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Understanding Value Creation Process in Business

The most successful businesses in the world today understand that the purpose of any business venture is to create value for customers, investors, employees; and the interests of these three groups are intertwined. Therefore, economic value should not be offered to one group, leaving the others behind, but should be created for all.

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What is Value Creation in Business to Customers, Employees, and Investors?

For a customer, it means creating products and services a customer finds consistently useful. Such value creation is based on the product, innovation process, and understanding customer needs in today’s world.

But companies cannot deliver outstanding products and services without professional and dedicated employees. Value must also be created for employees to motivate them to give their best in achieving the overall business goals. Value for employees includes being loved, valued, and appreciated in the place of discharging their duties. They need to be respected and carried along in every decision-making process. Employees also value excellent compensation plans, meaningful work, and continued development and training.

Creating value for investors involves delivering high returns on their capital consistently. This requires attractive profit margins and strong revenue growth. All these can only be achieved if a business delivers sustained value for customers.

If the sole purpose of every business is value creation, it, therefore, means every organization should be defined in terms of its principal value-adding activities. This simply means McDonald’s should see itself as providing quality meals in a friendly atmosphere across the world. Honda should see itself as a chief manufacturer and marketer of quality automobiles, etc.

In this post, we will consider value creation in business, value creation model, economic value creation, and why your business needs a systematic value creation model.

Before we start, let’s define value creation and look at why your business needs a systematic value creation process.

Value Creation Definition in Details

Value creation is the goal of every successful business entity. Creating value for customers help you sell your products and services with ease. In the same vein, creating value for shareholders in the form of an increase in dividends and stock prices ensures availability of investment capital to fund future operations.

From a business perspective, value is created when a company earns a return on capital (revenue) that exceeds initial capital. However, most financial analysts insist on a broader value creation definition that differs from traditional financial measures.

Value creation in today’s world is represented by intangible factors such as brand, ideas, people, and innovation. Therefore, when broadly defined, value creation is seen as a better management tool than mere financial measures of business performance. Value creation should be the motivation behind every business. It is believed that if your business focuses on creating value for customers, it becomes easy to convince people to patronize your products and services.

Successful Value-Creation Strategies and Value Creation Models

Actual value creation occurs when businesses develop consistent streams of products and services that offer compelling and unique benefits to a specific target audience. This means an organization must establish and maintain a specific, sustainable value creation model to maintain industry leadership.

When investors buy stocks in a company or when customers enter into a partnership with the same company, they are not basing their relationship on a particular product or service. Instead, customers expect the company will continue to provide valuable products and services that meet their needs. On the other hand, investors expect the company will continue to make products or services that will meet the needs of customers and generate more revenues.

This ability to develop resources and effectively match them with opportunities is the core of any well-run business’ value to customers and the basis of its valuation by investors. In the same vein, that value creation process is built on the capabilities and motivation of the company’s employees.

Some of the major factors that underline effective value creation models in businesses are:

Product and Process Innovation

Product and process innovation involves a detailed, real-time understanding of the changing needs of a target market. It also involves leveraging emerging technologies in existing markets, creating win/win partnerships with employees, customers, and suppliers.

Pragmatic Idealism and Value Creation

The conventional approach to business contains a fragmented view of the interests of investors, employees, and customers. For managers and business owners who hold that fragmented view, efforts to create more value for customers or improve employee compensation opportunities are usually futile.

If value-based behavior is vital, idealism is the most effective and pragmatic way to manage any business. Such pragmatic idealism rejects the selfish interest of the business in making a profit without caring about the maximum satisfaction of its customers. Pragmatic idealism embraces an integrated value creation model that recognizes the role of all players in the value creation process.

Here are principles that will help you in adopting this value creation model:

  • Your first driving force in any business you venture into is creating value for your customers, employees, and investors.
  • Create products and services that capture part of that value as profit
  • See the value of a product or service as what the customer would consistently pay for if they had the perfect information (such as total costs and benefits of the product).

A company can take two broad approaches to do business. First, it can embrace the idea of pragmatic idealism, challenging itself to create value for employees, customers, and investors in a win/win cycle. Or it can pursue a more narrowly defined or illusory self-interest by attempting to exploit the lack of perfect information held by most firms. The latter approach is unworkable, owing to the advancement in the emerging information economy.

