Build A Focused Firm with Hector Garcia, CPA

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Hector Garcia: [00:00:00] If you Google definition of business model, you'll say a company's plan for making a profit. I don't love it, but it does create a good start. A better definition for the business model is a framework on how a company will create value for its customers.

Blake Oliver: [00:00:21] If you'd like to earn CPE credit for listening to this episode, visit EarmarkCPE.com. Download the app, take a short quiz and get your CPE certificate. Continuing education has never been so easy. And now on to the episode. Hello, everyone, and welcome to Build a Focused Firm with Hector Garcia, CPA. I'm Blake Oliver, your moderator for today's episode. This is the second installment in an eight part series all about how to build an accounting or bookkeeping firm that gives you joy by focusing on what matters. Thank you to our sponsor Avira for their financial support to make this series possible. Avalara's Award winning tax automation solutions help accounting practitioners of all sizes from sole proprietors to top 100 firms. Avalara simplifies sales tax compliance with real time rates, automated returns, filing registrations, tax research, and automated tax solutions for specialized tax areas. They live and breathe tax so you don't have to. Learn more at Avalara.com/accountants. Thank you to everyone who has joined us as we record live. Please chat with us. With that out of the way, let's get to our topic today, which is business models. Hector, it's great to see you again. I'm excited to talk about accounting firm business models.

Hector Garcia: [00:01:44] Hey, Blake, How are you? So, yeah, definitely. We have to talk about business models. Second, after positioning episode one, which is all about positioning, which is the fundamental strategy on how you think about how you provide value to your customers, how you communicate that you're different than everyone else, and how you identify the type of customers that you work with. So really business model comes one in theory comes one step before the the positioning exercise. However, the reason why we teach positioning first and business models second is because positioning is the one that connects with accountants and accounting professionals quickest, because that's a very difficult thing to do when you're in a dinner party or in a networking event and somebody asks you, What did you do? And then you want to give a cohesive answer that basically says, What did you do? How you do it, why you do it, and who you do it for in a single sentence, in a single statement. Generally, I don't like to say I'm an accountant unless I'm purposely trying to shoot the person away. Right? So if you're trying to attract people, you want to you don't want people to say, Oh, he's just an accountant. She's just an accountant because people tend to make up their own stories in their mind about what an accountant is. So positioning allows you to reshape that story and be the author and and protagonist of that story of what is it that you do for a living? So that was positioning. So now let's talk about business models where we're going to basically take a step back and positioning it.

Hector Garcia: [00:03:32] It's part of it. We're going to skip the positioning piece during the business model conversation. We're going to talk about everything else that is that entails once your positioning is set in stone. So that's going to be part number two. And then make sure you you connect with us for part number three on technology, part number four on your sales process, part number five on value pricing, part number six on attracting and retaining talent. Part number seven on innovation and part eight, the end of the mini series on practice management. So let's jump right to it and we're going to talk about three essential topics. There's going to be three lessons you're going to walk out out of today's podcast. Lesson number one is the legacy of Peter Drucker. I think every small business owner, every accounting professional, every consultant, whether it's a technology consultant, management consultant, financial consultant, accounting consultant needs to understand the legacy of Peter Drucker. And once you learn it, you're going to go, Oh, yeah, that makes sense. He's kind of the godfather of modern business management, and there's a reason why he has that title. The second lesson you're going to walk out with is designing a business approach or designing a business model. So just think about that, designing a business approach or business model. And sometimes the two terms are mixed together. Business model. This is approach. This is how you attack business, how you go after business.

Hector Garcia: [00:05:08] So in the last lesson, it's going to be how we create value. So it can be the three underlying lessons we're going to learn today. So let's start with the legacy of Peter Drucker. So the first quote from Peter Drucker, which is going to set the tone for the entire talk today is the theory of the business is best defined as what the business will and will not do. The theory of the business is the term that Peter Drucker used to describe the business model, the term. Business model model didn't exist then. So these are the very beginnings of what fun fact business model, the concept. It's only about 30, 35 years old and it hasn't been until recently. And when we talk about the designing of the business model, it hasn't been until recently where it's sort of rethought and reimagined. And I think you're really going to like sort of how you go about designing your business model. The next thing that you want to talk that we want to discuss is the assumptions. And this is Peter Drucker's assumptions on the theory of the business. So you have a theory that you can do do something. Somebody will buy it from you and you will profit, Right? That's that's the theory of the business. Now, for that theory to come true, there are three assumptions that you need to have. One is that you know who your customers are. Assumption number one. Assumption number two, that, you know, what do those customers value? And assumption number three is can we deliver that value at an appropriate cost, obviously, under the price that we charge, Right.

Hector Garcia: [00:06:53] In order to be profitable or cost it to be under the price that we charge and our price needs to be under the value that we deliver and we'll discuss value and cost deeper in another session. But even though we may know all those three assumptions or all those three assumptions may ring true at any point in time, that is subject to change and it needs to be put to the test every year. And I say every year. There's no specific heart number in terms of the cadence of this. But since accounting professionals for the most part are very cyclical, at least once a year, you need to evaluate does your theory of your business, your business model. And all the assumptions still hold true. And if it doesn't, you need to yourself abandon it, reassess before your competitor proves your theory wrong. It's much better for you to disrupt yourself than for a competitor to disrupt you. What happened to the taxi industry? They never they never questioned their business model. So Uber came in, destroyed it. What's happening to that? To the hotel hospitality industry? They never questioned their business model. And then Airbnb and VRBO are proving them wrong. And this is going to happen across all industries. And I'm not just thinking about solving the problem with the accounting industry business model. I'm talking about your specific firm's business model, because within the accounting industry there can be multiple firms with different business models.

