Do You Capture All the Value

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Stefan Michel of IMD gave an example of using carbon credits to pay for expensive LifeStraws that purified water (in HBR, October 2014). Carbon credits came from not having to boil water using petrol or wood fires. LifeStraws is an innovation that can create value if used (it is otherwise expensive for poor people) and value is captured through using carbon credits to pay for it.

Companies are so stuck to the standard ways of creating value, either through increasing price, marketing or through cost cutting. Most innovations are looked at as cost saving or opening new markets. The concept of value creation says nothing about profit. Creating Value is profitable when a company captures value. Competition forces a company to look at capturing more value. Companies must understand that creating value must also translate to profit. Later I give examples of value creation that must be captured and converted into profit for the company. Thus, we later will see that many cost centres should be converted to profit centres to notice and capture more value and make their efforts profitable for the company.

Value is generally benefits minus costs. The benefits to the consumer are measured along with the cost to the firm. This alone does not determine profit, which is generally a Price minus costs type of an equation.
So, what stops value capture (and indeed value creation) from happening?

In my opinion, it is the way business and profits are taught and understood. Value is never truly understood even by the professors, and certainly not by the students who then go on to become managers. Finance managers suggest value is what you get when you sell something. Others see value as quality and use terms like value for money (implying price consciousness) and money for value (being more quality conscious).

Creating Value has a wider connotation. It is executing normal, conscious, inspired, and even imaginative actions that increase the overall good and well-being, and the worth of and for ideas, goods, services, people or institutions including society, and all stakeholders (like employees, customers, partners, shareholders, environment and society), and value waiting to happen.

 This definition throws up new thoughts:

  1. Thus, to create value, companies must go beyond just improving the worth of an offering (product or service). Their concept of worth is Benefits minus Cost. Cost, of course contains price (and other out of pocket expenses like maintenance cost, running cost and the like) and non-price (the hassles, the energy required make things work or correct problems, the time etc.) In a way these are value destroyers, and if anything, prevent or reduce the capture of value, because using the notion of Customer Lifetime Value, you may lose a customer and create and capture less value.
  2. Value goes beyond the worth of a product. Value is created when you do something good for a stakeholder be it a customer or an employee or the environment, or improve their wellbeing. Therefore, understand when you are doing something good, you are creating value like LifeStraws did and you have to find a way of capturing it. So, when your frontline person solves a customer’s problem, he is creating value for the customer. But when your customer cannot get the right person to solve his problem, value is destroyed and you can capture less value. Examples include getting the wrong dish in a restaurant and being told by the waiter, but this is what you ordered.
  3. Value waiting to happen is a concept that says value and value ideas exist all around you, but you have to notice them first before you can innovate and create value from them. Most of us never thought of the driverless car twenty years ago. A few did and even fewer were able to make it happen and eventually some will create value from it. Simultaneously, value will be destroyed for professional drivers, servicing centres etc.

We must understand how value is created in the business world.

The process starts with the company deciding it can create value with an offering, The process is shown below

  • Company determines it can create value with an offering
  • Company determines what value it is creating and what value it will capture
  • Company makes an offering and creates value for a customer in the company’s perception
  • The customer determines his perception of the value of the offering
  • He compares the company’s offer with the value he gets from competitive offers
  • If his perception of the value the company creates for him is higher than for competitive offers, he will buy from you
  • The customer creates value for the company by buying, and talking about the company and the product
  • The company receives value from the customer. The company’s perception of the value it receives is different from the perception of the value the customer thinks he is creating.

This process is a circular one starting with the company creating and offering value to the customer, who receives and extracts the value and then creates value for the company which it can extract.

This process happens when you create value for society, or the environment, the employees. If you accept the fact that society, the environment, the employees the customers and other stakeholders create value for you then do not look at the employee or the customer or society or the environment as cost centres but as profit centres. This will change your mindset form thinking of the money spent and only cost cutting to how you can create and capture value from them.

So, then you work on what creates value for the employee and create more value for him. To do this you must understand the value the employee perceives he is receiving, not just the value you think you are creating. And you may convert the chief of HR into the chief value creator, and he must determine how to create and then get more value from the employee which the company can then capture.

This also makes the company much more innovative when looking at customers, employees, the environment or other stakeholders. What can I do that will create value for the environment and for me? Lesser packaging, recycled packaging. Lowering energy, capturing waste energy all create value for the company.

So, using the above thinking let us examine possible means of creating value that the company might have ignored. These can create value for the company and allow them to capture value.