Principles of Creating an Effective Customer Value Creation Model

Outstanding customer experiences don’t begin with customer journey mapping. They begin with effective value creation in mind.

Here are some principles of creating an outstanding customer value creation model:

1. Value Creation is the Bedrock of Any Successful Business

In the past, producers and business owners created products and services that were ‘pushed at’ customers via mass marketing channels. This left end-users with no choice but to patronize those products and services, whether they are satisfied or not. But now, with advancements in technology, exposure, the great availability of information, heightened expectations, and customer preferences, customers expect their wants, needs, and desires to be met accurately.

Therefore, any business that will thrive in this era must understand how to satisfy customer’s desires. This is where value creation comes in.

2. Value Creation Should Be Based on Customers’ Desired Outcomes
Creating value in business is only possible when customers’ needs, wants, and desires (even if not fully understood) are first identified. This is the starting point for deciding what to do and how to go about it.

Before you start any business activity, you should always have the customers in mind. The question you should seek to answer is how best can you help the customers? This helps you make the right choices regarding the activities, products, or services you should provide for the customers.

3. Creating Value Consistently for Customers is the Surest Way to Maintain Sustainable Profitability for All Investors

Investors and other stakeholders are also crucial for the success of every business. To sustain a business and continue to serve customers with valuable products and services, a business must be able to attract investors, make profits, and keep the confidence of its stakeholders. However, there can be only one primary value focus, and that is the customer. Everything else follows from that.

4. Value Creation Must Consider Direct Competitors and Other Industry Alternatives
The progress of every organization depends on how well the customers patronize products and services offered by the company. And customers only keep patronizing your products and services if you’re meeting their needs, demands, and aspirations. If they are not satisfied, they will look for other alternatives. Hence, for your business to stand out, you need to have a thorough understanding of the market and provide valuable products and services that beat industry standards.
5. It Requires Continuous Innovation Strategy on the Customer Frontline

As seasons are changing, so are the customer wants, needs, and aspirations. Therefore, businesses must position themselves to identify, track and respond to these changes. This often means giving greater decision-making power to customer-facing employees to create value-based products and services for the customers consistently.

6. It Must Represent the Experiential, Functional, and Financial Aspects of the Entire Buying Journey

Customer value satisfaction is experienced in 3 stages: pre-purchase, purchase, and post-purchase. The chain of experiences within these three stages, which must be articulated in value propositions, must reflect functional, experiential, and financial aspects, all combined to create a hard-to-copy differentiation for your organization.

7. Customer Value Creation Requires Proof and Validation

The functional aspect of customer value creation is provable using different business modeling such as Return on Investment. The emotional aspects will be validated and proven through your brand identity. For customers to become loyal to your brand, you need to have years of track records and proof of providing valuable products and services.

8. Economic Value Creation and How You Can Create It
Value means different things to different people. To some, value means price (the economic value of a product or service). To others, it merely means benefit (the value gotten from the product or service). It is also seen as the worth of something – a product or service for instance. This is why you hear people saying ‘value for money’ (meaning they are price sensitive) and others prefer ‘money for value’ (meaning they are more willing to pay for benefits).
In business, the value creation definition must be precise so that everyone understands what it really means. Customer value is the perception of the true worth of a product or service in the customer’s eyes. It is a representation of how customers feel they got value/benefits for what they paid for. The customer is not only paying for economic value but also non-price value.
The economic value of the product or service includes the advantages or quality of the product, service, image, and brand of the company.

How is the Economic Value Created, and What Does It Do?

Economic value is created just as much by focusing on systems and processes as by culture and mindset. While culture and mindsets are more difficult to emulate or change, it is easier to copy systems and processes. Therefore, for long-term success in business, mindset and culture are essential. These, along with systems, create significant value and experience.

Creating customer value enhances customer experiences and customer satisfaction. A good customer experience automatically creates value for a customer. In turn, customer value increases price loyalty and market share.

How to Create Real Economic Value

Effective economic value creation begins with the understanding of the customer value concept, what customers perceive as value, how customers’ needs change over time, and how to get customer feedback.

