The definitive guide to value creation

In my youth I dabbled with dark arts. I thought experimenting wouldn't hurt, so I tried a little, but little became a lot. My addiction took up all my spare time and heavily impacted my social life. I became alienated by friends and had a hard time talking to people close to me.That's how I spent six years studying economics.

Creating value is tossed around these days as the way for startups and freelancers to contribute to the marketplace. So why is no one talking about what that really means, or how to do it? The short answer is because they don't know. The long answer is that the ones that do know think it's so obvious they don't the need to explain it.

What is value, and how do we get it

I'll just touch upon the economics of Value first, but don't worry, it'll be short and painless: All value is derived from trade. That's what value IS.

The idea works like this; if I have a ton of gold, but no one wants it, it is worth nothing. Literally nothing. Because I can't get anything for it. If someone would give me a loaf of bread for it, it'd be worth a loaf of bread.

Thank god we have money (an abstract form of value, think of it as shares in the work you've done) so we don't need to slog around with all that stuff all the time.

The interesting thing about this idea is that it implies that everyone gets richer all the time. You wouldn't trade for something you didn't want would you? We all trade what we think is worthy, which makes us better off. So in every trade there are two winners. Not one. Everyone is better off. If they aren't, the trade has been forced or is certainly the last trade between them.

How do startups and freelancers get value? They trade with their customers (and everyone you trade with is a customer). If the customers are better off after the trade they are likely to keep being customers.

Seems abstract? Let's get all practical with examples.

How to Create Value

The question of how to create value is now a lot easier to answer; we need to create stuff to trade. By stuff I mean anything that people are willing to trade for. It can be a product, or a service, but whatever we create we must have a clear definition of what it is before we trade. Otherwise customers might get impossible expectations or simple refuse the trade.

But the main point here is create. We must be constantly creating to add value, and to show our customers what we can create.

Defining a product

A product is anything that can stand alone is a product. A book, a play, and a website are all products.

Defining a service

A service is anything that can not stand alone, anything that only exists while you do it. Cleaning, making a website, and acting in a play are all services. Seem of them create products, others just create value either by saving the customer time or lending them expertise.

The good sale and the bad sale.

Good salesmen focus on adding value to their customers, which is why they often have good relationships with their customers.

Poor salesmen are just trying to sell whatever is the flavor of the week, which is why poor salesmen often have high spikes in sales but rarely recurring customers.

Summary

The only way to create value is to trade something. Making your product or your service easier to understand by defining, simply, what the customer gets is a great way to increase your trade.

Creating stuff is the only to add value. So never stop creating.

Why in-house development never works

So your company is starting a new project and you need a piece of software. There are similar third party apps out there but they don't do exactly what you need. Custom Software Development

So what do you do? Develop a new one in-house right? DON'T!

All software needs to develop over time, much like business or science, not only because the demands on them change but because the users change. As the world moves forward people learn new things and develop, if your app, tool, function or software does not it will become less usable even if it still performs the necessary function.

Third party developers work full time to make sure their software is good. Your in-house team does not. If you're lucky or experienced enough to know that everything has to be updated from time to time you'll schedule development time from time to time to update your app. But it's still lagging behind the third party version. It might do exactly what you need, but that need will probably change faster than your app is updated.

Many companies grow into this problem and than takes it to it's logical extreme. Make the team a dedicated department of your company.

But now you've basically created a company. And this team will get more and more out of touch with the goals and difficulties of the original company. Not to mention that to grow they'll need to meet demands from outside the parent company.

There is another way to do it. Use third party apps. If the software takes over a function in your company, so that you can't change it, you were in a lot of trouble before the software fails you anyway.

UPDATE: After some constructive criticism from  Christopher McCann I'm forced to admit that the post is rather Utopian since it depends on not having to replace legacy systems that already lock you in to a certain way to handle data. I still prefer the idea that data should be more important than system, but it is Utopian, anyway thanks Christopher!

UPDATE2: After even more criticism, this time from Magnus Engdal, I must concede the point that while my slightly Utopian post might be true for LAMP software it doesn't really work for MS systems because of the size of the community and availability of solutions.