Hector Garcia: [00:08:33] And that's the stuff that we're going to just discuss in detail. Now, I'm going to give you a couple of essential business lessons from Peter Drucker that has shaped my thinking about business ownership and business management. Lesson number one. What identifies a business is its purpose. Everything else can be outsourced. What defines a business is its purpose. Everything else can be outsourced. Think about Uber. Uber essentially outsources the entire labor pool. Right. And their purpose is to help someone with technology get to 0.8 to point B in the quickest, most pleasant way as possible. Everything else is outsourced. So it's interesting that he said this 40, 50 years ago. Next one is the purpose of a business is to create a customer. Now. There's a subtle difference between the purpose of a business is to find customers, versus the purpose of a business is to create a customer. If your business is solely searching for customers to take from other businesses, you're competing against everybody else. And we talked about this as lesson one is only way to create the customer is for you to define the problem that no one else has defined. And the minute that you are the sole owner of that or the sole author of the understanding of that problem and the and the sole solver of that problem, you have created that customer out of thin air. Out of thin air. Uber is a perfect example. They created customers out of thin air.

Hector Garcia: [00:10:27] They did not go after the taxi industry's customers. They create customers out of thin air. And you want to know why? Because I am more likely to put my daughter, my 14 year old daughter in an Uber to take her to do an errand than to put her in a taxi. And they created a customer because she was never going to be a taxi driver as customer. So think about that. The purpose of the business is to create a customer, not to go find a customer. The second piece is actually a two part of the first one of the of the creative customer. Quote. The two most important functions of a business are marketing and innovation. Everything else is cost. So I know the accountants and financial people in this podcast are flipping out saying, Well, accountants are very important and finance people are very important. You know what? Accounting finance are cost. They don't create value. They may safeguard the value. They may protect the value. They may create insights on how the value is measured and potentially how it can be kept. And project its future value, all that sort of thing. But they don't create value. They don't find. They don't create customers. Marketing and innovation is the only one. And I'm telling you every year that I read this quote, it's mature and truer and truer. Next big lesson for Peter Drucker is in business. All profits come from risk. This is counterintuitive. Most accounting professionals are trying to avoid risk in the first place, and they're trying to become more profitable by not taking risks.

Hector Garcia: [00:12:11] That doesn't make any sense. That's how the stock market works, right? The riskier your your your willing to be, the more the profits could be, but also the bigger the loss, of course. But if you're sort of tired of the current profits that you're getting now and your business is very stable and hasn't changed and you've taken no risks, then you should not be surprised that the profits are not going to go up anymore because there's a direct correlation between risks and profits, also between risks and losses. That's true, but. You take the risk because you believe on that business model, you believe in that business approach. Next one is Culture Eats Strategy for Breakfast. Now that becomes truer and truer and truer when you have employees, when you have managers that work under you. If you are the firm owner and you've always been the manager and you have the privilege to no longer be the manager and give someone else that's not a firm owner the reins of the firm per se, so they can be managers. At that point it clicks. Without culture, your strategy is useless. Culture is how the humans inside of the organization behave. And culture is how your customers behave, too. If your culture is so good, they start behaving like you. When you go to Walt Disney World and I mentioned Walt Disney World a lot because sort of a gold standard when you. When you go to Walt Disney World, people dress up like the characters.

Hector Garcia: [00:13:51] People dance and sing the Disney songs. People pretend to be goofy and Mickey, etc., etc., because the corporate culture seeps through. The customers. And then once the customers start behaving the way your employees behave. That's when you know something great is happening. That's when you know your culture is greater and your strategy. But also maybe the culture was the strategy. Sometimes the culture is an accident, a happy accident from the strategy. Go back to the Uber example. The culture of Uber is five star drivers. That's what they want. They reward five star drivers. What's happening once their drivers start behaving like five star people? Customers do what? They start behaving like five star people. So as a business, you can reshape culture and I mean culture in general with a really, really strong corporate culture, stronger than strategy by far. Next one is knowledge is the source of wealth. And we're going to get deeper into this a little bit later on. Knowledge is a source of wealth. Next one is efficiency is doing the right sorry. Efficiency is doing things right. Effectiveness is doing the right things. There's nothing more useless that efficiently doing the wrong thing. There's nothing more useless that. Executing a strategy perfectly. But the strategy was wrong. The theory was wrong. So efficiency is doing things right. Effectiveness is doing the right things. I no longer think of efficiency. I only think of effectiveness. And the best way to predict the future is to create it. One of my favorite ones.

Blake Oliver: [00:15:55] Hey, Hector, we had a question come in from Donna. She wanted to know which Peter Drucker book you would recommend as a good starting point.

Hector Garcia: [00:16:04] Oh, wow. Great question, Donna. So the way I got introduced to Peter Drucker is a book called The Daily Drucker, and it's 366 pages. And it's every page is one bite sized. Drucker lesson. So if you want to do this low and slow immersion into. Drucker within a year, I would say the daily Drucker. Great book. Another one that is probably really, really good for folks that don't have big teams yet is managing oneself. So Peter Drucker wrote for years about management. His whole thing was management. And management comes from the word for man, which means people. So management means managing people, right? Handling people. One of the books that I think is probably one of the best sellers is that one that wasn't about managing people, was about treating yourself as an entire team, and that was called managing oneself a place. That's my favorite.

Blake Oliver: [00:17:05] And I have a question, Hector. I love this statement that marketing and innovation are the two main functions of a business. Because I've worked as a product marketer and as a head of marketing. But I feel like in accounting firms, marketing is more of an afterthought. But Peter Drucker is actually saying, no, it's like a core. What was it exactly? It's it's like the two main functions. It's one of the two. Like, how do you reconcile innovation? Yeah. How do you reconcile marketing?

