Value proposition

A value proposition is a promise of value to be delivered and acknowledged. It is also a belief from the customer how value (benefit) will be delivered and experienced.

A value proposition can apply to an entire organization, or parts thereof, or customer accounts, or products or services.

Creating a value proposition is a part of business strategy. Kaplan and Norton say "Strategy is based on a differentiated customer value proposition. Satisfying customers is the source of sustainable value creation."

Developing a value proposition is based on a review and analysis of the benefits, costs and value that an organization can deliver to its customers, prospective customers, and other constituent groups within and outside the organization. It is also a positioning of value, where Value = Benefits - Cost (cost includes economic risk).

Overview

A value proposition is a statement which clearly identifies benefits consumers get when buying a particular product or service. It should convince consumers that this product or service is better than others on the market. This proposition can lead to a competitive advantage when consumers pick that particular product or service over other competitors because they receive greater value.

The phrase “value proposition” (VP) is credited to Michael Lanning and Edward Michaels, who first used the term in a 1988 staff paper for the consulting firm McKinsey and co. In the paper, which was entitled “a business is a value delivery system”, the authors define 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”. In a modern, clear cut definition, Labeaux defines a value proposition as a statement that clearly identifies what benefits a customer will receive by purchasing a particular product or service from a vendor. According to Hassan, however, there is no specific definition for Value Proposition.

Creating and delivering value proposition is a significant issue that marketing planners need to consider in planning strategies. Value propositions vary across industries and across different market segments within an industry. Capon and Hulbert linked the success of firms in the marketplace to the value provided to customers. They introduced a principle of customer value, with customer insights driving the company’s marketing activities. Customer value should also drive investment and production decisions, because customers perceive value on the benefits of the product or service they receive. Consequently, as the environment changes, and the customer experience and their desires change, the value they seek changes. As a result, companies are pressured to invest more resources in marketing research in order to gain deep customer insights, improve value proposition.

Consumers are always looking around for the best possible deal at the best quality and how these products or services will contribute to their success. The value proposition is the promise that the business will give the consumer to assure best possible value. The value proposition is a creative statement that depicts the unique selling point. Without this statement you lose an opportunity to tell consumers why they should pick you over competitors. An important goal in a business is to convince customers that they are getting many more benefits. Coming from a customer’s perspective, buyers are not only asking how this product is different to one they may already be using, but what value this product or service may have. Customers are looking for answers that may improve or replace products or services. Customers will never buy a product or service if they don’t feel like they are receiving the best possible deal. Therefore, the value proposition is important to businesses and their success.

The value proposition is to differentiate the brand from competitors. To understand and get an idea about the value proposition it is important to analyse the business through the marketing mix. Identifying what the product is, the price of the product, where this will be sold and how this product will be promoted. By identifying these key questions the value proposition becomes more obvious. Another strategy that has been used to help process learning and growth of a business is the balanced scorecard. This was a concept that was developed by Robert Kaplan and David Norton in 1990, to help communicate value proposition in a way that businesses can understand. The maps create a visual representation of the businesses objectives and goals so it becomes more approachable. Through these theories the proposition becomes more obvious and displays to consumers why this product or service is so special to the market. Once businesses determine what makes this item or service so exceptional compared to competitors, it can begin to guide a business more clearly. This can lead to marketing concepts and ideas. The value proposition helps the business understand what their primary focus and goals are within the business and help to understand the consumer’s needs.

When creating a value proposition it’s important to think about these key questions: What is your product or service? Who is the target market? What value does your product or service provide? How is this different from competitors? Many businesses that can answer these will have a relatively strong value proposition as they know how their product or service differentiates from competitors. But it’s more than just understanding and recognising what makes them different; it’s about creating a statement that engages customers to purchase your goods or service. There are many benefits that the value proposition can have on a business. These benefits include a strong differentiation between you and your competitors, increase in quantity, better operations efficiency and increase in revenue. By also creating a more personal and honest relationship with consumers through the value proposition also gives them another reason to choose you. These benefits will help the business grow and succeed in the market.

