By Don Sexton, Ph.D.
The value of a business depends on its future not its past.
You can find huge numbers of books that discuss how to determine the value of a business. Many of these approaches are based on analyzing various financial ratios but such approaches tend to look backwards.
If you want to know how to manage the value of your business, you need to look forward and understand where your customer value and your costs are headed.
An organization’s financial success depends on how well they manage the value that their customers receive and the costs of providing that value. Some management gurus have suggested generic strategies where you focus primarily on either value or costs. Such generic strategies often produce lop-sided strategies that simply don’t work.
If you try to maximize customers’ “delight” then your costs may soar. If you keep cutting costs (a real temptation these days), you may well destroy customer value. Customer value and costs must be managed together not separately.
To maximize the value of your business, you need to measure and manage what I call customer value added - the difference between customer value and costs.
Southwest Airlines succeeds because they arguably have the highest customer value added in the airline industry – very high customer ratings and the lowest costs. Zappos succeeds with very high customer value added – they provide high value to their customers, such as free and fast shipping and a liberal return policy. Even though providing that value increases costs, the value to their customers increases even more.
As explained in my new book, to know where the value of your business is going, look at both your customer value and your costs.
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