MEASURING VALUE WHEN DOLLARS DON'T MAKE SENSE

by: Cary Christian

If you go out and spend $500 on advertising, measuring the value of the advertising you purchased is a fairly straightforward exercise. You track your ads, know the response rate, and you can see how many sales dollars were generated by your $500 expenditure. Easy.

But what about the value of a new accounting system? Adding two new employees to handle customer service? Automating your email marketing efforts? Implementing just-in-time inventory concepts?

With these types of investments it's easy to quantify the cost but very difficult to identify specific dollar benefits associated with those costs. It can be done, but sometimes it seems to require advanced degrees in business and mathematics to carry out the analysis. Even then, you'll be dealing with many factors that are intangible and defy quantification.

Even very large companies with seemingly bottomless budgets have difficulties with this type of analysis. Most of the cost-benefit analyses performed are really nothing more than very educated guesses backed up by impressive verbiage.

The problem with this type of analysis is the need to analyze in and of itself. People, particularly those with lots of education, tend to over-analyze. People working with large companies are worse because they are usually in the position of having to justify an expenditure or requested budget increase.

So how do you escape this analysis trap?


DEFINE YOUR GOALS FOR AN ACTION IN TERMS OTHER THAN MONEY

Let's take the example of adding two new customer service employees to your business. It's a very natural tendency to attempt to attach an expected dollar value benefit to this action. For example, "we will improve customer satisfaction and increase repeat sales by 20 percent resulting in an additional $200,000 in sales during the year."

While there is nothing inherently wrong with this type of goal, the focus is misplaced. In order for this type of action to achieve the desired result, you need to make sure the focus stays on solving the underlying problem, and that is improving customer service.

If your customers are currently waiting 72 hours to receive an answer to their question, solution to their problem, exchange of a faulty product, or whatever their problem du jour is, your goal should be to reduce that response time to something not only acceptable, but impressive. This should be your overriding concern. Concentrate on the benefit to your customer rather than the benefit you hope to derive in terms of increased profits.

Once your goal in taking an action is defined in these terms, measuring the value of your expenditure becomes much easier. You will have accomplished your goal when your response time has been cut to the desired level. You WILL see an increase in profits but it will no longer be that important to measure them. You will know your business is operating more efficiently, your customers are happier, and you have made a net profit by taking the action. You really do not need to know more.

Any time you are considering making expenditures to improve your business, begin the process by identifying the problem that is causing you to consider spending money on an improvement. Once you identify the problem, resist the urge to place a dollar value on it. Isolate the non-monetary result of the problem and make your goal the elimination of that result.

For example, let's assume you read about a software package that will totally automate your email marketing campaigns, including handling subscriptions and removal requests to your advertising lists. You are very interested in the package. Ask yourself why? Is it because you just like technology and this thing sounds really neat? Or is it because two of your employees, or YOU, are wasting 10 hours per week maintaining your lists and babysitting your mailings?

If you're wasting 10 to 20 hours a week maintaining lists and monitoring mailings, define and measure the benefit to be derived in terms of the hours saved by implementing the software.

There are several benefits to using this methodology to determine value. First, it keeps your focus on solving problems. Profit is the ultimate yardstick for measuring business performance, but profit is a high level measuring stick. You need to get down in the trenches and concentrate on the individual problems that are draining your profits in order to bring about positive change.

Second, it will help you understand your business better. By shifting your focus from profits to actually running your business more efficiently and in a customer-centric manner you will find that you're more in touch with reality.

Third, it can improve your ability to SELL. As you get better and better at identifying your internal problems and the benefits of solving them, you'll find yourself having a more thorough understanding of how to sell to your customers based on benefits rather than features and price.

This methodology is really about getting back to basics and simplifying the way you view your business activities. Far too often we try to get too sophisticated for our own good. We confuse ourselves with our own intelligence. More often than not, simpler is better.

Copyright (c) 2002