How to Measure Value Creation - Validate your Profit Engine.
Neil Bussey
I help Tech/Engineering leaders sign clients through specification selling strategies / Civil Engineer / EMBA / Managing Director / Fractional Executive / Operational Expert
I engage with a lot of companies and they often want to talk about profit and growth and managing risk and controlling costs.???
And whilst this is all good, I also want to understand what's at the heart of the business and what's actually creating the value.?
Because many businesses don't fully understand this and it can be an existential threat if it's not properly harnessed.
In the roles I've held, I've had thousands of interactions with customers where we’ve solved problems and sold products and services, often at a premium.?
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To do this successfully it’s really important to understand what the value is that's embedded in these offerings and what value customers attach to it and how they make buying decisions.?
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And I think once you get into the mindset of value creation and how you might create value, it turns on its head how you choose to manage your business and how you interact with the various stakeholders around the business as well.?
Let's dive in.
Understanding Value?
When I speak to companies and I deliberately talk about profit and growth, and I talk about managing risk and managing cost.?
And the reason I do that is because I know that those are things which cause?business owners to sit up and take notice.??
These are areas of interest, and they're topics their shareholders want to talk about too. They're topics that accountants want to talk about.?
They are proxies for successful businesses, or indicators of successful businesses, if you can do these things right.?
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But it doesn't tell me, underneath everything else, what their business actually has to offer.?
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Value creation is upstream of all of these other aspects. ??
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And so I want to unpick value creation itself that and give you my take on it.??
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This is a take based on a formal business education, but also 25 years in the?trenches, selling in commercial roles and holding managing director and other executive roles as well.?
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If I go into a sector that I'm not familiar with, (I'm from an engineering background), that isn't doing something that I'm an expert in, then I have the luxury of being able to ask “silly” questions.?
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I want to understand, (and I'd like to think that most investors would want to understand this as well) behind the website and behind all the branding and the social media and the clever language and all the other stuff, is there some?diamond in the centre of the business whereby it creates something really valuable that it can then monetise??
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And is that value quite marginal or is it something really very exciting??
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And there's not really a lot of good measures for that sort of thing. And yet if you create value, then you have an opportunity to make profit.?
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If you create value, then you probably have an opportunity to take market share and to grow.?
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And if you create value, you have a business within which you can then manage the risk and the costs too.??
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Without the value upstream of this, these things are all just secondary.?
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So yes, it's very important to manage profit and growth and risk and cost and everything else.??
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But for me, I just look for an initial sense check when I first deal with a new company. What is it I’m dealing with here??
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Do they understand what they’re dealing with??
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Do they know how to communicate it, and do they know how to leverage it properly and actually take it forward??
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And surprisingly, there are businesses that don't have a good handle on that.?
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And when you look at accounting measures, there's return on capital employed.?
You can do discounted cash flow models and net present value of future cash flows, and try and work out all these supposed indicators of value.?
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But I, as a simple human being, just want to be able to have a better more intuitive measure.??
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And there's some things you just cannot measure in numbers, but that are very important in terms of value creation that I'll talk about now.?
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What is Value Creation? ?
Value creation. It almost feels like a form of alchemy. ?
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You're taking some components, some resources that you have, and putting them together in such a way that it's worth more to somebody else than the sum of the parts you've collected together. Something additional emerges from the process. ?
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So whether that is literally, physical parts that you build into a piece of machinery or a vehicle or a device of some sort that has intrinsic value, that is more than it costs you to put it together. Or it could be expertise, or access, or leverage that you can create for someone in a way that it’s valuable to them. ?
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And that value creation, as far as I see and through my travels and all the interactions I've had with customers, breaks down into a couple of areas.?
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One is measurable monetary outcomes.?
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Actually understanding what it can deliver in monetary terms, and that does actually break down into a number of different monetary benefits.?
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What does it cost to make, what does it cost to create, and what benefit does it give to a customer which I can actually communicate in a monetary sense??
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And is it quite marginal??
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Is it I've got to spend a pound to make something which is worth a pound and five pence to somebody??
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Or is it something whereby I can make something for a pound and it's worth ten pounds to somebody in terms of money saved or money created or opportunities opened up??
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Because the bigger that divide, the more opportunity is there to transfer value to clients and also to lock in profit for the company too.?
