Strategic Planning Analogy #542: Printing Money

THE STORY
When I was a child, I visited a site where a famous US Civil War battle took place way back in the 1860s. As a souvenir, I got some imitation samples of “Confederate Money”. This was the paper money created by the confederate states who tried to defect from the USA during the war.

The souvenir money was worthless, because it was not actual confederate money. But even if it had been real confederate money, it still would have been worthless to anyone who was not a collector of old stuff.

When the Civil War ended—and the confederate states lost—there was no government to back that confederate money. It became worthless. It had value during the war, but not afterwards. But even so, I liked my souvenir money because it came in large denominations, which made me feel rich, even if it was only in my dreams.

THE ANALOGY
Paper money is a funny thing. As long as both sides agree that the paper has value, they can use to transact business. But if they no longer agree that the paper has value, it becomes worthless, like confederate money.

Implementing a strategy can be very expensive. It may require developing competencies, acquiring firms, buying market share and other such costly activities. Without a means for paying for all of this, the strategy cannot happen.

Wouldn’t it be nice if you could just declare yourself a nation (like the confederate states) and print up your own money? Then you could buy up all the stuff you need to succeed at very little cost.

Well, in a sense you can do this.

Broadly speaking, currency is anything that people on both sides of a transaction agree upon as having value. Over the centuries, all sorts of things have been used as currency, including stones, livestock, seashells, and tulip bulbs. As long as you can get people to believe that what you have is valuable, you have invented your own currency.

Like in the case of confederate money, the time period in which it has value may be fleeting. But as long as you conduct your business during the period when the item has value, you can use it to purchase the costly necessities of your strategy.

You may have hidden value somewhere in your company that you can use to create a tradable currency. And that may be the most cost-effective way to bring your strategy to life.

THE PRINCIPLE
The principle here is that the winners in business are often the ones who can best afford the costs to acquire what it takes to win. If you can develop a currency which is less costly to you than the currency used by competition, then you can outspend your competition and win.

There are lots of currencies you can use other than money to accomplish your strategic goals. Many of these currencies can buy you a lot more than you could buy with mere money. Let’s look at a few.

1. Stock

Stock has a tradable value. You can purchase things with stock. If you can convince people that your stock has an abnormally high value, you may be able to purchase a lot more of your strategy a lot cheaper with stock than with money.

Remember when AOL stock commanded an extremely high price? AOL used that stock to purchase Time Warner. Eventually, people no longer put a high value on AOL stock, and its stock became almost as worthless as confederate money is today. But, by that time, AOL had already converted a lot of that now nearly worthless stock currency into valuable Time Warner assets.

A variation on that theme is what Amazon has done. For over a decade and a half, Amazon cultivated an interest in its stock among people who were not all that interested in whether Amazon made a profit (at least not for a long, long time). Since Amazon did not have to bother with earning a profit in order to keep its stock up, it created two cheap currencies. First, it had a relatively high value stock compared to profitability. This allowed them to buy stuff with stock that was more valuable than using money.

Second, because Amazon was less pressured to make a profit, it could afford to plow more of its money into strategy than competitors who were under profit constraints. How would you like to be a retailer who is competing against Amazon and has shareholders demanding an immediate profit when Amazon shareholders do not? Amazon can afford to offer the lower price and win the low price strategy.

So if you can develop a strategy which gives you a higher than normal value for your stock, you have created a valuable currency to convert into strategic accomplishments at a lower cost than your competitors, who are stuck using regular cash.

2. Access

Perhaps you have access to something that others want access to but cannot get on their own. For example, you could be a retailer with access to a customer type that is difficult to reach through any other distribution channel. Or perhaps you have access to data that nobody else has. Or maybe you have access to the rich and famous and can make introductions that could not otherwise be gotten. Or perhaps you have access to one of the few mines that can extract a valuable commodity.

Whatever it is, that access could be more valuable than money. You could trade that access for something very valuable at relatively low cost to yourself. For a long time, the nations of OPEC had the best access to oil, something others wanted but had no access to. The OPEC nations became very wealthy by letting others have access to that oil. (Of course, now that the US have found another access to oil via fracking technology, the value of the OPEC currency has dropped, but there are ways to manage access for optimal value)

Do you have access to something valuable? Are you properly charging what others would be willing to pay for that access?

