The Value-Creation Mindset
“So to the best we can, what we do is focus on creating value for others, and how do we do that? We do it by trying to produce products and services that our customers will value more than their alternatives, and not just their alternatives today, but what the alternatives will be in the future.” – Charles Koch, Chairman & CEO of Koch Industries
Creating value for others involves producing products and services that the customer will value more than their alternatives—not just alternatives of today, but what alternatives there will be tomorrow. There, I summarized the pithy quote with some inherent wisdom built into it. The end, right? Regardless of how you might personally feel about oil companies, billionaires, Koch Industries, or the Koch brothers in general, I believe this quote applies to this profession now more than ever.
We’ve all heard it and listened to it being talked about ad nauseum. We’ve all talked about it ad nauseum. What is it? The “headwinds” of rising cremation, consumer behavior is changing, more and more people are unchurched, blather, blather, blather. So, what have you done about it? Did you introspectively look deep within and stayed true to your beliefs and principles in providing high-value services to your community? Or did you level down so you could compete with the $995 guy in a race to the bottom? Did you listen to your families, your guests? Or did you think that you knew best what they wanted just because the family was Baptist or Catholic? Yes, all these aforementioned things are challenges or obstacles to our profession. But challenges are just the flip side to the coin of opportunity, aren’t they?
Notice that the introductory quote mentions nothing of competition. You would think that a billionaire businessman got to where he was by beating down the competition. Yet, Charles Kock mentions nothing of competition in his value creation quote. Speaking of quotes, I will give you another one: “Companies that solely focus on competition will ultimately die. Those that focus on value creation will thrive.” This was stated by Edward de Bono, a British-Maltese physician and the father of “Lateral Thinking” (for an example of what this is, read into the Judgment of Solomon). You should know your competition, but focusing entirely on what the other competitors are doing will distract you from focusing on your business becoming better.
Here are five areas of focus that will help you be in and stay in a mindset of value creation:
- Know Your Value and Vision: Whether you lead a firm that is multi-generational or whether you started your business, this is about staying true to the identity and the culture of your business. If your business’ mission is to serve your community with the highest and best level of service, then this is what you must be dedicated to and not make decisions (or have the self-awareness to not make decisions) that contradict the values, vision, and culture of who you are. Are you and your staff’s experience, education, licensing, expertise, and level of service worth more than $995? Then, catch yourself when you feel that urge to match low-cost pricing or reduce your own pricing structure. Your values, vision, and culture are what separates you from others (even worthy competitors), so do not stray from this and commoditize yourself.
- Understand Basic Financial Principles: This involves taking the time to educate yourself on the dynamics of how cash flows in and out of your business. This is what is usually meant (in addition to continuously building community relationships) with the saying about “working on your business, instead of in it.” Do not let financial terms such as Gross Margin or EBITDA (earnings before interest, taxes, depreciation, amortization and is the closer measurement of cash profit than Net Income) intimidate you. Understanding financial terms are great, but truly understanding how an action taken (or not) could impact your numbers is the goal. For example, funeral service is a relatively high-fixed cost business. All this means is that everyone who serves death calls has overhead costs that remain relatively constant, no matter how many cases you serve. Everyone has this. Everyone, including the low-cost provider. What this realistically means is that the low-cost provider that may take ten calls from you and eleven calls from your other full service competitor on a given year is not likely going to eke out business survival long-term on $20,895 annual revenue—given that they still have to expend costs on people and at least a vehicle for pickups, cost of a retort (or have someone else perform the cremation for them), rent for space, gas, website, phone number, etc.
- Being Open-Minded and Listening to Everyone: This especially holds true for your families and your guests. In Foresight’s 2024 Funeral & Cemetery Consumer Behavioral Study (FCCBS), almost 40% of respondents stated that they did not know enough to make an informed decision when it comes to funeral service options and products. They may not know what they want, but the almost assuredly know what they do not want. Furthermore, educational and consultative opportunities create opportunities to build and earn trust. If a family is candid enough to tell you what they don’t want—and you are earnest enough in listening—then your focus can easily shift in identifying what it is that they want, and then give that to them. If your big dilemma is in still considering whether or not to let guests bring coffee or a beverage into your chapel in 2024, then chances are that you need to be a little more open-minded and listen. This point speaks directly to the introductory quote regarding “alternatives today” and “what the alternatives will be in the future.”
