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Twelve Standard Forms of Value

Economic Value usually takes on one of twelve standard forms:

  • Product
  • Service
  • Shared Resource
  • Subscription
  • Resale
  • Lease
  • Agency
  • Audience Aggregation
  • Loan
  • Option
  • Insurance
  • Capital

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Product

A Product is a tangible form of value. To run a Product-oriented business, you must:

  • Create some sort of tangible item that people want.
  • Produce that item as inexpensively as possible while maintaining an acceptable level of quality.
  • Sell as many units as possible for as high a price as the market will bear.
  • Keep enough inventory of finished product available to fulfill orders as they come in.

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Service

A Service involves helping or assisting someone in exchange for a fee. To create value via Services, you must be able to provide some type of benefit to the user.

In order to create a successful Service, your business must:

  1. Have employees capable of skill or ability other people require but can’t, won’t, or don’t want to use themselves.
  2. Ensure that the Service is provided with consistently high quality.
  3. Attract and retain paying customers.

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Shared Resource

A Shared Resource is a durable asset that can be used by many people. Shared Resources allow you to create the asset once, then charge your customers for its use.

In order to create a successful Shared Resource, you must:

  1. Create an asset people want to have access to.
  2. Serve as many users as you can without affecting the quality of each user’s experience.
  3. Charge enough to maintain and improve the Shared Resource over time.

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Resale

Resale is the acquisition of an asset from a wholesale seller, followed by the sale of that asset to a retail buyer at a higher price.

In order to provide value as a reseller, you must:

  • Purchase a product as inexpensively as possible.
  • Keep the product in good condition until sale.
  • Find potential purchasers of the product as quickly as possible to keep inventory costs low.
  • Sell the product for as high a markup as possible

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Subscription

A Subscription program provides predefined benefits on an ongoing basis in exchange for a recurring fee. The actual benefits provided can be tangible or intangible—the key differences are (a) the expectation of additional value to be provided in the future and (b) that fees will be collected until the Subscription is canceled.

In order to create a successful Subscription, you must:

  • Provide significant value to each subscriber on a regular basis
  • Build a subscriber base and continually attract new subscribers to compensate for attrition
  • Bill customers on a recurring basis
  • Retain each subscriber as long as possible

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Agency

Agency involves the marketing and sale of an asset you don’t own. Instead of producing value by yourself, you team up with someone else who has value to offer, then work to find a purchaser. In exchange for establishing a new relationship between your source and a buyer, you earn a commission or fee.

In order to provide value via Agency, you must:

  • Find a seller who has a valuable asset.
  • Establish contact and trust with potential buyers of that asset.
  • Negotiate until an agreement is reached on the term

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Lease

A Lease involves acquiring an asset, followed by allowing another person to use that asset for a predefined amount of time in exchange for a fee. The asset can be pretty much anything: cars, boats, houses, DVDs. As long as an asset is durable enough to survive rental to another person and return ready for reuse, you can Lease it.

In order to provide value via a Lease, you must:

  • Acquire an asset people want to use.
  • Lease the asset to a paying customer on favorable terms.
  • Protect yourself from unexpected or adverse events, including the loss or damage of the leased asset.

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Loan

A Loan involves an agreement to let the borrower use a certain amount of resources for a certain period of time. In exchange, the borrower must pay the lender a series of payments over a predefined period of time, which is equal to the original loan plus a predefined interest rate.

In order to provide value via Loans, you must:

  • Have some amount of money to lend.
  • Find people who want to borrow that money.
  • Set an interest rate that compensates you adequately for the Loan.
  • Estimate and protect against the possibility that the Loan won’t be repaid.

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Audience Aggregation

Audience Aggregation revolves around collecting the attention of a group of people with similar characteristics, then selling access to that audience to a third party.

In order to provide value via Audience Aggregation, you must:

  1. Identify a group of people with common characteristics or interests.
  2. Create and maintain some way of consistently attracting that group’s attention.
  3. Find third parties who are interested in buying the attention of that audience.
  4. Sell access to that audience without alienating the audience itself.

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Insurance

Insurance involves the transfer of risk from the purchaser to the seller. In exchange for taking on the risk of some specific bad thing happening to the policyholder, the policy holder agrees to give the insurer a predefined series of payments. If the bad thing actually happens, the insurer is responsible for footing the bill. If it doesn’t, the insurer gets to keep the money.

In order to provide value via Insurance, you must:

  • Create a binding legal agreement that transfers the risk of a specific bad thing (a “loss”) happening from the policy holder to you.
  • Estimate the risk of that bad thing actually happening, using available data.
  • Collect the agreed-upon series of payments (called “premiums”) over time.
  • Pay out legitimate claims upon the policy.

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Option

An Option is the ability to take a predefined action for a fixed period of time in exchange for a fee. Options are all around us: movie or concert tickets, coupons, retainers, and licensing rights. In exchange for a fee, the purchaser has the right to take some specific action—attend the show, purchase an asset, or buy a financial security at a particular price—before the deadline.

In order to provide value via Options, you must:

  • Identify some action people might want to take in the future.
  • Offer potential buyers the right to take that action before a specified deadline.
  • Convince potential buyers that the Option is worth the asking price.
  • Enforce the specified deadline on taking action.

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Capital

Capital is the purchase of an ownership stake in a business. For parties that have resources to allocate, providing Capital is a way to help owners of new or existing businesses expand or enter new markets.

In order to provide value via Capital, you must:

  • Have a pool of resources available to invest.
  • Find a promising business in which you’d be willing to invest.
  • Estimate how much that business is currently worth, how much it may be worth in the future, and the probability that the business will go under, which would result in the loss of your Capital.
  • Negotiate the amount of ownership you’d receive in exchange for the amount of Capital you’re investing.

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