Hector Garcia: [00:17:39] So this is the this is the problem that we have. And many of and I think many accounting professionals would recognize this, which is. Currently the state of the accounting profession is there are more customers than accountants, there's more demand than supply. So right now we're both blessed and curse with that circumstance. We are blessed because most accounting professionals have to be really, really negligent not to have a whole bunch of customers waiting at the door to work with them because they're just there's a big scarcity of accountants in general, at least good ones in any way. So that's the blessing. The curse is we get too comfortable, we're getting too comfortable. And if you're an accounting professional that has a clients, you know that you have clients are profitable that always have positive cashflow and you send them reports and they don't care about it because they're not hurting because they have money in the bank, because they can meet all their obligations. So nothing that you do as an accountant, it's ever urgent for them because they're sort of blessed and curse with positive cashflow. I think this is happening to us too. I think the problem is, is that for so long we're sort of been accustomed to just very easily being able to hang our shingle and customers will just walk in that we don't think marketing is that important, but marketing right now is not going to be for you to get clients over the next firm.

Hector Garcia: [00:19:16] Marketing is going to be for you to get clients over there, software companies that are going to take over our customer base. So the way I reconcile it is the software companies are going to take our business with their innovation. And since we can't innovate as fast as they can, at least from a technology perspective, from a software AI perspective where we can innovate better than software companies, it's on the marketing piece because marketing is a human side of of creating value or innovation is sort of and it's debatable too. But innovation, for the most part, is the technological part of creating value. But in between innovation and marketing, there's innovation of the mind, right? Which is reframing, right? You can innovate simply by re explaining what you do in a way that it connects with the customer better. That's reframing. And we only do that through relationship building and communication. So I would say a subset of that marketing and innovation. It's also relationship and communication. If you can nail relationship and communication, you can leverage that to market and reframe and contrast some of that. Software companies are out innovating at least our fingers when it comes to data and automation. So that answer your question. Yeah.

Blake Oliver: [00:20:41] That makes sense.

Hector Garcia: [00:20:42] Okay. So let's talk now. Let's talk about designing the business approach or the business model. So the definition of a business approach or a business model is a company's plan for making a profit. And I'm using the word approach and model the same way, because it has to do with how you're thinking of approaching or attacking that problem as a business. So according to Investopedia, the definition is a company's plan for making profit. I actually don't like the definition. If you Google definition of business model, you'll say a company's plan for making a profit. I don't love it, but it does create a good start. A better definition for the business model is a framework on how a company will create value for its customers. Now, I'm gonna give you another Peter Drucker quote Profit is not the purpose of a business. Rather, the test of its validity. Profits are actually the cost of staying in business. Profits are the costs of staying in business. Wait, how are profits costs? Without profits, you can't stay in business, period. We all know that. But without profits. So we can reinvest in marketing and education, we're going to get out innovated by someone else. So it's not just the operating profits, it's profits to reinvest back into marketing and innovation. So profit is not the purpose of a business, rather is the test of its validity, and the profits are the cost of staying in business.

Hector Garcia: [00:22:25] I love that quote from Peter Drucker as well. So what's the difference between a business plan and a business model or a business approach and a business plan? A business model is the theory of the business as designed. We will design it right, because we can have a theory, but then we design how we approach the business model. A business plan is the roadmap for execution of the theory court. Lewin has his famous quote that says, There's nothing more practical than a good theory. I love that one. Right? So you can go into business willy nilly without a plan, without a business model, and it could work. And many people do it. But long term, for this to work, you've got to have a good theory. You've got to have a good idea because executing a bad idea flawlessly, it's useless. But what is the best definition of a business model in my mind? And this is sort of my own is the process of capturing a portion of the value we create for our customers. The process of capturing a portion of the value we create for for our customers. That's my favorite one. It's my own definition of it for obvious reasons in my favorite one. But I think that one really encompasses what we're trying to communicate here. Now there is an operating and accounting implication in the business model, sort of the underlying problem per se, at least the immediate thing that the customer.

Hector Garcia: [00:24:08] Feels when you're interacting with them and executing your business model. And that operating and accounting implication is time and money. What I mean by time money is the main implication of the business model is when does the customer pay and where they get their value. How you design your business model affects these two things. When does the customer pay? When do they get the value? Because if your business only got paid after delivering value. Then most customers would never say no to that. Think about that. Think about that. And I think restaurants have sort of pushed this narrative that you walk in, you pay nothing, you eat. And most people are confident that if they tell the chef this food is bad, they don't have to pay. It doesn't work always like that. People don't always try to sort of execute that that theory. But in restaurants usually pay after you get the value. But in all other business, it doesn't work like that. So that's the main implication of your business model, How you how you design that business model basically affects the timing and the money. When does a customer pay? When did they get their value? So you want to think about asking yourself that question after you're done designing your business model. Is this piece clear? Is it clear to me? Is it clear to the customer? And does the cash flow involvement of all the cost elements that you have to invest in in order to deliver that product or service? Does it work timing wise? Now they're essentially for service industry for ways to capture that value, a.k.a.

Hector Garcia: [00:25:56] your pricing strategy. So for service industries, there's four main ones. There could be more, but right now there's four main ones. One is capturing value based on units of effort. Best example for that is charging by the hour. Another approach to capturing value could be based on deliverables. Best way to describe that is a productized service. I think like an H&R BLOCK. It's a good example where you go to H&R BLOCK and they look at all the tax forms that you need and at the end you're going to need the 1040 with this six schedules. And every schedule has a price. And basically you pay based on the output. That is an approach based on deliverables. H&r BLOCK is not too much concern. I'm talking about I'm talking about retail tax shops, not to pick an H&R BLOCK, any retail tax shop. They're not concerned about tax planning or you're saving in tax or is your corporate structure the most optimal one? Are you saving enough for retirement? None of that stuff is coming into play. You know, how many forms, how many sheets of paper that we print out on your tax return? Based on that, you're going to pay a fee.