3. Time

People say that time is money. You may be able to trade time for money. Perhaps you can do things faster than others. How much is that worth?

Perhaps the most valuable thing you have is access to a future point in time. For example, let’s say that you are a promising start-up that will eventually go public. The time in which you do your IPO may be a huge wealth transfer moment. Many people will want to be a part of that. By selling them portions of your company now at an outrageous premium, you are “guaranteeing” them a seat at the table when your company goes public in the future.

You can use that outsized amount of money today to enrich your strategy for the future.

Lowering Your Cost of Capital

Even if you are stuck using the same money as your competition, you may still have an edge over competition if your cost of capital is lower. For example, studies have shown that private, family-run businesses tend to have a lower cost of capital, because they look at money and their businesses differently than public companies. As a result, private family companies can often do things strategically that public companies cannot, often giving them an edge in businesses—particularly those with a longer payback.

Or let’s say you are a company with a “near-monopoly” business that is throwing off far more cash than that business could ever use. All that excess cash could have a lower cost of capital to invest in new ventures than what it would cost someone else to try to round up that much cash in the open market.

Companies like Google and Microsoft have had “near-monopoly” divisions throwing off tons of cash, which has opened up strategic opportunities others would find harder to do. Google’s offering of Android to smartphone companies for free was an extremely clever strategy against Apple, but how many other companies would have had the financial ability (or permission from its cash sources) to pull it off?

Sometimes you can get your cost of capital down to nearly nothing by having people give you money for free. For example, Elton Musk was able to get a fortune in government subsidies for building a battery manufacturing plant for his Tesla electric cars. That's like printing your own currency in your basement.  

In another example, children’s hospitals seem to do a better job of getting charitable donations than competing regular hospitals do, giving them a cost of capital advantage.

Look for Your Currency

So when developing your strategy, don’t just look at the options for what you want to accomplish. Look at the options for how you can pay for it. You don’t only have the option of cash. You may have better currencies than your competition hidden somewhere in your company. If you plan it properly, you can develop a funding mechanism which gives you just the edge you need in the race to winning a position in the marketplace.

SUMMARY
Although we just scratched the surface of all the strategic options for creating superior currencies, it can be seen that money is not the only way to acquire the keys to strategic success. You may have internal currencies which are more valuable than money and can allow you to afford to buy your strategic success faster and less expensively than others in the race for that same position. Either that, or maybe you have some creative ways to lower your cost of capital, so you can get your hands on more cash more cheaply than competition. Either way, that’s a strong competitive edge and should be part of your strategic consideration.

FINAL THOUGHTS
Clayton Christensen has written a lot on the disadvantages incumbents have over new startups. One of the areas he doesn’t focus on, but I think is important, is the fact that startups are often more creative in finding ways to fund themselves.

Strategic Planning Analogy #511: Motivated by Money

THE STORY
Years ago my team was proposing a new business plan to our CEO. In brief, the idea was to stop a competitor’s aggressive move into our markets by making a reciprocal move into their most profitable market. Since we were in a stronger cash flow position than them, we could afford to attack their key source of cash, and they would have to retreat in order to protect their core.

We could inflict great pain on them in their key market with only limited pain on ourselves. And this would cut off the cash they were using to attack us. Hence, we would create a long-term gain for ourselves with only a small immediate hit to ourselves.

The CEO listened to the detailed strategy with a puzzled look on his face. Eventually, he looked up and said, “Don’t give me a strategy. Just tell me how to make money.”

Since the strategy did not immediately make more money for the firm, the CEO rejected it. As a result, the competitor continued attacking our company. Eventually, their cash flow became even stronger, so they became even more aggressive. Over time, this aggressive behavior wiped out a key division of our company, leaving us with a huge loss of earnings.

The CEO’s actions helped us make a little bit more money in the near-term, but wiped out an entire division in the long term. It appears that we would have made a lot more money if we had focused less on making money and more on having a strategy.

THE ANALOGY
In the world of capitalism, making money is a good thing. If you aren’t eventually making money, your investors and other key stakeholders will get upset. However, if your only motivation is to obtain money, then you may make decisions which lead to bankruptcy. The irony is that a single motivation towards money is not usually the best path for achieving the most money.

