Where are you on the value chain?

A colleague of mine asks his clients to consider a cup of Starbucks coffee. The actual grounds in that coffee cost only pennies of the $3.75 you pay. At a diner, a cup of coffee might cost $1.50. But Starbucks manages to create a service experience that allows the company to charge 200X the cost of the actual product!

The same applies in professional services. Here are two examples:

1. A graphic designer charges a marketing consultant $350 to make a PowerPoint presentation look pretty. The marketing consultant charges his investment banker client $5,500 for the same PowerPoint, because he is producing a story that the client can use to raise money. The investment banker who hired the consultant gets $900,000 in stock for raising the money with the PowerPoint presentation.

2. A web designer charges $35 per hour to design the site for a new online service. The IT architect, who manages the designer, charges $6,000 per month ($150 per hour based on hours devoted to the project) to oversee the development project. And the owners of the company, who hire the IT architect, stand to make hundreds of thousands of dollars per month from the site.

Where are you choosing to play in the value chain? Are you the coffee grounds or the Starbucks?

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  • http://www.lengelzigich.com maxor

    The underlying theme of this all is that it’s important to make sure that you put yourself into the position of adding a lot of value to your client.

    In each of the examples above, the IT related examples, there is the bottom-of-the-barrel freelancer who is selling their services for what is probably the market price. However if these freelancers were in the business of adding value, rather than using photoshop or programming PHP, they would obviously be able to take home a bigger piece of the pie at the end of the month.

    While we can’t alone be responsible for each level of the value chain, we can at least learn more about the next level, and later the level above that so that one day we will be working inline with the client rather than three levels removed.

  • http://www.bittime.com transio

    Andrew,

    I understand your point here, but I think you’re missing two factors in the “value chain” that play an important part on roles:

    1. Outsourcing overseas. While $10/hr may be “coffee grounds” for a North-America professional, it’s “Starbucks” for those living in depressed economies. In much of Asia, Eastern Europe, and South America, IT professionals are commanding higher salaries than doctors and lawyers, because they’re able to get work outsourced from America. Even at what’s considered a discount rate here, they’re doing quite well where they are. Also, corporate America may seek outsourcing overseas (or even opening a foreign office) for large or continuing projects that are managed internally, but typically won’t look outside the country for small-scale one-time projects. In fact, they’ll typically look locally, within their established network of contacts. This means that if you’re residing in a 3rd world country, you’re most likely coffee grounds, whether you like it or not. This is a crappy situation, but I believe it will balance itself out within 5-10 years.

    2. Kids. Graphic and Web design in particular are fields that more and more teens and kids are gaining in-depth knowledge of. It’s quite a phenomenon. Unfortunately, most of these “whizzes” would never get the banker’s work – even with all of the marketing they can muster – because he’s got $900k riding on the deal, and he wants a “responsible” adult dealing with his project. Also, $350 for a presentation or $15/hr is way above the average income for teens these days. The way I look at it is that you can’t walk into a restaurant at 16 and be placed as general manager. You always start off in life as coffee grounds. It doesn’t matter how much raw talent you have. That’s just how it is.

    Aside from those two anomalies in this particular industry, I think it’s a good question for people to ask of themselves.

    Running with the metaphor, I’m Starbucks, but not satisfied w/ being a franchise selling coffee. I want to be the public corporation, selling the coffee franchises. :)

  • drakke

    As you go up the value chain, your stake in a particular project increases, as does the level of risk.

    Of course if you do your homework, you can reduce the risk.

    To paraphrase one Clint Eastwood movie, ‘If you let other people make decisions for you, you take your life in your own hands’

  • aneitlich

    Transio:

    What’s your plan to achieve your goal of selling the equivalent of “coffee franchises” — or were you kidding?

    Andrew

  • http://www.bittime.com transio

    Andrew,

    I’m definitely not kidding. My long-term goal – 20 year plan, if you will – is to establish my company as a top player in the marketing and advertising industry, a la DDB, Gray, O&M. While not a public corporation or franchise business model, I think that’s about as lofty a goal as one can establish in this industry. As for the steps to get there, well I haven’t quite mapped out the specifics yet, but the first step will be to establish the design studio, at which point I will solicit advertising work from existing network of incentives marketing clients.

  • http://www.sheppardweb.com Derek Sheppard

    I’d be a little careful not to mix apples and oranges. Neither the investment banker, nor the marketing consultant is selling PowerPoint presentations. The graphic designer is. He isn’t selling marketing advice – he’s a tradesman. To achieve more he must expand his expertise or his client’s perception of his value to them. For example, I see a lot of folks selling logos on the web for $250 a pop. When the NeXT computer company was launched, they paid a well-known logo specialist $50,000 for thier logo – why? And how do I attain such rarefied heights? Not by designing web sites – but by providing my clients with something more.

