Understanding the Creation of Value – Part 2

Here at The Motley Fool Singapore, we’re being highly encouraged to read – it’s one of the greatest perks of my job.

One of the books I am currently reading now is “The Personal MBA” by Josh Kaufman, a blogger tuned best-selling author.

At the beginning of his book, Kaufman talked about the different types of value a business can provide which can define it as a sustainable business. According to Kaufman, there are twelve types of value that a business can bring to the table for its customers.

Kaufman’s book triggered my mind and led me to the opinion that thinking about the value that a company can provide is a very good starting point for investors who are analysing a new firm.

In the first part of this series, I looked into companies that provide value through their products and services. In here, let’s look at business models involving shared resources and subscriptions.

Providing value with a shared resource

Some products or services might be too expensive for an individual customer to purchase on their own for usage. Therefore, a type of value a company can provide is to purchase the asset and then share it with multiple customers at an affordable individual price-point.

Singapore’s flagship airline Singapore Airlines Ltd (SGX: C6L) can be seen as a type of company providing a shared resource. Without airlines, an individual wanting to travel from one country to another might have to purchase his own plane and fly there. But, that’s a ridiculously inefficient way to travel and is out-of-reach for most people.

That’s where an airline comes in: It will purchase an aircraft and sell each customer one seat-space for the duration of the travel from point A to B. This is a form of providing value through a shared resource: The company (an airline) buys an expensive asset (the aircraft), and shares it with multiple customers at a fraction of the price of the asset.

Providing value with subscriptions

A subscription is a continuous offer that’s provided to a customer in exchange for a recurring fee.

Mobile phone services are a typical and ubiquitous form of subscription. It is advantages for both the customer and a telecommunications company to operate on a subscription model for mobile phone services. That’s because it’d be a huge hassle for a customer to have to renew the service frequently and the company would also prefer to have a constant and predictable recurring stream of revenue instead of having to deal with multiple one-time transactions.

Companies like Singapore Telecommunications Limited (SGX: Z74) and Starhub Ltd (SGX: CC3) are well-known local telecommunication firms that provide value to their customers through subscriptions. Both companies provide a variety of communications services (like pay TV, mobile services and data, and broadband internet access) which are all based on the subscription business model.

Foolish Summary

Businesses that can create sustainable value are the ones that likely will have longevity. They are also the types of businesses that we as investors would ideally like to own as they can help compound value for the long-term.

What’ve we’ve just seen are only four of the 12 types of value that a company can provide. There’d be more to come from me on the 12 types of value, so stay tuned!

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own any companies mentioned above.