Value Creation Definition, Model, Principles, Importance & Steps
Published: 12 June, 2022
Value Creation Definition
Value Creation is the process of turning labor and resources into something that meets the needs of others. That includes, for example, farmers growing crops, workers building something in a factory, as well as other intangible goods like computer code and creative ideas.
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, the economic value should not be offered to one group, leaving the others behind, but should be created for all.
Value creation is the goal of every successful business entity, creating value for customers helps 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 the availability of investment capital to fund future operations.
Much more about value creation, innovation strategy & business strategy you will find in our brand-new FREE book “How to Create Innovation”. Register for the download now!
Value Creation in Business Definition
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 assets such as brands, 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.
What Is Value Creation In Business To Customers, Employees, And Investors?
Value Creation in Business refers to the specific act of offering a product or service to a customer. Because the business is helping the customer satisfy a need, the business is rewarded through the exchange of money or other material with an agreed-upon value.
Value Creation for a Customer
For a customer, it means creating products & services a customer finds consistently useful. Such value creation is based on the product, innovation process, and understanding of customer needs in today’s world and you can easily do that by understanding their Jobs to Be done.
Value Creation for Employees
But companies cannot deliver outstanding products and services without professional and dedicated employees. The 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.
Value Creation for Investors
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.
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 or 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 revenue.
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 and 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 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 doing 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:
The UNITE Business Model Framework
All of our separate model pieces fit into the comprehensive UNITE Business Model Framework. The centerpiece is the Business Model Canvas, which covers the six main areas of a Business Model (the Operating, Value, Service, Experience, Cost, and Revenue Models). The eXtended Business Model Canvas adds the immediate business context, including Business Drivers, customers, and the team, as well as the Unfair Advantage.
Our goal is that every model and canvas we discuss can be placed within the context of your overall business model, no matter where you are in your innovative transformation journey. While the Value Model is beneficial on its own, using it in conjunction with the complete UNITE Business Model Framework and working through all the canvases we provide will let you realize the maximum advantage possible and guide you to a successful Digital Transformation Strategy
How to Create Innovation includes helpful advice on every aspect of the UNITE Framework, including models like:
- Business Model Canvas
- Value Proposition Canvas
- Operating Model Canvas
- Organizational Culture Canvas
- Business Model Environment Canvas
- Jobs to Be Done Theory, Framework & Examples
You can claim your free copy of the book by visiting the book section of our website: How to Create Innovation: The Only Book on Innovation you’ll need
1. Value Creation is the Bedrock of Any Business Success
In the past, producers and business owners created products or services that were ‘pushed at’ customers via mass marketing channels. This left end-users with no choice but to patronize those products or 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, adding value to customers.
Therefore, any business that will thrive in this era must understand how to satisfy customers’ desires. This is where value creation comes in.
Related: Introducing the UNITE eXtended Business Model Canvas
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 & 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 & services offered by the company. And customers only keep patronizing your products & 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 success, you need to have a thorough understanding of the market and provide valuable products & services that beat industry standards.
Related: Customer Centricity: How Do You Create a Customer-Centric Strategy?
5. It Requires a Continuous Innovation Strategy on the Customer Frontline
As seasons are changing, so are the customer’s 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 & services for the customers consistently.
6. It Must Represent the Experiential, Functional, and Financial Aspects of the Entire Buying Journey
Customer loyalty & value satisfaction is experienced in 3 stages:
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 customer loyalty to your brand, you need to have years of track records and proof of providing valuable products & services.
8. Economic Value Creation and How You Can Create 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 & services, the essential things to customers in their buying decisions, and the favorable price range.
Related: Unfair Advantage: What is it, and how do you find yours?
Moreover, you need to be sure you’re offering products & services the customers believe in. You also need to ensure your products & services are better than your competitors in terms of quality and maximum customer satisfaction for guaranteed future success.
Here are some examples of how to create economic value:
- Peg your products & 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 & 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.
Related: The Value Proposition Canvas: The Beating Heart of the Business Model Canvas
3. Identify the Group of Customers or Regions Where You Can Create high 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?
