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Creating value is table stakes for any business. But is your organization capturing it?
In this episode he explains how to apply his framework—whether you’re developing new business ideas, or formulating a strategy to compete with a new entrant in your market. He also discusses how value-capture works in the real world, drawing on examples from companies like Nespresso and Google.
This episode originally aired on HBR IdeaCast in October 2014. Here it is.
JULIA KIRBY: Hi. I’m Julia Kirby. Welcome to the HBR IdeaCast. Today our guest is Stefan Michel, who is director of the Executive MBA program at IMD in Lausanne, Switzerland, and a professor of marketing and service management. Welcome, Stefan.
STEFAN MICHEL: Thank you for having me.
JULIA KIRBY: Your article in the October issue of HBR is called “Capture More Value.” It has great advice for business innovators. But it starts with this observation about a major blind spot you say they have.
STEFAN MICHEL: Many companies spend a lot of time on innovating, in a sense that they create more value for customers. And what they often miss is to think about how to capture that value. And this is really what this research is about. How can we capture the value that we create with customers in different ways?
JULIA KIRBY: So how do you think more rigorously about that? Is there some systematic way to think about value-capture opportunities?
STEFAN MICHEL: So what I did in my research– I looked at cases across industry, across the globe. And tried to figure out patterns behind those value-capture innovation. I came up with 15 ways of how to capture value differently in five categories. And that’s what I present in this paper.
JULIA KIRBY: And the five categories– I remember one of them is change the price mechanism. What else are the categories?
STEFAN MICHEL: Yes. The first one is change the price mechanism. The second one is that you change the payer. So who actually pays for the value. The third one is that you change to price carrier. That means, where do you put the price tag on? The fourth category talks about how to change the timing when you capture that value. And finally, the fifth one is how to change the segment and capture value differently with different segments.
JULIA KIRBY: Let’s get an example on the table here of changing the payer. That seems a little strange, because wouldn’t the consumer of the value normally be the payer for it?
STEFAN MICHEL: That is most often the case, but not always. And one good example is LifeStraw. That’s an innovation created for developing countries. So it’s a straw. And you can drink water through that straw. And it filters out the bacteria. So you get clean water when you use that straw. So the value creation is obvious. It’s much safer and much more healthy. But the value capture is difficult. Because those people who need it most don’t have the money to pay for that.
So in this case, in order to make use of that innovation, you need to find a different payer. And what LifeStraw figured out is that by using this straw, you don’t need to boil the water. And if you don’t need to boil the water, you need less wood to burn. And with this, you can achieve a CO2 reduction. And the CO2 reduction in turn helps you to get carbon credits for this. So in the end, it’s the carbon credit to pay for the LifeStraw, which then saves the people’s life.
JULIA KIRBY: What a clever solution. To use carbon credits to pay for a water solution. Price carrier– what does it mean to change the price carrier?
STEFAN MICHEL: This is another example from a completely different market. It’s Nespresso– the coffee machine and capsules by Nestle. And when you think about it, it’s a great innovation in itself. The coffee’s good. And how it’s presented and the whole ecosystem around this is really a great example of value-creation innovation. But what makes this so profitable is the value-capture innovation. Because in the end, you pay $130 per kilogram of coffee. But no one actually pays $130 per kilogram of coffee, because as a consumer you buy a capsule at a time. And then it’s maybe $0.50, $0.60, or $0.70. And so here, Nespresso very cleverly moved the price carrier from the pack of coffee– the kilogram of coffee– to one cup of coffee. And with this, they were able to charge a premium for each and every cup.
JULIA KIRBY: One thing that’s made such a impact on pricing since the internet came along is auctioning. How does that fit into your framework?
STEFAN MICHEL: So auctioning is– the case of Google as the most prominent example. When you advertise at Google, you don’t get the price of how much does it cost if you want to advertise a certain keyword. But you put in your own price. And then Google auctions out. So whoever pays more for a certain keyword in a certain language in a certain country, gets more hits. And that’s a way for Google to capture almost a full willingness to pay in the market.
Another interesting example of auctioning that is on the government side is license plates. So we have seen in several countries like Saudi Arabia or Switzerland or Russia that the government sells out very unique license plates. Like the number one or specific numbers. Maybe 88 in China. And then whoever bids the highest amount for a specific license plate gets that license plate. And sometimes the price that drivers are willing to pay is much, much, much higher than everyone would have guessed. It could be six digits, seven digits figure. And that’s a good way for the government to capture a value then apparently exists in the minds of some drivers.