As we saw in the story, the best path for making the most money involved a time consuming process which caused near-term pain. By rejecting this approach and instead taking steps which created the most money immediately, the company put itself on a long-term path which destroyed a key division of the company.

Key decisions are made based on what motivates us. If “making money right now” alone is the key motivation, then we may end up making the wrong decisions. Other motivators are more likely to make more money.

THE PRINCIPLE
The principle here is that motivations matter. And the singular motive to just “make money” is not the best motivation.

The Principal Applied to Entrepreneurism

Many studies have been done to look at what makes a successful entrepreneur. These studies consistently show that if the primary motivation for the person becoming an entrepreneur was “to make a lot of money,” then they usually failed as an entrepreneur.

Becoming a successful entrepreneur takes a lot of hard work and a lot of sacrifice. It often requires living near the poverty line for quite a while before the business takes off. If all you want is a lot of money right away, then you typically will not put up with the level of sacrifice needed to succeed as an entrepreneur. So you will fail.

In fact, there was a recent stream of articles on Quora.com about people who voluntarily chose to become homeless in order to invest everything they had into their entrepreneurial start-up. In essence, they were looking for ways to become as personally cashless as possible for the sake of building the business. That type of sacrifice requires a different type of motivation than merely wanting to make money.

The studies on entrepreneurism usually show that the most successful entrepreneurs are motivated primarily by a desire to create a superior solution over what is currently in the marketplace. They are more driven to build a better answer for others than build a bigger pile of cash for themselves. Yet, ironically, by not focusing so much on the bigger pile of cash, the entrepreneur is more likely to eventually have that big pile of cash.

The larger, grander, and nobler motive of giving the world a better alternative is needed to motivate the extreme levels of sacrifice needed to create success. It also has a secondary benefit. Customers don’t just want to give you money because you want them to give it to you. The customer wants great value. If you are motivated to provide superior value for the customers, then you are motivated by the same thing that will motivate customers to give you their money.

In other words, an outward motivation to better the lives of others is the best way to get others to voluntarily want to give you the money needed to get rich. This point really reached home to me when watching the recent movie about the life of Steve Jobs. Making money was nowhere near the top motivator for Jobs. He was driven by a motivation to make great products (and got very angry with those who did not share that motivation). Yet, in the end he was very wealthy.

If all you want is a lot of money and aren’t motivated by a larger purpose, then you’re probably better off seeking a life of crime than one of entrepreneurism. In crime you get the money involuntarily from people. Rather than giving them a reason to want you to have their money, you just steal it.

This is not to say that successful entrepreneurs have no motivation for wealth. No, a desire to be rewarded for one’s sacrifices is logical. If there is no potential for a pot of gold at the end of the rainbow, then the entrepreneur will eventually stop the effort of chasing the rainbows. The point is that a money motivation alone is usually not enough. A larger, external motivation to provide the world something better is also needed.

The Principle Applied to Big Business

This same general principle also applies to large corporations. In the story at the beginning of the blog, we saw a large corporation destroy one of its business divisions because it focused too much on looking for easy ways to make money quickly rather than looking at the sacrifices needed to ensure long-term viability.

The grander, market-based motivations help large corporations in many ways. First, they provide a reason for all of the employees to give a strong effort on behalf of the company. Let’s face it. In large businesses, most of the employees are not going to become extremely wealthy. So why should they put in the extra effort?

When you have a business mission based on a larger, nobler goal, you provide a motivator that everyone can rally around. There’s the old story of the government official in the 1960s who was getting a tour of the NASA operations. He was asking people at NASA what they did. When he asked the question to a NASA janitor, the janitor replied “I’m helping to put a man on the moon.” Because the janitor captured the larger vision, he became a more diligent janitor.

Is your mission wrapped in a nobler goal, like putting a man on the moon? This is a great motivator for the masses in your organization.

Second, if a large business does not see its mission in larger terms, then it will not know what to do to succeed. Many large businesses have strategic plans which say little more than “We want to make a lot of money.” Sure, they may disguise it in more “flowery” language and make it sound more tangible by attaching a numeric target to it. But fancy words and numeric targets won’t disguise the reality that these types of “strategic plans” are nothing more than vague wishes for greed.

