THE ART OF VALUE CREATION

BUT FIRST WHAT’S VALUE?

Value is one of the most misunderstood notions in marketing. Yet, it’s arguably the most important one. A business that doesn’t understand how to create, communicate and capture value is doomed.?

What makes value a difficult concept to grasp is that we naturally have a self-centered view of most things. As a result, we usually think about value from the vantage point of our companies. That’s our default. And it plays out in one of two ways.?

On the one hand, we think about shareholder value. In this case, we think about value in terms of revenue, profit, or stock price. And the purpose of business is usually to maximize shareholder value.?

On the other hand, we might think about value as the difference between quality and price, where price is an objective measure for quality. Great value means, therefore, offering the same quality for cheaper or offering superior quality at a higher price than the competition.?

While both of these definitions of value seem different, they are similar because they look at value from the company’s vantage point, which is a limited view. Without also understanding value from the customer’s vantage point, we don't have a full picture.

VALUE IS SUBJECTIVE

To understand value from the customer’s vantage point, you have to understand that consumers are seeking a profit too. And that profit, the difference between what they get and what it costs them (money, time, effort, etc.) to acquire your products or services, is value.?

We truly have to empathize with customers to see things from their perspective. We have to understand the full benefits and costs of what we offer, as well as the tradeoffs they make in pursuit of that profit .?

From the customer’s vantage point, value is subjective because depending on the individual and the purchase, people weigh benefits and costs differently. Someone might think it’s stupid to buy expensive sneakers, but find it completely reasonable to spend on luxurious dining experiences.?

Value is also contextual. The same wine costs less at the grocery store, for example, than it costs at a wine cellar or a restaurant.?

The value of something also changes based on what we compare it to. Rolls Royce sells their cars at boat and plane shows because, by comparison, it seems more reasonable to spend three hundred thousand dollars on a car.?

While the producer thinks quality dictates price, from the customer’s vantage point the opposite is often true. If I don’t know anything about wine and I am looking to buy a great bottle to bring to a dinner party, I will just choose the most expensive one as a shortcut for assessing quality. In other words, people usually do not pay more because they objectively understand that it costs you more to produce higher quality, or can even assess quality objectively. They pay your higher asking price simply because even at that price point, they stand to make a profit.

EMPATHY-LED VALUE CREATION

In the long run, customer value always aligns with shareholder value -- Jeff Bezos

Value creation requires that we first understand the cause-effect relationship between shareholder and customer value.?

Shareholder value is the effect of creating and delivering value for a large enough group of customers. Price is how companies get to capture and keep a portion of the value they create for customers. Revenue or profit is a measure of how well they are doing.?

Value creation should focus on creating value for customers. While the desired outcome is to create shareholder value, the goal should be to maximize customer profit since that’s how shareholder value is created.?

At grio, we created a customer profit equation that helps our clients shift their focus. If company profit is REVENUE-COST= PROFIT, then customer profit is Perceived BENEFITS- Perceived COSTS= PROFIT. We add “Perceived” because we recognize, as stated earlier, that value is subjective.

Customers are seeking three sets of benefits: functional, transactional and aspirational. The functional benefit of a car is taking us from point A to B. The transactional benefits are those attached to the experience of buying a car, like convenience or customer support. And finally, the status attached to a Porsche or Ferrari is an aspirational benefit.?

But it also costs people more than just their money to buy from you. It also costs them time, energy (physical and psychological), and opportunity costs. Uncertainty, for example, is one of the biggest costs, which is one of the many reasons branding is powerful since it lowers the risk associated with buying from an unknown company. Most people are willing to pay more for that kind of certainty.

When perceived benefits exceed costs, customers usually make a purchase and become repeat customers. And whenever you fail to close a sale or retain a customer, it’s usually because the perceived costs outweigh the perceived benefits.

If company value is derived from the value we first create for customers, and if shareholder value and consumer value always align in the long run, then we should spend a disproportionate amount of time obsessing over how to satisfy our customers. Ultimately, value creation requires empathy; it hinges on our ability to understand people— who they are, what they want, what challenges they face and what they value. This is precisely what makes it an art.

RESOURCES and SUGGESTIONS

Video

Value-Based Pricing by Ron Baker

Book

Implementing Value Pricing by Ronald J. Baker

While this book primarily focuses on companies selling professional services, such as consultancies, it’s a great resource to deepen your understanding of what value is, how to create and communicate it.

COMMUNITY SPOTLIGHT

Juliet D'Ambrosio is the Chief Brand Officer at Adrenaline, a brand experience company that specializes in helping financial institutions grow.

Juliet is renowned for her empathy-led approach to branding and marketing that helps brands stand out and connect with the hearts and minds of employees, customers and other key stakeholders.

A journalist-turned-strategist, Juliet has 20-plus years’ experience in building some of the globe’s most notable brands, including Coca-Cola, Virgin, Samsung, the International Olympic Committee, Visa, and S&P Global.

In her current role at Adrenaline, Juliet helps her clients find their DNA-- the immutable, enduring truth of who they are and why they exist. She helps them communicate that core ideology, internally and externally, and shows them how to use it as a north star that informs how they lead their companies and brands forward.

GRIO’S CORNER

We’ve come to the end of season 2 of our podcast Empathy-Led. We had some incredible conversations with leaders all around the world on the podcast.?

If you’ve missed any episodes or want to check them out, you can find all of these conversations wherever you like to enjoy podcasts.

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