Aardsma

On life and business.

In every product or service there are one or more points where the rubber meets the road, where the deliverable value actually gets created. I call these “core value add”.

• For a doctor in might be the moment when she connects the dots to diagnose the patient’s disease.
• For a plumber, when he removes the clog from the drain.
• For a manufacturer, when raw materials come together to form something worth more than it’s parts.
• For a salesperson, when a prospect is influenced to become a buyer.
• For an inventor, when he see his idea through to become a prototype that works.
• For a leader, it’s when her followers achieve more than they thought possible.
• For a designer, it’s when he creates something delightful and new.

In recent decades I think it became almost fashionable to be in a business where all the high-value-add parts of the product or service where outsourced. Outsource manufacturing to a company in Asia. “Outsource” capital investment by borrowing from a bank. Outsource sales to an independent rep firm. Sometimes I think this leaves a company without a compelling answer to the question “what do your customers pay you to do?”.

I propose a simple rule. Over time, gross margin cannot exceed value add. In other words, you can’t expect to markup the price more than the value you add, not for long. I know this is incredibly old fashioned and so not 1999, but I am sticking to it.

In this day and age of abundant choices and limited cash, customers simply don’t want to pay you a lot to do a little. If you don’t add enough value to earn your keep, the market is going to find a way to do without you, or at least give you a pay cut. This economic environment is hard on every business, but it’s brutal to the businesses we can painlessly do without because they weren’t adding much value.

I like watching “Dirty Jobs” on the Discovery Channel because Mike Rowe is always visiting businesses that do tons of core value add. Like a farm that breeds, feeds, and packages fishing worms. Or a factory that builds train engines. These jobs lack glamor, but they are very “rubber meets the road” kind of jobs. They have earned the right to a solid markup because they are adding solid value.

The only way to succeed long-term without a big value add is to 1) add only a small markup, 2) be very cost-efficient, and 3) do a huge volume. (In other words, be Wal-Mart.)

I’m not against outsourcing. Outsourcing to someone who can do it better, add a markup, and still do it cheaper, that’s a good thing. But if someone can do everything you do better and cheaper than you can, you’re in big trouble.

To all you high-value-add types out there who feel a little old-fashioned and inferior for not outsourcing and financially engineering your way to an easier, more glamorous ride — I say good for you. We will keep paying for what you do, because even in this economy, we’d miss the value you add if you stopped.