The Value Equation How To Reverse Engineer Pricing Ep 181



In the Gym Secrets podcast, the host discusses the 'value equation' for business pricing and value enhancement with entrepreneurs. He emphasizes that perceived outcome and likelihood of success are the traditional focus areas for increasing value but points out that reducing detractors like delay and effort can significantly boost a product's value. Using fitness and meditation as examples, he explains how minimizing the time and effort required for a customer to achieve a desired outcome can increase a product's appeal and price. He shares insights on how top companies, like Amazon and Netflix, have mastered this by removing friction from the customer experience, suggesting that businesses should focus more on eliminating pain points rather than just enhancing perceived benefits.

Summary Notes

Introduction to the Value Equation

  • Speaker A introduces the concept of the value equation, which is a unique approach to reverse engineering pricing and providing value.
  • The value equation consists of four components, divided into two positive factors on the top and two detractors on the bottom.
  • Speaker A emphasizes the importance of this equation in consulting and coaching, especially for high-level business owners.

"For those of you who don't know what the value equation is, it's something that I have not seen anywhere else. And so this is just kind of like how I view and how I put it together and it really works well."

The quote explains that the value equation is a proprietary method developed by Speaker A and is considered effective in his experience.

Components of the Value Equation

Perceived Outcome

  • The perceived outcome is the first part of the top half of the value equation.
  • This represents what the prospect believes they will achieve by purchasing a service or product.
  • In the fitness industry, perceived outcomes could include increased energy, an attractive appearance, and a great body.

"The perceived outcome that a prospect has of what they think they're going to achieve by buying your service, information, product, whatever, right?"

This quote defines perceived outcome as the customer's expected benefit from a purchase, which is a critical factor in the value equation.

Likelihood of Achieving the Perceived Outcome

  • The second part of the top half of the value equation is the likelihood of achieving the perceived outcome.
  • This involves how much the prospect believes they can achieve the outcome, which can be influenced by social proof and marketing efforts.
  • Speaker A notes that his focus for most of his career was on enhancing these top two components to increase value.

"The second part of the top of the equation is the likelihood of actually achieving that, right? So that's whether the prospect believes that they're going to achieve this outcome."

This quote explains that the prospect's belief in their ability to achieve the perceived outcome is a key factor in determining value.

Delay as a Detractor

  • The first detractor in the bottom half of the value equation is the delay between payment and achieving the perceived outcome.
  • A longer delay can decrease the value or price that can be charged for a service or product.
  • In fitness, the time required to achieve a great body can be substantial, which is a considerable detractor.

"So that's the amount of time between when they give you money and when they're actually going to experience the perceived outcome, when they think they're going to actually achieve it."

The quote highlights delay as a negative factor in the value equation, emphasizing the time gap between payment and result.

Effort Required as a Detractor

  • The second detractor is the effort and time the customer must invest, not related to the delay but to the work they need to do.
  • In fitness, this includes dietary restrictions, exercise routines, and lifestyle changes.
  • The effort required can significantly detract from the value, as customers must make sacrifices to achieve their goals.

"Now, the fourth piece of the equation. So the second detractor from the equation is the effort that they have to put in."

This quote identifies effort as a detractor in the value equation, which reflects the customer's required input to achieve the desired outcome.

Application of the Value Equation in Sales

  • Speaker A uses the fitness industry as an example to explain the application of the value equation.
  • He acknowledges that the likelihood of success in fitness goals is often low, which affects the equation.
  • The substantial time and effort required are major detractors that prevent easy online sales of expensive personal training packages.
  • Speaker A and Speaker B suggest that the complexity of the value equation is why high-pressure sales tactics are often needed to convince customers to commit to fitness programs.

"And that's why we have to spend 60 minutes arm wrestling someone to get them to take the decision to change their life."

The quote implies that due to the negative aspects of the value equation, such as effort and delay, convincing customers to make a significant commitment often requires intensive sales efforts.

Four Value Pillars

  • Discusses the concept of four value pillars that contribute to the perceived value of a product or service.
  • Emphasizes that having only one strong pillar (perceived outcome) is insufficient for high overall value.
  • The speaker implies that all four pillars need to be strong to create a valuable offering.

"Because we only have one of the four value pillars in our corner, which is just that. We have a really good perceived outcome."

This quote highlights the importance of the perceived outcome in the value equation but also suggests that other pillars are lacking, which diminishes overall value.

Meditation vs. Xanax: A Value Comparison

  • Compares meditation and Xanax in terms of the value they offer based on the four pillars.
  • Highlights meditation's lower likelihood of achievement, longer time delay, and greater effort and sacrifice.
  • Contrasts this with Xanax's high likelihood of achievement, short time delay, and minimal effort, leading to higher perceived value.

"The likelihood of achieving meditation, probably pretty low, right? Because let's be real, people are really distracted." "What's my time delay? 15-30 minutes. I mean, maybe ten minutes if you mainline it. I'm just kidding. But short, right?"

These quotes illustrate the challenges of achieving success with meditation due to distractions and the effort required, versus the quick and assured effects of Xanax, which require minimal effort.