Hector Garcia: [00:27:08] The third way to capture a value pricing strategy is as a percentage of the value created. Best known as value pricing. My favorite. We will have a whole session on that. And the fourth one is buy Access to our Capabilities, which is the subscription approach or the subscription model. Best example for this is Netflix. Netflix is in the business of access to the capabilities, the capabilities being their entire library. Disney Plus same thing, the capability being the entire library. You subscribe for access to it. Now, underneath these four approaches of capturing value, there's this concept of the sub approach or the sub model, which is how your business does that Like this is we know the mechanism of how we charge, but now we want to know the mechanism of how we can actually be in the position to charge. And there's essentially five ways or five sub approaches to that. And this is based on how you organize your business or how your business is organized sometimes kind of interchangeably. So one is, is your business a source of labor? Is your business a source of labor? So, for example, if you work with any sort of outsourced data entry, people overseas, they don't really provide much advisory or judgment or decision making. You basically tell them, this is what I need you to do, and they do it right, kind of like a virtual assistant.

Hector Garcia: [00:28:57] They are a source of labor and that's a business model, and that could work. I know the business model, sub model is, are you the source of knowledge? So are you getting paid for just having the knowledge or experience? So a business consultant would be a source of knowledge, a tax expert. It's sort of a mixture between source of knowledge and source of labor, although as Peter Drucker says, everything else could be outsourced. Right? So the purpose of your business is being the source of knowledge. Everything else can be outsourced, because at the end of the day, if you know what laws apply to that particular complex tax return, you can have somebody else do the data entry all day long. What you can't outsource is being the source of knowledge. The third sub approach is are you the source of customers? So, for example, we're talking about Uber earlier. Uber is not the source of labor. They have no employees. I mean, they had him in the sort of in the. Admin mean? Up in the admin capacity, but the actual drivers, they're not employees of Uber. They're all subcontractors. They're not Uber. It's not a source of labor. Uber is a source of customers. Uber figured out how to get everyone on Earth or 60% of people to have the Uber app in their phone.

Hector Garcia: [00:30:21] So what it did is they penetrated the hearts and minds of customers. So they're using the app to then get the right, and then they work with a different business, with a different business model, which is a source of labor. Now, the source of knowledge could also be something you can apply to Uber, because Uber now has the working knowledge of all the customers that want to ride and all the drivers nearby and the traffic, the current state of traffic plus the distance and time it takes to get from point A to point B. So now Uber is both the source of customers and the source of knowledge. The fourth sub model or sub approach is the source of money. Banks are the source of money. That's their business model is to have money to lend, to multiply, to invest. And the fifth sub approach is the source of infrastructure. So this is when you have a building and you rent, you have equipment and you rent OC. Some businesses are all five of these in the accounting profession. Most of us are either the source of labor or the source of knowledge. But in my business model, talk about Hector Garcia. I'm actually also the source of customers because people watch my videos, they contact me via email, they ask for help. I don't do what they want me to do.

Hector Garcia: [00:31:49] I refer out to another expert. The other expert, sometimes, depending on the situation, can pay me a commission for bringing them that customer. That is when the source of customers could be your sub approach an influencer. It's a good example. Influencers don't really create any value other than finding the cost or bringing the customers to the brands so they can think about that. Are you the source of labor? Are you the source of knowledge? Are you the source of customers? Are you the source of money? Are you the source of infrastructure or your combination of all of five? Do you want to be a combination of one or two or three of these five? Think about that deeply, because most people don't think about this piece. So also, labor is your human capital source of knowledge Is your intellectual capital source of customers? Is your social capital source of money? Is your financial capital and source of infrastructure? Is your manufactured capital now behind? So we had talked about the business model, then we talked about the sub model, and then we're going to take a one layer even deeper, which is how do we approach customer creation and acquisition. So this is the practical, this is the tactical. So we talked about strategy and let's talk about tactical. What does this look like at the end of the day? So we have the list building approach.

Hector Garcia: [00:33:20] So as I mentioned earlier, an influence marketer, that's what they do. They build lists, they build followers. Sometimes list builders. Their customers are actually the product, like the actual customers are the product, the influencer, the list builder. It's just building a list of customers who are going to be customers of someone else. And your job is just to broker access to that list. So you created some value in some way, whether it's through social media, through YouTube, through giving access to knowledge, helping people, reputation, whatever you you build this list of people that trust you and then you use your monetize that trust by sending those people to the brand or the business that actually sells to them. That's an interesting one too. As a YouTuber, my followers in YouTube are both my customers because they could potentially buy my services, but they're also my list that I sell to brands that want to approach them. The second approach to a customer creation and acquisition is direct sales. This is the door to door, right the door to door, multi-level marketing, door to door. Just shake hands, talk to people, try to figure out if you can find a customer simply by just speaking to as many people as possible. The third approach to customer creation and acquisition is a membership approach. So could you give someone low access to your knowledge? Can you give someone low cost access to your people? Can you give someone low cost access to your infrastructure, for example? So I think Costco is a great example.

Hector Garcia: [00:35:09] They give you a very low cost access to the infrastructure, and the infrastructure gives you a plethora of products that are better priced retail wise versus a regular supermarket or a regular store. And in many cases there's exclusivity. Because you're a member of Costco, you can get access to products and services. Others can't. So as the membership approach and again, you want to think about that. Where is my firm? You want to think about. Where's my firm now? Where do I want it to be? Does it fit into any of this? Is it congruent to what I want? Another one is the freemium approach, where you have always a free version to get the foot in the door. And then it could be easily upgradable to a paid version. So I think earmark media, the app, the wonderful app you used to get KPIs. It's a freemium model, right? So most people can get most sleep. Most courses that are available for free and get their CPE, but they pay a little bit extra per year and they have access to other courses, deeper, more advanced courses, that sort of thing. The freemium model. The next one is the free consultation approach. And I think most of this sort of small business accounts are in this one, which is case by case transaction underwriting, which is exhausting, by the way, which is customer calls.

