Value Propositions
Identifying a Strategy for Sustainable Value
Hello!
Thank you for reading the Brainwaves newsletter. I’m Drew Jackson, your content curator, and today I’m writing about marketing the value of your business’s products/services to customers. Let’s dive in.
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Credit CPA Practice Advisor
Thesis: A business’s value proposition is one of the most critical portions of its strategy as it defines the marketing, sales, customer success, finance, and product development portions of the company. Customers only purchase a good/service when the value provided is the most of all of their options and companies have the opportunity to propose this value—to convince customers of this value.
Value Proposition
A value proposition is a statement describing the benefits a product or service offers to its target customers. The term “value proposition” is believed to have first appeared in a McKinsey & Co. paper in 1988 titled “A business is a value delivery system.” The proposition was that companies deliver value to their customers in order to incentivize them to purchase their goods and services.
The McKinsey piece opens with the following:
Customers select the product they think is a superior value (benefits minus price). Competitive advantage is delivering a superior value to enough customers at a low enough cost to generate wealth. So a business is a system for superior value delivery: choosing a superior value proposition, and echoing it through the business system by providing and communicating it. And managing this delivery is top management’s primary job.
There’s a lot to unpack there, so let me break it down into a couple of different buckets:
Customers select the product/service that provides them the most value
Competitive advantage is creating a source of sustainable value for your customers
A business is a system that delivers value to consumers
I’ll discuss each of the following in the sections below.
Coming back to our mission of defining a value proposition, Wikipedia writes the following:
[A value proposition] is part of a company’s overall marketing strategy which differentiates its brand and fully positions it in the market.
This builds nicely on the McKinsey piece, as it shows how value propositions are a source of competitive positioning for companies where companies can express their differentiation to build up a brand, attract customers, and hopefully provide more value than their competitors.
With that, let’s jump in and dissect all of the different aspects of value propositions.
Credit Discover Magazine
Value Creation & Value Capture Framework
Customers select the product/service that provides them the most value
The McKinsey piece defines a value proposition as "a clear, simple statement of the benefits, both tangible and intangible, that the company will provide, along with the approximate price it will charge each customer segment for those benefits."
To explain in other words, a value proposition is the difference between benefit and cost for consumers.
This thought is best explained through the economic value creation and value capture framework, an example of which is detailed below:
As you can see, nothing in the above graph says “value creation”, “value capture”, or “value proposition.” So how do those terms fit in?
These things are always easier to understand when you put actual numbers/words to them.
For example: let’s say currently you want a rare playing card. The maximum you would be willing to pay for this card would be $200. Anything above that and you wouldn’t choose to purchase the card. Let’s say a company in your area is selling the card for $100. This would mean the consumer surplus that you would be getting by buying the card would be worth $100. Say that the company purchased the card from its previous owner for $90. This would be their cost, meaning that profit would be $10 for the company in this scenario.
In this case, the value being created through this transaction would be $110 ($200 - $90). The business captures $10 of that value as profit and the consumer captures $100 of that value as consumer surplus.
Great, but where does a value proposition fit into all of this?
At first, naively, I thought a value proposition would be the same as consumer surplus. Yet, this isn’t totally the case. While both concepts relate to the perceived value of a product or service, they have distinct meanings:
Consumer Surplus: The difference between what a consumer is willing to pay for a product or service and what they actually pay. It represents the additional value the consumer receives beyond the price they paid. In equation form: Consumer Surplus = WTP - Price
Value Proposition: A statement that highlights the benefits a product or service offers to its target customers. In equation form: Value Proposition = Benefit - Price
The key differences between the two are the following:
Different Perspectives: A value proposition is from the company’s perspective (it’s what the company promises to deliver). Consumer surplus is from the consumer’s perspective (it’s the extra value a consumer receives when they make a purchase).
Timing & Value Realization: A value proposition communicates expected value (before a purchase), whereas consumer surplus is realized after purchase.
Subjectivity: Value propositions are often qualitative and subjective, whereas consumer surplus can be quantified.
Scope: Value propositions often focus on differentiation and competitive advantage. Consumer surplus includes all excess value present (including factors the company might not emphasize).
