First, let’s define Value Proposition. Here’s what Wikipedia has to say:
A value proposition is a promise of value to be delivered and acknowledged. 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.”
Why is having a clear and compelling Value Proposition so important?
- It solves a customer problem or satisfies a customer need.
- It is the reason why customers turn to our company vs. a competitor–i.e. it is a source of Competitive Advantage.
- It is the foundation to a company’s business model–other components include Profit Formula and Key Resources & Processes.
Most companies believe they already have a compelling Value Proposition–a product offering that’s the best thing since Pokemon Go. But, do your customers agree? Is there a disconnect between the value as defined by you (i.e. Customer Value Proposition) and the value as perceived by the customer (i.e. Customer Value Perception)? This disconnect is known as the the Value Perception Gap.
To close the Value Perception Gap, we need to have an offering that is truly compelling. A compelling offering must both
- demonstrate high value to the customer (customer says, “I need” or “I want”); and
- be highly differentiated (customer says, “the alternatives aren’t as good”).
A useful tool for determining those attributes that fulfill these criteria is the Value-Differentiation 2×2 Matrix, which defines categories of offering attributes:
- Table Stakes - Features that are important to customer, but are provided by all competitors at a similar level.
- Game Changers - These are the must-haves that allow you to truly craft a compelling Customer Value Proposition.
- Neutrals - Features that are irrelevant to consumers.
- Fool’s Gold - These are distinctive, but do not drive true value. These “nice-to-have” attributes alone will not meet the customer’s basic needs.
At a minimum, we must have the Table Stake attributes. Without these, we aren’t a viable player in the industry, as we are not even meeting the customer’s basic needs.
To differentiate ourselves in a useful way, we need to develop the Game Changer attributes. Game Changers score high on both Value Proposition and Value Perception, thus minimizing the Value Perception Gap.
Many companies spend time and effort developing and marketing the Fool’s Gold attributes. While these attributes may also make the offering highly differentiated, the customer don’t need these bells and whistles. Companies that create offering with these features don’t have an accurate understanding of what their customers truly need. These offerings (and companies) don’t last.
Another powerful framework for identifying and prioritizing those attributes to create an offering of high Value Differentiation is the Value Curve. (The Value Curve is at the foundation of Blue Ocean Strategy, an innovative growth strategy framework for creating an uncontested market space.) The Value Curve allows us to allocate our resources by answering the questions:
- Which of the attributes that our industry takes for granted should be eliminated?
- Which attributes should be reduced well below the industry’s standards?
- Which attributes should be raised well above the industry’s standards?
- Which attributes should be created that the industry has never offered?
Since we don’t have unlimited resources, we can only increase value on the Game Changers by reducing or eliminating cost of non-essential attributes.
What do you think makes a compelling Value Proposition?
You can download an editable PowerPoint about the Customer Value Proposition here on the Flevy documents marketplace.