The origin of most businesses is to serve an unmet need, bring innovation to market, or simply to do something better than it has been done before.  

Businesses fall into two camps, either they focus more on creating value for their customers than they do on capturing it. Or capturing value is considered last rather than alongside creating value.  In both cases Capturing value is often reduced to a constrained and tactical exercise done in a reactive manner that lacks strategic impact.  

Bridging the gap between the value associated with your product (inherent customer utilities) and the value you capture as a result is highly complex.  In other words, businesses fail to effectively ‘Monetise’ the investment they are making in their product.  

At Pearson Ham Group we believe the route to optimising value capture it through taking a more strategic approach, represented by a methodology for monetisation which seeks to tackle four areas of lost value.  

Value Creation, Value Alignment, Value Capture and Value Realisation. 

Section 1: Value Creation 

What is Value Creation? 

Value Creation requires a deep understanding of the utilities of your customers. Many organisations mistakenly focus on the features or products that customers most value.  This constrains thinking about customer value within the limits of the current approach.  Reflecting on a customer’s utilities and the extent to which they are being satisfied provides a more revealing critique of current performance and potential opportunities  

Effective communication of the benefits you provide, at all levels of your organisation, is essential for successful Value Creation. 

How to get Value Creation right 

• Engage directly with customers using research and existing feedback mechanisms to develop a deep understanding of needs. This is likely to go beyond what they might articulate, requires hypotheses, a degree of imagination and a good degree of interpretation and reflection.  It is not about developing quantitative surveys but deeper pieces of qualitative research. 

• When you have understood the scope to create value for your customers, you should consider where to choose to focus.  This must reflect your brand positioning, where your core competencies lie and how they compare the competition. 

• The results are likely to require a mixture of actual development of your offering as well as its communication. Organisation-wide agreement is needed first, and a plan of course. 

Section 2: Value Alignment 

What is Value Alignment? 

Successful Value Alignment removes all sources of friction that price creates when acquiring and retaining customers. 

This means firstly that your pricing reflects a coherent and justified competitive strategy. Where you have the ability to charge a premium, charge it and tell your customers why you are charging it. If you feel your service is not comparable to competitors, but are consistently undercut, then change how and when you charge. 

And secondly this means aligning how you charge, with what your customers value. Often we see that although a company has value based pricing, the way that they structure how they charge is cost plus.  Value alignment seeks to understand how value is derived.  This includes DENOMINATION which focusses on whether value is driven by usage, possession, access or other ways and TIMING which focusses how value is derived through the period from acquisition to completion or ownership or consumption.  When charging is not aligned with value creation, your acquisition and retention rates suffer, and you are passing up an opportunity to better deliver value.   

How to get Value Alignment right 

• Consider questions of denomination and which ones align best with value creation for your customers.  Plot value creation and value appreciation over the course of your customer’s lifetime. 

• Compare the drivers of value creation/appreciation with the drivers of charging, and establish areas of opportunity to better align them 

• Consider other questions with regards to customer and product strategy and customer elasticities and competitive context, that may justify misalignment in creation and charging 

• Determine the optimal strategy for price denomination and value timing alongside the current solution, and how a transition may be achieved 

Section 3: Value Capture 

What is Value Capture? 

Value Capture is about two core elements: Setting a price that reflects the value you provide, and charging each of your customers the right amount for the right product. Regardless of how much businesses invest into this step, it will always be constrained by how much Value is created, and how you drive demand through Value Alignment. 

It is the area of monetisation where companies focus most, yet still there are inherent challenges of complexity to overcome. There is also a temptation for the task to be delegated too far by management and therefore treated in a tactical manner.   

Instead we advocate a sequenced approach to creating a solution, starting with building your product packaging or product offering per customer segment, and ending with the definition of price changes.  

How to get Value Capture right 

• Packaging should be viewed fundamentally as a pricing problem. To improve how you monetise value, the structure of your offering should mirror differences in needs and willingness to pay of your customers, help them to understand and chose options that are aligned to their needs, and simplify the decision making process 

• Price differentiation is a core principle of Value Capture, and an important step is understanding the price levers you have to differentiate customers to. Whether this is through price structures, differential rate cards, negotiated terms or simply through pushing specific products – how you price should reflect as much as possible differences in value you create at an individual customer level 

• There are countless approaches to setting the right price for your customers, from elasticity-based pricing to sales teams acting on conversations with clients. All have their place depending on your sector and context. The essential element to any price optimisation problem is insight, and ensuring any pricing decision optimises between your cost structure, the value you create and the competition 

Section 4: Value Realisation 

What is Value Realisation? 

Having gone to all that effort to build compelling product offerings that are tailored to your customers’ needs and optimise subsequent prices, many organisations take the financial impact as a given. ‘Pricing flows all the way through to the bottom line’ is a phrase often used when trying to highlight the value of doing a pricing project.  

Sadly, this is only true with a concerted effort to prevent ways in which value is given away. It is easy to underestimate the level of sophistication required to do it well, the time and effort needed, and to think that it is ‘just getting it done’. 

Clear sequencing of actions to prepare both your organisation and the market for the upcoming changes is essential. Businesses make the mistake being reactive in their communications and their response to competitors. Instead, game theory techniques and alternative communication channels like PR can be used to lay out planned competitive responses as well as influence the market prior to implementing your changes.  

As well as approaching implementation of monetisation changes in the right way to ensure that what is planned actually happens, organisations need to optimise their discounting, sales teams and price communications. All three of these areas are key reasons why implementation commonly fails. 

How to get Value Realisation right  

• Invest (time and focus) in implementation. Make sure you have a clearly defined ‘end-state’ you are working towards that includes tailored customer treatment plans, well written customer communications, required systems changes and tools to ensure sales teams can go after ambitious pricing ‘asks’ 

• Figure out the best way to sequence your communications with the market to get the best results. Consider indirect ways of signalling to customers that change is coming 

• Test your price communication approach, where possible using behavioural science. The difficulty of this step is often underestimated, and getting it wrong can have serious impact on how well you monetise value 

• Set up the required governance that gives oversight to senior teams, as well as escalation channels should they be required. Specifically ensure that you agree on how to measure a successful implementation as well as how to capture and review results as early as possible 

Well executed discounting should leave you with no doubt as to the value it brings your organisation. If you are concerned that discounting or promotions are cannibalising revenue, you are not doing it effectively.  

Conclusion 

Monetisation encourages you to consider pricing more strategically, rather than at a later stage in the planning process. It helps the value creation agenda to get more proactive prominence within your organisation  

Optimisation problems – like pricing – are complex and require a well crafted network of dynamic inputs and outputs. With so many levers to apply to help you monetise in the most optimal manner this is particularly the case. The Monetisation framework outlined above breaks the challenge down, and provides a manageable and optimal sequence in which to tackle them. 

Do you want to learn more? 

Over the course of the next months we will be diving deeper into each of these four areas and will explore the common mistakes we observe, the impact this has on businesses and what to do about it.  Please do get in touch if you would like to explore the subject further. 

Want to see these insights in action? We’re hosting events across the globe on monetisation: Find our events here