Just because you can say “We want to make a lot of money” does not mean that you have a clue as to how to make that money. Money is made when you have a solution desired by the marketplace that you can profitably provide because of the unique business model you have designed to deliver that solution. Unless your business has a specific strategy about…

1.     What it is delivering to the marketplace;

2.     Why it is a superior solution; and

3.     How it can be delivered profitably

…then you will not make those big piles of money. Without a reason to succeed, there is no reason to expect to succeed. Therefore, large companies need a planning process to ensure that the reason to succeed is discovered.

Finally, in large companies, you have lots of people doing all sorts of different things. If there is not a common understanding of what your success formula is, then employees will go off in all sorts of different directions. These uncoordinated efforts will be more like random anarchy than a coordinated march to success.

If you want a large company to be successful, you need to everyone moving in the same direction towards that success formula. That requires not only developing the grander plan, but making sure it is widely known and is rewarded when followed. Otherwise, the plan will not reach reality.

SUMMARY
People act based upon their motivations. Ironically, the best primary motivation to create business wealth is not an inner motivation for wealth. Instead, it is an outer motivation to provide a superior solution in the marketplace. This outward focus forces one to create the types of value needed to cause others to pay you for your offering (the source of wealth). It also provides that higher cause which motivates people to work harder. That is why companies need strategic plans which outline what the outward success formula is and put it in words which motivate employees to put it in place because it achieves a higher, nobler goal.

FINAL THOUGHTS
In the movie Wall Street, Michael Douglas (playing the role of Gordon Gekko) famously says, “Greed is Good.” I say “Greed is Not Enough.” You also need a viable plan and an external motivation which transcends greed.

Strategic Planning Analogy #337: Magical Profits

THE STORY
When I was a child, I wanted to grow up to be a magician. I read quite a number of books about how to do magic tricks. I even bought some magic kits that came with an assortment of tricks in them. I would take these tricks and combine them with what I learned from the books and put on magic shows for other children in the neighborhood.

It didn’t take very long before I gave up this ambition. First, as it turns out, I wasn’t very good at doing magic. Second, once the other kids in the neighborhood had seen one of my tricks, they didn’t want to see it a second time. They wanted to see new tricks. I simply wasn’t good enough (or rich enough) to keep coming up with new tricks.

THE ANALOGY
Lots of people enjoy magic. It seems like business people are particularly fond of it. After all, businesses tend to flock to whatever the latest “trick” is that is being written about to “magically” improve the performance of their company. This includes tricks like six sigma, balanced scorecards and all those tricks referred to by some three-letter acronym.

Unfortunately, most business people seem to be as bad at magic as I was as a child. Their results do not magically improve. The trick fails to deliver as promised, so the trick is abandoned.

And then, like the other kids in my story, you can get business people interested in magic again if you come up with some new tricks they haven’t seen before.

Magic looks powerful when performed on the stage by a trained magician (who are often called “management consultants” in the business world). However, if you try to apply what you saw on stage in real life, you soon find out that what you saw on stage was just an illusion. The power isn’t real.

THE PRINCIPLE
The principle today has to do with risk. In particular, the principle is that staying the course is often riskier than taking bold new moves.

At first, this may sound counter-intuitive. After all, staying the course is to remain on the same path which created today’s success. And, as research has shown, most bold new moves fail. Whether you are talking about new product introductions, acquisitions or other such bold moves, the vast majority fail to provide a positive return on investment. Therefore, it appears at first as if bold moves are the much riskier choice.

The problem is not that bold moves are inherently more risky. The problem is that it is easy to confuse solid strategic moves with magic tricks. Magic tricks can appear bold, but that is only an illusion. Risk is increased, because illusions rarely have a lasting positive impact.

Instead, true success comes from making real, substantial improvements either to the prevailing value proposition in the industry or to the business model which supports the value proposition. If you focus on improving value or the business model which supports it, then you may be substantially reducing your risk of failure, even if the path to do so is bold departure from the past.