Hector Garcia: [00:36:47] I need something. You're like, okay, let me listen to your problem. And then based on you sort of in your head, solving the problem and picturing what a solution looks like at that point, you decide, okay, we can work with you. Here's the price. Maybe you're charging by the hour. Maybe you're charging based on value. So how you charge, whether it's by the hour, by the by the product, by the subscription, doesn't matter how you price. How you get your customer in the door, Your approach, your customer creation was a free consultation in the first place. I started like that. How most people start like that. And the last one, my favorite is the expertise approach. This is where all the interactions are valuable. Like a customer saying hi to me. My response to them. It's already valuable from word one. That's the expertise approach. Most attorneys do this. Most doctors do this. I've never been to a doctor where the consultation is free, or at least not in my world anyway. You know, consultations are paid. Doctors are not going to like even a diagnostic is paid. So I believe that the expertise approach should be the one. Most people, especially when they have experience, they should look up.

Blake Oliver: [00:38:09] So, Hector. Question about your previous slide there. First, let's take a break and hear a message from our sponsor, Ava Lara. Thank you to Ava Lara for providing the financial support to make this series possible. Did you know that 52% of accounting practitioners from small to large still rely on spreadsheets and manual processes for sales tax compliance? It's time to stop and focus on automation. The average for accountant suite empowers even the smallest practitioner to support clients tax compliance needs. All firms can benefit from their referral program. Simply refer clients to avira and let them assist on your behalf. For practices that offer direct compliance services, you can use Avira for Accountants award winning tools to help you start or grow a tax compliance or CAS service expressly designed for accounting service providers with multiple clients. Solutions include real time rates, automated returns, filing registrations, tax research and automated tax solutions for specialized tax areas. Partner with Avalara and grow your practice with efficient and accurate sales tax compliance while reducing risks for you and your clients. To learn more, contact Avalara at Accountants at Avaliacao. Just send them an email accountants at avaliacao or you can visit them at avaliacao. Smart accountants. Talking about the membership approach, the freemium approach. What would that look like in an accounting firm? Either one of those.

Hector Garcia: [00:39:52] That is such a good question. Like, and the reason why it's such a good question for me is because I personally been on this journey where one of my personal commitments for next year is to turn my firm into a membership based.

Blake Oliver: [00:40:08] Membership business model.

Hector Garcia: [00:40:09] Membership. Membership. I have been in a freemium model for a very long time, which is I create content in YouTube. I give away my email. I let everybody get some taste of my expertise for free, either through a video and by allowing them to email me. Sometimes I answer the email myself. Sometimes the answer to the email is you need a paid consultation. That could happen. But many times there's. You know what? I think I understand your problem. Check out this video. Check out this article. So I've been in this freemium version freemium approach for a very long time. Once I was at capacity where I couldn't really answer every single email, I switched to expertise approach where, Hey, listen, just for me to listen to your problem, you got to pay and erupts some people the wrong way. But then it started filtering people out and then only people that are willing to pay at least $1,000 pick your number. Doesn't matter are the ones that can even ask me a question. So as expertise approach. But between that freemium approach and that expertise approach, it's just such a big gap where I'm trying to figure out how to transform to the membership approach. And what I'm thinking I'm thinking about is how do I turn my firm into Costco, Right? I don't know if you're a Costco member, Blake, but when you walk into Costco. That feeling is just different. It's different than any other store, like walking into a target, working, which it could be equal quality, walking into a high end supermarket, Whole Foods walking into Costco is a different it's a different feeling. I could be biased because the very first store I came to when I came to America was Costco. And it just the impact of a Costco to a 12 year old, it's just really big.

Hector Garcia: [00:42:04] And Costco has a really special place in in my heart. But what I'm thinking is what if you become a member of my firm and as a member, then you get the freemium. So so the freemium, it's only available to members. So you're a member. If you want to find out if we can help you with something, we will do the free consultation, but only to members. Does that make sense? So it's taking the free consultation approach and the freemium and only giving that to members and telling someone, Hey, do you want cohesive answers to your question? That might not be the solution, by the way. So as a small business owner, my question might be should I amend my tax return? Right. That could be just a question that's bothering you. You don't know the answer. Should I be answering? Should I be even thinking about this? And most accountants don't want to deal with answering that because it's difficult to say yes or no because you have to listen to a whole slew of facts, facts and circumstances to know whether or not that's even something to think about. So if you paid a membership, you could ask all these silly questions, and I don't mean to call them silly, but anything that comes to mind is, should I be thinking about this? So that's I think that's where I want to take my firm. So I'm teaching the things that I'm learning that I also want to implement. And you don't have to be all of these or some of these. You just got to pick the one that makes the most sense. That's why I'm teaching them all. So you can pick the one that makes sense with you.

Blake Oliver: [00:43:42] That's that's great. I've seen yeah, I've heard about farm owners who are, you know, creating. It could be as simple as like a microsoft teams or a Slack. Or you could get some more complex social, private, social media for your firm. And then you charge a membership fee to to have access to that to clients. And then that's where you post your videos and that's where you post your answers to questions. And people who pay that membership fee can then ask questions in the forum, Right? Right. Which is private. And and then it's it's just it's a way for you to do one to many instead of having to answer these questions one on one on one on one over and over again.

Hector Garcia: [00:44:24] Absolutely. Absolutely. And just think about it. Let's say you're a tax practitioner and you have 500 clients or 200 clients. Right? The reality is the time that your clients will give you individually to actually learn from you and the time that you have to give individually time for them to learn from you, it's going to be limited. There'll be a point in time where there's only so much you can do for them. But if all your customers paid a membership of sorts and they have skin in the game, so they feel like, Hey, if I don't use it, it's you know what? Have it, right? Right. So just like Costco, like I think one of the reasons I end up going to Costco is because I pay for the membership. So so because it's a lot farther away from my house than a local supermarket. So if somebody had skin in the game and they were paying a membership, I think they're going to want to use it and and encourage people to have access, you know, one to many approach to teach everybody about retirement plans, everybody about prepaying taxes quarterly, everybody about some other new tax law or clean energy credits, R&D credits or whatever that maybe it applies to them, but going through customer by customer individually, underwriting it individually to figure out whether it applies to them or not, it's just not feasible. So being able to have a megaphone and talk to every customer at the same time and the customers pick and choose what stuff attraction, that could be a really powerful way to just create more value in a in scale.