Value Proposition Builder Model

Value proposition development is an organizational approach to building in value to the customer experience. It is simply that by building a value proposition you will provide profitable and superior customer value. The Value Proposition Builder Model states six stages to the analysis:

1. Market: Analysing and identifying the market segments, or specific clients, or target individuals within those clients for whom your solution has the potential to deliver value and profitably.
2. Next, analyse and define the value experience that clients get from your organization from its current activities. You need to define good, bad and neutral experiences, The effectiveness of the value proposition depends on gathering real customer prospect or employee feedback.
3. Then, define the offerings mix capable of leveraging your proven value experience with the defined target market group.
4. When you have done this, you are in a position to assess the benefits of the offerings in the context of the value experience you are able to deliver to the market group. There is a cost component of benefits here which includes price and customer risks, enabling the calculation of value where Value = Benefits minus Cost.
5. Alternatives and diiferentation is the next aspect to analyse, what alternative options does the market have to the product or service?
6. ... and back it all up with relevant proof, to ensure there is substantiate value proposition in place.

Neil Rackham believes that a value proposition statement should consist of four main parts: capability, impact, proof, and cost [that is, the price a customer is expected to pay] .

Organizations do not directly communicate the outputs of the value proposition creation process (i.e., the value proposition statement and template) to external audiences; value proposition statements are internal documents, used by organizations as a blueprint to ensure that all the messages they communicate, inside and outside the organization, are consistent. Some of the ways that organizations use value propositions include in marketing communications material or in sales proposals.

A convenient model to state the customer's reason to buy your service or product in a succinct relative value and differentiation summary for a target group is offered by Winer and Moore.

For (target customer) who (need statement), the (product/brand name) is a (product category) that (key benefit statement/compelling reason to buy). Unlike (primary competitor alternatives), (product/brand name) (primary differentiation statement).

Geoffrey Moore's positioning statement framework identifies the added value and product purpose in filling a market gap better than alternatives. It provides a quick summary with analogies to other existing solutions which, creates an image that focuses on user benefits over features or specific implementation methods.

Value-Focused Enterprise Model

Creating a Value Focused Enterprise (VFE) requires a fundamental rethink of the way things are organized and managed. This takes us right to the heart of your business strategy and implementation. These customers demand, and are willing to pay for, a sales effort that creates new value and provides additional benefits outside of the product. Using this model, you are able to plan your business on the basis of value to be delivered.

1. Value-Centered Strategic Intent: Where do you intend your organization to be in the foreseeable future and what principles will guide your journey?
2. Value Proposition: What is your Value Propositions (market, Value experience, Offerings, Benefits, Alternatives and Differentation and Proof) and how is it congruert with your Strategic Intent?
3. Value- Focused Operating Model: Where the ‘How’ factors (organization, process and so on) for the operationalization of your Value Proposition to achieve the strategic Intent?
4. Value- Creation- Based Management and Execution: How will you execute and manage all of this to ensure maximum Value Delivery.

The Value Cycle

Osterwalder and Pigneur state that the value proposition must be studied through its entire value life cycle. Value elements can be created in each of the five stages of the value life cycle. These stages are: value creation, value appropriation, value consumption, value renewal and value transfer:

1. Value Creation: The tradition al view of the value creation process doesn’t allow customers to take part in feeling the value. Marketing and research and development are mainly responsible for adding value at this stage based on historic data and observation. However, in modern times, the customers of several companies are included in this stage.
2. Value appropriation: value can be created in this stage by developing, improving and facilitating customers buying experience. This can be done in two steps, firstly improving how transactions are made, and secondly, considering the fulfilment of customers.
3. Value Consumption: This is core to the value proposition. At this stage customers see and feel the value through the actual use of the product or the service. At this stage value can be created through a bundle of benefits that are linked to the product or service. It can be improved through observation and resulting feedback.
4. Value renewal: This stage is when value expires. The value can be created from this through adding more benefits and features to the product or service when it is renewed.
5. Value Transfer: The final stage of the value life cycle is the stage when customers can no longer gain value. Value abundance can occur at this stage, when customers need to pay for disposing certain used goods, e.g. TVs/computers.