You must realize that people only buy products or services that create the most value for them. Therefore, to create economic value, you must identify and understand what a customer perceives as great value. You must understand how customers view your competitor’s products and services, the essential things to customers in their buying decisions, and the favorable price range.

Moreover, you need to be sure you’re offering products and services the customers believe in. You also need to ensure your products and services are better than your competitors’ in terms of quality and maximum customer satisfaction.

Here are some examples of how to create economic value:

  • Peg your products and services at a price range that makes customers believe they are getting more than what they paid for in terms of benefits, quality, and what others are offering.
  • Reduce the price or maintain the price as appropriate to give extra value over your competitors.
  • Offer variable payment options. This gives the customer the liberty to choose a payment option that is most convenient to them.
  • For B2B organizations, offer an exceptional price justification and not just a price.
  • Enhance the image of your company.
  • Provide products and services that work as expected (as perceived by the customer) and are easy for them to use and understand.

Steps to Creating Value for Customers

Here are time-tested steps you can take to create value for your customers:

1. Understand What Drives Value for Your Customers

To understand what drives value for your end-users, you need to engage them, talk to them, survey them, and study their actions and reactions. Above all, capture data to understand what is essential to your customers and what products and services you can offer to help them.

2. Understand Your Value Proposition

The value customers get represents the benefits of the products or services derived minus its costs. What value do your product and services offer customers? What price are you offering relative to your competitors? The quality of products and services you offer is what makes customers loyal to your brand.

3. Identify the Group of Customers or Regions Where You Can Create More Value Relative to Your Competitors

Most customers will have a varying perception of the value you’re offering relative to your closest competitors. This can be based on geographical location, for example, or a product that only one region finds particularly attractive.

Factors to Consider When Creating Value Creation Models

Generating value is grossly misunderstood by most business owners and entrepreneurs. Nonetheless, value creation puts one company above the others and ultimately ensures continuity and survival. In this modern time where competition is fierce, it becomes evident that Value creation is the key to running a successful business.

That said, it is noteworthy that value can be challenging to create and measure since it isn’t tangible. Even though you can’t see it, value is the ultimate benefit your business provides and is the sole reason why people want to purchase your products and services.

Small business owners struggle to understand what value truly means to their customers. How does a business generate value for customers?

Factors to Consider When Creating Value Creation Models

Generating value is grossly misunderstood by most business owners and entrepreneurs. Nonetheless, value creation puts one company above the others and ultimately ensures continuity and survival. In this modern time where competition is fierce, it becomes evident that Value creation is the key to running a successful business.

That said, it is noteworthy that value can be challenging to create and measure since it isn’t tangible. Even though you can’t see it, value is the ultimate benefit your business provides and is the sole reason why people want to purchase your products and services.

Small business owners struggle to understand what value truly means to their customers. How does a business generate value for customers?

Value Creation Models: The Basics

Before we discuss the factors to consider when creating value creation models, let’s review the three ways of value creation in small businesses. 

1. Create New Value
Creating a new value is the most challenging approach because you are creating something entirely new from scratch. This approach involves doing something entirely new, such as developing a new product or service and entering a different market sector from the one you’re familiar with.

2. Create More Value
Creating more value is a more straightforward approach compared to the first because you are working with something you already have. One of the perfect examples of this digital business strategy is making your business strategies and operation more excellent and efficient to deliver more for the same price.

3. Create a Better Value
Creating a better value is another simple approach because it improves existing products, services, and (digital) business models. The best approach to this value creation model is to focus on quality over quantity.


Now that we have seen the best ways of creating value in businesses, let’s review what you need to consider when creating value creation models.

1. Create Intensity
This means that your business should focus on delivering products and services with additional strength and power that is already present in the industry. For instance, you may be offering quality products and services above and beyond what competitors are offering, thus exceeding customers’ expectations and gaining their loyalty in return. This is one of the most suitable ways to increase the level of value your business provides.

2. Value Application
Value application refers to the strategies you employ in delivering or providing value to your customer base and how such strategies expand your customer base. For instance, a person that owns a retail store should think of how having an e-commerce site can improve their business. This has the potential of enhancing the experience and satisfaction of your local customers while also expanding your customer base to globally, thereby creating a bigger and better value for all parties.

