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A key concept that helps you know whether you’re leaving money on the table, are the concepts of value capture and value creation.
Each of us creates value everyday. The contributions you make – the work you do – helps you either increase sales, grow profits or get things done more efficiently. As an entrepreneur, if you’re not delivering value to your customers, they would not be customers.
The same goes for services and products. When you have your car serviced, you pay for that service. If you feel you paid a fair price for the work, you received a good value. If you feel like you paid too much, then the shop received i.e. captured more of the value.
In any business, we create value – often a lot of value. If we’re not fairly paid for the value we offer, we’re not capturing it – the purchaser is. The amount of value you can capture depends on the following factors:
- The market – how much competition do you have? The more competition, the less of your own value you can capture because the buyer has many options.
- The need and difficulty of what you do; the more specialized and complex, the less able the buyer is to find others that do the same. Therefore, you can charge more and thus capture more of the value.
- Price sensitivity. If the buyer is desperate and cannot live without you, you’re in a better position to name your price. Commodities are things that one can find everywhere, and the goal is simply to find it at the best price. You don’t want to be a commodity as it’s virtually impossible to capture much of the value created.
Take a look at the products and services you provide. Are you fairly compensated? Do people always try to get you to drop your price? How easy is it to raise prices over time? Do you dictate the price or does the buyer?
If it’s the buyer or employer, then take a look at either how you position yourself in your company or in the marketplace. Figure out how to present what you offer in a more compelling manner. Talk about how you solve problems and make positive contributions, then determine the fair price and ask for it. Don’t give away the store – make others appreciate what you offer and help them understand how they benefit from hiring and working with you. They’ll feel better about paying more money and still feel they’re receiving good value (i.e. not feeling they’ve been had). You want customers coming back, and need to find the balance between creating high value and how much of it you can capture through your pricing strategy. A fair price for good work, products and services is the goal.
TAKE AWAY: Thinking about how much of the value you create that you’re capturing will help you set financial goals, earn more money over time and have better success at achieving financial freedom. I did not truly learn about this concept until I was working on my MBA. All businesses needs to think about how they can maximize their value in an increasingly competitive global market.
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