decision based on cost – but also fairly evaluating future potential, market rates, and overall worth.
How do you measure value?
By the way, if you put a value on marketing and marketing planning, we’d love to be your marketing partner. Let us prove the value of our services – we’d love to help you and, if we’re already helping you in some capacity, even more for the future.
Yours in value,