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And secondly there's the emotional outcomes.?
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There's value that's attached to emotional experiences that people have.?
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And that's very difficult to quantify because will people pay different amounts of money for different experiences, depending on their mindset and personal values.?
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But the emotional side of it is very much a driver. And the two are interconnected and can't really be separated, in my experience.?
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So if we look at the monetary side, first of all, there's different ways of being able to?say to somebody, I've got something for you, and it's going to financially be good for you.?
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Saving Money in the Future?
The first one that I see is a product or a service which actually saves money in the future.?
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And this would be things like avoiding some form of loss, for example.?
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So something which creates efficiencies or durability. Maybe it's compliance with regulations or it's safety or security, something like that.?
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So in essence, it's basically saying, this will last longer.?
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So therefore you can defer the cost. There's less cost in the future. It saves you money on repairs, or it saves you money on being prosecuted for failing to comply?with regulations or to avoid an accident or to avoid theft or something like that.?
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So it's about being able to say, you spend this, but you potentially get this saving.?
And the stronger the evidence that that saving is locked in, then the more?compelling that monetary message will be.?
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Example:??
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A smart thermostat that will read your behaviours, make adjustments and lock in heating and cooling savings in the future.?
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If it costs say ￡100, but you can confidently demonstrate to customers that this is going to save them ￡1,000 in their heating and cooling costs over the course of four years (or whatever it may be) then you've got a nice ten to one ratio that you can play with in terms of communicating value and a monetary benefit.?
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And you'd have to try and build some certainty around those figures and make sure those figures are robust to be able to communicate a monetary saving.?
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So this first aspect is selling a product or service, which is?actually creating a future benefit, but it's not putting money into people's pockets.?
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(Well, it is, but it's doing so by saving them money, not by generating money for them.)?
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And I find that emotionally, people are more attached to the idea of actually generating money than they are to maybe saving money.?
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There's a slightly different emotional response to those two different types.?
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Which brings me to the second type.??
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Creating Money in the Future?
If you can actually give a client something which would allow them to generate money themselves, then that can be a compelling offer and a compelling demonstration of monetary value.?
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I'm talking about teaching a skill, bolting on a competence, or opening up new sales?avenues or opportunities or that sort of thing.?
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Example:??
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This might be something like online courses and learning.??
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Giving somebody the ability to fish and go and catch fish themselves, if you like.?
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And then you should be able, depending on what you're teaching them, to quantify what financial benefit that would bring them over a period of time and build that into how you communicate the value to them.?
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Creating Money Now?
I think this is a little bit more commoditised space, but it does sound amazing.?
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In this instance you sell somebody something and they're able to turn that into something immediately which is of greater value.?
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Example:??
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Merchanting. Buy this thing and sell it on at a premium.?
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Wholesalers will sell to somebody, they will mark it up and they'll sell it on, so they'll know if I can buy it for x, I can mark it up and I can sell it for y.?
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And it's about the distribution network which allows them to break it down and sell it retail.? That is a straight step up in value and a buyer can see that monetary step up.?
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Things like CRM tools and sales tools, where you sell a piece of software and it immediately enables a company to go and generate sales, potentially in a short turnaround are a slightly grey area in my view.?
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Maybe this should belong in the second example, but it's kind of borderline.?
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Logic Versus Emotion??
You'd like to think that we all think like an accountant and we can say, okay, well, if I'm going to save ￡1000 pounds over four or five years with this magic thermostat, then it's a no brainer that I would spend the money up front (as long as I have that money available.)?
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But not everybody has that thought process and not everybody acts logically based on the monetary value that you're able to create, which is why there are many good ideas out there and many good solutions that we've seen that never make it, because they're just not able to switch on that emotional trigger that people have and attach themselves to an emotional response in customers, which means that people recognise the value.?
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And when I talk about emotional value indicators, I'm talking about benefits such as:??
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It's difficult to put a number on these because one person will pay a lot more money for social status than another.?
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It depends really on their values. So whether they're paying for style or for comfort, for wellness, it comes down to people's personal preference. But there is most certainly a value attached to those things.?
