Budgeting Beyond Legal Boundaries

One of the many oddities shared between entrepreneurs is their ability to budget beyond boundaries. They don’t make the same assumptions about where the lines must be drawn. The edges are more fluid. They see customer value and customer alternatives and they see new ways of assembling systems to deliver value at a profit regardless of what companies currently do or do not do. This viewpoint is immensely valuable and quite rare despite being fairly straight forward (says the entrepreneur.) Here is a quick pictorial outline:

Entrepreneurs must first comprehend the customer’s desire and roughly how valuable that is to them. They jump out of their mind and see the world through the customer’s point of view. This is what makes it so common for entrepreneurs to solve problems they’ve experienced themselves. It’s a very common starting position. It’s also not uncommon for a newbie to break old molds. They don’t see the same boundaries. Furthermore, the entrepreneur usually understands the competitive landscape pretty well. How does the customer obtain this desire now? This is where newbies have a hard time. Where might he go if he didn’t go to his past place to fulfill this desire? What is charged elsewhere for the same experience? What is lacking? What is over done? What can be eliminated?

Then, ideally, the customer value proposition is met at a price point that is LESS than the value they receive.

Last week I used the real-life example of me observing someone going up to a snack bar for a cold drink only to find the location had closed a few minutes earlier. I was seated nearby and knew what they charged (when open) and also knew the surrounding alternatives were more expensive and served a better dressed clientele than myself and this prospect. The third alternative –a grocery store run or delivery–was much cheaper only if you ignored the value of your time. Not only would he have to leave, he would first have to get properly dressed. All this went through my head automatically and super fast. I don’t think this is the unusual part. The next thought was to offer him a cold drink from my cooler (possibly unusual) for 50 cents less than his next best alternative (highly unusual.) That’s when I paused, realizing I was crossing some legal boundaries in my mind. Still my thoughts ran on (though I stayed seated.) My cost of production was much lower and this $5.50 deal most likely would have gone down had I asked him if he’d like to purchase a cold drink for $5.50. But maybe not… the snack bar charged to his room and I couldn’t do that. I also wasn’t licensed for this particular transaction…

The point here is seeing the whole picture. The snack bar clearly had me beat when they were open. But when closed then maybe didn’t… but then again, maybe they did? They had a regulatory moat.The point here is to look across various entities and assemble a solution for less than it cost at a price point that is less than the value. In that scenario, everyone wins.

The same above thought process works when selling products and services to farmers, or fixing windshields via a mobile service. It also impacts roll off dumpster prices and insurance rates.

I personally like when the customer gets their value from us at 30-50% discount to their full value. That’s usually a feel-good purchase that will persist and lead to referrals of a like-kind customer. However, in order to produce that large of a gap between the value delivered and the price charged, the competitive alternatives need to offer an ill-fit solution for my ideal customer. This usually happens when I can subdivide a larger customer group into a smaller, more niche group that I can better serve than the competitors. The ideal way to find this is to pair up two usual alternatives on either side of a customer and build something that carves off the best parts for the ideal customer and eliminates wasted features from each alternative.

The other, more difficult, but sometimes much more profitable approach, is to look way beyond the legal boundaries currently used directly by the customer and pull together disparate elements that can be eliminated if combined into your solution. In this case you might take two vendors that sell different things to the same customer. How could these be combined for more value at same cost? Or same value at half the cost?

The most common example of combining disparate products is the general discount store. They offer “everything” under one roof. In so doing the retailer is eliminating travel time for the consumer and promising a cheaper aggregate price on the most common merchandise of a particular customer segment that buys common things. In so doing the consumer saves time and money (so long as they stick to their shopping list!)

Finally, the other simple but rare practice that successful entrepreneurs exploit is the elimination of unnecessary functions. They say to themselves, “this customer cares nothing about the appearance of the cold beverage server. They just want it now.” And by this manner, the attire and serving station matter not. You don’t even need a counter or a table and chairs. From cooler to their hand. This elimination insight is available when customer needs are well understood.

Ultimately, the best entrepreneurial insight by temporarily ignoring legal boundaries and assembling functions that produce something valuable for both customer and business owner. In the most ideal design others cannot easily replicate this insight in the same way.

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