Business Focus: Top vs. Bottom of Value Equation

  • Reflects on the speaker's evolution in business thinking from focusing on increasing perceived value and likelihood of success to reducing time delay and effort.
  • Mentions that more successful and intelligent business people often focus on the bottom side of the value equation.
  • Suggests that reducing the time and effort required to achieve an outcome can significantly increase a product or service's value.

"So I'd say the first three quarters of the time that I was in business, I focused much more on the top side of the equation." "And so when I talk to people who make a lot more money than me and who are a lot smarter than I am, I noticed that a lot of them focus on the bottom side of the equation more."

These quotes reflect the speaker's shift in strategic focus from enhancing perceived outcome and likelihood of success to minimizing time delay and effort, inspired by the practices of more successful business figures.

Netflix as a Model of Value Innovation

  • Uses Netflix as an example of a company that increased value by reducing the bottom side of the equation (time delay and effort) without changing the top side (perceived outcome).
  • Describes how Netflix made content consumption instantaneous and effortless, leading to its success.
  • Suggests that by reducing the time and effort for customers, businesses can increase activation, lifetime value, and overall value.

"Netflix did not change what we consumed, right? They didn't change movies. They didn't change the tv shows. In fact, they just put the same shows we're already watching. But all they did was they made it instantaneous and we had virtually no effort."

The quote exemplifies how Netflix revolutionized content consumption by making the process instant and effortless, thereby significantly increasing the value of their service without altering the content itself.

Investment in Business and Product Endorsement

  • The speaker is an investor in a business and has contributed to the product's formulation.
  • They do not own the business entirely but believe in the product's quality.
  • The product is described as a significant undertaking.

nity, by the way, because I get asked about this all the time. I'm just an investor in the business. I think it's an amazing product. I've helped in the formulation of it. I'm not the sole owner. All right? But I think it's awesome.

The quote clarifies the speaker's role in the business and their belief in the product's excellence, emphasizing their partial ownership and involvement in product development.

Value of Software in Generating Leads

  • Alan's software is designed to work leads effectively.
  • The software is implied to be a valuable tool for businesses in managing leads.

So anyways, what Alan does, it's a software that works leads.

This quote introduces Alan's software, hinting at its function and importance in the context of lead management.

Call to Action for Podcast Support

  • The speakers request support from their audience without running ads or selling products.
  • They emphasize the importance of helping entrepreneurs through sharing the podcast.
  • The speakers ask for ratings, reviews, and shares to increase the podcast's reach and impact.

You guys already know that I don't run any ads on this, and I don't sell anything. And so the only ask that I can ever have of you guys is that you help me spread the word so we can help more entrepreneurs make more money, feed their families, make better products, and have better experiences for their employees and customers.

This quote highlights the speaker's reliance on word-of-mouth promotion and their goal to support entrepreneurs, emphasizing the podcast's non-commercial approach.

Is if you can rate and review and share this podcast.

The quote is a direct request for audience engagement to support the podcast's growth and outreach.

Efficiency and Impact of Software on Lead Management

  • The software increases leads and throughput for businesses.
  • It reduces the time delay in processing leads, offering immediate benefits.
  • The software eliminates the effort and sacrifice typically associated with working leads.

So the value is leads come in the door, right? That's great. I get two or three x my throughput. All right, awesome.

This quote discusses the software's ability to enhance business efficiency by increasing the number of leads and the speed of their processing.

And then the effort and sacrifice, what it does is it removes all of the effort and all of the sacrifice that is typically customary with working leads.

The quote emphasizes the software's role in reducing the labor and challenges inherent in managing leads effectively.

Interruption Cost and Productivity Loss

  • Working leads often interrupts other important tasks, becoming a top priority.
  • Task-switching significantly increases the time required to complete tasks.
  • Business owners face productivity loss due to constant task-switching.
  • The speaker highlights the importance of managing leads without affecting daily productivity.

The biggest cost is that the moment you get a lead, it becomes a ten out of ten priority in your life, because you could be writing an invoice, you could be doing a contract, you could be writing on meal plans, you could be talking to a customer. Whatever it is, it immediately takes your attention, becomes priority number one.

This quote explains how leads can disrupt other business activities by demanding immediate attention, emphasizing the high cost of interruption.

And so the primary cost of something like an interruption based issue, like working leads, phone calls, et cetera, is that it destroys the productivity of the person during the day.

The quote elaborates on the negative impact of task interruptions on daily productivity, particularly when working with leads and handling phone calls.

Sustainable Lead Management and Business Efficiency

  • Ensuring consistent lead flow is crucial for the sustainability of lead workers' roles.
  • The speaker seeks to make business processes seamless, focusing on pain removal rather than product changes.
  • They aim to simplify the customer experience by removing barriers and friction.

It's also impossible to manage someone else, especially at the pay rate that you usually have to pay someone to do that for them to do a sustainable job. And make sure that for every single week for the rest of the year, you always have sufficient lead flow for them because God forbid you have somebody who's supposed to work leads and you're not running a campaign right now.

This quote discusses the challenges of managing lead workers sustainably, stressing the importance of maintaining a consistent lead flow for efficiency.

