Successful businesses often change the way the world lives. Consider Apple, Google, and Netflix and the immense value each offers customers. Despite ambitious profit margins, the companies' business strategies didn't stem solely from financial goals. Each prioritized consumer value through innovations such as smartphones, faster search engines, and video streaming.
If you want to develop a successful business strategy, here's an overview of value creation, how to create value, and examples of companies successfully implementing it into their business models.
Access your free e-book today.
DOWNLOAD NOWWhat Is a Value-Based Business Strategy?
Creating value for the customer and company determines whether a business strategy is successful. According to Harvard Business School Professor Felix Oberholzer-Gee in the HBS Online course Business Strategy, "These companies don't win by having the best product or most impressive service. They win by creating the most value."
While this can be difficult to visualize, the value stick framework illustrates how a company can maximize profit while creating more value for its customers, suppliers, and stakeholders.
The value stick is a graph comprised of four components: willingness to pay (WTP), price, cost, and willingness to sell (WTS). Each segment represents how a sale's value is split between a firm, its customers, and suppliers. While each component leads to value, two levers create it: WTP and WTS.
To better understand how these components aid value-based business strategies, here are examples of how you can implement them in your organization.
Raising WTP
Willingness to pay (WTP) refers to the highest price a customer is willing to pay for a product or service. This calculation determines the threshold at which customers are more likely to make a purchase. Any slight imbalance in this number can deter, or even dissuade, consumers from purchasing. Only when a customer is delighted by a product or service are they willing to pay more.
Companies need to know their customer's WTP to remain profitable. According to HBS Online's Business Strategy course, it's influenced by the functional attributes of the product or service and other considerations, including:
- Business sustainability: Is the product or service environmentally sound?
- Social status: Does the media give your product or service additional value?
- Market influence: Does your product or service inspire your competition?
Raising WTP can be an effective strategy for companies interested in increasing profit margins. This difficult balancing act requires an understanding of the product and target consumer. Business Strategy identifies three main mechanisms for raising WTP:
- Conferring status: Earning "status" granted by media and the consumers to gain more value through public attention and brand legitimacy
- Reducing uncertainty: Ensuring quality and purpose within an organization, so customers know what to expect with your product and service every time
- Forming tastes: Taking the time to get your brand to the consumer as soon as possible because of nostalgic drivers
Lowering WTS
Willingness to sell (WTS) is the lowest price suppliers are willing to accept in exchange for materials needed to create products or services. Just as customers must weigh personal versus monetary value in determining whether they want to participate in a transaction, so do suppliers.
Another way to measure WTS is by considering employee engagement and retention. One of the most valuable assets a company has is its talent. Effective leaders nurture and develop employees to ensure salary isn't their only motivator.
Lowering WTS for one or both of these groups can be an effective business strategy for companies that can't raise their WTP. For example, companies that can motivate employees to work for a lower cost by providing value in other ways—such as benefits packages, flexible work hours, and generous paid time off—can lower WTS. Another method of lowering WTS is creating value for suppliers. This can take the form of additional warehouse space or long-term contracts.
3 Companies With Successful Business Strategies
One of the best ways to learn about business strategy is from real-world examples. Here are three companies that faced numerous challenges but overcame them through value-based business strategies.
1. Best Buy
Best Buy, the multinational electronics retailer, is an excellent example of how a shift in business strategy can lead to rapid growth. In 2012, Best Buy faced fierce market competition with online platforms like Amazon and big-box stores like Walmart and Home Depot. As a result, the company lost over a billion dollars in revenue in a single quarter.
Rather than closing stores or developing new products, Best Buy's leadership decided to leverage an existing asset not being utilized to its full potential: its storefronts. Best Buy started using its stores as "mini warehouses," providing faster shipping times, easier customer pick-up, and improved product availability. As a result of enhancing convenience for the customer, Best Buy increased its WTP.
Best Buy is an exceptional example of a value-based business strategy because it subsequently lowered WTS with this initiative. By keeping the vast network of stores intact and allowing vendors to build showrooms within its stores, Best Buy provided a cost-effective option for its vendors. This additional value lowered vendors' WTS, leading to product discounts.
2. Nike
As the largest sportswear manufacturer of shoes, clothing, and accessories, Nike has become one of the world's leading global sports brands. While much of Nike's success has come from its iconic products, it's also resulted from effective business strategies that out-compete in today's crowded sportswear market.
Value-based pricing greatly contributed to the company's reported global revenue of more than $44 billion in 2021. For example, Nike has consistently leveraged consumers' perceptions of its products to drive prices up within their WTP. Nike can do this by creating the highest quality products to justify charging a premium price.
Many of Nike's competitors struggle to follow this same business model because of Nike's most valuable asset: its image. Company leadership at Nike has long understood that its pricing model isn't just reflected in the quality of its products but in the influence of its logo. By understanding its social and market influence, Nike's exclusive products, such as Air Jordans, have contributed to driving its perceived value to an even higher level. As a result, brand value and customer loyalty are two major pillars of Nike's long-term success at consistently raising its customer's WTP.
3. Starbucks
The world's largest coffeehouse chain, Starbucks, also needed to adopt a value-based strategy to gain market domination. In 2008, Starbucks faced immense financial pressure from increasing fast-food chain competition, rising prices in food and supplies, and global strains on coffee trading. In fact, by March 30, 2008, its profits had fallen nearly 28 percent compared to the previous year, leading to 300 closed stores and 6,700 employee layoffs.
To combat these challenges, Starbucks focused on better understanding the company's WTP. According to a letter by Starbucks CEO Howard Shultz, "The company must shift its focus away from bureaucracy and back to customers. We need to reignite the emotional attachment with our customers."
One method of doing this was the "My Starbucks Idea." Its goal was to create a space for customers to exchange ideas with each other and the company about Starbucks' products, services, stores, and corporate social responsibility. With nearly 93,000 ideas recorded and 1.3 million newly generated on social media, Starbucks tapped into what their customers cared about most.
Understanding what drives customer value led to many business model changes synonymous with Starbucks today. For example, free Wi-Fi, lounge chairs, and Starbucks' rewards program all sparked from customer feedback and forums. As a result, Starbucks is widely known as one of the fast-food chains with the highest WTP because of its loyal customer base.
Making Profits the Outcome, Not the Goal
Companies considering a shift in business strategy are often facing financial hardships. Whether an impending bankruptcy, decreasing profit margins, or increasing employee turnover, business strategies are meant to solve these problems. Yet, this isn't where your strategy should start.
"Profit is not the goal," says Oberholzer-Gee in HBS Online's Business Strategy course. "You treat it as an outcome. It's people first, then business."
Business leaders need an in-depth understanding of customer value to succeed in today's competitive marketplace. While real-world examples illustrate the implementation of these value-based strategies, taking an online course like Business Strategy can help you create an effective business strategy that wins over customers while generating a profit.
Are you interested in learning how customer value relates to financially successful business strategies? Explore our online course Business Strategy, or other strategy courses, to develop your strategic planning skills. To determine which strategy course is right for you, download our free flowchart.