However, this line of reasoning isn’t entirely faulty.
A strong value proposition aims to create consumer surplus by promising benefits that exceed the price. An effective value proposition anticipates potential consumer surplus.
In relation to business strategy, companies that can accurately predict and then deliver high consumer surplus through their value propositions are likely to be more successful.
To quote my previous self:
Customers select the product/service that provides them the most value
Alternatively phrased, the company that provides the most value to its customers will attract the most customers. That is to say, the company that has the highest value proposition will gain market share as others lose it.
That is, only if the value proposition can be sustained for a long period of time.
Credit The CEO Magazine
Sustainable Value Proposition
Competitive advantage is creating a source of sustainable value for your customers
The Wikipedia article on value proposition states the following:
Strategy is based on a differentiated customer value proposition. Satisfying customers is the source of sustainable value creation.
In the business setting, you often hear words like “competitive advantage” or “differentiation” thrown around, but what do they mean and how do they relate to value proposition?
Competitive Advantage: A unique feature of a product or service that gives it an edge over competitors.
Differentiation: The process of making a product or service distinct from competitors.
A strong value proposition is based on a combination of competitive advantage and differentiation. If a product or service can offer unique benefits superior to those offered by competitors, it can create a compelling value proposition.
In the cycle of product creation and business success, it would look something like this:
Differentiation leads to competitive advantage
Competitive advantage creates a strong value proposition
A value proposition can lead to sustainable value for customers
Diving deeper into the idea of sustainable value, a competitive advantage is about providing something that customers consistently find valuable over time. This means that the unique feature or benefit offered by the product or service is not easily replicated by competitors.
A key term to discuss here is the idea of “value arbitrage”. Value arbitrage in the context of competitive advantage and value propositions refers to a business’s competitors attempting to diminish or neutralize the unique value a company has created. Essentially it’s competitors trying to close the gap between their offerings and those of the market leader.
Competitors do this by first identifying the features or benefits that give the market leader a competitive edge. Once identified, competitors can develop strategies to either match or surpass it. This may involve any of the following:
Imitation: Directly copying the market leader’s features or benefits
Innovation: Developing new features or benefits that are superior to the existing market leader
Price Undercutting: Offering a similar product/service at a lower price
Niche Market Focus: Targeting a specific segment of the market where the market leader may be less competitive
The trick to business success is to create sustainable value—value that persists over a long period of time. Put differently, just because your company can provide value to someone today doesn’t mean it will be successful.
A sustainable value proposition is one that meets the needs of customers today and continues to be relevant and valuable in the long term. This isn’t an article diving deep into that concept, but businesses interested in creating sustainable value (and proposing it to customers) should focus on creating value in the following areas:
Long-Term Customer Needs
Environmental Sustainability
Social Responsibility
Innovation and Adaptation
Customer Loyalty
This is an incredibly difficult task, one that many businesses—even the most successful, have struggled with.
Credit Brown Advisory
Each Business Needs a Value Proposition
Each business needs a value proposition. It’s as simple as that. Businesses need to propose value to their customers to provoke their customers to want to purchase from the business.
How do you determine what value you offer to customers?
Let’s begin with the idea of identifying and determining what value a business offers to its customers. Here’s a breakdown of the steps that happen to determine a business’s value proposition:
Understand the market your business is in and the players in it
Once you understand the market, figure out where your business stands
Once you know where your business is in the market, you can start to analyze the unique benefits, costs, and value you provide to your current customers and prospective customers
From there, you can begin to identify your position in the value cycle
Once you understand what value you are offering and at what stage, you can begin to propose the value to customers and potential customers
The first step to identifying a business’s value proposition is to understand the market your business is in. This includes understanding what resources and capabilities your competitors have. From there you can identify where each player sits in the market—understanding the breakdown by geography, pricing, quantity, scale, and more.
Once the competitive landscape has been identified, your business can begin to identify where you are positioned within the landscape. That includes identifying what unique value your business can offer in comparison to competitors. What benefits does your business provide customers that they can’t get elsewhere? How does your cost structure compare to that of your closest competitor? The factors and more combine to be the beginnings of a company’s value proposition.
