Many businesses do well at creating value, offering customers goods and services that both whet and satisfy an appetite for consumption. Fewer are as successful at capturing value—turning demand into dollars. Radiology and healthcare at large are well advised to heed the advice of Stefan Michel, in the October issue of the Harvard Business Review1, who urges organizations to innovate in value capture as well as value creation.
Take traditional newspapers and magazines. Most are suffering because, in the age of free content, few have figured out a way to monetize their core product lines: Plenty of eyes still land on their pages, and stay awhile, but the revenues no longer follow.
Nor is the pain confined to Old World industries. Even new-economy super-player Facebook has yet to innovate a model of value capture that yields paying transactions in numbers worthy of its 1.3 billion-user base. Its highly volatile share prices testify to its struggle to capture value for itself from the value it creates for the masses.
From that premise, and with those examples, Michel introduces a number of innovation strategies for businesses to better capture value. “Even managers who know they should worry about value capture often reduce the subject to pricing,” he writes. But value capture “involves more-fundamental considerations, with greater strategic implications.” The first step toward innovating in value capture is simply to make people conscious of it, he adds, then rolls out his strategies in five categories.
Pricing may not be everything, but it must be something because that’s where Michel begins. As Michel sees it, the most familiar yet still innovative pricing rationale is value-based pricing—setting prices not by marking up production costs or marking down from competitors’ rates but, instead, charging “according to the offering’s worth to the customer.” Other innovations in this category—which Michel labels changing the price-setting mechanism—include “discovering customers’ value perceptions” and charging them according to what they are willing to pay.
If you have Googled today, you’ve seen auctioning at work. Some of the top links that come up in searches are paid for by advertisers who bid for the keywords with which they want to be associated. An auction can quickly surface its highest acceptable price, Michel explains, and Google rewards the top bidder with maximum prominence in search results. Other strategies in this category include demand-driving pricing (think of the yield-management practices of airlines, hotels and rental car agencies), name your own price (think Priceline) and pay what you want.
In a category he calls “changing the payor,” Michel discusses a two-sided market model in which advertisers subsidize consumption. He also describes markets that have more than two sides, sometimes making it possible to “change the payor in the value constellation.”
Here Michel spotlights the U.S. market for tutoring as a case in point. With the 2001 passage of the federal No Child Left Behind Act, parents of underachieving children gained access to private tutoring services paid for by the government, he notes. Other players with a stake in student outcomes include state and local education departments, future employers, schools, teachers, and students themselves. “With multiple diverse players,” he writes, “tutoring services can move among and combine several revenue streams.”
Other categories include changing the price carrier, the part of the experience that carries the price tag (for instance, a single perfectly brewed cup of coffee versus the bag of beans), changing the timing (usually tied to a price-carrier change), and changing the segment (by understanding what each segment is willing to buy).
Making it happen
In a section on focusing managers on value capture, Michel suggests forming a committee of top managers who are not afraid to challenge the status quo, charging the group to rethink how to capture value. “Having a dedicated team creates a sense of urgency and lets members develop a common language for discussing ideas,” he writes. “Beyond the core team, anyone in the company responsible for defining and executing strategy should be invited to join a network that is kept apprised of the team’s work and routinely asked to offer ideas and feedback.”
Michel writes of a workshop for a services firm with more than 250,000 employees worldwide in which the CEO challenged his top team to imagine how the operating margin, which had dropped to 5.5%, could be expanded—not just to 5.7%, say, but to 9.5%. “Over two days the group discussed 24 value-capture innovations,” Michel writes. “The cases were presented in six batches, each followed by a two-hour exploration of how the firm might make similar changes. Several concrete follow-up actions emerged. Although none gave the firm a margin of 9.5%, the margin’s decline was slightly reversed.”
“My work with more than 50 companies in dozens of countries has confirmed for me that businesses have spent far more time, money, and effort on value-creating innovations than on value-capturing ones—and that much can be gained by correcting the imbalance,” Michel concludes. “When a driver eagerly pays 135,000 francs for a special license plate, it suggests that many sellers may not be capturing nearly as much value as they have already produced. When a coffee lover happily spends $137 for a kilo of coffee, it reminds us that new value can be created—and captured—when customers’ needs are better understood. What opportunities to capture value are you missing?”
In the comments section following the article posted on the publisher’s website, a reader who works for a healthcare market research firm pointed out that healthcare providers are struggling to see that their value capture keeps pace with the rapid rate of innovation in value creation.
Referencing his strategy on how to “change the payor in the value constellation” as probably the most relevant, Michel replied: “I worked on a case... in Indonesia, where the value creation innovation was clear (handheld ultrasound scanner could save thousands of babies and mothers every year), but the price was still too high for many midwives. Thinking creatively about this, one idea was to include the price of the scanner into the tuition of a multi-year midwife education, so that every midwife wo uld receive a scanner upon graduation.”
He then confirmed what the healthcare commenter had suggested—Michel’s article is not so much a plan to work from as “a broad basis for reflection.”