Blake Oliver: [00:46:02] Makes sense.

Hector Garcia: [00:46:05] Next important lesson here is a business model is not chosen. It's designed A business model is not chosen. It's designed. So if you're going to take a take away from everything we're teaching here is Well, Hector says I have to pick one. No, I'm giving you the entire framework and you customize it to work for you. And you can pivot or change your business model at any time now. Your customer, you're going to drive your customers crazy. If you're going to say, Hey, this year, you're going to pay monthly, next year you're going to pay by the hour. Next you're going to pay. They're going to go nuts. So obviously, customers are not going to be too happy about you changing your business model. But if you change your business model for the new set of customers and can somehow sustain the old customers at the old model while you transition or test, if the new approach is better, that could work too. So people transitioning from hourly to value, I recommend that you value price all the new customers and then little by little transition the hourly to value or going from value to subscription or hourly to subscription. Whatever business model shift, you're going to make a change of approach. You can design it for your next set of customers because you change your firm, you transform your firm. One new customer at the time very difficult to do it with old customers. The older the customer gets, the harder it is to get them to buy into a different approach.

Hector Garcia: [00:47:38] So, Blake, my favorite way to approach business model, it's called the Business Model Canvas. So just go to Google and type strategies. So like strategy, these are strategies and or type business model canvas. So don't, don't say business approach canvas just because the approach is sort of a term that I'm using to differentiate like the sort of old school thought process of a business model versus a business approach. But you want to search business model canvas by strategize. I was really cool about it is you're going to get this eight and a half by 11 sheet. It's a PDF. You can you can print it on a single sheet of paper. You can print it in a humongous poster board, and it's a visual way to design your business model, and it's broken down into nine quadrants. Key partners, key activities, key resources, your value propositions, customer relationships, your channels, customer segments, cost structure and revenue stream. And we actually need a podcast for maybe 2 hours to go through this entire model. I studied the entire model. There's a book called Business Model Design that completely goes through this process. I strongly recommend it. It's one of my favorite ways to think about business model design. So one of the ways to to, to break down those nine that I mentioned earlier is three groups feasibility, desirability and viability. So the feasibility of a business is so the feasibility of a business essentially is your key partners, your key activities and key resources.

Hector Garcia: [00:49:38] So do you have the infrastructure to deliver partners activities, resources. Resources could be an employee, resources could be a skill. Activities is your capacity to do it. Partners is if you're a bookkeeping practice your partner with CPA, CPA, send your business. It's kind of an idea, but there's all sorts of partnerships. For example, I'm a I'm an educator as well as an accountant, and I partner with Blake to deliver education. Without Blake and earmarked media and The Cloud Accounting Podcast, this podcast series wouldn't exist without this partnership. I am less effective at my purpose to educate people in accounting and bookkeeping. So feasibility. Key partners. Key approach. Key resources. Desirability. Value proposition. Customer relationships, channels and customer segments. So do customers want this in the first place? And then we have viability, which is basically your cost structure and your revenue stream. So feasibility, desirability and viability, is it even worth doing? So can there be more income than costs? So think about looking into that business model canvas. And probably the best way to design a business model like the exercise of the business model canvas is truly transformational. So those are the first two lessons that we talked about, the legacy of Peter Drucker. We talked about the business model canvas. And I'm going to leave you with my favorite one, which is what are the opportunities to create value? Think about every interaction with your customers or before their customers, your leads of your prospects, your future customers, and then the customers that you don't serve anymore.

Hector Garcia: [00:51:34] Think about every interaction with them as an opportunity to create or destroy value. There's my own personal theory, by the way. So should haven't heard this before. I think you're going to like it. I believe there's nine key opportunities to create value. We have doing the the pre purchase stage, the pre purchase stage. There's three opportunities. One is called positioning value. The other one's called availability value. And the third one is pricing value. We're going to break down each one during the purchase and delivery stage of the transaction cycle. There's three opportunities to create value understanding, value, performance, value and results of value. So we got six and in the last stage, which is Post-delivery, there's three types of value membership, value, tail value and transformation value. Let's break them down during the pre purchase stage so before the customer makes the decision of hiring you. So before the customer makes a decision to hire you, they think about these three essential things that come to mind about how your firm can create value. So those three things are positioning. What do you promise to do? We talked about positioning in an entire episode. What do you promise to do? The customer is asking. What are they promising to do for me? That's your position, is that one question? If that question can be answered, then you create a value.

Hector Garcia: [00:53:11] Second one is availability. When can you do it? There's value on being able to do it now versus not being able to do it now. And then pricing how much your cost. These three elements positioning, availability and pricing create value during the pre-purchase stage. But how do we how do we actually create value in these three things? But with positioning, we talked about this. You're going to have a brand promise. So when you go to a store and you buy some audio equipment, Right. You know that. And I'm not endorsing Bose, but most people know Bose is probably going to be high quality. And you know what price follows. And if you went into a store wanting to buy a Bose because you love the brand and the salesperson convinces you to go with a different brand, because audio quality is very subjective. Many people and I used to work for Best Buy a long time ago, and I experimented with this. In the real world, many people come back and return it. They're like, It didn't sound like a Bose, even if it sounded better, even if technically and objectively and measurably, it sounded better because most audio files will tell you Bose sounds horrible, but customers love the way Bose sounds, so the brand promise creates value before they even buy. Second one is reputation for accounting professionals.