Credit Pam Prior
A key part of identifying what value you provide to existing and potential customers is to identify what value you provide at different steps of the value cycle. Value elements (portions of the value proposition) can be created in each portion of the value life cycle. All of the stages in the value cycle are detailed below:
Value Creation
Value Appropriation
Value Consumption
Value Renewal
Value Transfer
Value Creation: As discussed in the section above, value is created by companies using their available key resources and activities to create a product/service with a higher consumer willingness to pay than the company’s cost for the product. This involves developing new products, services, or processes that address customer pain points and provide value.
Value Appropriation: Value can be created in this stage by developing, improving, and facilitating the buying experience of existing and potential customers. There are two ways this can happen: Improving the transaction process (making it quicker/easier to make a purchase) or improving the fulfillment process (making it easier for customers to get a product/service).
Value Consumption: Customers see and feel value through the actual use of the product or service. Value is maximized when the value proposition’s aspects match the customer’s actual needs—this is known as consumer satisfaction.
Value Renewal: With some products/services, it’s possible to renew and/or create value during or after use (when the original value intended is already used up). This stage also includes continuously developing new products or services to maintain relevance and competitiveness—steadily updating value for customers (e.g., adding new features to an existing value proposition). Products and services are adjusted to changing market conditions and customer preferences.
Value Transfer: This stage includes the transfer of value from the producer to the consumer through a transaction. There is the possibility that a customer transfers the acquired value after its consumption (e.g., resale of a second-hand product).
Through this, a value proposition can be developed. There are usually five core value propositions upon which companies can position their products or services:
Offer the best product or service and charge a high price for it (more value for more money)
Offer a better product than the market leader and charge the same price as the market leader (more value for the same money)
Offer the same product as the market leader for a lower price (same value for less money)
Offer a lower-quality product to consumers who want lower-quality products for a much lower price than the competition (lower value for a much lower price)
Offer a better product for a lower price than the market leader (more value for less money)
Once your business understands what value you are offering to existing and prospective customers, you can propose this value to customers and potential customers.
Credit Shopify
Once a product/service’s value has been identified, how do you “propose” it to existing and potential customers?
The entire field of sales and marketing is dedicated to this process—the process of trying to convince your customer (or prospective customer) that you create the most value for them (in comparison to their other options).
This process generally happens through five steps:
Creating a Clear and Compelling Value Proposition
Tailored Communication
Effective Storytelling
Demonstrating Value
Strong Customer Relationships
Creating a Clear and Compelling Value Proposition: Clearly articulating what sets your business apart from your competitors. Emphasize how your product or service addresses customer needs and solves their problems.
Tailored Communication: Companies should research their target market to understand customer’s specific needs, pain points, and preferences. Communication is tailored to resonate with different customer segments. This involves leveraging market research, customer data sources, and case studies.
Effective Storytelling: Companies should develop a story connecting their brand with their customers' aspirations and challenges. Testimonials, case studies, and reviews from satisfied customers should be leveraged to promote further customer purchases.
Demonstrate Value: Companies can offer free trials, samples, tastings, or other demonstrations to allow potential customers to experience the products/services in person. In addition, companies can informational content (generally in the form of ads) to demonstrate expertise and provide value to their audience.
Strong Customer Relationships: Companies can establish trust with their customers through open communication, transparency, and reliability. This includes going above and beyond to meet and exceed customer relationships to encourage repeat purchases. Companies should seek feedback from customers to understand their needs and improve their product/service offerings.
Credit CIO
Customer’s Value Proposition
Up until this point, I’ve only been discussing value propositions from a company’s standpoint - how they provide value to their customers. Yet, customers have a value proposition too.
A customer’s value proposition is the perceived subjective value, satisfaction, or usefulness of a product or service.
To dissect that further, let’s dive into where the customer’s value proposition is being derived from.
A Customer’s Value Proposition is Subjective: Unlike a company’s value proposition which is often focused on objective features and benefits, a customer’s value proposition is heavily influenced by personal preferences, social values, and the perceived benefits of the product/service relative to other available options.