  1. A stakeholder or an outsider gives you an idea. Do you have a capture mechanism to examine it and see if it can create value for you and your stakeholders.
  2. Someone recommends you and your company: How can you take advantage of this and create value?
  3. Someone complains, and you solve the problem. Do you examine the problem and ask if it is systemic. Do you work on eliminating the problem for all customers, so that value is created for them, which you can capture later? This value created is lower costs by making fewer mistakes and higher revenues from satisfied or loyal customers.
  4. You innovate something: Do you create and capture value from this innovation?
  5. You use AI, data analysis, knowledge creation about your stakeholder to create more value for the stakeholder. How do you capture this beyond just cost reduction.
  6. You reduce costs. Do you share the savings, thereby creating value for the customer and yourself? Savings can make present customers loyal and attract new customers.
  7. You add value through engagement and relationship, and even build brand advocates. How do you capture value from their recommendations?
  8. You build your image and your brand. This should create value for you in increased sales, consumer preference. Part of this value may come in the way your re-seller or partner positions your product.
  9. You do things for your stakeholders (be they the environment, society, employee or customer) and they create value for you
  10. 10.Examine all possible problems customer might have and try to eliminate them (taken from Gautam Mahajan in Business World, June 30 2023)
  • Work on the problems
  • Appoint a problem noter and a problem solver particularly on what the customer sees. For example, does the airline check in work on your device and is it synchronised with the check-in computer terminals? Does the seat work, does the TV screen work, do the escape jackets work? Is safety in place? Solve these problems pronto. I was told spare controllers for the inflight screens do not exist. Why not? You have no excuse of not having spares on-ground at least.
  • Also, do not stop at solving individual problems. If the problem is systemic, change the system so that others do not have the same problem.
  • Remember, that very few customers complain and even fewer do something about it.
  • What causes staff to get frustrated? Use Customer Centric Circles to solve their problems, and you will solve many customer problems also.
  • Do not run the airline with bean counters but with a heart. Most passengers will accept problems if they are brought into the loop. Use co-creation and co-operation.
  • And for attitudes of the ground staff, get this changed. Use Customer Centric Circles approach as told in my book Total Customer Value Management (Sage, 2011)

Of course, you have to work on a prioritised list so that you can achieve your goal, bit by bit.

So, you can see value creation is all about a mind-set change. You need your executives to learn the 8 A’s (Mahajan, Creating Value for Leaders, Routledge 2023). These are:

Awareness: Leaders and executives must be aware of things around them, they must be curious, they must want to know more. Look at Value waiting to happen

Attitude: They must have a super attitude, positive, forward thinking, and multi-dimensional. Able to be strategic and innovative to practical. Some are functional in nature. Mind-set plays a major role

Ability: Much of this is innate, but some comes from learning and experience.

A great mind-set helps here

Agility: This comes from a mind-set and mental make-up

Adaptability: Being able to change with circumstances

Anticipation: Being able to be ahead of others by forward thinking and view.

Part of this comes from a 6th sense which is developed in your mind

Ambidextrousness: Capability of doing more than one thing at a time; capacity to think of different things

Action: Convert thought into action

Capturing Value from Customers

The obvious value capture is the sales price the company receives. But when you start creating more value you must capture more value. Giving away value is not a good solution. Sharing value is also possible. In the example below, I will show you how you can create more value.

To do this you must learn how to measure the value the customer or the stakeholder perceives he is receiving. In this kind of a measurement called Customer Value Added (Kordupleski, Mastering Customer Value Management, Pinnaflex, 2003)

CVA (Customer Value Added) = Perceived value or worth of you / Perceived value or worth of competitive offers

Note the value you create is always compared to competition. And value you remember is Benefits minus Cost.

Our example is about a fertiliser company in India. Fertilisers are sold as commodities, because there is nothing to differentiate the product effectiveness, except the packaging and the condition of the fertiliser when received. Of course, the retailer makes a difference, but by and large it is the price that determines the sale. The fertiliser company, AA conducted a Customer value study with Customer Value Foundation and found they were creating more value for the customer than competition.

Our client, AA decided to get out of the commodity “hell.” They determined that a membership program or a farmers’ club should be started. By using farmer meetings, and by giving extra help to member farmers, and building an engagement and relationship, they found that they were creating more value for the farmer through another Customer Value Added study. In the chart below called a Value Map, we see a fair value line. Those companies lying below the line create value, whereas those above the line are destroying value. CC is close to the fair value line and is creating average value. AA is creating more value, but even much more value for the AA members.

On examination of the Customer Value added results, it became clear that the company was not capturing any value from the membership program.

They had choices:

  1. AA could increase the price (see upward arrow) and create more value for themselves and capture some or all of it.
  2. AA could reduce benefits to members. For example, they could reduce meetings from once a month to once in two months, or charge for membership. See arrow going to the left
  3. AA could do both: increase the cost and reduce the benefits, see the diagonal arrow.
  4. They could do any of these and share the value with the farmer.

This way AA was able to capture more value from its membership program and prevented it from becoming a giveaway program.

Recommendations

Here are some recommendations. Research can be carried out in these areas also.

  • Give customers a reason to be loyal. Increase value to them, and share value captured if possible.
  • Design a creative and engaging loyalty program. Add levels to your program to motivate your customers which drives them towards making a purchase decision.
  • Provide great customer service. Look for areas where there is value starvation or destruction. Eliminate these. Post-Purchase (after-sales) experience should be outstanding.
  • To achieve all this,
  • First understand all sources of value, and create more value
  • Measure value through a customer value added study
  • Then find a way to unlock this value, and create value with it for yourself and your stakeholder.
  • Then capture this value, and find innovative capture mechanisms such as LifeStraws did.
  • This works for all aspects of your company and is not dependent only on your in-house marketing and cost cutting.
  • Understand value waiting to Happen, and use the 8 A’s to change mindsets.

Republished with author's permission from original post.

Gautam Mahajan
Gautam Mahajan, President of Customer Value Foundation is the leading global leader in Customer Value Management. Mr Mahajan worked for a Fortune 50 company in the USA for 17 years and had hand-on experience in consulting, training of leaders, professionals, managers and CEOs from numerous MNCs and local conglomerates like Tata, Birla and Godrej groups. He is also the author of widely acclaimed books "Customer Value Investment: Formula for Sustained Business Success" and "Total Customer Value Management: Transforming Business Thinking." He is Founder Editor of the Journal of Creating Value (jcv.sagepub.com) and runs the global conference on Creating Value (https://goo.gl/4f56PX).

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