    That’s why I don’t mind the web designers in India. In fact, I love the web designers in India. I pay them money that they are happy to make. I sell the work as part of my consulting and add expertise and experience to it. That’s what my client is buying from me. That’s what the designers in India can’t and probably will never be able to provide.

  • http://www.creativearc.com creativearc

    Another thing to consider is that many companies out there have ‘value’ as their priority when they interview potential contractors.

    Some companies would certainly be interested in what a high school student might be charging for their services. That may be a battle not worth fighting, if the client has it on their mind to find the bargain basement price.

    For larger clients, I’ve never had a situation where I had to justify my value compared to outsourcing or what a whizkid is doing. I usually have to justify my value compared to another established company like my own.

  • Brian Egan

    Ok, so here’s the question: I’m an undergrad who wants to be the marketing consultant, or the IT director, but has no degree as of yet. How can a kid without a degree establish himself as a consultant or IT director without a degree? Is this a barrier I shouldn’t think about? Or is there valid reason for a client to be concerned with dealing with someone who may not be a college certified professional? Should I just focus the attention on the money I’ve made clients rather than my college degree?

    I don’t want to be the bean, but as a 20 y/o how can I transform myself into the starbucks? Not overnight, obviously, but I won’t have a degree until I’m 23.

  • Cliff

    Great topic – in both instances, it’s the challenge of the designers to shift their own mindset from commodity-pricing to value-based pricing. What percent of the $900,000 deal is it worth to the banker to have communication that gets results? 5%? 10%? She’s probably happy with either one; it’s the designer who has the opportunity to reposition himself as a consultant who can add that value. A good book on how to do this is “Getting Started in Consulting” by Alan Weiss.

  • http://www.kostamijic.com kosta

    This is one of the best blog entries so far IMO. Keep the good work, Andrew!

    I am on the bottom of the chain right now (17), and work is outsorced to me :) For now, I am very sattisfied. In 10 years, however, I will be a creative director of … (haven’t thought of a name), and sell the value.

    Again, this blog already helped a lot.

  • http://thehazel.com/board TheHazelOp

    Great Stuff Guys~! I am finding it hard to develop high end deisgn services. four sites that are community driven.

    I am not at the bottom of this chain, but I am pretty darn low on the consulting end. Speaking from an independant design providers view.

    This blog is helping me out as well. Good topic.

  • moagw

    I understand where you are coming from andrew, with the story.. BUT most of the clients I can pull in are wanting brochure like work done, and office networking.. They choose me for my low rates on those services… I guess the question is, can you really be starbucks without being the beans first? I mean off the street you can’t demand 10% of the 900k deal. Who would hire someone for that?

  • http://www.bittime.com transio

    moagw,

    Some people get lucky with instant success, through a combination of extreme talent, great personality, and a little luck. However, I agree with you that in general you have to work your wau up the food chain (or value chain, if you will).

    I do believe – and I think this was Andrew’s intention – that some people unnecessarily pigeon-hole themselves into a role that’s going nowhere. Say, for instance, outsourcing. There are designers out there with 100s of projects under their belt who’ve got more than enough projects to branch out and explore the next eschelon of business, but who stagnate.

    I believe that there are many reasons for this: comfort, fear, language, introversion or shyness, and on and on. I think the intention of Andrew’s question is to get you to introspect and figure out where it is that you are. I also suspect that his next blog entry will ask you why you’re there, or where you’d rather be and how you plan to get there!

    - Steve =)

  • aneitlich

    Transio,

    You’ve covered that topic fine, so I don’t have to. Next blog entry will be about a nifty new educational marketing technology that is getting great results for me….

  • AM

    With age comes maturity and an increase in general knowledge, which is reflected in various aspects of life, including work. The ability to empathise, or understand a clients viewpoint increases also with age.

  • http://www.bespokesites.com bespokesites

    When I started out, my prices were way too low, until one day a large company approached me, we met, I tried to sell, and they liked what they saw, however ended by saying I was so cheap, that they thought there was a snag. Since then, my prices have gone up roughly 35% and I have got more work in now !!!!!
    I know this is slightly off what your posts theme was, however I now charge more for my services, and what they are worth in direct competition in my geograhical location.

    Many thanks for these Blogs – this is the one I look out for most.

  • http://www.sarote.com Agitator

    Brian,

    A degree, IMO, is worthless if you don’t have perceived value. I say “perceived” because that’s what you need to get in the door. Once on the inside, you’ll need to deliver that value. If you have the skills (hard and soft), you won’t have a problem and the degree will just be a nice piece of paper to hang on the wall. That’s not to say a degree, in all respects, is worthless. Your degree should be for yourself – a sense of accomplishment and better knowledge.

  • SM

    FYI – Starbuck’s doesn’t sell franchises. The majority of their revenue (85%) is generated through company-owned retail stores, the remainder through partnerships.