How to create a Value Proposition
In business, it doesn’t make sense to focus on doing the same thing as everybody else. Especially since research show it pays off to differentiating your brands and business in meaningful way in the minds of the consumers, clearly separating you from competition.
When talking about differentiation, terms like Positioning, Brand Positioning, Brand Positioning Statements and Value Propositions are often used. Often without explanation. What is it really? Here we take a look at a few of the concepts, with particular focus on the Value Proposition and how to create one.
First out: Positioning
Positioning as a business concept originates from business strategy. From the car industry of the 1920ies, and from Alfred P. Sloan, the president of GM, to be exact. When Sloan entered the business, Ford (a branded house) dominated the market and GM (a house of brands) suffered. Sloan’s solution was to give each brand a clear identity and a specific price point developed for different customer segments. A solution where the different GM brands wouldn’t cannibalize on each other anymore. And, no wonder, Sloan’s strategy turned out to be a big success! To a marketeer, this sounds very similar to brand positioning. Strategic management has however developed into a direction where the competition rather than the customer is in focus. With positioning the strategy guru Michel Porter for example means finding the sweet spot where a company positions itself from its competition by leveraging its strengths.
Brand Positioning and Brand Positioning Statements
Brand Positioning has developed in another direction, mainly seen as a marketing issue till recently. As a strategic marketing term, brand positioning aims to make a brand occupy a distinct position, relative to competing brands, in the mind of the customer. A perspective nicely described by Al Ries and Jack Trout in “Positioning. The battle for your mind. How to be seen and heard in the overcrowded marketplace” – a now almost classical marketing book from 2001.
For a marketeer, the Brand Positioning Statement flows from the Brand Positioning and should include the essence of the brand. It is normally used for creative briefs to a communication agency as well as to internally communicate what the brand stands for.
The Value Proposition
Creating a Value Proposition is an important part of business strategy. To Kaplan and Norton (both well known within strategic management as the authors behind the balanced scorecard methodology), “Strategy is based on a differentiated customer value proposition”. And customers are important because they help create sustainable value for the company.
The Value Proposition concept seem to have been around for long and can be created from two different angles, that of the company and that of the customer. Thoughts about the “Customer Value Proposition” in particular were developed by Ray Kordupleski in “Mastering Customer Value Management: The Art and Science of Creating Competitive Advantage” (2003) and “Influencing Market Share: The Link Between Customer Satisfaction and the Bottom Line” (1997).
In short, customer value management and creation is about choosing value (determining what customers really value and developing your Value Proposition), delivering value (making sure business processes are aligned with value proposition) and communicating value (educating the market on your value proposition). It is also relative to the competition. Hence, the Value Proposition itself is an important first step in the value creation.
The Value Proposition can be described as the sum total of functional and emotional benefits which that a company promises that a customer will receive in return for what they pay. It can apply to an entire organization or parts thereof, such as specific customer segments, products or services. To be effective it however needs to bring more value than available customer alternatives (internally and externally). From a strategic management perspective the Value Proposition can also be said to be the umbrella holding the different brand positioning statements of a company together.
How to evaluate your current Value Proposition
Developing a Value Proposition is traditionally based on a review and analysis of the benefits, costs and value that an organization can deliver to its customers, prospective customers, and others within and outside of the organization. To be effective it however needs to be matched with the needs of the targeted customer segments, and provide better value than the competition. You also need to understand your current situation.
A great tool to evaluate your current value proposition is the Value Map (see below), where you can map the relative customer ratings of perceived price and cost to their relative rating on perceived products, services, relationship or image (rated by the customers). All in relation to competition.
Where does this take us? In short, that a Value Proposition is relative to its competition in the eyes of the customer. You can either provide a value on par with your competition, a value that is better or a value that is worse than competition. An Value Proposition however doesn’t mean much until you also take the customer perspective into consideration.
The Value Curve
A value proposition is above described as the sum total of functional and emotional benefits which that a company promises that a customer will receive in return for what they pay.
But, how do you know what benefits that are most valued by your customers, or most relevant to them? A great tool to help you examine that is the Value Curve from Blue Ocean Strategy. The strategy canvas is both a diagnostic and an action framework for building a compelling value proposition, and a blue ocean strategy. It however requires customer insight as well as competitor intelligence to get it right.
In general, the horizontal axis captures the range of factors that the industry competes on and invests in, while the vertical axis captures the offering level that buyers receive across all of these key competing factors.
We have used the model both high and low – on product group and brand level as well as on company level – with great results. The limitations of the Value Curve (from our perspective) is however that it aspires to capture the value of all customers, rather than being specifically aimed at solving problems and bringing value to certain customer segment. Also, it doesn’t help you in the process of identifying the relevant variables in the first place.
Match with the targeted customer segments
In “Business Model Generation” and “Value Proposition Design”, the authors show that a winning Value Proposition, fit to the targeted customer segments, is the foundation of successful business models. They argue that matching your chosen target segments with a relevant and attractive Value Proposition is key to success. Something we fully support.
We specifically like using the Value Proposition Canvas (copyright Business Foundry 2012). A simplified version is sketched out below. You can find the complete, downloadable version here or at www.businessmodelgeneration.com.
The underlying logic of the Value Proposition Canvas is pretty straight forward. The process starts with your offering and your targeted customer segments. The Value Proposition is then designed in relation to your understanding of the targeted customer segments (the jobs that needs to be done as well as related pains and desired gains). The methodology also help you ask the right questions to identify the underlying customer needs.
Developing your value proposition from scratch
To create a successful Value Proposition from scratch we suggest the following approach:
- start out with the Value Proposition Canvas from Osterwalder (et al) to understand your target customer segments, and their jobs, gains and pains, in relation to your value proposition,
- continue with the Value Canvas from Blue Ocean Strategy to rank the identified variables of your value proposition and how to differentiate from your competition,
- finally use the Value Map to create an overview of where that puts you in relation to your competition.
In doing this, it is mandatory that you spend time in the field observing and interviewing your customers as they go about their everyday lives. We also suggest that you bring in your team or colleagues for a workshop approach, and invite them to the same type of ‘customer safari’. Based on our experiences, the workshop format then unleashes both ideas and opportunities beyond the individual level, coming from putting a diverse team of people with different experiences and insights together.
A few final words
Above, we have now shown how to choose value (determining what customers really value and developing your Value Proposition). Still delivering value (making sure business processes are aligned with value proposition) and communicating value (educating the market on your value proposition) remains.
Bringing this all together, the best thing that could happen is that you design a Value Proposition that is highly attractive to your targeted customer segments and clearly differentiated from your competition, helping you increase customer satisfaction, sales, profits as well as long term shareholder value. The worst thing that could happen is however that you stumble on the way and develop a Value Proposition that is not relevant to your targeted customer segments and that is not differentiated from your competition. Ultimately, that could even lead to the end of your business.