How to capture and create value!

Batman roams the streets of Gotham City capturing criminals, protecting citizens, and promoting law and order. This superhero creates so much value that he’s irreplaceable. Wouldn’t you like to become the Batman of your organization? Then it’s time to understand the value creation process.

What is Value Creation?

No, it’s not the “Great Value” label on that giant package of toilet paper from Costco. You know the one. It’s the 26-roll monster you can barely fit inside the trunk of your car. Value creation isn’t something you buy or squeeze. Rather, it’s a discipline that’s evolved. Marketing began after the Second World War. Then supply began to exceed demand and company competition became common.

As an example, consider how Proctor & Gamble began adding product features to appeal to specific target audiences. This let P&G distinguish itself, but the changes didn’t stop there. The year 1950 marked the start of market segmentation as companies began creating solutions to specific problems. Today, we talk about value creation and the power that individuals receive from a product or service.

This the is value creation formula.

Value = Benefits – (Price + Allocated Time + Psychological Fatigue)

Remember that customers perceive value when the benefits exceed the sacrifice. In other words, value is the difference between the benefits you’re offering and three main sacrifices: price, allocated time, and psychological fatigue. The following diagram explains.

Apple’s Example

Let’s consider an example. Consumers value Apple’s iPhone. The brand is cool, the design is beautiful, and users like the interconnected ecosystem with iTunes and iCloud. Most consumers would agree that the iPhone has many benefits. Yet Apple didn’t stop there. Instead, the company increased the size of the sacrifice that’s involved in switching phones. That’s why changing from an iPhone to an Android requires more time and energy than most users are willing to spend.

How does this relate to Batman? Consider how the Caped Crusader brings so many benefits to Gotham City that residents don’t mind paying to replace the expensive infrastructure that gets damaged during Batman’s epic battles with Joker.

Measuring Value

Measuring value is about customer loyalty. In terms of cost-per-value, it’s the minimum investment that’s required to create a loyal or satisfied customer. It’s a key part of the value creation process, but there are also steps for exploring, creating, communicating, and delivering value.

Exploring Value

Exploring value is about finding the “white space” or available opportunities in a market. Asking the following questions is a good place to start.

• What is the essential customer segment?
• Is there an overlooked or unsatisfied segment?
• What does the customer need?
• What does the customer want to achieve?
• Where is demand rising?

Value exploration is based on both primary and secondary data.

Primary data is acquired intelligence and insight. The best way to get it is to feel a customer’s pain and understand his or her reality. There are several ways to collect primary data, but the main methods are interviews, focus groups, and surveys. You can also observe a target audience in its environment.

Secondary data comes from second-hand sources that can help you to identify opportunities. There are both internal and external sources to consult.

• Internal sources include CRM and ERP systems, sales data, customer complaints, and Google Analytics.
• External sources include trade associations, government data and industry statistics, Google trends, and digital assistants like Amazon’s Alexa.

By combining primary and secondary data, you can identify where value resides and determine how to create it.

Creating Value

Creating value can be challenging because the value needs to fit within your organization’s larger business strategy. In other words, the value that’s offered must be profitable, feasible, and endorsed by senior management. If the value doesn’t support your organization’s mission, the project may be dismissed as a distraction.

Communicating Value

Communicating value is about reaching the same audience that led you to believe you’d identified value in the first place. That means it’s time to roll up your sleeves and reconnect with your target audience. Start by understanding the audience’s media consumption and habits. If you don’t understand their media usage, you can’t map their customer journey and decision-making process. 

It’s also important to know which types of media or channels your customers use so that you can reach them. Communicating value is more than a marketing campaign, however. It’s about your ability to create a pattern of communications that is consistent, repetitive, and articulate.     

Delivering Value

What happens after awareness is created and customers line-up to buy what you’re offering? As an organization, you need to select the right delivery channels. You can deliver directly, or through an intermediary. Generally, you’d use an intermediary to mitigate risk and to reduce the massive investment that’s necessary to control the entire supply chain. With the rise of e-business, however, organizations are eliminating the intermediary and establishing their own multi-distribution channels using e-commerce, affiliate programs, and physical stores.

The Netflix Example

Netflix succeeded in creating value by first determining that families wanted a wide variety of movie choices at a meager cost. Next, the company built a business model around this concept. Originally, Netflix mailed DVDs to customers. The company than went on-line with its streaming service. Today, everyone knows that Netflix offers a vast choice of films and original content at low prices. That’s a testament to the company’s ability to communicate its value proposition.

The Netflix delivery method is a direct-to-user model with no intermediary. By contrast, the now largely defunct Blockbuster used a rental model with physical stores. From a Netflix perspective, the business value is in the subscriber volume. The more subscribers that Netflix has, the more the can company can negotiate rights and ultimately eliminate this cost by creating its own content. Today, Netflix is valued at $158.84 billion (USD).

Three Takeaways

Value creation involves a series of steps, but there are three takeaways you need to know.

#1 Follow the Formula

Value creation is the evolution of marketing. It’s more than solving a problem for a customer segment. You create value when you empower customers, help them do their jobs, and fulfill their needs. The formula is Value = Benefits – (Price + Allocated Time + Psychological Fatigue).

#2 Satisfy Customers

Value is a measure of customer satisfaction. Value also enhances satisfaction, which is a prerequisite to loyalty. From a financial perspective, the cost-per-value is the minimum required investment to create a loyal or satisfied customer.

#3 Feel Their Pain

Value is created by first identifying the customer's needs and pains. Then the organization creates the offer, communicates it, and delivers it back to the market. In theory, this is an easy process. The bad news is that few organizations succeed at all these steps because they’re either good at marketing or  manufacturing (but not both). The good news is that this challenge is your opportunity to become your organization’s Batman, an indispensable superhero.

Richard Saad (MA, EMBA)

Business & Marketing Consultant.

richardsaad.me