JULIA KIRBY: That seems like an extreme form of what’s known as a value pricing.
STEFAN MICHEL: Correct. This is an extreme form of value-based pricing. It’s almost the perfection of value-based pricing, where you capture all the willingness to pay. Value-based pricing in most industry is not done by auctioning, but by figuring out what is the value that we create with the customer? And how can we capture that value better? And one example I use in the article is from Bossard, a Swiss company that sells screws, nuts, and bolts. Of course, they call it “fastening technology” because that sounds better than screws, nuts, and bolts. And what they have developed is a screw that is already prelubricated.
And when they price the screw, they don’t look how much does the screw cost and how much does the lubricant cost. That will be cost-based pricing. But they try to figure out how much value does it provide to the customer and industrial company who puts together coffee machines, for example. Or cars. Of not having to lubricate each and every screw. So they tried to figure out what is the value that the prelubrication has to the customer. And based on that, they set a price that creates a win-win for both parties.
JULIA KIRBY: You created this framework by looking around and seeing interesting examples of value capture and putting them in these categories. How do people use this framework in a managerial setting?
STEFAN MICHEL: So in an ideal case, what I advise my clients is to think about value capture every time you think about strategy and every time you think about innovation. And it’s very important that this framework can be used what we call to play offense and defense. So in one way, you want to use the framework to come up with new ideas how to capture more value. But at the same time, you want to be very careful about looking at competitors who come in your market with a different value-capture idea. Because they are very dangerous. If they change the price carrier, if they change the payer– they could really attack you from a side that you haven’t expected.
JULIA KIRBY: In other words, you could use this as a kind of diagnostic tool. Because something’s happening in your competitive set that is maybe blind siding you. But using the framework, you could understand it better.
STEFAN MICHEL: Exactly. And then, I think it’s important that you don’t delegate this to a pricing manager, for example or to the sales force. I think this really requires a joint effort of several cross-functional teams within your organization to think about this regularly and systematically, rather than just at the end of the day when you realize that your margin is under pressure.
JULIA KIRBY: Are there some organizations that you’ve seen actually be able to realize substantial new value as a result?
STEFAN MICHEL: One good case that I recall was a large as a service company with over 200,000 employees. They are under constant margin pressure. I think it’s about 5.5% margin. And usually they fight to get to 5.7% or 5.9%. But the CEO came to us and said, I want to challenge my team not to go to 5.9%, but to 9.5%, which is huge. And so what we did– we prepared 24 cases of value-capture innovation in different markets. And then we presented them and discussed them with the top team of the company. So we went through each case and asked, so what does this mean for us? How could we use this idea?
And in the end, we created a list of a new approaches of how to capture value. The company was not able to go from 5.5% to 9.5%. But again, this was just the trigger to get us thinking more creatively about capture more value. But what it did– it helped to open new revenue streams within the companies. And also it helped the top management to be more alert on this kind of thinking– to look into innovations not only from the value-creation perspective, but also from the value-capture perspective.
JULIA KIRBY: So that audacious goal he put on the table was really an exercise in forcing them to stop thinking incrementally about innovation, and really rethink model of the business?
STEFAN MICHEL: Exactly. And I think that’s the point here. That every time you use think about strategy– you think about innovation– that you have to question in your mind, how do we capture more value? And this framework helps you to do this because it provides a language that everyone can use. And you can go through those different patterns systematically and, hopefully, regularly with your team.
JULIA KIRBY: Stefan, it’s a great thing that you’re shining more light on this challenge of value capture. Thank you for coming in and sharing your thinking today.
STEFAN MICHEL: It is my pleasure, Julia. Thank you.
HANAH BATES: That was IMD professor Stefan Michel in conversation with Julia Kirby on HBR IdeaCast.
We’ll be back next Wednesday with another hand-picked conversation about business strategy from Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues, and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. While you’re there, be sure to leave us a review.
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This episode was produced by Anne Saini and me, Hannah Bates. Ian Fox is our editor. Special thanks to Maureen Hoch, Erica Truxler, Ramsey Khabbaz, Nicole Smith, Anne Bartholomew, and you – our listener. See you next week.