So the riskiness of an acquisition is not based on the size of the deal, but on how one approaches an acquisition. An acquisition is just a process. If you justify an acquisition based on a belief that all sorts of “magic” will happen when you combine companies, then the acquisition is just a bad magic trick. On the other hand, if strong, strategic due diligence is done to ensure that either customer value or business model performance will significantly improve through a combination of companies, then the acquisition is no longer just magic. It is a means to make a solid strategy a reality.

In the early 1990’s IBM’s old strategy focused on computer hardware was becoming obsolete. They knew they needed a bold move to stay relevant in the computing industry. The bold move was to shift from hardware to software and consulting. It was only after the bold move was strategically chosen that they started on the path of acquisition—acquiring 200 software businesses chosen because of they fit with the master plan. It was strategy first, supporting tactic second. As a result, the bold move by IBM was a success.

The same can be said for innovation. If money is just blindly poured into innovation in the belief that any innovative endeavor will magically increase profitability, then you have turned innovation into a magic trick. By contrast, if one starts with a focused innovation plan, you will point your innovation efforts into areas more likely to benefit your company.

Acquisitions and innovation programs are not magic wands. They are merely tools. The tools are only as good as the person who is using them. Random sawing and nailing does not magically result in a sturdy house. To get a sturdy house, you need to follow the blueprint. Solid strategic planning is like that blueprint, telling you how to use these tools properly.

There is not a large risk in building a house if you start with a good blueprint and manage the process well, even if the house is huge. But if you try to build a house without adequate plans, the risk of failure is huge, even on a small, simple structure.

With this in mind, we will return to the original proposition that bold moves can be less risky than staying the course.

1. Staying the Course Will Eventually Fail Because All Strategies Eventually Fail
As mentioned above, successful strategies are based on providing superior value via a superior business model. What constitutes superior value and superior business models today will eventually cease to be so due to changes in the environment. Competition may catch up or pass you by. Consumer needs and desires may change. Technology may make your approach obsolete.

The world is dynamic and changing. If you do not adapt to the change, you will cease to be relevant. Kodak film and paper was a superior way to solve imaging problems at one time. But when the world shifted to digital, and cameras became just a feature on a mobile phone, and images were posted on Facebook rather than put on paper, Kodak’s analog strategy was no longer relevant. In that case, staying the course increased the risk that Kodak would fail. A bold, early move to find relevancy in a digital world could have actually been less risky.

2. Small, Incremental Change is Rarely Enough to Overcome Environmental Change
No amount of incremental improvement to photographic film and paper would have been enough for Kodak to overcome the dynamic redefinition of superior value and superior business model wrought by the shift from analog to digital. Only a bold move could maintain any resemblance to Kodak’s former leadership in imaging.

Similarly, consider the problem facing Blockbuster. The Blockbuster video rental business model was based primarily on superior convenience. This superiority was a result of a strategy focused on having the best network of conveniently located stores. Then along came Redbox with a new business model based on eliminating the video store and replacing it with video vending machines.

The Redbox video vending machine business model redefined convenience. These Redbox vending machines became more plentiful than Blockbuster stores (superior proximity convenience), were located inside of stores that were already being patronized, like grocery stores (superior one-stop shopping convenience), were located in places where one could access them 24 hours a day (superior time-access convenience), and did not require waiting in a long checkout line in a store to make the rental (superior transaction-time convenience). And by eliminating the high cost of leasing and operating a store, Redbox could rent DVDs at a lower cost than Blockbuster (meaning that the added convenience of Redbox came at a discount rather than a premium).

There is virtually no way to incrementally modify all of those Blockbuster stores in order to regain superiority in convenience. A bold move is needed to either find a new value to be superior in or a bold move away from the old store-based model. Oh, and by the way, a business model based on delivering videos directly to the home via the internet is also growing, making stores even less relevant. Staying the course with the old strategy is the riskiest thing Blockbuster could do.

3. Bold Moves Need to Be Based on Solid Strategy Rather than a Reliance on Magic
Bold moves should not start with a focus on a particular tactic (like acquisition or innovation or web 2.0 or sustainability). Again, these are just tools, not magic wands. Instead, the focus should be on finding a bold new business model which ensures superiority at delivering a particular type of value which is relevant for the evolving environment. Last month, many of my blogs looked at ways to do this radical rethinking of business models.

