Remember that it’s simple to create value, because there are really only two ways to do it: you can be cheaper or you can be better. If you don’t remember, here’s the link…
Luckily, capturing value is just as simple, and can be divided into just two ways too: “direct” and “indirect”.
- Direct capture makes sure that the price of the product or service delivering the value to the customer is high enough to allow you to share in it.
- Indirect capture means that the thing that delivers most of the value doesn’t capture it, but other products or services do.
Most businesses that fail have not focused sufficiently on capturing any value at all. Successful businesses are generally capturing enough value from one of these methods that the value they capture can be re-invested into the business, or returned to the investors.
That’s you. Or your friends, family, or the bank that lent you the money to start the business. Don’t they deserve their money back just as much as your customers deserve to share in the value you have created for them? Don’t you deserve to share in the benefits and value you have created for other people?
(Answer, just in case you were in any doubt: yes.)
We will focus to start with on direct value-capture because it is the most straight-forward method. You make something and then you sell it at a price that ensures you can do it again, happily. That’s a simple calculation, although there are lots of choices in the way you make that calculation. We will discuss some of those choices soon.
Indirect value capture is a little more complicated. First, you really need to create at least two products or services. One of them will create most of the value that the consumer wants. They really, really like it, and want to buy it, but for some reason (competitive industry, mass-market dynamics) they are price sensitive about the decision. If you push the price up to where you can capture enough value to make it worth your while, you won’t sell enough to make it worth your while.
What do you do then? You find a product or service that goes with it, is almost essential to it, and that customers are then (often bizarrely) much less price-conscious about, quite possibly due to the very high value your first service created.
An example: cinemas would not stay open if they just showed movies. A $10 ticket will net the company possibly just a few cents, if that, after costs. A $5 bucket of popcorn however, costing only a few cents to make? While the movie creates the value (no one goes out just to eat popcorn), the value is captured indirectly through a separate product.
You only need to capture value in one of these ways, although both would be nice! It’s worth noting that you can sometimes capture more value indirectly than you could directly, so it deserves to be in all business plans.
Now you need to know how to capture value sustainably.