In the last couple of weeks, I have been publishing chapters of the“10 foundations of business success”, an excellent very practical book by my friend and colleague Guy Hamilton.
If you missed any of the articles in the topic, see links below.
Series Intro – 10 Foundations of Business Success
Chapter 1: Market Segmentation Part 1
Chapter 1: Market Segmentation Part 2 – The Steps
Chapter 2: Customer Needs – You only have a business if a customer wants to buy your products.
Today, I bring to you, the 3rd Chapter: Value Propositions – What a customer perceives as good value is all that matters. A business view of value does not count.
In this chapter Guy says that the only value of service or product is what our customers’ value; that are sure to keep them coming and keep the profit margins up..
The idea of creating and delivering a value proposition is fairly straight-forward: the “value” element is defining the value you aim to give to your customer, and the “proposition” (or “proposal”) is how you present this in a clear and compelling package that increases a customer’s engagement with your business.
Defining and building up a clear, concise and compelling value proposition is the natural next step. If your core offer is not naturally clear, you run the real risk of confusing customers and encouraging them to look at competing business they understand better.
Let’s be clear, by “value” I do not mean price as a stand-alone attribute. Price will always be part of the value equation, but it is just one element a prospective customer uses to decide whether they are receiving “value for money”. The more niche or premium in nature a product or service, the greater the need to implicitly or explicitly define a value proposition for it.
We all intuitively assess value for money for products above a certain price point. The price point will vary by socio-economic group. A business that seeks to build its repeat customer base may look to increase value through loyalty schemes that encourages customers to return.
Increasingly, the value you offer needs to be presented in tight and compelling language supported by good imagery. Now that the need to define a value proposition is clear, some rules will help you get into the specifics of developing them.
Rule 1: The value in a product or service is the value a customer sees, not the value a business owner thinks they want to give.
This is so important. It is the point at which many businesses get it wrong in terms of their marketing and sales messages. Promoting value attributes is not only important for higher priced products, a common misconception.
Rule 2: Value propositions should target customers at a business level not at a product or service level.
A good value proposition builds a completing context within which a product or multiple products can be sold. It is about creating a preferred supplier position, not just a preferred product position, in the market.
You’ll need to think through the following:
- If you want an existing customer to promote your business to their friends and acquaintances, what would you want them to say?
- How would you describe what is positively different about your business versus other in your market segment, in one sentence?
- Would a customer be prepared to pay a little more for your points of differentiation?
- Why should a target customer buy from your business rather than a competitor?
- What extra value will a customer receive from your business versus competitors?
These fairly straight forward questions start getting you to the heart of a value statement. Answers need to be succinct and clear: customers looking at options on a smart phone will not read paragraphs of text.
Rule 3: Value propositions should always be linked to business success criteria.
When developing a marketing campaign based on new value statements, always ask: “Where is the money in this?” It is relatively easy to come up with clever and differentiated marketing ideas; it is much harder to make sure they will make money!
Business success is driven by building and retaining profit margins. A quality campaign that builds brand preference through a good value proposition is a business investment and as such will probably incur some upfront costs before revenue benefits become evident.
What is the point spending time, effort and cost on developing a slick marketing campaign if it ultimately does not help margins?
- Does it improve customer retention rates?
- Does it improve average costs of recruiting new customers? Do product cross-sales increase?
- Does it increase “switching”
- Your business culture, behaviours and style of service must be consistent with your value proposition.
They must also deliver what has been promised. There are 3 important elements to this:
- Can you deliver the value you have promised? Is the value proposition working?
- How will you measure success?
It goes without saying that you must keep talking to your customers. Do they understand your value proposition? Do they see value in it? How strongly do they feel about making a purchase commitment?
Rule 4: Keep innovating and developing value propositions.
Nurturing a proposition from infancy to maturity needs a little time and care, and also a commitment to continually review and consider underlying, data and information to build a clearer view of what is, or not, working.
Developing and evolving a value proposition in the market is an important tactic to avoid being drawn into a downward price spiral. Don’t let your businesses’ reputation becomes stale; keep it fresh and engaging by finding new ways to improve customer experiences.
Rule 5: Good value propositions cannot be quickly copied by competitors.
Price offers made by one player in a market segment can be copied by other market players very quickly. But where a point of differentiation is based on value, it normally cannot be copied quickly. Building a value proposition is not just about keeping margins intact but also about building a competitive position that cannot be copied in the short term.
Rule 6: Keep your value proposition/s simple and consistent.
A good value proposition has to be easy to understand and memorable. Lengthy product explanations typically do not work, nor do detailed technical descriptions that the customer does not fully understand. The best value propositions are typically very elegant in their simplicity and articulation. If you cannot clearly describe the value you wish to offer in two or three sentences, it is too long and is probably not going to work!
The Steps
So let’s recap how you can build a value proposition in a pragmatic way. For larger and more complex businesses, building a value propositions take considerable time and effort, with investment in research and customer focus groups. This detailed research is not necessarily required for smaller businesses. The most important step is committing to developing a business culture that builds a value-based proposition in a market and delivers it promises consistently well. Follow these basic steps to get started.
- Actively listen to the customer and stay close to their needs. Over the years I have used a very simple question to tease out what I need to know: “If there are three things we can do more of, and three things we should do less of, what would they be? Over a series of interactions, a common picture will emerge. Make it simple for a customer to give you feedback and they will provide you with what you want!
- Do not focus on what competitors are doing well. Focus instead on what your industry segment is not doing well. Ask: “What do you find most frustrating about typical suppliers in our marketplace?” Arguably, the Virgin brand has used this to good effect globally by delivering a service style and value proposition designed to attract those customers fed up with established players.
- Do not focus tightly on just your market segment: keep looking at other relevant segments and see what they are doing to create value.
- Identify role models in other industries and analyse what they do differently, why it is successful and how it might be transposed into your business segment and model. Using good role models can be a powerful way to build ideas for a business.
- Link new value propositions to a few clear and measurable business targets. Good propositions should drive increased referrals, sales, revenues and engagement with customers. How will you track this? We’ll explore this in more detail in Chapter 5.
- Build a basic model that allows you to understand the cost-volume-profit equation for any new value proposition.
- What is the expected cost of a campaign, and how does that break down into a target unit cost per sale? What sales volumes do you envisage, and what revenues and projected margins is this likely to deliver?
The heart of any good business is its core service proposition, driven by customer expectations in the segment, and supported by a business model than can deliver consistently and profitably. For example, there would be little point for a hotel focused on budget-conscious and time-poor business travelers to offer premium spa services.
Of the business disciplines building the right value proposition will prove to be one of the more difficult for many. Don’t expect to achieve perfection in one go: good propositions evolve over time based on customer feedback and trends. It is the culture of thinking “value” that matters, as this is what drives business success: winning and retaining customers at increasing profit margins!