The best entrepreneurs and business owners know that capturing value, not just creating value, is critical to success. The phrase “capturing value” is not meant to convey a zero-sum concept of one person capturing what another person loses. It is a way of saying that just creating value is not enough.
Peter Thiel explains this when he says, “If you have a valuable company, two things are true. Number one, it creates ‘X’ dollars of value for the world. Number two, it captures ‘Y’ percent of ‘X’. The critical thing that I think people always miss is that ‘X’ and ‘Y’ are completely independent variables. So, ‘X’ can be very big and ‘Y’ can be very small. To create a valuable company, you have to both create something of value and capture some fraction of the value of what you have created.”
An example that comes to mind for me is TiVo. TiVo revolutionized the watching of television and has created huge value for many people, but it essentially did not figure out a way to capture that new value for itself.
Business Strategy Should Focus on Value Capture
The concept of capturing value should be present in every strategy discussion and decision. To help with this, I came across a recent article in the Harvard Business Review that places a framework to help the discussion. It was written by professor Stefan Michel of IMD in Lausanne, Switzerland and can be found here. This chart has some of his ideas and methods for capturing more value.
In his article, Michel identifies 15 ways to capture value in five clusters:
- Changing the price-setting mechanism. Some people are used to the idea of setting price based more on the value received by the customer rather than the cost of the product or service. Michel goes beyond that to identify other concepts such as (a) auctioning, (b) demand-driven pricing, and (c) name your own price that are worth considering in a value capture brainstorming session.
- Changing the payer. Michel explains that this often comes up in two-sided markets, or in a market where multiple parties could benefit from a service or product which can create opportunities for multiple revenue streams.
- Changing the price carrier. The price carrier is “the part of the experience you hang the price tag on.” In today’s world, subscription services for snacks, make-up, men’s razor blades, and more are creating dramatic change. I have seen the power of the subscription model in Massage Envy that charges a monthly membership fee for massage therapy rather than only a per massage model. Michel expands this idea to bundling, unbundling, and all-inclusive offerings.
- Changing the timing. Everyone knows the “razor-and-blades” model of business, and Michel explains how this is a way to capture more value by capturing the value from later in the series of transactions.
- Changing the segment. This idea is adding a new customer base to a business. As Michel writes, it starts with “identifying customers who are unwilling or unable to pay current prices but display a need for a given offering, So, then the business must determine how to create a profitable offering for them.”