3. Tradition
One of the biggest limitations of businesses today is that most business owners and entrepreneurs get trapped by ‘traditions’ in doing things. These people struggle to accept new digital innovations that could take their businesses to the next level and expand their customer bases.
Many businesses get trapped for two main reasons:
Fear: most business owners fear change and often worry that change will hurt their business rather than improve it.
Tradition: many business owners don’t want to change the way they have been doing things simply because that’s how it has worked for X number of years.
These limiting mindsets can be detrimental to the growth of the business. Outlining a new value creation model can lead to innovations as well as improvements in customer engagement.

4. Customer Engagement
Businesses can improve their value by paying more attention to their existing customer base and finding what they find attractive. This information will help them create products and services to meet their customers’ pressing needs and desires.
Established businesses can apply these principles by leveraging the information they already have on their existing customer base to create new, better, and improved services.

5. Value Vs. Revenue
Most businesses confuse profits with value. They fight for revenues before customer satisfaction (value). Unfortunately, the truth is, if your business puts revenue first against customer satisfaction, you might not last in the business. Your sales team must sell on value versus price. Putting customer satisfaction first is the best way to create value while increasing your revenue.

Why is Value Creation Important in Your Business?

To gain your customers’ trust, love, and loyalty, you should create a strong bond between your brand’s products and services with your target market. This is achievable if you provide something more than just quality products and services. For instance, you can create a good customer care system that makes it possible for customers to communicate with you effectively.

How do you effectively create value for customers in your business?

1. Create an Attractive Motivational Program

Here are some of the best motivational programs you can create for your customers:

A. Discounts

You can offer discounts as a strategy for appreciating loyal customers. Your discount proposition can also cover multiple purchases or regularly purchased products and services. Moreover, you can propose discount packages during holidays, special celebration seasons, or off-season to boost sales and help customers.

B. Special offers

These are one of the best ways to let your customers know how much you value and appreciate them. You can offer free goods and services in the form of a special service or bonus for customers. For instance, expedited or free shipping for goods, after-hour service, assigning personal manager, or decreasing a minimum order quantity.

C. Free trials

Experts reveal that 10-20% of people who use free trial products and services end up becoming customers with paid accounts. If you’re providing subscription-based products and services, customers will want to have a feel of what they are investing in before opting for a payment plan. This is a perfect opportunity to let your customers realize the value of your products and services without suffering any expenses at the start.

D. Partnering with another brand

You can start creating value for customers with co-branded offers. As a potential partner, you choose a company that complements your brand. For instance, certain bank customers can get higher cashback if they’re buying from their partner’s retail website. If you offer relevant goods and services with this collaboration, customers will feel you care about providing excellent products and services.

2. Use Loyalty Programs

End users are more likely to recommend companies with loyalty programs than those without any. The goal of a loyalty program is to appreciate customers for their cooperation and loyalty to your brand. There are different types of loyalty programs, and they include:

A. Point-based

Here, customers get points for email subscription, purchases, adding personal information, or giving feedback. Accumulated points can be spent on future purchases. Coffee houses mostly use this approach. After the first purchase, they give their customers a stamp card where they put a stamp on every cup of coffee purchased. As soon as the customer completes the card, they receive a free cup of coffee.

B. Tier-based

Here, customers get rewards and benefits based on their membership levels. By purchasing more or spending more money, customers move to a higher membership level with commensurate higher rewards and benefits. By progressing on each level, customers get bigger points and discounts.

Steps to Building a Successful Value Creation Plan

This is based on the SMART (Specific, Measurable, Achievable, Realistic, and Timely) principle. The steps include:

  • Create specific and measurable value drivers
  • Set realistic and achievable targets
  • Add target dates
  • Monitor and measure performance of the value-creation plan
  • Share your value-creation plan
  • Add feedback into your value-creation plan to keep it up-to-date
  • Link your objectives and actions to the value chain
  • Develop objectives and strategies to support your value-drivers
  • Identify actions needed to achieve the targets
  • Share the progress and performance reports

Conclusion

Value creation is the bedrock of every successful business. When developing and marketing new products or services, the first thing to keep at the top of your mind is value. Consider what your target market cares about the most and focus on creating products and services that deliver that to them. Implement value creation models in your business so you can compel your prospects to become long-term and loyal customers.

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