Hector Garcia: [00:54:39] This is your reviews. This is customer recommendations. Do you have a reputation of being accurate, of being responsive, of being valuable, of fulfilling your promise? Another way to create value in positioning is your horizontal value. This is a unique skill. We discuss that in podcast number one recommend. Go back and listen to that if you forgot about horizontal specialization. The next one is Vertical Focus. Do you focus on a particular type of client? Clients like when they see you as a person that's been there. Done that. Been there. Done. That is one of the single most important value drivers in this profession. Because especially small business owners that go through many bookkeepers and they complain about how many bookkeepers they go through, it's because all of them are generalists and they have not been there, done that, and they been in a similar place, done similar work, but they have not been there, done that. Customers want you to have been there and done that because that's precise and that means I get what I pay for. That means I get what I wanted. Another way to create positioning value is through authoritative content. So if a customer of mine, a small business owner, not an accountant, happens to listen to this entire podcast series, I don't think that the first thought is that guy doesn't know anything about business. I think it's quite the opposite. So when you create authoritative content, people trust you. That's part of your positioning as your expertise.

Hector Garcia: [00:56:24] Next one is availability. So let's break down availability. So path of access. So let's say, for example, you need a really good. Type of doctor, A specialist. Could you pick up the phone and talk to the specialist to find out if they can? Cure you or deal with your situation. Probably not. And there's value in the restrictive path of access, because a restricted path of access spells that for you to get there, you've got to work for it. And you also need to talk to level one specialist, level two, specialist level three, like you scale and you earn your way through that. A person has little faith about or has a difficult path about. Sorry, difficult path of access. Now the opposite is true. Also, being really available, being abundant, available could be valuable because sometimes it's a matter of timing, sometimes a well customer. Awesome, perfect customer. That's I pay you a lot of money, could land in your lap and if you answer the phone, you got him. But also is that even sustainable long term? The answer is no, not really. So you've got to think about whether or not you want to create value through abundance, through availability, through easy paradoxes, or through scarcity. Difficult path of access. Either one can create or destroy value depending on how your business is structured and how it is positioned. So if you were a 32 year old, 32 year old, fresh of college surgeon.

Hector Garcia: [00:58:14] For you to have a difficult path of access doesn't jive with what the customers expectations are. If you have operated on this thing for 30 years, then they expect. A difficult path of access. So availability can create or destroy value contextually response time can create. Value. Also, sometimes responding too quick could give the signal that you're not busy enough. Right. So again, it's sort of a psychological game because value is subjective. So truly psychological location or proximity. So being close to the customer obviously helps. By the way, sometimes it helps being far away from the customer. So a lot of the a lot of my best customers are really far from me. Like geographically, they're in California, Hawaii or Alaska. And it's this thought that they had to go all the way across the country to find a specialist. Makes him feel that I'm more valuable. So again, it's interesting. It's it's all psychological. All subjective. Location or proximity could either create or. Or destroy or destroy value. And again, it needs to be cohesive to your strategy. Now your platform or technology. So if you're an accountant that only works in QuickBooks Online or only works in Xero, only works in QuickBooks desktop, or only communicates via email or only communicates via WhatsApp or Slack. The platform is how you're available to them that can create or destroy value. Isa communications customers value extremely being able to understand what you're saying.

Hector Garcia: [00:59:59] Or making it easy to communicate with you, whether it's a phone call or email, it doesn't matter. They need to feel that it's easy. And also your pre sales process, how you handle from a random person calling your office a lead, how you handle that entire process until you literally call them to find out what can we do for you. So they leave your contact information on the website. What does that entire process looks like through the first interaction? That's a piece that can create or destroy value and pricing value. All of this pre sales process, pricing value, we're going to discuss pricing in detail in another session is do you have pricing integrity? So do you give discounts? Do you not give discounts? In my opinion, not giving discounts is the best way to go about it. Discounts should always be tied to reduction of scope. Again, we're going to have a whole podcast on that, your pricing structure. So how do you price, how how much down payment you require the you the timing of the payment pay now pay later your price point, not the specific price but the price point. So you can be a value price firm, but you can also be you can also be perceived as a high price point. That means higher than the rest of the competitors or a low price very aggressively price because you're acquiring new customers. So even though you're going to price the price based on value and there's not a commodity per se that's being measured for price, the price point itself could be a value creator or destroyer.

Hector Garcia: [01:01:40] Do you give pricing options or choices that creates value? We'll discuss that on the pricing podcast. And are there discounts based on timing? So I'm not discounting to gain the customer and discounting to reward the customer for paying quicker. That's fine. That creates value. Is there easy upgrade or downgrade? So they but something they engage in to something can easily move up and move down that creates tons of value. This is why the subscription model is so popular, because you hop in, you go up, you go down, you hop off. So if it's easy to upgrade and downgrade, that creates value, especially on the pricing side and a free option. We talked about the freemium. I believe every firm should have a free version of what they do. Could it be YouTube videos? Could it be a library of content? Could it be an e-book? Could it be an actual book, physical printed book? But you always want to take away the most valuable piece, which is your one on one consultative work and say, That's fine, you can't afford us. Now here's a freebie, because that freebie, that freebie creates value. Because the customer goes. I couldn't work with them, but I took something with I took something with me and that stays with them. And that's a constant reminder that when they're ready to pay you.

Hector Garcia: [01:03:12] You're going to be there for them. Next one is that middle stage, the purchase and delivery stage. So we talked about these three opportunities to create value, which is an understanding value basically are the main pain points being addressed. That's the only question the customer is going to is going to have in their mind is are they actually addressing my pain points? Are they understanding them? Are they asking the right questions in the Sales Process podcast? We're going to talk about all sort of specific questions we ask in order to make the customer feel we're addressing the pain points. Next one is performance value. How does it feel to work with you if you've been to a play which they call a performance? Usually the way you feel in a play or in a concert is completely a personal, spiritual feeling. It's a subjective feeling. So how does it feel to work with you? There's a performance value that can destroy or create value and then result value where the problems actually solved. So did the service actually attack and solve the problem, Not the underlying issue per se. We're talking about putting out the fire because the underlying issue is a transformation different than problem resolution. Problem resolution is putting out the fire. Where transformation is fundamentally changing the way your customer operates personally or as a business, to not have that problem come up again. So understanding value could be the scope of work, so that you scope correctly, that your scope explain correctly, that you summarize the problem correctly.

