I have studied Value Propositions in Michael Porter’s Five Forces framework and in Chan Kim and Renee Mauborgne’s Blue Ocean Strategy. In Blue Ocean Strategy, Kim and Mauborgne suggest moving beyond the bloody waters where the sharks are and developing core differentiators that the marketplace cannot compete with. In one of my all-time favorite books, the Business Model Generation by Alexander Osterwalder & Yves Pigneur, they also relate Value Propositions to differentiation.
The key questions to answer are:
- What value do you deliver to your customers?
- Which of your customer’s problems are you helping them to solve?
- Which customer needs are you satisfying?
- What bundles of products and services are you offering to each Customer Segment?
To quote directly from Business Model Generation, “(a) Value Proposition creates value for a Customer Segment through a distinct mix of elements catering to that segment’s needs. Values may be qualitative (e.g. price, speed of service) or qualitative (e.g. design, customer experience).” Here are just a few of the ways to create your value proposition:
- Performance – One of the most common ways to differentiate is to improve product or service performance over what is traditionally offered in the marketplace. This is demonstrated continuously in the computer sector. New computers are continually produced which outperform the models that are just a few months old.
- Customization – You can create more value for your customers when you can tailor your products or services to meet their specific needs. This would be how we operate as a CPA and business advisory firm. While we provide consulting, accounting and tax services, we tailor the services for each specific client.
- Newness – You can capitalize on newness if your Value Proposition satisfies an entirely new set of customer needs that customers previously didn’t perceive they had. Think about Apple inventing the iPhone. They produced a product that took care of concerns customers didn’t know they had. Now there are over 500,000 applications for the iPhone and only one of them is the actual phone app! That means there are 499,999 things you can do with your iPhone that is not answering and talking on the phone. In my interpretation, you carry a computer in your pocket that just happens to double as a phone when you need it.
- Design – While the design element can be difficult to measure, in industries such as fashion, design is a unique core differentiator.
- Price – Price is a very difficult differentiator and most companies cannot compete on price alone for very long. Companies that attempt to compete on price alone will typically get driven out of the marketplace by competitors with deeper pockets, buying power and strategic relationships. A prime example of a company that competes on price is Walmart.
- Cost Reduction – Companies that help their customers reduce costs use this to differentiate themselves. Think of the software in the cloud model. Many of these companies help their customers by reducing hardware and even software costs.
- Risk Reduction – Customers value risk reduction. Think of how the warranty on a new car reduces your risk. Now consider how BMW has further reduced that risk by including all maintenance (including brakes, batteries and oil changes) for the first 50,000 miles.
Now that I have covered some of the ways that you can create your Value Proposition and given you four questions to consider in shaping your value, take some time over the next couple of weeks and brainstorm the value that you deliver to your customers. If you would like help in this process, please let me know. This is always an exciting process to go through.