Value Status

Perceived value and willingness to pay are correlated. Customers are willing to pay in several circumstances, a few examples being; when they are faced with different offers, when they are in a partnership with the supplier, when the need to buy is urgent, when there aren’t any substitutes, and when there is a high positive relationship between the value perceived and the price. Companies must choose the best pricing strategy to deliver value for both the customer and corporate perception. Capon & Hulbert introduced some factors that a firm must consider before making pricing decisions. Some of these factors include:

1. Perceived substitutes: differentiation on offers and prices compared to competitors.
2. Unique value: customers weigh the benefits and features of the product and perceive these benefits as a unique value provided solely by the organization.
3. Price/Quality: firms should consider that customers will seek to have a positive price/quality relationship for a product to make a purchase decision.

Zeithaml studied three consumer defined values: Low price, Quality and value for money, and Features. The study concluded that perceived value is the customer’s overall assessment of the utility of a product based on perceptions of what is received and what is given. Some Customers may see value in cheap prices, and other may see value in volume obtained.

Innovation

It is believed by Lindic & Marques that Value Proposition is a significant catalyst for customer focused innovation. Kambil and Baragheh claim innovation is a phenomenon that requires a multidisciplinary approach for analysis due to its sheer complexity. Fields such as strategic management, organisational science, and information systems marketing are central to this analysis.

Lindic used the example of Amazon.com; the transformation from an online bookstore to one of the world’s most important online shopping services. Amazon.com has evolved through high levels of diversification from their struggling brand prior to the internet bubble burst in 2000, allowing for a great example for analysis and explanation of the potential innovation resulting from value proposition.

Amazon also represents the so-called new economy yet at the same time it shares many characteristics with traditional companies. In fact, offline activities represent 70 percent of its core business. As a result, we are able to identify innovations which are common in both traditional and new economy companies.

Innovations implemented by Amazon.com included features like the possibility to search among books based on not only book titles, but also keywords spread throughout the content, reducing the consumers time and energy related to finding their desired item. Another innovation was the patented “one-click” feature, allowing customers to efficiently purchase goods without having to repeatedly submit their payment and shipping information. All of these minor adjustments over time were the result of developing value proposition, ultimately leading to the success that Amazon.com is today.

Lindic has developed a PERFA framework to evaluate this concept of value proposition in regards to innovation. Meticulously matching innovations’ effects on customers with existing definitions found in the existing literature led to the following five elements that altogether represent a complete overview of all value propositions generated by innovations at Amazon.com. These are Performance (P), Ease of use (E), Reliability (R), Flexibility (F), and affectivity (A).

Bonner states that the performances of innovations or new goods or services offered to customers is a result of a superior company’s offering in terms of quality, technical performance, features and ability to meet customer needs and demands. This perspective emphasises innovation as a generator of performance in a customer-oriented way.

Ease of use refers to the degree to which a person believes that using a particular system or product will be effort-free (e.g. the ease of search and acquisition, usability, personalisation, service, and support). All else being equal, a feature or application perceived as easier to use than another is more likely to be accepted by users, according to Wang. Interestingly in Tornatzky and Klein’s meta-analysis of the relationship between the characteristics of an innovation and its adoption, they found compatibility, relative advantage, and complexity have the most consistent significant relationships across a broad range of innovation types. Complexity is defined as “the degree to which an innovation is perceived as relatively difficult to understand and use”. Therefore, the easier it is to use an innovative application or feature, the more likely it is to be accepted by the user. Consequently, ease of use reduces the cost included in the value proposition equation and increases its value.

