Value Creation vs. Value Capture
People approach creating products from many different perspectives. Some seek out customer pain and dedicate themselves to solving their problems. Others follow the technology and strive to deliver solutions that are just now possible. Some like to follow competitors and deliver better solutions in a fast-follower model. Others are simply trying to find a way to make some money so that they can sustain their business.
No matter your approach, our job in product is to create value.
Unfortunately, many product leaders think their job is not to create value, but rather, to capture or extract value. I find this situation in so many places, from early stage startups to large companies, for both new and existing products.
I often find product teams running endless pricing tests, or continuously optimizing on-site advertising, or trying to squeeze out costs from a supply or delivery chain.
Don't get me wrong, creating products includes the work to design in your monetization strategy, so that your company can capture some of the value you create, which enables us to sustain our business and continue to invest in our products.
The problem is that I see far too many product teams spending too much time on value capture, and not nearly enough time on value creation.
I'll talk about the startup case first, and then the case for more established companies.
In a startup, it is a race to traction before you run out of money. Hopefully you are not wasting your precious time on old style business plans, but many have simply replaced their business plan with a Business Model Canvas or Lean Canvas. While I vastly prefer the Lean Canvas to antiquated business plans, I'm seeing many startups falling into the same trap. They start focussing way too early on their business model, especially what their various sources of revenue will be, what their sales channels will be, and what their costs will be, and they leave the pesky matter of "the solution" - can they actually solve the target customer's problem by discovering a solution that is valuable, usable and feasible - as a (largely coding) task for later. Yet unless you can succeed in creating real value with your solution, the rest of the canvas won't be worth much.
In established companies, the problem usually occurs after a product has been around a few years. The product team is often spending their time chasing incremental features, building minor enhancements, fixing bugs and doing some optimizations. None of which typically creates much new value. At best they help to preserve some value, but mostly they are about extracting that value.
Moreover, there is another consequence of this focus on value capture rather than value creation. Ironically, when you focus so much of your time on value capture, you can significantly reduce the value capture potential of your products. What would you rather do? Optimize the lifetime customer value from $100 to $115 by extracting another $15, or double the value from $100 to $200, even if you only capture half that incremental value.
Several teams have asked me what the ideal blend of time and effort is for value creation vs. value capture. I don't believe there is a single answer to this as there are so many factors involved, but when pressed I typically encourage spending at least 3/4 of your time on value creation. And I applaud those companies that have their product teams focus exclusively on value creation, and then have specialist teams that help with value capture.
The key to keep in mind is that the very best thing the product team can possibly do to facilitate capturing value is to create value – as much as possible. Create products that are compelling, sticky, and engaging – the kind of products that your customers could not live without. Make the job easy for your pricing specialists and your sales people.
The bottom line: focus on value and always create more value than you capture.