Hector Garcia: [01:05:00] Did you do a needs assessment? I do this always through paid consultations. Did you have the value conversation which was discussed in the pricing pricing episode? Are you prioritizing expensive problems? That's a really important one. Are you actually laying out all the problems? Because the sometimes the customer gives you a problem and then it has layers and there's problems, solve problems and site problems and sidequests. So which is the actual expensive problem? Can you prioritize? The performance value is very, very simple. What did your customer experience through every touchpoint? What technology did you use? How did you respond to feedback? Can they give feedback? Did they get a response to their questions? What's the response time is a pleasant was the pleasantness of working with you and your firm and your technology. Are you flexible? You tell the customer you have to use the portal period and that customer, for whatever reason, the technology doesn't let them use your portal or it's just it's just a quirky thing for them that's not flexible. That's like a destroy performance value. So are you being flexible where, Yes, you want to be efficient, Right. But. To give the customer a positive experience is to be effective. So to harp on you have to use the portal, have to use the portal where for the customer. It's not a positive experience.

Hector Garcia: [01:06:31] Yes, I understand you're trying to be efficient, but you're not being effective. Are there educational or entertaining experiences? So during the process, working with you? Do they feel they're learning something new? Do they feel entertained? I don't mean haha entertained. I mean like cool entertain. Because when you work with a provider that's efficient and uses great tech. You're entertained by just in Marvel how great they work. I love, for example, the see through car car wash. When I was a kid, my my dad used to take me through the see through car wash where you either step out of the car and there's a huge windows and you see the car going through the conveyer belt per se. You see the whole process of the machines cleaning the car or the human beings cleaning the car or when you're inside like a gas station carwash where you actually seeing the soap coming in all through the window, almost like a like a Disney. Right. Right. That's an entertaining experience doing a what seems like a mundane thing such as washing the car or educational experience like is a customer does the customer feel they're learning new things while they're working with you? And also, you want to think about the visible versus invisible outputs, as a matter of fact. You know, we don't have time to go deep into this. But when you when you productize a service, you want to think about what are the things that we do that the customer can see versus the ones that they can't see.

Hector Garcia: [01:08:08] And sometimes you design some to be visible and some not to be. I'll give you a classic example. A customer sends you an email about some issue with a tax return. If you want to make the entire experience invisible, you can email back saying, We address, we're addressing your issue. I let you know when it's done and you communicate six emails, six six like conversations back and forth with your internal employees. You figure out the problem and you come back. You bring it to visible again and to the customer. We found the error. We fix it. Here we go. But that could be by design. What you can do is you can go back and forth with your employee CC, the customer the whole time, and they're watching this conversation go. And this conversation could both create or destroy value. In some cases, customers love to see you thinking through the problem. They value that and in some cases they hate being copied on something that doesn't have an actual action. Sometimes by hiding it and taking a week to respond. It doesn't give you any illusion of progress. Even though there's progress, there's no illusion of it. So sometimes bringing certain outputs or tasks visible to the surface creates an illusion of progress and makes the customer feel that they're part of the process, that we have results value.

Hector Garcia: [01:09:35] So the economic value of the work, like if I save somebody's taxes through tax planning, there's real economic, tangible, measurable money value tied to the work. The emotional and spiritual value of the work. Giving somebody a peace of mind is emotional or spiritual value, Making somebody feel that if they audit it, that return is ironclad, emotional, spiritual value. Are you guaranteeing a result? Are you, quote, de-risking the purchase? Are you transferring the risk of the unknown result to your firm? And if you do that, customers see feel the value of the results because no longer they're worried about is this investment going to deliver the return that I'm looking for, the results and the quality of the work, again, their subjective and objective elements to this. As a firm, you should explain to your clients how you measure quality of work from the firms. So objectiveness that should become your customers objectiveness. And then you should ask your customer, Mr. Customer, how do you. Evaluate quality of work. What is your objectiveness? So I can understand my objectiveness. So my objectiveness is your subjectivist and. And vice versa. And if both parties are not setting expectations to what is their subjective quality of work, you will never connect. And the results value will not be there. And the last one is during the post-delivery stage, the three opportunities to create value and actually trigger a recommendation trigger repeat business trigger word of mouth are one membership value.

Hector Garcia: [01:11:38] The customer will ask themselves, Am I a lifetime customer or was I a transaction? So like, what club do they belong to after transacting with you? Just once. Example, how many of you think that being a member of Mar a Lago. Right. President Trump's property. The value is strictly on the physical building and the amenities of the building. Now that part of the value is a membership of feeling you can be around and express it. Make sure. Forget about the politics. Just think about that concept. Like if you are a famous YouTuber, or at least some people tell me, tell me that. People like to work with me and like to say, You know how my accountant is the YouTuber and there's value just feeling like you're part of this special club. Are you creating that feeling for your customers? Are you creating membership value? Then we have value, which is how good is your warranty? Like if you guarantee something, how good is it? Like, does it have tail? Right. So how long after you the work the the work is guaranteed. And last one transformation. This is not just solving the problem. Are you solving the underlying issue to make sure the problem doesn't happen again? So the customer is going to ask, Am I in a better place now? Versus before. After working with you. So that's the third lesson of this three part. Lesson, which is how we create value. Like, I let you help me with the ending here.

Blake Oliver: [01:13:31] We will be back here live on YouTube on Friday at 11:30 a.m. Pacific 2:30 p.m. Eastern. Subscribe to the earmark channel to get notified when we go live. And if you want to get CPE, be sure to download the earmark CPE app. We will follow up with an email next week with a link to the course. Log in to the app, Take the quick five question quiz and get your CPE certificate emailed to you.