Value chain

Many of us first time entrepreneurs get it wrong.

When we conceive an idea and execute it… most often we get excited and blinded by the greatness of the idea that we fail to study something vital. (Or like in my case, after wanting to start something exciting and not getting any great idea, start something without actually studying vital information.)

That vital thing is value chain. (I don’t know if there’s a better phrase for it.)

Value chain is an indication of how much value exists in several phases of the consumer cycle directly or indirectly related to your product / service. Something that tells you where exactly the customer has a good chance of letting you sell something to him and of what size is his total wallet. And in that wallet, what is your share.

It extends beyond just market analysis. I am kinda stuck trying to express it appropriately. Nevertheless let me try.

Take Photography as an example.

The consumer cycle includes (order could change a bit):

  1. manufacturer creates a product by sourcing from suppliers (like Nikon)
  2. manufacturer markets it
  3. retailers stock it and sell them
  4. renters like Tapprs rent them out
  5. user buys / rents a budget digicam / prosumer / DSLR
  6. user attends a workshop and learns more about photography
  7. user purchases other aids like books, tutorials, etc
  8. user goes on a tour and learns more
  9. the increased knowledge on photography prompts him to buy more / rent more
  10. the new equipment prompts him to travel more
  11. obsolescence forces a few changes (film DSLRs)
  12. he sells used equipment / someone purchases it and spins off another cycle
  13. repairs and service
  14. he sells his photos
  15. he uses many peripheral services like Flickr, printing, etc
  16. he uses many closely / loosely related products like GIMP, Photoshop, etc

The above is just a half-baked list. Still, I guess you get the idea. There are several segments in the life cyle of a business. The sum total of all that makes the value chain.

Now, questions that should clarify what I mean by value chain

  • how much does a customer spend over his lifetime across the entire breadth of segments (entire value chain)?
  • is that total value chain a good enough number to attempt something significant?
  • what does he spend most of his money on (sweet spot of the value chain, though not always)?
  • which segment has high profit per action (the actual sweet spot)?
  • what has been the trend over the last few years (technology doesn’t really change behaviour.. though it could impact the chain’s overall value.. like film rolls vs memory cards)?
  • how much does an average customer spend in ‘your’ segment? Given that, does it make sense to stay in your segment?
  • could you spread to more than one segment, profitably?
  • do you exist in a segment that is awesome for the customer but horrible to you in the long run? (am asking this every morning to myself about Tapprs)
  • if you could re-do the entire thing.. which segment would you pick?

I guess that should give you a rough idea of what I mean by value chain.

Given that knowledge now.. I would:

  1. NOT do something where the customer’s wallet isn’t significant enough. (selling film rolls now would be a horrible idea)
  2. NOT do something where I don’t reach customer’s wallet directly. (a photography related book library is more of a book library than a photography thing.. at least IMHO that is an indirect way of reaching out to a book lover first and then the photographer in him.)
  3. be careful NOT to confuse the single basic trait of a customer (mix up a photographer and a book lover and start a book library for photographers?). In some niches, it works very well… like photography & travel. But in most, your position in the value chain is poor.
  4. spread legs to creep into the higher value side of the chain

Now.. that’s it for today!

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