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 to create value to a specific customer segment.
Values may be quantitative (e.g. price, speed of service) or qualitative (e.g. design, customer experience). The following are examples of some of the elements of a value proposition.
Some value propositions satisfy an entirely new set of needs, for which there was no similar offering. This is often technology-related, but not always. Cell phones, for instance, created a whole new industry around mobile telecommunication. One non-tech example is the creation of ethical investment funds.
Improving product or service performance has traditionally been a common way to create value. The computer industry has traditionally relied on this factor by bringing more powerful machines to market. But improved performance has its limits. For example, computers keep getting faster, with more disk space and better graphics, but it hasn’t produced corresponding growth in customer demand.
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 really taken hold. This approach allows for customized products and services, while still taking advantage of economies of scale – a decrease in costs after an increase in output.
“Getting the job done”
A lot of 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 is an important element, but difficult to measure. A product may stand out because of superior design. In the fashion and consumer electronics industries, design can be an especially important part of the value proposition. And in today’s always-online world, the importance of photo-worthy design can’t be ignored!
Customers may find value in the simple act of using and displaying a specific brand. Wearing a Rolex watch signifies wealth. Eco-friendly materials in everything from clothing to reusable water bottles signifies that a customer values the environment. What does your product or service say about your customer?
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 can be important for the rest of your business model too. No-frills airlines such as Southwest, easyJet, and Ryanair have designed entire business models specifically to enable low-cost air travel. Another example of a price-based value proposition can be seen in the Nano, a car designed and manufactured by the Indian conglomerate Tata. Its surprisingly low price made the automobile affordable to a whole new segment of the Indian population.
Increasingly, free offers are starting to permeate various industries. Free offers range from free newspapers to free email, free mobile phone services, and more.
Similarly, 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.
Customers love being able to reduce risk 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.
Can you make products or services available to customers who previously lacked access to them? This can result from business model innovation, new technologies, or a combination of both. NetJets, for instance, popularized the concept of fractional private jet ownership. Using an innovative business model, NetJets offers individuals and corporations access to private jets, a service previously unaffordable to most customers. Mutual funds are another example of value creation through increased accessibility. This made it possible even for those with modest wealth to build diversified investment portfolios.
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.
What combination of elements can you combine to create an outstanding value proposition?