The goal of this post is to help breakdown value creation and value capture. At first glance we can see that there is more than one way we can add value and that not all value added will actually go to the user.
There are 3 fundamental ways to add value to your customers:
1. Add value to the product without increasing Intrinsic costs or Financial Costs
2. Reduce Intrinsic costs (e.g., complexity, training requirement, filling in forms, etc.)
3. Reduce Financial costs to the user (e.g., licensing costs, product maintenance cost, etc.)
The model below illustrates how the pieces of the Value Pie are divided:
Note: An additional important aspect which I will cover in a future post is the timing element of value and cost creation (e.g. if the first task users have to do is registration then at time unit number 1 they are capturing negative value and only later on will start “enjoying” the product. This can seriously and negatively impact virility and adoption.)
Quick discussion on each of the elements:
note: As mentioned in previous posts I hope to continue to write in further detail on each of these in the future.
Value created by feature– Here we take the assumption that each new features actually adds value to the product. Therefore adding new features typically increases the total value created. However, we must differentiate between total value created and total value captured by the user. For example adding more features can make the product more complex and increase intrinsic costs thus, actually reducing the value captured by the user.
Note: To really understand value created it is important to segment and understand your users. For example a specific feature might add a lot of value to a 16 year old, but add no value and increase Intrinsic costs for an adult.
Intrinsic Costs – This is the big one and includes anything from: Training required, implementation, advertisments, asking 3 of your friends to join, installation, setting up a profile, filling in a form, giving your credit card details, figuring out new UI,
In order to measure Intrinsic costs I suggest to look at the length of time and effort required for the user to unlock the value they are looking for. Units can be number of clicks, time, etc.
Financial costs – This is one is easy, how much does it cost? This bucket can include anything from the actual licenses or subscription to the hardware needed.
As always thoughts and comments are more than welcome.
How to use this blog and where to go from here
My goal in this post and others is to build a knowledge map for the main activities Software Product Managers are responsible for. I plan to continue discussing and breaking apart each activity. Slowly, I hope to turn some of the art behind product management into a science. Take a look at the Product Management Framework page for more info.