Once you determine the proper value and business model, then you can start looking to see which tool (or tools) is the best means to get there (acquisition, innovation, strategic alliance, web 2.0, etc.). This helps one avoid the high failure rate associated with these tools.

Also, it pays to be a bit skeptical when presented with bold new strategies. Don’t automatically assume that all of the synergies and benefits will magically appear as promised in the business models. The more the model is based on a solid strategy (rather than the latest trends in the fashion of business tricks), the less risk there is.

SUMMARY
Sticking to the old ways of doing things in a dynamic world almost guarantees eventual failure. Even incremental change may not be enough to remain relevant and superior. Instead, only bold moves may be enough to remain relevant and superior. Yet bold moves also have their own type of risk. That risk is heightened when the bold moves are based on a belief in the magic of a particular tactic rather than properly doing one’s strategic homework. If a proper strategic approach is used, even radical bold moves can become less risky than staying the course.

FINAL THOUGHTS
When I gave up magic, I took an interest in juggling. I wasn’t good at that, either. Juggling in business can be an exercise in failure as well. It’s difficult to juggle both a continuation of the status quo and a bold move in a new direction. They need to be managed separately, by different individuals who can focus on just one of the tasks.

Be Like Tom

THE STORY
I’m sure you all know the story of Tam Sawyer and how he convinced others to paint the fence for him. However, I’ll bet it’s been awhile since you heard in Mark Twain’s words. We’ll pick up the story where Tom just about has Ben convinced to beg for the opportunity to paint the fence, when Ben pleads:

”Oh, come now - lemme try. Only just a little - I’d let you, if you was me, Tom.”

“Ben, I’d like to, honest injun; but Aunt Polly - well, Jim wanted to do it, but she wouldn’t let him; Sid wanted to do it, and she wouldn’t let Sid. Now, don’t you see how I’m fixed? If you was to tackle this fence and anything was to happen to it --”

“Oh, shucks, I’ll be just as careful. Now lemme try. Say - I’ll give you the core of my apple.”

“Well, here - No, Ben, no you don’t. I’m afeared --”

“I’ll give you all of it!”

Tom gave up the brush with reluctance in his face, but alacrity in his heart. And while the late steamer Big Missouri worked and sweated in the sun, the retired artist sat on a barrel in the shade close by, dangled his legs munched his apple, and planned the slaughter of more innocents. There was no lack of material; boys happened along every little while; they came to jeer, but remained to whitewash. By the time Ben was fagged out, Tom had traded the next chance to Billy Fisher for a kite in good repair; and when he played out, Johnny Miller bought in for a dead rat and a string to sing it with - and so on, hour after hour.

And when the middle of the afternoon came, from being a poor poverty-stricken boy in the morning, Tom was literally rolling wealth. He had, besides the things before mentioned, twelve marbles, part of a jew’s-harp, a piece of blue bottle-glass to look through, a spoon cannon, a key that wouldn’t unlock anything, a fragment of chalk, a glass stopper of a decanter, a tin soldier, a couple of tadpoles, a kitten with only one eye, a brass door-knob, a dog-collar-but no dog - the handle of a knife, four pieces of orange-peel, and a dilapidated window-sash.

He had had a nice, good, idle time all the while - plenty of company - and the fence had three coats of whitewash on it! If he hadn’t run out of whitewash, he would have bankrupted every boy in the village.

THE ANALOGY
Just like painting fences, not everything in the business world is particularly pleasant. Take selling, for example. Anyone who has spent much time doing cold-calling for sales will tell you that at times it can be a tough way to make a living.

Wouldn’t it be great if you could devise a system like Tom Sawyer, where people would actually pay you for the opportunity to endure a something undesirable, like sitting through a sales pitch? Believe it or not, it is possible.

THE PRINCIPLE
Today we are going to talk about the idea of altering the location of value in a transaction. Normally, we think of the value we offer as being tied directly to the product or service we are offering. For example, if we are selling automobiles, then we see the primary value as being in the value of the automobile—its performance relative to the price. Or if we are selling a credit card service, we might see the value in how well the card works and how low the interest rate is (or how many airline miles you get with it).

