solution finder

07 May 2019

Value capture

Author/Compiled by
Mirella Haldimann (EAWAG)
Urs Heierli (Antenna Foundation)
Reviewed by
Jeske Verhoeven (IRC)
Caroline Saul Jennings (EAWAG)
Julie Smolnitchi (Skat Consulting)
Astrid Agthoven (Aqua for All)
value capture
Executive Summary

Value capture stands for value based pricing and revenue management. The concept entails how a safe water enterprise is monetising its business model. Meaning how the sold water or household water treatment solution (HWTS) is priced, marketed and what payment mode is offered to customers. Value capture also covers the of aspects of willingness to pay of customers, meaning how much value the HWTS or safe water reflects for them and they want to pay for.

This factsheet provides insights on how to develop a value capture strategy including payment methods, willingness to pay and price setting, and provides examples on how to do so.

The case study of Hydrologic shows how the ceramic water filter manufacturer in Cambodia evaluated willingness to pay and launched a new aspirational product based on these analysis in order to capture more value.

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What is value capture?
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Value capture is part of the core tasks to define in every business model and goes along with value proposition and value creation and is linked to how products and services are delivered. The concept of value capture entails generally speaking how a safe water enterprise is making money out of its business model. This includes aspects of payment methods, timing of payments, price setting strategy (that requires to have a clear picture on costs of the household water treatment solution (HWTS) or sold water), willingness to pay and profit expectations.

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Why is value capture important?
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An often-made assumption is that base-of-the-pyramid customers are poor and therefore cannot afford to pay much for products and services. Such assumptions are dangerous as they lead businesses to price their offering too low, so that especially early ventures grow dependent on external funders. This leads to low cash flows, higher dependency on grants and funding that may decline, and less sustainable impact on local markets in the long run. Thus many organizations have experienced difficulties in moving away from external funding to gain more managerial autonomy. To foster a business model from the beginning, it is key to be clear on monetisation of your business model and know what customers can pay and how to set the price of the product or service offering – known as value capture (BADEN-FULLER & HAEFLIGER, 2013). Accordingly, considering value capture as part of the business model in an early stage is absolutely critical to ensure sufficient sales that have to be in line with your marketing strategy, payment mode and distribution process to keep the business afloat and allow to grow.

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For whom is value capture useful?
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Value capture is incremental to any safe water businesses who wants to sell affordable products and services; but must make sufficient revenue for ongoing operations and growth, while not being dependent on external funding to cover operational costs (OpEx).

The concept of value capture is also important to investors who do assess a start-up on how the business model is planning/executing monetisation (collection of money) and reach break-even.

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How can the concept of value capture be conceptualised and implemented?
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To implement value capture in a safe water enterprise, aspects that should be addressed are, amongst others: (1) A strategy to capture value, (2) definition of monetisation methods of a value proposition including the important aspects of timing, effectiveness and (3) price setting (that are paramount additional value capture dimensions for any organization (BADEN-FULLER & HAEFLIGER, 2013)) and (4) concrete examples of value capture methods to inspire safe water initiatives developing and implementing their value capture strategies.

1. Value capture strategy

In order to come up with an innovative value capture strategy the following ideas can be helpful:

  • Ask yourself: Is your business model balanced and does the pricing strategy reflect the value your company proposes?
  • More information and inspiration can be found here and here. (BOWMAN & AMBROSINI, 2000).
 
2. Monetisation methods

Monetisation methods are methods of how to collect money from customers. Specifically suitable methods for BoP customers in the context of safe water do include:

  • Direct money collection when purchasing a product or water 

Selling HWTS or safe water at a given price for cash is potentially the most common method. Depending on the country context this can pose certain risks. For example when currency is quickly depreciating or when bills are not valid anymore. The Indian case from 2016 is exemplary for currency depreciating, when the government banned the use of INR 500 and INR 1,000 bills in 2016. This led to massive market interruptions as 80% of currency was not usable anymore, especially in rural areas this incidence took weeks to balance the currency needs. Spring Health lost significant number of customers that were not able to pay their daily water purchases anymore due to currency that was not available.

  • Via vouchers, token or value cards that can be topped up

Tokens can be purchased in bulk at a certain price and are valid for example to exchange for 10l of safe water or a single dose of chlorine. Vouchers could be sold by a subsidy that covers a certain amount of the effective costs of the product or safe water service. Practical examples where tokens are used to pay at the water kiosk can be found here and here.

