The Only Way to Ensure Renewable Profitability

The Only Way to Ensure Renewable Profitability

Provide more value then you charge for.  If this isn’t your motto then you won’t last long.

I was reading Chris Dixon’s popular post last week about builders.  He points out that there are two types of people in the startup world.  People who are builders provide more value then they take from the system, extractors take extra value out of the system.  I think this advice is more practical then Chris or even Tim O’Reilly stated.  I think that people and companies that provide more value then they charge for are the only ones that can consistently succeed.

The most obvious reason that this is true is that people just aren’t any good at determining how much something (or someone) is actually worth.  Whether you’re an individual or a company, if you insist on charging for every penny of value that you or your product provide, you are assuming that your customers (or employers) will see that value and be willing to pay for it.  That’s a lot of trust to have in your fellow man, too much.  It’s worth noting in this space, that you’re also trusting yourself not to overcharge for your own services or product.

If you’re a person working for a living (as opposed to a business), creating more value then you’re paid provides instant job security.  Your company would be foolish to fire you and if they’re thinking about cutting your position they will go out of their way to find another spot in the company for you or even recommend you to a competitor.  In this example I always think of one of the Professional Deployment Managers (PDMs) I worked with at IBM, let’s call him Bill.  One day I read an email that he has moved over to another team in the company and it occurs to me that it’s an enormous shame, because he always seemed to me to be one of the best we had.  Not more then a month or so later I got word that they were getting rid of the PDM role and replacing it with engagement managers.  All the PDMs had a month to find another job in the company or be let go.  I have no doubt that Bill’s management tipped him off and helped him move before the resource action occurred and I have no doubt it’s because he was consistently providing a great deal of value to the company.

If you’re a company, providing more value then you charge for makes it difficult for other companies to compete with you.  You don’t have to look any further then the classic business analysis, Porter’s Five Forces, to discover this.  Companies are unlikely to enter a business where customers have preferred providers and profit margins are lower then they are in other sectors.  I’m not saying you go without a profit, I’m merely suggesting that you make sure your customers see more value then you charge for.  If this requires that you lose money, you’re probably in the wrong industry.