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And every purchase that people make will have an emotional aspect, whether it's a loaf of bread or a car. It's easy if you're buying something like a car, but if you're buying everyday things like a loaf of bread, you may still be thinking about the health benefits of that or what it will be like and what it will taste like etc. And these all play into an emotional response which will sit alongside a monetary consideration.?
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So it is very much part of the value piece as I see it.?
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And I've had situations where I've been able to demonstrate monetary benefit to prospective clients in the past who haven't bought because they haven't been taken on that emotional journey.??
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So even though logic says it would be a no brainer, there's something else on the?emotional side that would hold them back.??
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“People buy with emotion and they justify it with logic.”??
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I'm sure you've heard that phrase before.?
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So people will look at opportunities and they will think that they're making a logical decision, but actually they're making decisions based on the emotional triggers that are there, and then they're using the logic to justify the decision later.?
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Example:??
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You might want to go and buy an electric car and you might say to yourself, well, this is economically the right thing to do. It stacks up and we've done the calculations and it's practical and it's something that we should do.??
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But there's this other part of you that’s also thinking, wow, what would the neighbours think when they see this? And what would it feel like to drive this and it looks great.?
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You're excited about the emotional side, so you might make the decision based on what it looks like and the aesthetics and those other things, and then you justify on the fuel consumption and the energy and the environmental benefit.??
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You game yourself, if you like, on the logic and use it to justify your emotional desires.?
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So if you're a business owner and you're trying to sell to people, then it's very important that you understand both the monetary side (the logical side) and also the emotional triggers at the same time.?
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Using it in Your Business??
To understand and leverage in your own business you need to understand what the?value creators are that your solution touches upon and what the monetary value is behind those.?
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So is it a very potent monetary solution??
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Because if it is, then you're in a good place, potentially, and notwithstanding competition and what's going on in your particular field.?
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If you can take ￡1 and you can turn it into ￡10 for somebody, either in a saved cost?or in a future benefit, and you can demonstrate that reliably and with a good link and good logic, then that puts you in a good position, as long as you're able to communicate that and you understand it.?
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But also, what are the emotional value triggers and how does that factor into the business as well??
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What do you touch upon??
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And this all needs to be validated.?
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Many a time I've seen product development go on behind closed doors, and you assume that you're going to take a huge benefit out to customers.?
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And I've been involved in rolling products out at the front end where you're having customer interactions. And they can have a different view of the world in terms of what their costs are and some of the assumptions that are made on the monetary?side, but also on the emotional side as well.?
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You've got to test these things and make sure that in the real world that you?understand what the emotional triggers are. And they're validated not just within the four walls of your business, but actually out in the market.??
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So understanding both the true monetary benefits, and the value triggers from an emotional point of view, is very important.?
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And you'd be amazed how many businesses don't really have a good handle on that.?
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And then finally as well, there is one more component.??
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Social Capital??
?Once you start thinking about value creation, (rather than just how do we?make money), it starts to create an environment which is much more supportive of business.?
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So what I mean by social capital is to think about a holistic approach to business where everybody wins.?
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If you can do that, if you can think about your suppliers and the people in your value chain, you can think about customers, internal stakeholders within your company and anybody else in the ecosystem of your business, and actually think about it in terms of how can I create value that helps everybody in this environment??
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Again, you'd be amazed. I've sat in board meetings at very senior level ?and very rarely has this ethos been touched upon, when we're considering ways to actually win and create value for shareholders. Very rarely do we think about how we actually create value for everyone else in the network in order to facilitate this. ?
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How do we help our customers to win. How do we help employees to win?and in so doing create an environment where people are then very open to collaboration.?
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Work with your supply chain, by bringing them into the fold, giving them access to your resources, partnering on projects, identifying opportunities for them in your own network. Essentially facilitating others success.??
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I can guarantee that if you present a solution to two parties and it has the same monetary benefits and is designed to?trigger the same emotional response, but one of?the parties also harbours a lot of goodwill (from all of the collaborative deposits you've made and the social capital you've built in your network), the response there will be very different to one where you're not known or where you haven't made those deposits.?
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And knowing that all business success flows from the initial creation of value changes the way that you probably build out a strategy and think about your suppliers and think about everybody in the ecosystem, rather than just focusing on a solution, cracking the whip and see how far you can go.?
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?Whenever you're ready I can help you in a few simple ways:
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