But the real value comes from the fact that it removes pain. It decreases the bottom side of the equation.

The speaker identifies the core value in reducing customer pain points and simplifying processes, rather than altering the product itself.

Big Picture Value Creation and Customer Experience

  • The speaker observes that successful companies focus on removing customer barriers.
  • Amazon is cited as an example of creating value through ease of purchase.
  • The speaker intends to apply this principle to their own business, aiming to reduce the time and effort required for customers to achieve results.

Like Amazon, they've just made it so seamless for you to purchase something with one click on a whim that by doing so, they've created more value than basically any other company out there, right?

The quote uses Amazon as an exemplar of how easing the purchasing process can significantly enhance customer value.

And if you think big picture about how you can provide value, there's a lot of opportunity. Like most everyone focuses on the top side, myself included, of the equation. Let me promise more, promise bigger, tell people how they're guaranteed all this stuff, right, where we're trying to increase their perceived likelihood of achieving the outcome.

This quote reflects on the broader opportunities for providing value by reducing customer effort, contrasting with the common approach of over-promising benefits.

Removing Friction to Increase Value

  • The speaker emphasizes the importance of eliminating obstacles that cause friction for customers.
  • By reducing friction, businesses can enhance the perceived value and justify higher prices.
  • The process of streamlining and simplifying the customer experience is a key strategy for business growth.
  • The speaker suggests that focusing on the bottom side of the equation, which involves removing pain and obstacles, can be more achievable than trying to infinitely increase the top side.

Okay, can I take care of their meals for them? All right, that's done. When they show up, how can I get it so they don't have to think about anything when they're here?

This quote illustrates the speaker's approach to preemptively address customer needs, ensuring a frictionless experience.

And so for me, that's been really profound because getting the top side to infinity is really, really hard. But focusing on decreasing the obstacles and the friction that a prospect has to go through gives you a very tangible way to provide value by removing pain and removing friction.

The speaker reflects on the profound impact of reducing customer obstacles as a tangible way to provide value, contrasting it with the difficulty of infinitely increasing the top side of the value equation.

Standardizing Onboarding Processes

  • The speaker discusses the importance of a seamless onboarding process for new customers or employees.
  • They highlight the critical 14-day period during which customer retention is most vulnerable.
  • Streamlining the onboarding process is seen as a way to standardize variables that affect customer retention and satisfaction.

And so part of the reason that it took so long for us to get Alan out was because we had to streamline the onboarding process for the people who were going to be coming in so that we could standardize the variables that we've now identified.

This quote explains the reason behind the delay in launching a service, emphasizing the necessity of a streamlined onboarding process.

If someone sticks with Alan for 14 days, and that's just because it takes 14 days to ramp up. If someone passes the 14 day mark, they stay.

The speaker identifies a specific time frame critical to customer retention, suggesting that overcoming this period is key to long-term customer engagement.

Differentiating Value in a Competitive Market

  • The speaker notes that many businesses make similar promises, making it challenging to stand out.
  • They suggest that focusing on reducing friction can be a powerful differentiator in the market.
  • This differentiation is proposed as a way to explain value to prospects uniquely, rather than making generic promises.

Sometimes everyone promises the same things. You know what I mean? Like, if you look at the gym space, right, there's a zillion people who promise the same things.

This quote highlights the issue of homogeneity in business promises, suggesting the need for a unique value proposition.

And I think one of the biggest opportunities, especially in the service space, because most people don't think this way is looking at the bottom side of the equation, because there's a ton of opportunity there.

The speaker proposes that there is significant untapped potential in focusing on the bottom side of the value equation, which involves reducing customer friction.

Lifetime Value vs. Cost of Acquisition

  • The speaker compares the lifetime value of a customer to the cost of acquisition, indicating that higher lifetime value is a significant advantage.
  • By reducing the actions required for a customer to achieve results, businesses can increase customer retention and lifetime value.
  • The speaker's company focuses on decreasing content in updates to reduce friction and increase speed to money.

The difference was the lifetime value of a customer in his business was $8,300. Lifetime value of a customer in our business was 42,000. That was the difference.

This quote compares the lifetime value of customers between two businesses, demonstrating the impact of customer retention strategies on revenue.

How few things can we get them to do to still have this great result, right? Reality is that most people don't even fucking consume the legacy portal.

The speaker discusses the importance of efficiency in customer actions to achieve results, noting that most customers do not fully utilize provided resources.

Focus of CEO and Team

  • The CEO is focused on reducing friction as a means to improve the product and differentiate it in the market.
  • The speaker believes that this focus on removing obstacles is a key responsibility of their role as CEO.
  • This strategy is seen as an effective way to communicate value to customers and stand out from competitors.

And so that is where all of our focus as a team on, that's where all of my attention goes as a CEO.

This quote indicates the CEO's dedication to reducing friction as a primary focus for the team and their role.

How you can provide value, but also how you can explain the value that you provide to your prospects and your marketplace differently, is by focusing on the friction and the obstacles that you remove.

The speaker suggests that explaining value to prospects can be enhanced by emphasizing the removal of friction and obstacles, offering a distinct approach compared to competitors.

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