Making More Money Isn't Going to Solve All Your Company's Problems
Money is not always what it seems. You would do better aiming to earn purchasing power, not pursue more dollars.
Entrepreneurs struggle to place that first groundbreaking sale. But even after establishing that there is a market, albeit of unknown size, selling is still very hard. Even when the offering is solid, which entrepreneurs tend to believe about their own product or service, customers may not be convinced.
When you ask them, they might refer to a lack of money. Had they more money, they would buy it — but since they don’t, they won’t. Or they say they will go home and think about it. Fine, they have no obligation to buy and it is better they are convinced that they are making the right choice than that they buy and become disappointed. But how often do they actually come back after thinking about it?
So it is easy for entrepreneurs to blame the scarcity of money. If customers had more money, they would be easier to convince to buy the product. Bill Gates or Jeff Bezos might not mind the expense of several hundred dollars just to try something out. Or would they?
There are two fundamental errors involved in thinking there is too little money around and that this is the actual problem you are dealing with. Both errors have to do with value: the value of your offering and the value of money.
The value of your offering
The simple fact is that if you have problems placing a sale, especially if it is to your target customer, then you are not offering enough benefit. The reason we buy things is that we expect to become better off. We do not, as economics models sometimes seem to say, buy because we value what we buy just as much as the money we pay. If we were truly indifferent, we wouldn’t go ahead with the transaction.
What is true is that you, as an entrepreneur, are in the business of offering your customers profit. It’s easy to place a sale if the customer expects to be much better off from your product or service than they could if they used their money differently. In other words, if the price you charge is significantly lower than the value your offering has to your customer, then it wouldn’t be difficult to sell. In this situation, all you need to do is make the customer aware of the opportunity.
So maybe the problem with selling is that you are charging too high a price?
The value of money
The other error is to think of money as having stable value. It does not. Part of this is due to inflation, but the more important issue is that people value money for its purchasing power. In other words, they will seek to get as much value as possible, on their own terms and to their own minds, from the money they have on hand.
Money is valuable because it is hard to come by and because there is not a whole lot of it. Whenever more money is created, which means there is more money in circulation than before, there is also more money compared to the valued goods and services offered for sale. In other words, there are just as many goods competing for more money. So prices adjust. They go up. Perhaps not universally and not at the same time, but as there is more money competing for the same number of goods, higher prices should be expected.
The problem, then, is that more money might make it easier to sell your goods at the same prices, but what you actually get in return (the dollars and cents) is worth less. So when you try to spend this revenue, you will find that your costs have (or soon will) gone up and that things are more expensive.
Your books might indicate a profit, but in reality you didn’t earn one. The goods you sold were really sold at a discount, you just didn’t notice it. That’s your loss. It certainly isn’t your profit.
How to think about money
This raises important issues that entrepreneurs must understand. It is not about customers not having enough money, but that they value that money too much to part with it. In other words, your offering is not valued enough. More dollars will not solve the problem, because each dollar will be worth less. Consider these rules of thumb for not falling into this trap:
1. Value is not expressed in dollars. Money is a helpful unit of account, but whenever more dollars are introduced, the value of each dollar will fall. So think value first, then think dollars.
2. Prices are for the future, not the present. Accounting does not capture the time element and also does not capture falling (or increasing) purchasing power of the currency. But the issue is that your product that you sell today was paid for using prices of the past, and this revenue will need to pay prices of the future. If the purchasing power falls, those prices will increase, which means your revenue today will buy you less production capacity than you think.
When there is more money around, it could mean that you initially sell more, but the replacement cost of those products of services goes up. In other words, you are inadvertently giving customers a discount. Can you afford it? If you can, then you should already have lowered your prices. If you cannot, then the stealth discount will hurt you. In both cases, you should focus not on the number of dollars but on their purchasing power.
Entrepreneur Leadership Network Contributor