Understanding the Value Cycle
A lot of words are written about the challenge of creating value for customers. Paul Graham’s “make something people want” mantra does a good job of summarizing it. Unfortunately, creating something valuable isn’t enough to find lift. And if you falter at any of the subsequent steps, your reward shrinks too. Don’t expect people to pay you handsomely for merely creating value in the lab. No, you’ve got to communicate that value and verify delivery of that value first. Then and only then can you expect to capture value commensurate with the value you’ve created.
THE VALUE CYCLE
Create Value
If you’re just starting out, you’re almost certainly obsessing over the value creation stage. Obviously, this is mission critical, and many see this as the hardest part - actually getting out of the building and confirming that you’ve creating something people want. If you don’t get this right, you’ve got nothing to carry to the next stage.
Real-world Example: BMW creates a car of value. It is now parked outside the factory waiting for shipment to the dealership.
(Unfortunately, even if you have value to carry to the next stage, due to the universe as it exists, there will always be some loss of value between each step - let’s just call it friction (or human imperfection). This is OK, but it’s important to recognize that you already have leaks in your bucket. If you survive long enough, you’ll get to address those leaks the next time around the cycle.)
Communicate Value
In this stage, your job is to then tell the prospect in extremely, painfully obvious ways what your product does for them and how it will change their life so much that they’ll be willing to abandon their current way of doing things.
If you’ve done it right, this stage can be about simply repeating back to the customer the things they told your while you were creating value in the previous stage.
Another key aspect of this step is communicating that you are capable of delivering the value to the customer should they decide to buy. It’s one thing to say you’ve created something amazing, but you need to persuade them that if they give you their money, they will actually get what they want. See: Customer stories, case studies, logos, refund guarantees, etc.
“Marketing” fits under this stage of the value cycle and is way beyond the scope of this post. But suffice to say, to whatever extent you fail at marketing, you will fail to acquire the right kind of customers, which means more value loss and less you can legitimately carry to the next step.
Real-world Example: BMW sends messages into the market telling people that this car is the ultimate driving machine. A heavy use of images reinforce that driving this car will thrill you deeply and BMW is a company that succeeds at doing this for people like you.
Deliver Value (with Delivery Confirmation)
This stage is so rarely discussed, but picture this: you buy your first BMW but there’s no salesman on the lot to explain any of its awesomeness to you. You take it home and the manual is a scribbled note on a paper towel crammed in the glove box. You stare at all of the gauges as you cruise down the road and wonder what this thing is capable of, but you’re afraid to do much more than gently rev the engine because you don’t know if you’re going to hurt anything. Your ultimate driving experience suddenly feels more like the experience you’d be getting out of any car. And all of a sudden, even though the car you’re driving is perfectly capable of rocking your world, you feel ripped off and start to doubt whether you should have bought this thing. Meanwhile, salesmen at the dealership are high-fiving another sale, convinced that you must be loving it.
Worse, imagine your new Beamer actually malfunctions, but there’s no OnStar button to hit, no number to call … frustration would set in pretty quick, wouldn’t it?
As value creators, we need to train ourselves to focus on this very important step of how to properly deliver value: hand over the keys, provide the tour and test drive, the manual, the sales collateral, the 1-day, 1-week, and 1-month follow up, and then the constant reminders through whatever means works, that tell the customer “You were very smart for buying this awesome car, weren’t you?”
Failure to confirm that your customer is actually experiencing the value of your product is deadly. It means you aren’t going to have much, if any, value to capture on the next stage.
Capture Value
Other than value creation, this is the one that grabs the most attention. Pricing, pricing models, revenue models, how to price, etc. Unfortunately, all of these things will be seriously hampered if you don’t do the communication and delivery (with verification) steps properly. Your customer has an empty bucket and now you want to dip into it?
Not going to work.
On the other hand, if you’ve done a great job with each of the above, you can now take a nice look into that bucket of value your customer is carrying around and decide a fair tax to levy on it. You created it, they have it, and now you can convert some of it into cash. Good for you!
Of course, the tricky part is knowing how much water is actually in their bucket. This is also called return on investment (ROI). Did you provide a convenient alternative to a much higher-priced product? Did you save them a massive amount of time or money? What value do they place on these? If you want to price right, you should find out.
Strategy
Looking at your entire company as an engine of value creation, communication, delivery and verification, and capture, allows you to look very differently at how you should spend your resources and product development time. Many CEO’s anxious to capture more value decide to double down on value creation, not realizing that their communication and delivery stages are what’s costing them the ability to profit.
Where is your startup failing or leaking value? How big are those holes in the bucket? A “feature” that patches a hole in your customer’s bucket of value through better communication or delivery (and reminders of that delivery) can be worth far, far more than a brand new feature or product extension. Choose carefully.
Discussion below and also on Hacker News.
