Maximize the Value in Your Business—Part I of III (Value Extraction)
Value extraction allows you to maximize potential revenue, using new and existing resources. Learn how the experts are doing it with technology, employees, and more.
This post is part of 1 of a 3-part series. For part 2, click here.
Typically, there are three main pillars to maximizing value in your business: revenue, cash flow, and shareholder wealth. We’re not going to cover any of these. Instead, we’re going to show you how investing in the customer experience will subsequently add value to your business. We’ll also show you how “giving” is the new “taking”, leading to a natural increase to the three main pillars. First, let’s quickly take a look at a couple of definitions of the word value:
Value definition #1: the regard that something is held to deserve; the importance, worth, or usefulness of something
This might mean, “Your business is of great value to me, because it allows me to get my shipping out on time.” In this example, the value might be time savings or convenience.
Another example using this definition might be, “She is of great value to the company, because of her ability to cut costs.” In this instance, value may be more intrinsic to profitability.
Another definition of value takes a different approach:
Value definition #2. a person’s principles or standards of behavior; one’s judgment of what is important in life
For example, “We pride ourselves on our values, like integrity and honesty. This is why our customers love us.” When you use value in this manner, it embodies more of an ethic or moral standard.
So which definition are we suggesting you maximize for your business? The answer is “both”. We’re talking about the value of your business in the eyes of your customers, as well as the values within your business, both financially and in principle. We’re referring to shareholder wealth, brand perception, and everything in between.
It is our belief that they can work synchronously and in harmony with one another if your interests are in the right place, namely: customers first, no matter what. If you can add value to your customers on a consistent and reliable basis, the financial gains will eventually come, as will the gains in value of your business. Your intrinsic motivations (such as value extraction) shouldn’t come at the expense of your extrinsic motivations (like value creation), because there are broader influences that determine long-term success.
Value extraction is a model that identifies and captures maximum potential from prospects, existing customers, technology, and employees. In terms of what we want to focus on, we are referring to the maximum dollar amount you can extract from your pool of potential customers through your value proposition(s), and also the maximum “load” you can leverage from systems within your business.
If you haven’t yet taken our course on Business Model Design, we recommend taking it at some point during your business creation (the earlier, the better). In it, we cover the concept of value propositions pretty extensively, especially with regard to how they work throughout your entire business. We won’t harp on it too much here, but the takeaway is that your value proposition is the offer of value through which your customers gain some sort of perceived benefit. Maybe it’s better customer service or faster technology. The benefit is what the customer ultimately pays for, not the product or service itself. Maximizing the perceived benefits of your value proposition will ensure higher engagement from your target audience, leading to maximum profitability in your business.
Customer Lifetime Value
In business school, they teach you that one of the keys to success in business is through maximizing customer lifetime value (CLV). CLV is defined as:
A prediction of the net profit attributed to the entire future relationship with a customer
It’s an important metric in determining what it’s worth to acquire a new customer, meaning that if your customer is predicted to spend $1,000 over the entire course of their relationship with your business, you could spend up to that amount without losing money, even if your first sale was only $200.
One of the most famous examples that illustrates this point is with the advent of the disposable razor head. Gillette knew that they could lose money on the sale of the razor itself, because a customer would likely spend far more money on disposable blades over the course of their lifetime. They effectively created a model that would maximize the value from each of their customers over the lifetime of the relationship.
There are many models that will help businesses predict what the CLV will be and how to extract that maximum value from each customer to be successful. There are also many methods, such as cross-selling and upselling, that help business actively seek value extraction. While these are all important factors in increasing revenue and something we may cover in future posts, we won’t go over them now because there is a larger matter that we want you to take away. That matter is the concept of intangibles, which we will cover next in next week’s post on Value Creation.
Technology & Systems
Technology and systems are other ways through which we can extract value, because they allow us to increase our output without increasing our input. If you were able to systemize your workload such that your effort was reduced half while still being able to generate the same results, wouldn’t you do it? Your efficiency will have doubled, and your value will have increased, because you are now able to focus on other areas of your business. Of course, it’s important to note that an increase in efficiency does not always mean an increase in effectiveness.
In many cases we can increase our output, while actually decreasing our input. It is this concept in system creation that will ultimately allow you to scale your business. Think about how much technology aids us in that regard. A four-page calculus problem that may have taken days to complete by hand, can now be solved in less than a second with a calculator. Similarly, what used to take businesses days to complete with social media, can now be done in minutes.
We encourage developing systems that will ultimately allow you to do less of the work that provides no intrinsic value to your customers so that you can work on areas of your business that will ultimately push it forward. If you have a service business that requires you to invoice customers and you hate invoicing, create or utilize an existing system that will automate the process for you so that you can get back to the work you are actually passionate about. The work that you are now able to do will offer far more value than invoicing ever could. Understand that the more you are able to focus on the things you enjoy in your business, the more valuable you and your business will be.
Thank you for taking the time to read our post. Next week, we will dive into Value Creation and it’s role in maximizing overall value for your business. As always, we encourage your comments below and if you liked the post, please share it with those who you think might like it as well. And if you’re looking for exclusive offers, online business tips, and more, be sure to sign up for our free newsletter below.