In other words, the customer does not receive the value until after the transaction—once they take ownership of the goods or service. However, what if we turned this on its head and said we want to create value elsewhere—like prior to ownership—and actually get people to gladly pay for the privilege of hearing a sales pitch (even if they end up buying no goods or services).

This is not that far fetched. Allow me to give a few examples.

Every community seems to have its share of “shows,” be it the Auto Show, the Boat Show, the Lawn & Garden Show, or whatever. Some place like a convention center is rented out to a number of vendors in that particular theme, and they ask people to come in and hear sales pitches. And people flock to the convention center by the thousands and pay good money to be given sales pitches. For example, opening day admission to the Miami Boat Show was $28. The Los Angeles Auto Show cost $10.

Not only do people pay for the privilege of hearing sales pitches, they often drive hundreds of miles for the opportunity. In addition, not only does the show get people to pay for the right to hear sales pitches, they usually get local TV stations to give them a ton of free publicity. It’s starting to sound a lot like Tom Sawyer.

And then there is the State Fair, where you pay money so that you can see exhibits where there are sales pitches and where you get the opportunity to pay outrageously high sums of money for greasy food, something you would not otherwise do if not at the fair. If there was ever something which smelled of Tom Sawyer, it would be the State Fair.

Or how about American Express credit cards? While others credit card companies are falling all over themselves to give you credit card deals, like free interest on transfers, airline miles, and cashback rewards, American Express goes the opposite route. They expect you to pay money for the privilege of getting a card. An American Express Platinum Card has a $450 annual fee, whether you use the card or not. And you are stuck paying off the bill in its entirety every month. Getting people to pay for the right to spend even more money when others let you do it for free (and even give you more time to pay it off) sounds like an idea Tom Sawyer would hatch up.

Finally, what about those warehouse clubs, like Costco or Sam’s Club? Depending on the type of membership you get, it can cost $50 to $100 a year to get one at Costco. Think about it—paying money so that the store will allow you to come in and spend money. Millions do. It’s sort of like having to pay money to get a discount coupon (or perhaps pay to whitewash a fence?).

What do all these examples have in common? They have shifted forward the value point in the equation. You don’t have to buy the auto to get the value of the auto. You get the value from the Auto show. The value at a State Fair comes from being a part of a spectacle, rather than the value coming from the food or what the exhibits are pushing. You don’t have to use a credit card to get the value of the card. You get the value from being a member. You don’t get the value from the goods you buy in the store, but the value is in being able to shop a particular store.

Once you realize that you can shift the value to a different location, lots of different opportunities open up—opportunities to get people to pay for things often thought of as being free.

To do so, you have to change people’s perception about what they are experiencing. At a Boat Show, the expectation is no longer to hear a lot of sales pitches (something one usually tries to avoid)—it is to enjoy visiting a world of dream boats and pretty girls—a place to fantasize. Now that has value!

What are some ways to change people’s perception and add value upstream?

1) Provide people with excitement or entertainment. Surround a sales pitch with enough excitement and entertainment and you have a Boat Show or a State Fair.

2) Stroke the ego by making membership at least as important as what the membership offers. That’s what American Express does. As they like to say, “Membership has its privileges.” The more exclusive the club, the more people want to clamor to get in.

3) Provide friendship or a place to hang out with your friends. The value comes through relationships and being with people you enjoy socializing with. The men of Mayberry didn’t hang out at Floyd’s barber shop just for the hair cutting. The value was more in being at the venue than in the service provided there. Even if a better hair cutting value came about, it would take a lot to give up the other value found in the friendship and camaraderie. To abandon Floyd’s would be like abandoning your friends.

We’ve just scratched the surface. Think about ways to apply this to your business.

SUMMARY
Value needn’t only be found in the product of service people buy from you. Value can also be added to the way you sell it, the improved image you imbue to people who purchase from you, the entertainment you offer, or the associations you provide. By surrounding your product or service with all of this, you may even get people to pay you money even if they don’t end up buying your good or service. Wouldn’t that make Tom Sawyer envious?

FINAL THOUGHTS
If you are in the business of selling “stuff”, you run the risk of commoditization. Even if you win, you lose because the profitability is sucked out of commodities. However, if you are selling experiences, friendships and ego boosts (and oh, by the way, there might be a product or service purchased in there somewhere), then you can avoid the commodity trap.