What does a company need to do to thrive and grow? You might think that increasing the size of its customer base, selling more of its products or services, and introducing new products are all keys to increasing profits. While it’s true that creating value is a crucial way for a company to set itself apart and bring in revenue, it’s only part of the equation. Companies that want to earn a profit or achieve profitable growth also need to capture value. Offering the cheapest product may help you win customers, but if selling that product means your business loses money, you won’t get very far.
Understanding how to capture value and coming up with a game plan that lets your business capture value is key for its continued success.
Creating vs. Capturing Value
When a company creates value, it offers something useful to clients. For example, social media networks that let people connect with family members or friends create value by allowing people to build their networks. The social media companies themselves benefit from a sizable user base.
Offering products or services for a reduced price or eliminating costly fees is another way companies create value. For example, years ago, Netflix disrupted the video rental business by introducing a rental service that didn’t charge late fees. People could keep their DVDs for as long as they wanted without racking up high fees. VoIP phone service providers created value by letting customers make long-distance calls for much less than the phone company charged.
Companies can create value by streamlining their production processes or by building up their brand reputation. People are more likely to pay more for a product from a well-known and highly respected brand, such as Apple or Nike than they are for a lesser-known competitor’s product.
Creating value is just part of the process. To continue to thrive, a company needs to capture some of the value it creates. Value capture is the process of retaining a portion of the value of a transaction.
For example, in the early days of social media, networks such as Facebook and Twitter had a lot of value in the form of millions, if not billions, of users. But they had no way to capture the value of all those users. Many of the networks were hesitant to charge fees to use their services. Ultimately, the networks found ways to capture value through advertising. Targeted social media ads allow companies to reach their desired audiences and earn money, and the social networks get to bring in a profit. A social network might charge an advertiser $1,000 for a targeted ad campaign. If the advertiser brings in $10,000 from the campaign, then the social network captured 10% of its value.
Maximization vs. Minimization
Value capture is all about balance. You want to charge enough for your products or services that your company earns a profit but not so much that you lose customers. There are often two approaches to value capture. If you focus on maximization, the goal is to capture as much value as possible in each transaction. Companies that focus on maximization tend to charge a lot for their products or services. In some cases, the approach pays off. For example, a company with a good reputation or that’s known for offering higher quality products can charge more to maximize its value capture.
On the other side of the spectrum is minimization. A company that uses a minimization approach captures less value but brings in enough profit to stay afloat. The goal of minimization is to appeal to the customer. Your company offers a “good deal” on its services or products in the hopes that doing so will increase loyalty and keep customers coming back again and again.
Your company might be able to capture value by offering two distinct services or products. Product A could be focused on value creation while Product B is focused on value capture. Amazon is a good example of a company taking a two-pronged approach to value capture. Most people know Amazon as a web-based retailer that sells pretty much everything. The company doesn’t capture a lot of value from its e-commerce side, though. Instead, the company’s web services, on-demand cloud platforms, are what brings in the most value for Amazon. If you aren’t sure that your main product or service lets you capture value, think of something that would bring in a profit and incorporate it into your business’ product or service offerings. A virtual CFO can help you capture value, increasing your company’s profits. To learn more about how a virtual CFO can help your business develop a plan for profitable growth. Contact us today to learn more.