You can capture value directly, through the pricing of the value you created, or you can capture it indirectly, through other products or services. Many start-up businesses focus mainly on direct value capture, but more and more successful business models rely on indirect pricing.
We have already mentioned the importance of popcorn (and the drinks that you need after eating all the popcorn) to the cinema model, and in “Priceless Psychology” we noted versions of indirect value capture, such as bundling and optional extras.
But Indirect Value Capture is too important to be thought of as an optional extra. It could be the reason your business model succeeds.
Think about the gaming industry. It used to be dominated by console makers who charged cheap prices for the consoles so they could then charge higher prices for the games. This, in its own way, was indirect value capture, because the console would have lost money without the extra profit that came in from those expensive games.
But that model has been out-competed by the arrival of online computing games that use freemium pricing, a huge indirect value capture play where gamers don’t have to pay anything up-front, they can try out the game for free, but then they pay to premiumise their use of the games, getting better weapons or equipment or playing experience.
The companies create the value of being able to play the latest amazing game for free: they then capture value as players choose how much they want to pay to premiumise that experience.
Great, right?
The focus is on value-creation, and providing as much access to the product as possible, as widely as possible. That’s amazing value-creation.
The capture is up to the customer, but because they feel great about all the value that has been created for them, they are often happy to spend a little bit of money to play a bit better.
Lots of other businesses use other versions of indirect value capture.
The music industry used to operate as direct value capture, with the value-creation and capture taking place at the record or CD purchase. In the age of streaming, the value creation doesn’t capture much value directly, as the artists get paid very little for all the times we hear their music. But because we hear it so much, the artists are able to put on huge concerts that they charge 10x for which they charge more for bigger venues than they used to, and they capture the value there instead.
What else? Most forms of advertising revenue models are indirect value capture, where the customers value the direct media product sufficiently that they are willing to allow advertising to run in it or alongside it. The value is created for the customer, the capture comes from the advertiser.
These are the most straightforward ways.
The less straightforward way is to create value for your customer you can’t really charge for, and then find a way of charging for it.
Starbucks, in many ways, generated its appeal more as a place to meet and feel part of the hipster Seattle vibe than it did for its coffee. Because of the vibe, though, they were able to sell capture the value through coffee.
In the same way the high-end fashion brands get a lot of free advertising and attention on their fashion, that loses money, but they make it back on their perfume, which is the only affordable thing they make (with margins of near 90%!)
Look at your product or service, and then look around to see where else you might be able to capture value indirectly:
If you make excellent cakes (yes, we’re back to our favourite example again) but struggle to capture enough value from them due to a competitive cake market, selling high margin tea and coffee to go with them might be where you can capture extra value.
Or perhaps it will be making customised birthday cakes.
Or balloons, or cards, or party entertainment.
It could be something that goes alongside your product that will make you more money than your original product.
Now find out how you capture value in an envelope!