Recently, I did an alignment assessment with a corporate executive team and they identified price as a competitive disadvantage. When I shared this finding with the senior leader his response was “Price isn’t the problem. The problem is our inability to connect the value of our services to our prices in the minds of potential customers.” Right or wrong, this was an insightful perspective and one that many businesses likely struggle with.
What is value and how is it determined?
Valuation exercises aren’t just limited to a company’s products and services. Valuation is a key input to most business decisions, from determining overall strategy to hiring resources to greenlighting projects to investing in R&D. Whether explicitly or implicitly, a value is placed on each possible choice in a decision. Businesses realize value in various forms:
Financial Value: Increased revenue / profit, decreased expenses, ROI, company valuation, pricing, elasticity
Relevance Value: Market perception, reputation, brand equity, goodwill, sustainability, innovation, recognition, demand, utilization, waste elimination, efficiency, customer satisfaction
Time Value: First-to-market, speed-to-market, market timing, cadence timing, longevity, tenure
People Value: Retention, engagement, employee satisfaction, creativity, dedication, presence, motivation, referrals
In my experience, value is often determined “in the eye of the beholder”. Each person has their own value gauge for everything. In our quest for making things easy and simple we’ve implemented some ‘helps’ related to value, as evidenced when a consumer tries to buy almost anything, and the price is already set. While we may not agree with the set price, it helps us rapidly make a purchase decision, and therefore has made transactions quicker and more standardized.
Contemplating something that already has a price on it is fairly straightforward. However, in business, many decisions like the ones mentioned previously (i.e. setting strategy, hiring, choosing projects, R&D), don’t come with a price tag and therefore the financial valuation portion of the analysis is not straightforward, and neither is the analysis of the other types of value mentioned above.
Most of the time, businesses and leaders make valuation determinations with incomplete and imperfect information. In order to do this effectively, they must understand the composition of valuation, at a minimum.
What is the Valuation Intersection?
Valuation is the intersection of consideration and acceptance (see Intersection 10 image below). It comes down to choice. Choice between two or more somethings or choice between something and nothing.
Consideration Consideration is the “what” in valuation. What is being considered? What are the choices? When corporate strategy is the consideration, the value associated with each choice is extraordinarily high, and the impacts are far-reaching. Therefore, the risk is also high.
Compare that to another valuation scenario where the consideration is which vendor to use to print business cards. The value of printing business cards is clearly much lower than the value of the corporate strategy. In a worst-case scenario it’s easier to resolve or fix bad business card printing than it is a poor choice of corporate strategy.
Consideration is complex, involving value variables like financials, relevance, time and people. Whereas the value to be realized from the choice of a business card vendor may be readily apparent (the cards look good vs. they look bad), the value from a business strategy typically takes longer to realize. Each valuation consideration is different, which is why valuation is so complicated.
Intersection 10: Valuation = Consideration + Acceptance
Acceptance
Acceptance answers the question, “Is it worth it?”, when it comes to valuation. The answer may be “no”, which is a form of acceptance in that we’ve accepted one option over another. It may not be the one we thought (or hoped) we’d be accepting, but for whatever reason it’s the one being chosen.
There is power in acceptance beyond just the choice of A over B. Acceptance also includes terms, aka the negotiation. Terms can be conditions, stipulations, compromise, boundaries, milestones, additional approvals, timelines, prerequisites, etc. In business, other than in some simple transactions, there will always terms. Each stakeholder wants to ensure they are deriving a maximum valuation from the consideration.
Of course, value derivation isn’t always fair and it’s usually those with power that have the higher probability of receiving the most value in a consideration. That said, well-prepared leaders can exert a lot of influence when it come to the consideration and acceptance of a valuation decision.
What Can Leaders Do?
Leaders must stay informed and know the value levers for all stakeholders when it comes to important valuations. The ability to control consideration can provide shape to the acceptance side of the valuation intersection. For example, leaders must plan for “when” valuation results will come to fruition or be known (i.e. short-term vs long-term planning). Only then, can trade-offs be made.
Importantly, the most successful leaders are those that build awareness with all stakeholders. Awareness doesn’t mean consensus, rather the understanding of what is being considered and what the rules around acceptance are.
Wrap Up & Up Next
Valuation is tricky. There is value placed on every aspect of a business, knowingly and unknowingly. Determining which aspects and decisions require deeper levels of analysis and consideration isn’t easy. Concentrated levels of diligence will lead to better acceptance decisions and outcomes.
Next time we’ll examine the 11th intersection of performance, which is the Opportunity Intersection. In this series of articles, we explore The Intersections of Performance, of which there are 30. The Intersections of Performance framework is based on the experience and insights of Brett Simpson, Managing Director of Elevate Simply, over his 20+ years of leadership in large and small organizations, and as an entrepreneur, advisor and investor.