At the heart of a business’s strategy is the question, “How does it create value?”
In the online course Business Strategy, Harvard Business School Professor Felix Oberholzer-Gee explains how this question plays out in strategic planning.
"As strategists, we really ask three questions,” Oberholzer-Gee says. “How can my business best create value for customers? How can my business create value for employees? And how can my business create value by collaborating with suppliers? Think of a company's strategy as an answer to these three questions.”
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DOWNLOAD NOWIn the course, Oberholzer-Gee introduces a framework for simplifying strategy by breaking down the components of value creation. This framework is called the value stick.
The value stick comprises four components, two of which are willingness to pay (WTP) and willingness to sell (WTS). Although they function similarly, each provides unique opportunities for crafting a strong business strategy.
Here’s an overview of how to create value using the value stick and a breakdown of WTP and WTS.
What Is the Value Stick, and How Does It Work?
The value stick is a tool that can be used to visualize the components that make up value-based strategy. By toggling its four levers, you can determine how much value is created for stakeholders in various scenarios.
The value stick’s four levers are:
- Willingness to pay (WTP): The highest price a customer is willing to pay for your product or service
- Price: The amount customers must pay for goods or services
- Cost: The amount a company spends on producing goods or services
- Willingness to sell (WTS): The lowest amount suppliers are willing to accept for the materials required to produce goods or services
These four levers can be moved up and down. For instance, you can increase the price of your product or decrease its cost of production. Moving each lever impacts the value created for each stakeholder.
- Customer delight represents the value captured by the customer and is influenced by WTP and price.
- Firm margin represents the value captured by the business and is influenced by price and cost.
- Supplier surplus represents the value captured by the firm’s suppliers and employees and is influenced by cost and WTS.
To illustrate how you might apply the value stick, imagine you own a company that makes cookies. Your cookies are made with premium ingredients, including chocolate sourced from Switzerland. You have a small but mighty team of employees who bake, package, and market the cookies. How can you create value for your customers, your suppliers, and yourself?
Price and cost are relatively straightforward levers; you can lower or raise the cost of producing and selling your cookies, and lower or raise the price you sell them for.
Raising the cookies’ price increases your firm’s margin but decreases customer delight.
Cutting costs increases your firm’s margin but decreases supplier surplus.
The remaining two levers are a bit more complex. Here’s a breakdown of WTP and WTS—and the factors that influence each—to help you create value for all stakeholders.
What Is Willingness to Pay?
Willingness to pay is the highest price a customer is willing to pay for your product. Although people may prefer a lower price, this is the cost they would pay if they had to. If you raised the cost even one cent higher than a customer’s WTP, they would opt out of the purchase.
WTP is influenced by countless forces, many of which are intangible. These factors can include:
- Income
- Geography
- Weather
- Age
- Gender
- Brand loyalty
- Service levels
- Advertising
- Competing products
- Expectations
- Legality
- Packaging
- Environmental or social impact
- Necessity
In the case of your fictional cookie company, here are some factors that can raise customers’ WTP:
- The cookies’ taste
- Added nutritional value
- High-quality ingredients
- Ethically sourced ingredients
- Beautiful packaging with a note from the baker
- Sponsorship of local events that shows you’re involved in the community
Sometimes, people may not be able to articulate the reasoning behind their WTP. For instance, maybe they subconsciously associate your cookies with a sense of comfort or luxury, or the taste of your cookies reminds them of the ones they used to eat as a child. Factors like this aren’t within your control, but others are, like using high-quality, ethically sourced ingredients.
When crafting your business strategy, define which aspects of WTP you can control, and use them to create value for your customers.
Related: 4 Business Strategy Skills Every Leader Needs
What Is Willingness to Sell?
Willingness to sell is the lowest amount of money a business’s supplier is willing to accept for materials, or its employees are willing to accept in exchange for labor.
While suppliers want to receive the highest amount possible for their goods and services, and employees want the highest compensation possible, their WTS can be lowered when value is provided in other ways.
In the case of the cookie company example, one supplier is the Swiss chocolate company that supplies you with the luxury chocolate your customers love.
Levers that influence suppliers’ WTS include:
- Respectful and timely turnarounds from your team
- Pleasant working relationships
- Discount codes for your cookies
- A feature on your website promoting their high-quality chocolate
As for your cookie company’s employees, levers that influence their WTS include:
- Safe and fair working conditions
- Benefits such as health care, sick time, and paid vacation
- Level of risk associated with the job (e.g., Are safety measures enforced in the kitchen? Are appliances up to code?)
These factors create added value for your suppliers or employees, which could cause their WTS to lower. They’d be willing to accept less monetary compensation because of the non-monetary value you provide.
Willingness to Pay vs. Willingness to Sell
The key difference between willingness to pay and willingness to sell is who or what they apply to: WTP pertains to customers, whereas WTS pertains to employees and suppliers.
WTP and WTS are similar in that they’re both levers on the value stick and can increase or decrease, creating and reducing value for various parties. Raising WTP and lowering WTS are the only two ways to create value for all parties represented on the value stick.
Ultimately, think of these two factors as ways to create value for all parties through different avenues.
Learning to Craft Value-Based Business Strategy
Willingness to pay and willingness to sell are two vital concepts for understanding the value your business can create for stakeholders. By manipulating the levers that influence WTP and WTS, you can craft an informed, value-based business strategy.
If you want to learn more about the value stick framework, consider enrolling in Business Strategy. In the course, Oberholzer-Gee breaks down each aspect of the value stick and provides real-world examples of how professionals have leveraged value creation to drive business success.
Want to learn more about how to craft a successful strategy for your organization? Explore Business Strategy, one of our online strategy courses, to learn how to create organizational value. Not sure which course is the right fit? Download our free strategy flowchart.
