PRICE VS. VALUE
The CEO looked at the proposal in front of her, and she felt her stomach going into a hard knot. “What a shame; we can’t afford this,” she said to herself sadly. “Even though we stand to gain millions of dollars of value from this initiative, we just can’t fit it into the current budget. The proposal has a $25,000 price tag, and we only have $7,000 in this year’s budget for this type of initiative. I’d love to take advantage of this opportunity, but I just have to be fiscally responsible.”
What’s wrong with this picture? No, not you kids with your hands up in the front row. I want to hear from the folks in the back of the room who are half asleep and relatively disengaged. Even you guys must think that the answer to this one jumps off the page, takes you by the shoulders, and shakes you into full awareness of your surroundings!
From where I sit, here’s the elephant in the room. Unless you’re on the verge of bankruptcy, if you can add millions of dollars of revenue for $25,000, then you’re crazy not to take that deal! The return on investment is staggering! For example, the ROI on $1M would be 40 to 1, the ROI on $2M would be 80 to 1, $3M is 120 to 1, etc. Try asking your stockbroker or financial advisor to get you that rate of return!
The fact that our CEO’s original expectations began at $7,000 is essentially irrelevant. For goodness sake, tweak the budget! Forego some other expense that doesn’t create the same rate of return and value. Don’t allow a tactical budget decision to interfere with a huge strategic financial opportunity.
Can’t you hear the CEO’s report to the board? “We had a great year this year! By passing up an opportunity to add millions of dollars of revenue we were able to save $25,000 and stay within the budget we created at the beginning of the year!”
Leaders who run successful organizations do so from a strategic perspective, have a clear vision, and make decisions based on reasoned risk. Cost control is a necessary and valuable tactical management tool, but it is not a strategy unless you aspire to be the low cost leader in your competitive niche (even Wal-Mart is experiencing trouble with this approach currently and is trying to move upstream).
Okay, sports fans, it’s aphorism time! Beware the siren song of a “false economy” or “misplaced precision” that leaves you feeling “penny wise and pound foolish.” If you make your buying decisions based primarily upon price, you’ll end up with a lot of cheap stuff that has very little value for your organization. It’s not how much you pay that matters most; it’s how much you get for your money. Think big, think smart, and think sustained success.
Technique #1: Make buying decisions based on value rather than price.
Technique #2: Make buying decisions based on a long-term organizational strategy (leadership) rather than on a short-term organizational tactic such as cost control (management).
Technique #3: Adjust your budget as necessary to create strategic advantage. A budget is not meant to be carved in stone—it is merely one of the many tools used to support a strategy.
Copyright Terry "Doc" Dockery, Ph.D. All rights reserved.