Overview
This lecture explains three core frameworks for understanding and creating value in business: economic value, the value stick, and the value equation.
Economic Value
- Value is created by solving problems for others.
- Economic value is the maximum amount someone is willing to pay for a product or service.
- Value is tied to customer choices and the allocation of limited resources.
- Willingness to pay sets a ceiling on price; to grow, add benefits or solve more problems.
The Value Stick
- The value stick measures the gap between a customer's willingness to pay and a supplier/employee's willingness to sell.
- Willingness to pay is at the top; willingness to sell is at the bottom.
- Businesses create value by increasing customer willingness to pay or lowering supplier/employee willingness to sell.
- Increasing willingness to pay is driven by innovation and network effects.
- Lowering willingness to sell relates to employee satisfaction, input costs, and productivity.
- Strategic decisions should focus on impacting willingness to pay or willingness to sell.
The Value Equation
- The value equation: Value = (Dream Outcome × Perceived Likelihood of Achievement) ÷ (Time Delay × Effort).
- Dream outcome: The ideal result the customer desires; increase this for higher value.
- Perceived likelihood of achievement: The customer's certainty they will achieve the result; increase this.
- Time delay: The time between purchase and outcome; decrease this for higher value.
- Effort: The work required from the customer; decrease this to make the product more valuable.
- Use all four levers together to maximize customer value and justify higher prices.
Key Terms & Definitions
- Economic Value — The highest price a customer is willing to pay for a product or service.
- Willingness to Pay — The maximum amount a customer will pay.
- Willingness to Sell — The minimum amount a supplier or employee will accept.
- Value Stick — A model measuring the distance between willingness to pay and willingness to sell.
- Value Equation — A formula: (Dream Outcome × Perceived Likelihood) ÷ (Time Delay × Effort).
Action Items / Next Steps
- Analyze your business using these three frameworks to identify new opportunities for value creation.
- Consider which lever(s) of the value equation you can adjust to increase value for your customers.