What Physician Entrepreneurs Should Know About Value

Everybody loves a good value, but some don't know it when they see it or know how to create it. For example, patients are terrible consumers. Some of the reasons are their fault and the result of low health and insurance IQs, but most of the reason has to do with a system that does not provide them with quality and price transparency.

Patients, doctors and payers have different definitions of value.

But “value” is a term that is surprisingly misused and misunderstood. There are many places to trip and fall when it comes to “creating value” due to wrong assumptions about what is valuable to stakeholders. A good way to avoid this trap is to reflect where your company sits on these three scales, which you should do in the order presented.

There are several examples of the fundamental value misalignments that could be starting points for these discussions. The first concerns the relative importance of health outcomes. For physicians like me, clinical outcomes are paramount; health improvement and high-quality care are essential components of health care value. And we assume that patients share that perspective. But, it seems, they don’t. When the Utah survey asked patients to identify key characteristics of high-value health care, a plurality (45%) chose “My Out-of-Pocket Costs Are Affordable,” and only 32% chose “My Health Improves.” (In fact, on patients’ list of key value characteristics, “My Health Improves” was slightly below “Staff Are Friendly and Helpful.”) Given the chance to select the five most important value characteristics, 90% of patients chose combinations different from any combination chosen by physicians. In general, cost and service were far more important in determining value for patients than for physicians.

For a start, here are a few things you should know about value. Scarcity sometimes creates. On the other hand, sometimes networking effects create it.

Creating value is another part of the equation. Here are some things biomedical and health entrepreneurs should know about value, how to create it and how to measure it:

1. Entrepreneurs create value, not just companies. Some are social entrepreneurs, intrapreneurs, physician investors, service providers or independent professional services providers. Not all are technopreneurs.

2. Value is the difference between user defined tangible and intangible perceived benefits- tangible and intangible perceived cost. In other words, quality of a value factor/unit price. Your assessment of the value you offer is irrelevant. What matters is how customers think you can solve their problems at a price they are willing to pay. 

Value is typically defined as quality of a given value factor/cost. Since time is money, the equation can also be stated as quality/time i.e. how does the solution improve productivity by getting more bang for the buck, or, the same amount of bang for fewer bucks.

3. Features that are not user defined benefits are costs to the producer.

4. Take note that 1) the intangible value factors, lke speed, convenience, experience, service and satisfying emotional needs usually drives the buying decision, and 2) the value is often perceived, not real. That's why doctors make Type 1 and Type 2 technology adoption errors.

5. Brand equity is the value customers place in your company 

6. There are many ways to measure innovation, but there are qualitative and quantitative components to the value you create. The result determines whether you have created sustaining or disruptive innovation or, worst case, whether you have created a solution looking for a problem or just tinkering.

7. Your value proposition is the promise you make to your customers concerning how you intend to solve their problem or do the job they are asking you to do. It's your pick up line. It is the cornerstone of your business model canvas.

8. The amount of user defined value you create is a perception and not necessarily a reality. Take bottled water. In most cities you can get clean water for free. Bottled water is the second largest commercial beverage category by volume in the United States. However, bottled water consumption is about half that of carbonated soft drinks and only slightly ahead of milk and beer.

According to the Beverage Marketing Corporation (BMC), in 2014 the total volume of bottled water consumed in the United States was 11 billion gallons, a 7.4% increase from 2013. That translates into an average of 34 gallons per person. You paid $13B for the packaging and branding.

9. On average, it takes a 5x difference in the perceived value in the mind of the customer to switch from one product to another. Disruption requires creating many multiples of that.

10. Doing a value factor analysis determines whether your product or service meets or exceeds the expectations of your target segment.

11. Patients and doctors have a different definition for value.

12. Conveniencecare trumps value based care.

What is your startup worth?

Carlson and Wilmot noted that VFA consists of four variables: quality and convenience and the costs of each. In equation form this is shown as:

Value Factor = [(Quality benefits) x (Convenience benefits)] / [(Quality costs) x (Convenience costs)]Creating a VFA matrix like the one shown in this article is fast and simple. As a rough guide, a new product or service should have a Value Factor that is 2 to 10 times greater than the competition for the difference to be noticeably significant. That said, calculating a VFA is straightforward:

1) List the product’s attributes (for Quality, Convenience, and Cost) The number of product attributes will vary from product to product, but users are encouraged to write down as many as they can think of—if you write down less than 10, you’re not trying hard enough.

2) Determine the importance of each attribute to the customerTo get started, these values can be estimated by you and your team. However, you will need to show your VFA to customers to obtain more realistic values.3) Evaluate each product’s performance attribute

Evaluate how each product’s performance satisfies the identified Quality, Convenience, and Cost attributes.

4) Calculate the total scores for quality, convenience, and cost as noted in the attached example.

5) Calculate the VFA according to the equation noted above

It's valuable knowing about value and how to create and measure it and that we are increasingly valuing patient defined value . But, knowing about value and how to measure it and report it and how to create it are much different things.

Arlen Meyers, MD, MBA is the President and CEO of the Society of Physician Entrepreneurs on Substack and Editor of Digital Health Entrepreneurship