Remember that a customer’s value proposition is the following:
Perceived benefits the customer believes the product/service will bring minus the perceived cost of the product/service
Diving deeper into the perceived benefits the customer believes the product/service will bring, here’s a list of the various components that could impact the perceived benefits of a product/service:
Product or Service Attributes:
Features: The specific characteristics or capabilities of the product/service
Quality: The perceived quality or expected performance of the product/service
Design: The aesthetic appeal and functionality of the product/service
Ease of Use: The simplicity of using the product or service
Post-Purchase Support: The availability of support and assistance after the purchase
Customer Needs and Preferences:
Personal Values: The customer's individual beliefs, values, and priorities
Lifestyle: The customer's lifestyle and habits
Preferences: The customer's unique tastes and preferences
Social Factors:
Peer Pressure: The influence of friends, family, or social groups on purchasing decisions
Social Status: The expected maintenance or improvement in social status through the use/acquisition of the product/service
Cultural Norms: Societal expectations and beliefs that can influence consumer behavior
Marketing and Communication:
Branding: The perception of the brand and the status it provides to consumers
Advertising: The effectiveness of marketing campaigns in conveying the product or service's benefits
Customer Testimonials: Positive reviews and testimonials from other customers
Credit Shopify
Diving deeper into the perceived cost of the product/service, here’s a list of the various components that could impact the perceived cost of a product/service:
Pure Monetary Cost:
Price: The direct cost of the product/service including any taxes and additional fees during the purchase
Non-Monetary Factors:
Time: The time required to purchase, use, or maintain the product/service
Effort: The physical or mental effort required to use or benefit from the product/service
Opportunity Cost: The value of the next best alternative that could have been purchased instead
Risk: The perceived risk associated with purchasing or using the product/service
Hidden Costs: Any unexpected costs or fees that may arise after the purchase including maintenance, unlocking additional features, subscriptions, and more
Marketing and Communication:
Framing: How the price is presented (e.g., as a discount or a premium)
Payment Terms: The payment options available (e.g., installment plans, financing)
Bundling: Offering multiple products or services together at a discounted price
Credit CIO
Bringing this back to our main topic, company value propositions, let’s compare how company value propositions compare with customer value propositions. Here is how the math breaks down for business & customer value propositions:
Business value proposition = Proposed benefits the business thinks a customer would receive - the price the customer pays for the product/service
Customer value proposition = Perceived benefits the customer believes the product/service will bring - the perceived cost of the product/service
The equations above aren’t exactly the same, so there is often a discrepancy between what a company’s value proposition is (what benefits they think the consumer will get from the product/service) and what the customer’s value proposition is (what benefits the consumer actually gets from the product/service).
Where does this discrepancy come from?
Limited Understanding of Their Customer: Companies may not fully understand their customers’ needs, preferences, or values
Overemphasis on Product Features: Companies may focus too much on the technical expertise of their products or services, rather than the benefits they offer to customers
Lack of Customer Feedback: Companies may not actively seek feedback from customers to understand their perceptions of value
Relating this to the math above, a company’s value proposition (proposed benefits the business thinks a customer would receive - the price the customer pays for the product/service) is a lot more black and white than the customer’s value proposition (perceived benefits the customer believes the product/service will bring - the perceived cost of the product/service). See, the company’s value proposition generally can be calculated easily as the proposed benefits relate to the willingness to pay of customers minus the price of the product. However, the customer’s value proposition is much more subjective as it’s specific for each consumer—it’s all about perception which is difficult to put a direct number to.
Credit Stax Bill
Takeaways
Value perception is incredibly subjective and differs person-to-person and business-to-business. Because of this, it’s difficult to articulate a perfect set of takeaways for this article.
If I had to consolidate this article into four main points, they would be the following:
1) A business should strive to create the most value for its existing and prospective customers as it possibly can.
2) The business with the highest value proposition will eventually win the most customers (it may take time to change consumer behavior or build a brand in the market).
3) The key to lasting business success is to create sustainable value for your customers over a long period, value that isn’t arbitraged away by the competition.
4) Identifying your value proposition is the backbone to deciphering the optimal pricing strategy of your products/services
See you Saturday for The Saturday Morning Newsletter,
Drew Jackson
Twitter: @brainwavesdotme
Email: brainwaves.me@gmail.com
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