The Importance of the Value Proposition
In every transaction or exchange, the value proposition is important to all parties.
From Meriam-Webster – Value is (1) a fair return or equivalent in goods, services, or money for something exchanged, (2) the monetary worth of something: MARKET PRICE, and (3) relative worth, utility, or importance <a good value at the price.> Proposition is something offered for consideration or acceptance.
From Wikipedia — Put simply, the value proposition is what the customer gets for his money. Accordingly, a customer can evaluate a company’s value proposition on two broad dimensions with multiple subsets:
- relative performance: what the customer gets from the vendor relative to a competitor’s offering:
- price: which consists of the payment the customer makes to acquire the product or service; plus the access cost.
Our primary interest is the producer or seller’s perspective. He needs to provide value in products or services to the market and sustainable profits to his shareholders. Providing value means satisfying the needs of customer or stakeholder first, and only having done that, can he satisfy his own. This is true of the corporate entity and of every individual who works for or on his behalf. It is true whether the entity is large or small, established or new. Each of us, in order to be valuable, needs to provide value.
Market viewpoint: The market sets the price on supply and demand and product differentiation. The value proposition is why customers will pay more for features they prefer. Product differentiation means added features or benefits which customers will pay more for. Examples are automatic features (i.e. cruise control), brand recognition (i.e. green and yellow tractors), local products or services, more durable materials, an excellent reputation (i.e. home builder), or quick response.
Market-based pricing assumes a price/feature/unit volume curve for established products and there will be a curve for new products. Products priced above the market-based pricing curve will not sell well because their value proposition is inferior. The market is very unforgiving on this point. When switching suppliers, buyers look for a reason to change such as a price reduction or something more for the same price. This is inertia in the market place – those who have business tend to keep that business until a better value proposition comes along. When a better offer is made, the incumbent supplier may be offered a chance to match before losing the business or subsequently attempt to regain the business (more on this later).
A special subset is where the buyer (perhaps an OEM) specifies the value proposition by furnishing a complete set of specifications, terms and conditions and only those sellers he deems able to meet them are seriously considered. In this case, price becomes much more important and even a long term preferred supplier cannot command much premium.
Producer viewpoint: The seller tenders his value proposition to the market. He sets his price based on his understanding of market-based pricing and where his product or service fits in. When entering a market, the new seller must normally offer a price reduction or offer something more for the same price as buyers need a reason to switch. He should anticipate that others will respond to match his price or feature. The current seller may struggle with resentment against the upstart or with feeling that the buyer, which he has so often “jumped through hoops for”, is disloyal for shopping around. Most producers will be interested in selling to new customers as well as protecting sales to current customers. The ‘golden rule’ should help in both situations. Corporate buyers need the right to check the value proposition they are getting. Getting upset at being checked will needlessly burn energy and, perhaps, rob of us of an opportunity to improve. In the long run, if we take care of business, business will take care of us.
In developing new products for introduction, the seller should (1) differentiate his product’s value proposition and (2) price his products within the market-based pricing curve. Successful innovators create new markets or can significantly shift the market-based pricing to their favor even while anticipating that other players in the field will scramble to catch up. Companies that stay on the move are harder to catch up to. Patent protection may improve the value proposition. It being the purpose of producers to make a profit, the value proposition to his shareholders (internal) is different than to the market. Just as the market looks for price/value, the producer looks for profit.
The building blocks for a producer’s internal value proposition are called core competencies.
From Investopedia – Core competencies are the main strengths or strategic advantages of a business. Core competencies are the combination of pooled knowledge and technical capacities that allow a business to be competitive in the marketplace. Theoretically, a core competency should allow a company to expand into new end markets as well as provide a significant benefit to customers. It should also be hard for competitors to replicate.
Core competencies are strengths relative to competitors and not just what one does best. However, any improvements toward competency in areas where the producer is weak or average adds to the value proposition. Some core competencies that may improve the internal value proposition are (1) customer knowledge and contacts as to what the customer wants and will pay for, (2) market channels passing through fewer hands, (3) sourcing parts at better value, (4) facilities, equipment, and tooling, (5) innovation in product differentiation, (6) labor efficiency, streamlined processes, and throughput, (7) lower scrap and fewer defects, and (8) responsiveness in form of low lead times and quick turns.
A producer must understand the important cost drivers in his markets and impact them so as to improve his value proposition. The producer must be honest in measuring and evaluating his own and his competitors’ performance. Success must show up in the bottom line – it is not good enough that one is losing less money than others over a long pull. Improving the value proposition takes innovation, hard work, input of resources, and focus over a long period of time. To be good, you gotta be good!
To some, competition means destroying rivals or taking sales from competitors even if bending rules. Jesus taught, “Put up again thy sword into his place; for all they that take the sword shall perish with the sword” (Mathew 26:52) and “And as ye would that men should do to you, do ye also to them likewise.” (Luke 6:31). Proper motives center on stewardship and serving others. When a boy, I was taught the following, “Work with a will boy, work with a might. Things done just half boy, are never done right.” Humility, focus on others’ needs, life-long learning, diligence, applied energy, balance, courtesy, respect, and even temperament will go a long way toward “ job well done” success rather than “beat somebody else” success. “Cornering the market” and “easy street” motives can easily morph into greed or complacency – both of which would eventually destroy us. Competition, in a healthy sense, keeps us on our toes and yields a better value proposition.
If the value proposition is not right, the business should not be attempted. This rule of thumb would save many start-up companies and existing companies venturing into new products or markets and their investors a lot of grief. Sometimes that is the end of the story. In other cases, it will lead to specializing or niche markets where the value proposition is improved. In any case, careful initial and ongoing consideration of core competencies and the value proposition will improve the focus of a business and enhance its’ success.