MEASURING VALUE WHEN
DOLLARS DON'T MAKE SENSE
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
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
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
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
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
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