Truly great businesses never fail to adhere to the simple principle that Tim O’Reilly coined:
Create more value than you capture.
The obvious examples are institutional:
Microsoft changed the world with Gates’ vision to have “… a computer in every home”. The actual revenue the company captured from selling Windows licenses seems like a drop in an ocean compared to the value Microsoft’s customers created with the Windows product.
Think about the businesses built. The efficiencies gained. The creativity that sprung forth from the personal computing revolution.
Likewise, Apple put a computer in every pocket and nothing was ever the same again.
The iPhone is consistently the most expensive smartphone out there, but a few hundred bucks every few years is a small price we pay for the benefit. Just think of any business that used ubiquitous mobile computing as a launch pad.
(Think of all the money made by drivers, driving for ride-share apps, that couldn’t have existed without Steve Jobs walking on to that stage with the original iPhone.)
What Apple and Microsoft collect in revenue from these products is just a drop compared to the ocean of economic value the products ultimately create.
For entrepreneurs, “Create more value than you capture” can serve as a powerful north star pointing to success.
Think of it as a guiding philosophy for optimal decision making in business.
Let’s say you’re pitching a B2B consulting contract. It’s valuable to think about your pricing as a fraction of the value that’ll be created by the impact your consulting has.
Leaving enough “meat on the bone for the next guy” when setting fee structures is important. Playing the long game this way means that you yourself might be the next guy. When your customer experiences a 10x ROI from your services, they’re gonna be much more likely to re-hire you.
Creating more value than you capture goes deeper than just pricing your services though.
The aphorism to “sell pickaxes to the miners” is saying the same thing: When your product or service empowers others to succeed at mining – to create MORE value – you’re following the principle.
Every technology revolution in history is a revolution precisely because of how much value it creates. The wheel. Steam power. Electricity. The telephone. These things all became tools that empowered other people to do incalculably significant things.
Even if you’re not some patent-owning inventor-entrepreneur, you can create significantly more value than you capture…
The secret is to have a vision for your customer’s success, not just a vision for your own goals.
If you’re dedicated to creating more value than you capture, every person your business touches must be transformed. They must level up, in the direction they desire.
Companies like Active Campaign (no affiliation but I use their stuff) are determined to turn their customers into marketing extraordinaries. To that effect, they don’t just sell software: They run workshops and host conferences. They teach. They want their customers to succeed because they know that when their customer is winning, the few hundred dollars a month for marketing automation is an afterthought. It’s a drop in the ocean of value.
Startups focus on network effect, building market places, solving discoverability problems in the gig economy. The best startups all create economies of massively more value than the business at the center.
Dribbble.com (also no affiliation) helps some of the world’s best designers find the people who need their help. Those designers make magic (and money!) with the clients that discover them. Instead of clipping the ticket, instead of trying to insert a layer of inefficiency and charges between the customers and the vendors who serve them, Dribbble just charges a nominal monthly fee. It’s a total no brainer.
Creating more value than you capture is a philosophy of generosity.
The principle holds true in the B2C world too. Most gyms just focus on optimizing for maximum fees, from a customer base who desperately don’t want to be there (and conveniently don’t show up). Meanwhile CrossFit builds a community of people dedicated to transformation, to showing up, to leaning in and learning. It really works, and people’s lives are changed – they become a better version of themselves – and the price of entry seems like nothing.
Make Generosity your north star.
The opposite is a race to the bottom. It’s attempting to charge the biggest brokering fee you can get away with, for example.
(I once had an acquaintance who asked for a commission for referring his friend to me for therapy.)
The opposite of the “create more value than you capture” rule… is trying to inject as much inefficiency into transactions as you possibly can. The world of affiliate, referral marketing (more often than not) seeks to get between consumers and what they’re looking for, then charge for sending them where they wanted to go in the first place. And the customer ends up paying more. If any value is created, the amount is too close to what’s captured.
What you can do next:
Entrepreneurs have the opportunity to wake up to the idea that helping customers succeed massively – empowering them to go out and creating their own value – way beyond what they thought was possible… is the long term path to building extraordinary, universe-denting businesses.
No matter what business model you’re building, it’s worth brainstorming what it’d look like – what it would require of you – to create ten times (or a hundred times!) more value for your customers than what they pay for.
Pursuing this philosophy has an uncanny way of making entrepreneurs filthy rich. It’s no accident that the companies that create vastly more value than they capture are the most prosperous on the planet.