- Keeping Score: Growing value means that there needs to be accountability. When children grow, parents often measure their heights year-over-year. When we go on a diet or begin working out, we step on a scale to see what our progress has been. So, what should you keep score on? While volume and market share are still important, long gone are the days when cremation was 30% and as long as the business did same/similar as last year (the “SALY” method), the business would be in good shape. The recommendation here is to exclude all the calls that direct disposers/low-cost providers take (they are not your competitors). Whenever possible, count how many calls a true competitor (one that more closely resembles your business) and compare them with how many calls your business does. Now, examine with the number of cases you serve on a given year against your topline Revenue (less Cash Advances) and your EBITDA. The easiest way to think about EBITDA and EBITDA Margin (percentage) is as follows:
- $1,051,800 Revenue (but you lowered your Direct Cremation price to $1,295 to keep 40 calls) on 300 calls, with a $31,554 EBITDA (EBITDA Margin of 3%). This means for every Revenue dollar your business brought in, you were able to capture $0.03 of EBITDA profit. You were lucky to make a profit, although you expended extra staff, time, and expenses on these Direct calls.
- $1,000,000 Revenue (but you did not lower your price to try and match) on 260 calls, with a $110,000 EBITDA (EBITDA Margin of 11%). This means for every Revenue dollar your business brought in, you were able to capture $0.11 of EBITDA profit. You made more profit while serving less cases because you served higher-quality cases and you did not have to spend the resources and costs on the 40 Direct cases above in a.
- Know Your Value: This time I am referring to the actual value of your business and not your values. I understand that many in the funeral profession entered the profession as a convocation or that not everyone sets out to be Charles Koch wealthy. And like how Keeping Score in the point above in order to know how you are keeping pace and holding yourself accountable to your values, vision, and culture, knowing the value of your business on an annual basis (and it changes from year to year) helps you stay dedicated and married to your goal of being in a value creation mindset, that is, if that is what you commit to. Besides, even if serving others is your undisputed calling, you might not be able to serve your community at the highest level if your business can’t at least stay profitable annually. While I would recommend retaining a firm to professionally perform a valuation, I will share some VERY general, high-level concepts:
- Businesses with typically higher EBITDA and EBITDA Margins, will likely be valued higher than those with lower EBITDA/Margins and most certainly against business struggling to stay EBITDA positive. This is true regardless of annual Revenue, but higher Revenue commands higher value generally.
- High EBITDA/Margins are a good thing obviously. However, growing EBITDA/Margins is a truer litmus test of value creation. For instance, over a five-year time frame, if you were able to grow EBITDA/Margin from 12% to 16%, then you are creating value (not to mention Goodwill value).
In my work travels, it makes me sad to drive certain major metropolitan markets to see that every funeral/cremation provider within a twelve- to fifteen-mile radius is $50 plus/minus of a $1,250 direct cremation price. What that tells me is that every competitor within that market radius abandoned his/her values, vision, and culture, and they all raced the first $1,295 low-cost provider to the bottom. Noticed I used a very active verb in “abandoned.” This scenario did not happen to them…it was what they chose (albeit consciously or not). None of them resisted the urge to compete for every single call, no matter the cost.
They focused almost solely on what the other was doing instead of focusing on their own business—its values, vision, and culture. They all either did not understand (or felt too much pressure) the financial fundamentals of funeral service and be able to “grit out” that there may be viable markets for both cremations with service and direct cremations. Perhaps, they did not listen to what their families, guests, or independent studies were telling them in terms of how they wanted to be served better or differently. May haps, in their efforts and attempts to hold onto as many calls as possible, that both Revenue and profitability waned. Regardless, these competitors are now commodity traders in a marketplace that has conditioned itself to low-cost alternatives everywhere…today and in the future.
And since the Holidays are just around the corner, I will punctuate with one last quote, and it comes from the Joker from the Dark Knight, “if you’re good at something, never do it for free.”