Reliability is defined as “the ability to perform the promised service dependably and accurately” according to Pitt. Raaij and Pruyn similarly perceive reliability as the ability of a product to deliver according to its specifications. Innovation may therefore add to the value proposition for customers by performing in accordance with the standard set for products and services.

Flexibility is perceived as necessary in order to maintain the fit of an organisation and a changing environment. It describes a firm’s ability to reallocate and reconfigure its organisational resources, processes and strategies as a response to environmental changes. In other words, flexibility is materialised through the dynamic capabilities of a company which enable it to integrate, build and reconfigure internal and external competencies in order to face rapidly changing environments.

Affectivity addresses the feelings or emotions associated with working with a company or using its products and services. Atken states it is highly correlated with a sense of belonging to a certain group or class. It is also correlated with the concept of co-branding where a brand or company may be associated with the attributes of the product or benefits derived from it. Such a brand generates emotions and feelings among its customers.

Kambil argues that the value proposition concept is too vague to be useful for innovation, however Lindic and Marques’ research indicates that if systematically decomposed, value proposition hold a vital role in the innovation process.

It is customers who decide whether or not to purchase a certain product; therefore, innovations should be based on what customers truly value. A value focused approach requires managers to rethink their perspective on innovation by placing themselves in the customer’s shoes. In doing so, managers are able to identify key factors among the five perspectives of PERFA and make better decisions when deciding what to innovate so as to improve value proposition for their customers.

Strategy and marketing

Businesses can use the value proposition to not only target customers, but partners, employees and suppliers. The creative statement should be able to persuade other businesses to create an alliance, which will be helpful in the long run. Joining up with another business can be a very powerful strategy. When businesses align there strengths seem to stand out, and there weaknesses become less noticeable. This makes their products and services stand out to consumers. Creating an alliance with another firm can increase your businesses brand awareness; create a larger customer base, new insights on products and access to new technologies to improve how the business runs. This strategy creates a competitive advantage over other competitors.

The value proposition should be able to influence new employees or motivate existing employees to support the businesses goals and plans. Employees are a great way to improve the business client base and build a stronger relationship. Treating your employees well, by offering bonus’s or special deals they will be happy to take on more responsibility and promote the business they work for. This alliance within the business will promote their product or service through word of mouth and even social media. The employee’s positive words and excitement about their workforce and products will interest new customers.

Suppliers should want to supply the business with products or items needed for the service by their thoughtful and creative statement. Businesses can increase their chances of the products they want and when they want it. By thinking of a well-constructed well thought-out value proposition it can lead to a very successful business. This can lead to possible alliances with suppliers that will support and help the firm with supplies and products that are needed to help improve the position of the business.

Value Proposition Advantages

A robust and impactful value proposition is essential for any business to effectively engage and connect with customers, partners, stakeholders, and critically internal employees, by clearly communicating how it is different, better and worth purchasing from. The value proposition is central to the overall business model and should form the anchor for all decision-making, operations, and customer engagement. It is more than a set of words; more than a set of marketing messages; it is the framework for how the business aligns its activities and output with its target audience’s needs, to deliver a compelling experience that can ultimately be monetized through an exchange of value. In this respect, the value proposition is key to validating your business idea; both as you start up and as you grow. These are the benefits and advantages that should be considered as you go through the process of discovering, articulating and realizing your value proposition:

Gives direction

A value proposition provides direction by defining the ideal target audience right up-front, then identifying and understanding the core needs that can be satisfied by the planned solution. A clear value proposition thereby helps avoid wasting time, money, and effort by offering products or services that aren’t relevant or attractive to the target customers.

Creates focus:

A robust value proposition gives team focus by identifying the fundamental initiatives, activities and aspects of the business; this will have the greatest impact on meeting the defined target audience’s needs. Value proposition assists in focusing on the who, why and how the business will be delivering value. It outlines what you must deliver to meet your defined audience’s needs and create an overall remarkable experience.

