Joel Sumner Smith

Product Manager @Gatsby focused on developer experience.
Analogical thinker in an analytical world.


Shades of Value

June 12, 2020

What is Value?

Just as in talking about jobs to be done, we can think about the concept of value from both the demand and supply side. On the demand side, value is generated when a product (or service) helps a consumer make progress that was either less efficient or impossible to do on their own. On the supply side, value is generated when the costs of delivering the product or service are less than the cost that the consumer paid.1

This value that is accrued to the supply side is often called profit and the remainder of that profit that are not spent on capital expenditures (property, plants, or equipment) is called free cash flow. Free cash flow is often used a measuring stick for publicly traded companies as a measure of their long term profitablity because free cash flow can be used to reinvest in the business for growth or can be returned to owners of the company.

New Value vs. Efficiency Value

In an essay more explicitly about the differences between lifestyle and growth startups, the venture capitalist and writer Jerry Neumann makes a distinction between types of value you might try to capture as an entreprenuer (i.e. how you might generate supply side value).2

On the one hand, you can capture value by providing a product that is delivered more efficiently (i.e. your costs of production are less than your competitors). And n the other hand, you can capture value by creating net new value on the demand side and therefore are able to sell your product at a premium. Either of these methods will give you what Neumann (citing the economist Joseph Schumpeter) calls “entreprenuerial profit.” This profit references the kind of profit captured by startups who innovate and don’t simply make a life-style business that mimics other similar businesses. You might call this a growth oriented startup, and almost all venture-backed businesses are growth businesses, at least aspirtationally.

It’s important to couch this value in terms of the innovation process.3Startups, by their nature and assumption of risk, are able to disrupt incumbents who have too much capital wrapped up in their current way of doing business to adapt or take on the risk involved with more efficient means of product and value delivery or the risk involved with providing new value. Startups tend to prove out the value thesis, and as Neumann points out, the profit that they capture before the incumbents catch on to that thesis (and theretically compete the stratup down on price) are the true measure of success for a startup.

Value Hypothesis vs. Growth Hypothesis

In the Lean Startup4, Eric Ries posits that the primary job of a startup is to learn, and the primary goal of that learning, initially, is figuring out your value hypothesis. Ries, applying the scientific process to building a startup, sees experimentation and validation as the key techniques to discovering that value. And this idea around a value hypothesis applies equally to new products: the very first thing that you’re trying to do when creating new products is to develop the value hypothesis. In the case of new products, the value hypothesis is a hypothetical reason that someone is willing to hire your product. It’s the original idea that allows you to begin your validation work: uncovering the job to be done by listening to customers5, rapid prototpying and user testing, and building an MVP.

Once you’ve developed an MVP and validated that you’ve found product market fit (which might be indicated by demand outpacing supply), Ries suggests moving on to think about your growth hypothesis, or thinking about how users are going to find your product. In the case of product management, thinking about distribution is certainly half the battle and often times large product teams will hire or partner with product marketing teams to work on getting users onto the platform. On the technical side, however, thinking about growth often means thinking about scaling. The things that you built out in your prototype are likely not primed for handling a growing a user base.

  1. Obvious caveat to say that this is a narrowly defined sense of value that is couched in a system of private business where the primary aim is the generation of cash. Other businesses and enterprises might aim at a closer to break even or publicly subsidized cost structure in order to deliver value to consumers at or below cost of production.
  2. Schumpeter on Strategy Jerry Neumann
  3. I try to tackle the concept of innovation here: Innovation and Competition.
  4. The Lean Startup by Eric Ries
  5. For customer development work specifically around jobs to be done, Bob Moesta’s frameworks around JTBD interview techniques is incredibly helpful. The Jobs-to-be-Done Handbook: Practical techniques for improving your application of Jobs-to-be-Done is his book on the subject.

© 2020, Joel Sumner Smith