Value Creation Model: 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.
Related: Disruptive Innovation Examples: 14 breaking Disruptive Innovations
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 high value in businesses, let’s review what you need to consider when creating value creation models for your business’s future success.
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.
Related: Customer Centricity: How Do You Create a Customer-Centric Strategy?
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 globally, thereby creating a bigger and better value for all parties.
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.
Related: The UNITE Value Proposition Canvas: The Beating Heart of the Business Model
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?
Create an Attractive Motivational Program
Here are some of the best motivational programs you can create for your customers:
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 a 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.
Related: What is Customer Relationships in the Business Model Canvas?
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:
Here, customers get points for email subscriptions, 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.
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 the performance of the value-creation plan
- Share your value-creation plan
- Add feedback to 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
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.
If you enjoyed reading this post, you’d also love:
- The UNITE Value Proposition Canvas: The Beating Heart of the Business Model
- The Business Model Canvas – Free Template and Guide
- Jobs to be Done Framework, Examples, and Statements (JTBD)
- The UNITE Operating Model Canvas: Bridging the Strategy-Execution Gap
- The UNITE Business Model Environment Canvas
- The Three Horizons of Growth: A Roadmap to Successful Innovation Strategy
- What is Customer Relationships in the Business Model Canvas?
- The UNITE Business Model Innovation Patterns
Frequently Asked Questions:
- Why is value creation important?
Business is built on value creation. This is what differentiates you from your competitors, secures long-term customers, and gives a distinct meaning to your brand. Your unique offering won't be valued by your target market if it doesn't create value.
- How is value creation measured?
It can be measured by revenue, customer satisfaction, or the success of a sale. Example of Value Creation: A company creates products using raw materials. These raw materials are then transformed into finished goods by various processes, such as assembly, packaging, and distribution.
- What are value creation examples?
1- Other features and functions: Smartphone manufacturers embed high-resolution cameras in their smartphones to add value.
2- Quality: Quality products are preferred by customers over inferior products, such as those that are less durable.
3- Design: Design is important when people purchase furniture, whether wooden or wood.
4- Convenience: A company can save customers time by using its products in the same way that fast-food restaurants do.
5- Ease-of-use: Consumers prefer easy-to-use software to write programs that execute commands.
6- Customer service: Companies may offer delivery services or product installation at the customer's residence.
7- Branding: It's about creating strong brand equity by influencing consumers to perceive the company's products.
The UNITE Business Model Framework
How to Create Innovation includes a number of canvases that focus on value creation and finding the right business model to meet your customer segment and customer needs. The framework is built to inspire drastic changes that help you find a competitive advantage. Our hope is that your company grows through business model innovation, and so we again encourage you to look deeper into our website and the book.
Here is a summary of the key ingredients of the framework:
The centerpiece is the Business Model Canvas, which covers the six main areas of a Business Model Canvas (the Operating, Value, Service, Experience, Cost, and Revenue Models).
The eXtended Business Model Canvas adds the immediate business context, including Business Drivers, customers, and the team, as well as the Unfair Advantage.
A Business Model can be broken out into its numerous aspects. Depending on what challenges you face, you can zoom in on your area of interest using an appropriate tool or canvas:
- Your Business Intention and objectives as well as your Massive Transformative Purpose summarize your drivers and give direction to what you do.
- The Value Proposition Canvas details the central components of your offering (the product or service).
- To dig into your Customer Segments, work with data-driven Personas.
- The JTBD Customer Job Statement and Job Map frame the JTBD of your customers.
- The Business Model Environment puts your Business Model in a market context composed of emerging trends and disruptive forces.
- The Innovation Culture Canvas helps you understand and consciously shape a culture that supports innovation.
- The Innovation team structure enables you to draft a team structure for your innovation initiative.
- Using learning and growth metrics, you can measure progress at the initial stages of development. These metrics help you focus on what really matters instead of creating a detailed business plan that will not really help you. Later on, you can expand the financial aspect of the Revenue and Cost Models with a full business case.
- The Operating Model Canvas helps you think through the Operating Model.