Breeds confidence:

Having a robust and perfected value proposition gives you, your team, and your stakeholders’ clarity so that you can progress without questioning and second-guessing your every move, thus breeding confidence. You can be assured of the decisions that you make by seeing where and how you’re adding value to your audience. Confidence comes from knowing that you’re making a difference to the people that you’re serving, that you’re doing so in a way that’s meaningful to them, and that your actions are aligned to delivering an overall remarkable experience.

Improves customer understanding and engagement:

Value proposition gives you the basis to engage with customers in a compelling and resonant manner by understanding how they view you, and your products or services. Without this alignment, you may be talking to prospects and customers in ways that breed misunderstanding or even alienation – and people who feel misunderstood don’t buy. The value proposition determines the factors that not only make a difference to your audience, but do so in aspects or ways that are meaningful to them.

Provides clarity of business value:

As a start-up without any brand recognition, you’re going to have to paint a very clear picture as to why you’re worth people’s time. Often though, many companies’ marketing messages end up being vague and unfocused, thereby losing their impact and persuasiveness. The value proposition frames not only how you’re creating value for your audience by addressing a core need, but critically why your solution is better than what they are currently doing or using, or versus whatever else is potentially out there that could do so.

Increases effectiveness of marketing:

Value proposition directs your marketing efforts to concentrate on those activities that will generate the greatest results. By truly understanding your desired customers and their core need that you’re accommodating to, you’re able to focus on the channels that are most relevant, and will effectively communicate the benefits and advantages of your solution.

See also

• Customer value proposition
• Employee value proposition

References

• Lindic, J., & Marques, d. S. (2011). Value proposition as a catalyst for a customer focused innovation. Management Decision, 49(10), 1694-1708. doi:http://dx.doi.org/10.1108/00251741111183834
• Baregheh, A., Rowley, J. and Sambrook, S. (2009), "Towards a multidisciplinary definition of innovation", Management Decision, Vol. 47 No. 8, pp. 1323-39.
• Kambil, A., Ginsberg, A. and Bloch, M. (1996), "Re-inventing value propositions", Working Paper IS-96-21, New York University, New York, NY.
• Barnes, C., Blake, H. and Pinder, D. (2009), Creating and Delivering Your Value Proposition: Managing Customer Experience for Profit, Kogan Page, London
• Wang, W.T. and Wang, C.C. (2009), "An empirical study of instructor adoption of web-based learning systems", Computers & Education, Vol. 53 No. 3, pp. 761-74.
• Van Raaij, W.F. and Pruyn, A.T. (1998), "Customer control and evaluation of service validity and reliability", Psychology and Marketing, Vol. 15 No. 8, pp. 811-32
• Pitt, L.F., Watson, R.T. and Kavan, C.B. (1995), "Service quality: a measure of information systems effectiveness", MIS Quarterly, Vol. 19 No. 2, pp. 173-87.
• Atkin, D. (2004), The Culting of Brands: When Customers Become True Believers, Portfolio, New York, NY.
• Tornatzky, L.G. and Klein, K.J. (1982), "Innovation characteristics and innovation adoption-implementation: a meta-analysis of findings", IEEE Transactions on Engineering Management, Vol. 29 No. 1, pp. 28-45.
• Capon, N., & Hulbert, J. (2007). Managing Marketing in the 21st Century: Developing & Implementing the Market Strategy. Wessex, Inc.
• Hassan, A. (2012), “The Value Proposition Concept in Marketing: How Customers Perceive the Value Delivered by Firms”, International Journal of Marketing Studies, Vol. 4, No. 3.
• Osterwalder, A. & Pigneur, Y. (2003), “Modeling Value Propositions in e-business”, ICEC ’03 Proceedings of the 5th international conference on Electronic Commerce, pp 429-436
• Zeithaml, V. (1988). “Consumer Perceptions of Price, Quality, and Value: A Means-end Model and Synthesis of Evidence”. Journal of Marketing 52 (3). American Marketing Association: 2–22. doi:10.2307/1251446.