2023 is the year of price increases for most startups. A global slowdown, no easy investor money has brought much-needed focus on profitability. Consequently most businesses have resorted to price-increases as the most obvious way to improve cash-flow.

While it is essential to ensure that your prices are competitive and reflect the value of the product, there are better ways to grow your business than just increasing the cost of your products or services

Harvard Business School Professor Felix Oberholzer-Gee in his book ‘Better, Simpler Strategy’ suggests a value stick framework to approach this problem

The value stick’s four levers are:

1. Willingness to pay (WTP): The highest price a customer is willing to pay for your product or service

2. Price: The amount customers must pay for goods or services

3. Cost: The amount a company spends on producing goods or services

4. Willingness to sell (WTS): The lowest amount suppliers are willing to accept for the materials required to produce goods or services

The HBS professor suggest that 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.

The value-stick approach starts with increasing the consumer delight rather than just simply increasing prices. Instead of raising the cost of your product, explore ways to add value and deliver extra benefits that increase the attractiveness of your product or service!

Delivering real value and improving customer experience can be done in many ways: investing in product quality, simplifying product experiences, enhancing customer service and providing an exceptional customer experience

A focus on WTP does not mean you build every possible feature. Excellence always requires resources that are in short supply: time, capital and managerial attention. To be great at a few critical features, companies have to be comfortable with deemphasizing others. Slack succeeded because it focussed on just three critical features - search, synchronization across devices and file sharing and neglected others

A great example shared in the book is this - Amazon entered the billion-dollar e-reader market dominated by Sony's Librie. Sony had a great product, a first-mover advantage, dominant market share and a big marketing budget. Despite these advantages, Amazon won a 62% market share within just five years. Amazon won because it offered free 3G internet access, which enabled users to instantly download e-books, while Sony users had to rely on computers. The product-centric Sony focussed only on a great reading experience which it knew would influence the customer's purchase decision. Amazon, in contrast, focussed on WTP and improved convenience across the customer journey.

By prioritizing the features customers find of highest value and investing in improving their experience, you can increase WTP and consequently be in a position to increase prices

Can organizations improve both WTP and WTS?

Yes, says the book Organizations can improve WTP and lower WTS simultaneously if both sets of value drivers are naturally connected. Malls give Apple a discount (lower WTS) because it attracts many shoppers (higher WTP). Doctors at Narayana Health perform more surgeries, which improves quality (higher WTP) and raises productivity (lower WTS). In services, employee satisfaction and customer experience are deeply interlinked. To create dual advantages, focus on connections that lead from one set of value drivers to others.

The key to organizational growth is a relentless focus on value creation. The value-based approach enables your company's core purpose: create more value for customers, employees, suppliers and shareholders.

See here for more insights from the book