Business Model Canvas: The Value Proposition

In our last post, we discussed the Customer Segments portion of a Business Model Canvas. The Business Model Canvas allows you to describe and think through the business model of your small business, your competitors, or any other company. This concept has been applied and tested around the world and used in large organizations, as well as hundreds of thousands of small businesses.

Today, let’s talk about the Value Proposition.

What is a Value Proposition?

The Value Proposition block of the Business Model Canvas describes the bundle of products and services that create value for a specific Customer Segment.

The Value Proposition is the reason why customers turn to one company over another. It solves a customer problem or satisfies a customer need. Each Value Proposition consists of a selected bundle of products and/or services that caters to the requirements of a specific Customer Segment.

In this sense, the Value Proposition is an aggregation, or bundle, of benefits that a company offers customers. Some Value Propositions may be innovative and represent a new or disruptive offer. Others may be similar to existing market offers, but with added features and attributes.

Ask yourself these questions:

• What value do we deliver to the customer?
• Which one of our customer’s problems are we helping to solve?
• Which customer needs are we satisfying?
• What bundles of products and services are we offering to each Customer Segment?

A Value Proposition creates value for a Customer Segment through a distinct mix of elements catering to that segment’s needs. Values may be quantitative (e.g. price, speed of service) or qualitative (e.g. design, customer experience).
Elements from the following non-exhaustive list can contribute to customer value creation.

Elements of a Value Proposition

Newness

Some Value Propositions satisfy an entirely new set of needs that customers previously didn’t perceive because there was no similar offering. This is often, but not always, technology related. Cell phones, for instance, created a whole new industry around mobile telecommunication. On the other hand, products such as ethical investment funds have little to do with new technology.

Performance

Improving product or service performance has traditionally been a common way to create value. The PC sector has traditionally relied on this factor by bringing more powerful machines to market. But improved performance has its limits. In recent years, for example, faster PCs, more disk storage space, and better graphics have failed to produce corresponding growth in customer demand.

Customization

Tailoring products and services to the specific needs of individual customers or Customer Segments creates value. In recent years, the concepts of mass customization and customer co-creation have gained importance. This approach allows for customized products and services, while still taking advantage of economies of scale.

“Getting the job done”

Value can be created simply by helping a customer get certain jobs done. Rolls-Royce understands this very well: its airline customers rely entirely on Rolls-Royce to manufacture and service their jet engines. This arrangement allows customers to focus on running their airlines. In return, the airlines pay Rolls-Royce a fee for every hour an engine runs.

Design

Design is an important but difficult element to measure. A product may stand out because of superior design. In the fashion and consumer electronics industries, design can be a particularly important part of the Value Proposition.

Brand/status

Customers may find value in the simple act of using and displaying a specific brand. This can range from wearing high-status brands to more underground brands. This is one way for like-minded customers to display their values, style, and commonalities.

Price

Offering similar value at a lower price is a common way to satisfy the needs of price-sensitive Customer Segments. But low-price Value Propositions have important implications for the rest of a business model. No-frills airlines have designed entire business models specifically to enable low cost air travel. Increasingly, free offers are starting to permeate various industries. Free offers range from free newspapers to free email, free mobile phone services, and more.

Cost reduction

Helping customers reduce costs is an important way to create value. Salesforce.com, for example, sells a hosted Customer Relationship Management (CRM) application. This relieves buyers from the expense and trouble of having to buy, install, and manage CRM software themselves.

Risk reduction

Customers value reducing the risks they incur when purchasing products or services. For a used car buyer, a one-year service guarantee reduces the risk of post-purchase breakdowns and repairs. A service-level guarantee partially reduces the risk undertaken by a purchaser of outsourced IT services.

Accessibility

Making products and services available to customers who previously lacked access to them is another way to create value. This can result from business model innovation, new technologies, or a combination of both.

Convenience/usability

Making things more convenient or easier to use can create substantial value. With iPod and iTunes, Apple offered customers unprecedented convenience searching, buying, downloading, and listening to digital music. It now dominates the market.

Read our complete Business Model Canvas series here!