For instalment based payments, paying for a product in instalments over a certain period of time. Please find more detailed information about instalment based payments in the factsheet and case study on microfinance.

  • Payment by mobile money

Mobile money technology of using the concept of SMS mobile technology to allow people without bank accounts to carry out money transactions was invented in 2003 and proved to be ground-breaking. Registered individuals are with the use of mobile phones able to withdraw cash, store money, make payments and send money P-2-P (person to person or more precisely user to user).

As example serves the case of M-Pesa, the first mobile payment project that has been developed by Vodafone and was successfully launched in Kenya in 2005.

Payment by mobile money can be a feasible option for selling HWTS or to top up value cards to pay safe water at a water kiosk (e.g. developed by Dutch company Susteq). Nevertheless the application of mobile payment has its limitations. Depending on the mobile money provider a certain minimum monetary amount has to be transferred (e.g. 10 l of water cost USD 0.1 but the minimum transaction is USD 1), which limits small transactions for example for water kiosks.

3. Price setting and willingness to pay

Besides choosing the payment method that is most suitable for a specific business case, a certain price point has to be set. In order to determine the right price point, safe water enterprises have to be clear on total costs of HWTS or safe water service and need to take into account willingness to pay of customers. Social enterprises should find ways to assess willingness to pay and accordingly set market prices before going into business (WHITTINGTON, BRISCOE & MU, 1987). There are a variety of methods that can help you identify your customer’s value and set the price accordingly:

  • Do market surveys to figure out what customers’ value perceptions are: Ask customers about costs associated to related ‘pains’ rather than how much they would pay for a product or service. This helps identifying price structures and allows you to capture more value.
  • Conduct market trials to verify what customers are able/willing to pay. Examples: A/B testing
  • Assess price points of similar products that are successful in the market if available

 

Tools to identify willingness to pay and for defining pricing strategies can be found subsequently:

 
4. Examples of value capture strategies
  • Market segmentation can be a strategy to capture more value in your firm. Applying a market segmentation strategy means differentiating between different customers groups (segments) that share certain characteristics (products use, willingness to pay, geography etc.). Based on such segmentation different pricing strategies can be applied. Safe water can for example be sold at a water points at a lower price and/or delivered home at a higher price for people with a higher willingness to pay. See also the factsheet on business model development for more information.
  • Another strategy can be to create premium products with a different branding that can be sold at higher prices to capture more value. Examples could be products that include additional features and/or services – a broader value proposition so to speak. As good example serves the Super Tunsai filter in the case study about Hydrologic.
  • Try and buy approach: An interesting approach to convince people of a product and figure what they are willing to pay is the try and buy approach. For example are water filters presented to a group of people or families. After the presentation participants are able to choose one filter and utilize it for e.g. 30 days. After this testing phase salespeople would follow up with the families and see whether they are convinced of the product and what they are willing to pay for it. If people are convinced of the product and see its advantages they will always be willing to pay the asked price. As concrete example serves the by Aqua for All in 2016 successfully launched pilot project in Ethiopia, please find more information in the PPP case study.

 

The subsequent case study about Hydrologic reveals how more value can be captured within a company by introducing an aspirational premium product.

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Library References

Business Models and Technological Innovation

This paper explores how business models are linked with technological innovation: First, business models mediate the link between technology and firm performance. Secondly, developing the right technology is a matter of a business model decision regarding openness and user engagement.

This is an open access article under the CC BY-NC-ND license.

 

BADEN-FULLER, C. and HAEFLIGER, S. (2013): Business Models and Technological Innovation. In: Long Range Planning: Volume 46 , 419-426. URL [Accessed: 15.08.2018]
Further Readings

Spring Health - What We Do

Spring Health is a water kiosk enterprise active in rural Odisha, India. At the doorstep via home delivery and at pick up points people purchase safe water in jerry cans. For more information please visit the homepage.

SPRING HEALTH (2017): Spring Health - What We Do. URL [Accessed: 10.04.2018]

Domestic Water Pricing with Household Surveys: A Study of Acceptability and Willingness to Pay in Chongqing, China

This study shows that a significant increase in the water price is feasible as long as the poorest households can be properly subsidised and certain public awareness and accountability campaigns can be conducted to make the price increase more acceptable to the public.

WANG, H. XIE, J. LI, H. (2008): Domestic Water Pricing with Household Surveys: A Study of Acceptability and Willingness to Pay in Chongqing, China. Washington DC: The World Bank URL [Accessed: 22.04.2012]

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