Value Proposition

What is it?

A company’s value proposition is one of the most important aspects of its strategy. It is one of the key elements of its strategic triangle.

At its most basic, it answers the question: “Why do customers buy our products?”

When is it useful?

Understanding value propositions is important in almost any strategic task:

  • When you are a new start-up, you are searching for a highly differentiated value proposition that will create a customer for you
  • When you are entering a market, you are looking for a differentiated value proposition that will enable you to differentiate from the incumbants and win market share.
  • When you are launching a new product, the new product will be trying to enhance your value proposition
  • When making product/market choices, you need to know where you have  differentiated value propositions to build growth upon.

How do you do the analysis?

You can build up your value proposition one step at a time.

1) Firstly, for this analysis you need select a single segment in a needs-based segmentation.  Since we are comparing the competitive offers to the benefits required by the customer, it does not work to have multiple segments. If you are interested in multiple segments, map them separately.

2) Then we need to identify what benefits the customer is looking for when they make a purchase – their “buying factors”. This can be tricky. A good starting point is conventional market research, using surveys to ask customers what aspect of the product or service is most valuable for them. However, much of this decision may be made at a sub-conscious level and customers are rarely able to articulate emotional benefits. Deep behavioral anthropology and/or quantitative method like conjoint analysis can provide a more accurate picture than surveys alone. Management judgement is useful as a cross-check, but is potentially dangerous since we want to understand the real customer perspective, not what management thinks the customer want.
The most important thing to remember is that buying factors should always be identified from the customer perspective. One trick to help you retain this mindset is to always use customer language. For example, no customer is going to say that a retailer has “range authority”, that is an industry term. Turn it into something the customer will actually say like “a broad choice” of products.

We can visualise this by graphing it – see this example for regular economy air travellers. Note that the buying factors are not just identified, they are ranked from the most important to the least important.

For economy travellers, price is the most important consideration in deciding who to fly with.

“Convenience” is an example of a buying factor that is too broad to be useful. What exactly does it mean? Is it frequency of flights? Is it ease to buy tickets? Is the the speed to board the plane? Is it about direct flights to the airport I want to go? You need to break these generic benefits down before they become useful. Other generic benefits to beware of are:

  • “Quality”. What exactly does this mean? Fit to specifications? Durability? Visible aesthetic beauty? Craftmanship? The only guideline is again, this has to be from the customers point of view.
  • “Brand”. Like quality, this is an intangible that you will need to break down before it becomes useful. Is this corporate reputation? Is is about what others will think when they see me using the product? Is it about how I will feel? Is is about reducing career risk (“no-one gets fired for buying IBM”)? Is is about buying the leader?
  • “Customer Service”. Is this about being friendy, efficient or professional? Is is resolution of issues, installation assistance or post-sales services? Is it the sales experience?

Even with good customer research and data, this picture is challenging to get right, but very powerful.

3) Once we have the list of buying factors ranked by importance, we can map our own and competitors performance against them. Traditional market research is a good starting point. Again, the key point to remember is that this should be done from the customer perspective. The reality of the number of products you stock is irrelevant, it is the customer perception of whether your range is greater than your competitor’s.

Sometimes you will find that two competitors are ranked very similarly. This means that these competitors are not “differentiated”. In this case, AA and United appear to have a very similar offer for regular economy travellers.

Note: as in any frameworks, this analysis is a simplification. It takes customers from different ages and towns and averages them. If we have done our-needs based segmentation right, the variance from the average should be small. If not, it is a flag that we should look into more detail, perhaps creating different segments.

Competitors should be named explicitly – this helps keep the analysis real and not theoretical. In general, you only want to plot your own performance and 2-3 competitors – your most direct competitor and others with very different performance on the buying factors (=differentiated value propositions).

An Example?

Here you can see that SouthWest has a highly differentiated value proposition relative to both cars and traditional airlines like AA/United. They are cheaper and more convenient than AA with more friendly service and better on time performance. AA beats SouthWest on the buying factors of meals, entertainment and seating choice, but not that these are far less important to economy travellers.

Southwest is also differentiated vs car travel, but on different buying factors – their flights are much faster than travelling by car and friendly service is hard to come by in a car.

Compared to traditional airlines, SouthWest’s value proposition is price, convenience, on-time arrival and friendly service.

Industry level interpretation

In addition to assisting company strategy, you can understand the industry better by looking at the value proposition map.

If the lines are very close together, then the industry is effectively commoditised. Competitors are offering very similar types of value and customers have little real choice. Competition is likely to be either cartelised, or price-focused. If price-focused, industry profitability will be low.

If the lines don’t move in lockstep, then you have differentiated competitor positionings, offering different types of value to customers. Customers have choice, competitive intensity will be less and the apples-to-oranges comparison will reduce

If the bulk of the industry is similar, like AA and United on the map above, but you have a competitor offering a very different profile, they are following a Blue Ocean strategy, stepping away from the conventional industry wisdom to offer different value to customers.

I want to know more

How can you adapt this concept?

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