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Monday, February 1, 2021

Value Creation and Value Capture by Shekhar Misra * [115]


Value creation and value capture have been extensively studied in both management and marketing. Yet, as recent work in this area has grown, their meaning has become ambiguous. I believe that value creation and value capture are distinct yet interlinked constructs. Value creation is determined by customers’ subjective evaluations of a firm’s offerings while value capture is determined by the profits a firm is able to generate.

Value creation is a central concept in marketing as customer perceptions of value are pivotal determinants of product choice and buying behavior. Customer value is based on the principle of utility maximization and is summarized as the customer’s overall assessment of the utility from a product based on her perceptions of what she “gets” in-return for what she must “give” up. The “get” aspect concerns the overall benefits customers derive (or expect to derive) from a product while the “give” aspect pertains to the overall costs customers incur (or expect to incur) to enjoy the product’s expected benefits. From this perspective, customer value can be defined as the “customers’ net valuation of the perceived benefits accrued from an offering that is based on the costs they are willing to give up for the needs they are seeking to satisfy”.

The “give” aspect of value creation is comprised of all the costs incurred by customers to obtain the benefits of product consumption. Customers sacrifice money and other resources such as time, energy, effort, etc. to find, buy and use products. These costs include those related to finding, acquiring, consuming, maintaining, and if necessary disposing of the product.

The “get” dimension of value creation includes the benefits customers derive from a product, which may be functional, experiential, and/or symbolic. Functional benefits are the intrinsic benefit customers derive from a product and are primarily based on its objective and perceived quality. Objective quality is the aggregate performance of all product attributes, while perceived quality is a customer’s subjective evaluation of the product’s overall superiority compared to other products in the customer’s evoked set. Experiential benefits capture customers’ personal experience using a product corresponding to product-related attributes, such as sensory pleasure, stimulation, variety, etc. For example, color is an important product attribute on which customers have varying preferences. Finally, symbolic benefits concern the extrinsic advantages of using the product. These benefits are generally linked to non-product related attribute benefits such as self-expression and social approval. Therefore, perceived value is the consumer's overall assessment of the utility of a product based on perceptions of what is received and what is given. This assessment is based on consumers’ idiosyncratic preferences and choices and as a result, varies from one consumer to another.

However, value creation for customers is only one element of the overall economic value process. The second critical element is the value captured by the firm in return—not least because in the absence of value capture a firm has limited incentives to create customer value. The concept of firm value capture is rooted in the economic principle of profit maximization, and similar to customer value creation, it implies a tradeoff between “give” and “get” elements from firm’s perspective.

The “give” aspect of value capture is the firm’s offering to the marketplace that creates customer value. To deliver a product to the market the firm has to incur various costs related to conceiving, creating, delivering, and communicating the benefits of the product to the market. Broadly, these costs can be broken down into R&D costs, manufacturing costs, distribution costs, and marketing and sales costs. R&D expenses are those operating expenses incurred in the process of searching for new solutions and products or seeking to update and improve existing products and services. Manufacturing costs cover materials, and labor and factory overhead expenses incurred in converting raw materials into finished products. Distribution costs are those incurred to transport and deliver the product from the producer to the end user. Marketing expenses include costs associated with advertising, promotion (such as on-shelf advertisements, floor ads, etc.), public relations, package design, and market research. Finally, selling expenditures includes sales force compensation (such as benefits, profit sharing, etc.), travel costs, consulting fees, etc.

The “get” aspect of firm value capture is the revenue the firm’s offerings generate in the marketplace. Revenues from the firm’s offerings are a function of the number of product units sold and the realized price of each unit. A firm therefore has only two primary mechanisms to increase its revenues—either by selling more units of the product or by selling them at a higher price. A firm can sell higher numbers of units by either attracting more customers to the product or by increasing the usage of the product by existing customers. Alternatively, firms can increase the revenue from a product by achieving a higher realized price for the product. Based on the above, firm value capture is the firm’s appropriation of financial resources based on the difference between the revenues and the total costs of delivering the firm’s offerings to the marketplace. Therefore, value capture can be defined as the firm’s ability to appropriate financial resources from the marketplace, i.e., how effectively a firm can convert the value present in the marketplace into profits.

The central premise is that value creation and value capture are distinct from each other but still interlinked. Value creation is the perceived value in customers’ minds resulting from the firms’ actions; and, value capture is the economic benefits a firm derives. This conceptualization of value creation and value capture enables us to independently look at the impact of firms’ resources and capabilities. Importantly, this view also demonstrates that value creation and value capture are not necessarily a zero-sum game. Both customers’ utility (value creation) and a firm’s profits from providing customer utility (value capture) can be simultaneously increased. Hence, a win-win results for the customer and the company.

* Shekhar Misra, Ph.D., is an Assistant Professor of Marketing at Grenoble Ecole de Management, France. He can be reached at: Shekhar.MISRA@grenoble-em.com


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