What do startups understand that many others in business tend to forget? It seems so simple, yet it’s a profound truth that many corporations lose sight of in the daily hum of operations, deadlines and metrics: you can create true value for customers, without cutting corners.
You see, the purpose of any business is to create value for their customer. Every customer wants a good value, and a good value is a value imbalance in their favor. This is the foundational problem that every business has to solve. So how do we create the value imbalance in their favor in a sustainable way? Maybe the following equation can shed some light on this. If you want to have a chance at standing out among a crowded market, you have to bring it back to the basics: Value equals what you get, divided by what you pay.
It begs the question then – how do you create value for your customers? The natural tendency is to focus on the denominator – they reduce what people pay. They jump to slash price tags, put up clearance signs or advertise limited time deals to get people through the door. Oftentimes it works, for a little while, at least.
If suddenly Chick-fil-A sold 99 cent sandwiches, there is no question that people would be beating down the door to get their hands on one (and we already know how long the lines can get at regular price!) – it increases demand. This approach is also measurable – we could prove to the CFO that reducing the cost worked because you can count, weigh and measure how many people came as a result of the 99 cent sandwiches. Sounds pretty good right? Maybe for the short term, but if price reduction is your only approach to creating value, you will find yourself in a sticky situation before long. If all you do is reduce what people pay, you reduce what you earn as well, and that simply isn’t sustainable.
On the flip side, businesses that create true value focus on the numerator and increasing the value the customer receives, without increasing the price. Many back away from this approach because it’s hard, it takes too long, it requires creativity, and it’s harder to measure, but the bottom line: it works, and it works sustainably. It may take longer but it will also last longer.
For example, If we have a $4 sandwich, what’s the most value we can ever create for you as a customer if we just reduce what you pay? $4. The most value we can ever create with a $4 sandwich is $4. But if we really work to improve the relationships and experience that surrounds your sandwich, we can create value well beyond $4.
Here’s another way to look at it: If we offered to sell you a single piece of paper, what would you pay for it? If you’re being generous, you might pay a penny. Let’s fast forward to February 14, 2024. A lot of people are going to walk into a store and buy a folded piece of paper that’s called a Valentine’s Day card, and they will happily shell out $5 or $6 for it. Other than a few-cents worth of ink, the piece of paper didn’t change much, but what did change is the emotion attached to it. They created value through the emotional connection.
The same can be said for a hand-made drawing from your child, or an autographed piece of paper from your favorite celebrity – what was once worth mere pennies is now priceless because we have attached emotion to it – we have created value. The same principle is true in business but is much more difficult to see and appreciate.
In addition to an emotional connection, there are numerous ways to add value to what a customer receives. Whether it’s delivering a product with increased efficiency, reducing the pain of doing business with you, saving time, or sparing inconvenience, there are endless ways we can create value. If we can find how to add to what a customer receives instead of reducing what they pay, there is an infinite amount of value we can create.
Here’s where startups get it right. Startups do this particularly well because they are not in the business of reducing what you pay. Instead, they’re in the business of increasing what you get. The very core of a startup is based on creating a new thing or service of value that the world has never seen before. In order to make it in today’s crowded and noisy market, they must be in the value creation business, not the price reduction business.
The beauty of a startup is they have the opportunity to create something the world is missing and a value that didn’t exist before. In their purest form, they have to focus on creating value for their customer. A lot of big corporations swell to the point where they think everything can be solved by writing big checks and throwing money at the problem, rather than using the power of their mind and heart. While many startups may be low on cash, they’re often intrinsically abundant in mind and heart, which is what you need in order to create value.
So what can we learn from startups? We should orient our daily business functions, yearly projections and everything in between around customer value creation, as opposed to value extraction. If your focus is to create more value for the customer than you did the year prior (value creation), rather than focusing on creating more profit than you did the year prior (value extraction), you’re more likely to see an overall profit increase and have customers return year after year.
Our job, every day and every week, should be strategizing and implementing around value creation. When we focus on the “what you get” side of this equation, by increasing value for customers without charging them a penny more, we create raving fan customers that sustain our organizations for decades to come.
