Many businesses are good at creating value by developing innovative new products and services. But when it comes to capturing that value and turning it into profits, the inventiveness of executives and managers all too often reaches its limits. Either they don’t worry about value capture at all assuming that innovations will pay off by themselves, or they reduce the subject to pricing. By doing so, they miss out on growth opportunities, writes Stefan Michel, professor at IMD Business School Lausanne, in a recent Harvard Business Review article, and argues for a more creative and strategic approach.
Framework for Value Capture Strategies
Michel presents 15 value capture strategies which he divides into five categories:
- Changing the price-setting mechanism
This group of value capture innovations includes value-based pricing, auctioning, demand-driven pricing, “name your own price,” and “pay what you want” strategies. The challenge here is to identify the customers’ value perceptions and create a pricing structure which reflects their different willingness to pay. A good example for this is Priceline with its “name your own price” strategy. Customers of the online travel portal can stipulate the price they are willing to pay for a flight or hotel accommodation within a given timeframe. Similar to an auction, sellers can take or leave the deal. But here is the twist: the amount is not disclosed to third parties allowing the sellers to stick to their general pricing policy despite the provided discounts.
- Changing the payer
Typically, those who consume a product or service pay for the value they receive. However, there are situations in which both buyer and seller may benefit if some else picks the bill. A nice example for this is the „meta-consultancy“ Cardea, which helps companies find the best consulting firms for their particular management challenges. The referral charges are covered entirely by the consulting firm that, thanks to the provided service, can reduce the high costs for new customer acquisitions. This model is called „two-sided market model.“ Sometimes markets have even more potential payers. In such cases, it is worth to reconsider the “value constellation,” Michel argues. In B2B, another option for changing the payer is to change the cost center within the company.
- Changing the price carrier
The offerings of companies often consist of packages made up of different services; however, the price the customer pays is usually affixed to one particular part of the package. „A strategic questions many companies should ask,“ Michel argues, is: “Is the price tag affixed to the right part of the package, and what would happen—to profits and other players in the market—if it were moved.“ An impressive example for this is the brand Nespresso by Nestlè. Nespresso doesn’t simply sell coffee beans and machines, but through its specially designed capsule system the “perfectly” brewed cup of coffee. For this experience customers are willing to pay more than seven times of the typical retail price for a kilo of coffee beans. A great combination of „value creation innovation“ and „value capture innovation.“ Other common strategies for changing the price carrier are bundling and unbundling of services (e.g., all-inclusive deals of established airlines vs. low price, few service deals by Ryanair, EasyJet, and other budget airlines).
- Changing the timing
Another category of value capture strategies is the desynchronization of the value exchange. Besides futures contracting, this mainly includes the so-called „installed base pricing.“ According to this model, customers initially pay a very low price for a product and service, but later have to dig deeper into their pockets in order to pay for customer service, operating licenses, spare parts, peripheral products, etc. (e.g., Gillette razor blades).
- Changing the segment
Last but not least, tapping into new customer segments is a key strategy to maximize profits. One way to do so is target costing, which uses market analysis to identify those customers who do have a need for the product or service but are not willing or able to pay the current price for it. Based on the insights from the market analyses, the business can then design a product or service that is attractive to those customers while ensuring a sufficient margin. Another approach to segmenting is what the author calls "self-segmented fencing." For instance, by offering coupons which are valid only for limited time, cost-sensitive customers are given the choice to pay a lower price for the same product.
The author stresses that the different approaches are not mutually exclusive and, in many cases, can be combined. He gives the general advice that “fresh thinking about value capture should be integral to every strategy and innovation exercise in the firm.” The proposed framework provides an excellent basis for such discussions.
Michel, S. (2014, Oct). Capture more value. Harvard Business Review [online ed.] http://hbr.org/2014/10/capture-more-value/ar/1