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Home arrow Site Optimization arrow In Search of a Value Proposition
In Search of a Value Proposition
Tuesday, 25 April 2006
Synopsis

Topic: In Search of a Value Proposition — If you had just ten words with which to describe why people should buy your company's products or service, what would you say?

We recently released the audio recording of our clinic on this topic. You can listen to a recording of this clinic here:

In Search Of A Value Proposition

You probably remember the "elevator speech" concept from back when venture capital companies were pouring billions of dollars into Internet start-ups.

And hopefully you heard about our own "Back of a Napkin" contest, in which we offered over $100,000 in services to the best new business idea.

Whether spoken in an elevator or written on the back of a napkin, one of the key indicators of a strong value proposition is that it lends itself to being articulated simply, clearly and very briefly.

  • But what is a value proposition?
  • Why is it important to your business?
  • How can you "find one" for your business?
  • And can an existing company find a new value proposition?

These are some of the questions we have set out to answer.

Our research was motivated by two additional questions:

  • Our primary academic question was this: What percentage of the Internet marketplace has a truly effective value proposition? It seems that many people try to "out-market" a poor value proposition. They use the heavy force of marketing to try to overcome the weak force of their value proposition. How does this affect competitive marketing on the Internet?
  • Our primary practical question was this: How do you evaluate your own value proposition?

This brief starts to answer these questions and helps you apply the findings to your own business.

Findings

In previous reports, we have stressed the importance of a Unique Value Proposition (UVP), which is one of the most essential elements of a successful online business. A UVP is a succinct statement of the uniqueness of a business that sets it apart from all competitors. Without a UVP, a company risks becoming lost in a sea of similar businesses.

The UVP statement will often contain quantitative statements about the uniqueness of a business. Precisely WHY should customers do business with you?

Competitive analysis will help you develop your UVP and test the validity of the claims you make about your business. We covered online competitive analysis in a recent report:

  • Online Competitive Analysis — How analyzing your competitors can identify your strengths and weaknesses and strengthen your bottom line.

When evaluating whether a business will grow, we use the following formula:

  • S = 2V + C + P

Where:

  • S is the probability that the business will Succeed.
  • V is the Value proposition.
  • C is the marketing Channel and the amount of cost-effective traffic that is available from this Channel.
  • P is the Presentation of your offer and website, and your ability to optimize this Presentation.

As marketers, we have complete control over "P" and some control over "C." We typically have no control over "V," at least once the business has reached the level of being marketed.

However, "V" is always the most important. This is reflected in the above equation by giving it twice the weight of both "C" and "P" individually.

Every day, we evaluate the "value proposition" (not always truly "unique") of business opportunities. We score the value proposition on a scale of 1–5:

The 1-5 scale is broken down as follows:

  1. [0 - No real value proposition (a full-price retail product that can be bought anywhere).]
  2. 1 - Limited value to a small market. There is extensive competition and/or few barriers to entry.
  3. 2 - Substantial value to a medium-sized market. There is limited competition and/or significant barriers to entry.
  4. 3 - A product or service with strong product differentiation, but little competitive protection.
  5. 4 - A unique product or service that is highly valuable to a large market, and strong competitive protection and/or extensive barriers to entry. This may take the form of a registered patent or limited access to product components.
  6. 5 - A unique product or service that is highly valuable to a large market, and exclusive or near-exclusive control of essential product components. This may also include a registered patent.

Recently, we went in search of a unique value proposition on par with the following:

Google is the search engine of the world.
Microsoft is the operating system of the world.
Wal-mart is the leader in low prices and huge selection.

We receive hundreds of applications each month from companies seeking assistance with market research and business development. Many of them are successful and growing. Most of them have smart management teams. But very few of them have truly compelling value propositions that can be conveyed in a concise manner.

A common response to the question, "What is your company's value proposition?" is: "Great customer service." 

Customer service on its own is not a value proposition. It is a service delivery factor. Great customer service should even be considered an essential part of your marketing:

We finally decided to issue a call around the world. In February of 2006, we announced a contest with a $100,000 prize.

The rules were simple: send us a business plan but articulate the value proposition on a 5 x 7 index card (the size of a cocktail napkin).

Within 24 hours, the plans began pouring in. We received almost 400 entries in 4 weeks. Many were from some of the top business schools in the U.S. Even more were from existing, profitable businesses looking to grow.

Most lacked a really compelling value proposition. For many, due either to oversight or to inexperience, there was no value proposition at all.

Only a handful of companies could articulate the value of their offers.

The following table illustrates the breakdown of value propositions according to the 1-5 scale presented above. Applications with no value proposition are not included in the table.

Value Propositions
Metric Total
VP Index 1 22
VP Index 2 215
VP Index 3 32
VP Index 4 6
VP Index 5 0

Check boxWhat You Need To UNDERSTAND: Out of 275 plans with value propositions of some kind, there were only 6 (2.18%) that scored a "4." No companies scored a "5." The great majority (86.18%) of companies scored a "2" or below.

KEY POINT: Companies around the world devote extraordinary time and resources to developing and fine-tuning the product delivery chain (sales, marketing, distribution, customer service, etc.), but FAIL to assess the most fundamental of business success factors: their value proposition.

So how do they survive?

Most do not. According to the Small Business Association, as of 2004, more than 50% of small businesses fail within the first year; 95% fail within 5 years (*1).

Many fail due to lack of experience or business sophistication.  However, even companies with experienced management teams often fail due to causes stemming from a poor (or poorly utilized) value propositions.

A smart value proposition can make a mediocre management team look very smart. (And vice versa, of course.) But only the best ideas succeed and grow to become billion dollar companies in the long run.

To help you develop your own value proposition, we have included several examples that vary significantly in quality:

Here is an example of a "weak" value proposition:

Basics Body Care is a 100% natural body care products company.  We sell handmade soap, lip balm, hand balm, belly balm (for pregnant moms), and spa gift baskets.  We personalize our soap labels for baby and bridal showers.

Here is one that has a decent value proposition, but which is not articulated well:

User-friendly website that customers use to select options for customization of magazine. Back-end content management system that allows magazine publishers to add editorial content, control advertising database, filter user profiles, etc.

Here is one that has a smaller market, but at least has a quantifiable value proposition:

I want to supply boat owners with high quality boat names, registration numbers, and graphics by using our website.  My site is unique in the fact that it allows the end user to have a hand in the design process and by allowing the customer to preview the image before submitting the order. EVERY boat owner is a potential customer of ours due to the fact that EVERY boat MUST display its registration numbers on the bow of the boat.

This proposition has a number of problems:

  • Problem 1: The first two words are "I want."
  • Problem 2: The second sentence begins with: "My site is unique...." He's talking about his business rather than a market need in search of a solution.
  • Problem 3: "Every boat must display...." This is a variation on the good old, "Everyone needs socks. If we can get just a half a percent of the world market we'll be rich!"

And finally, a couple of the worst value propositions:

Help people dress better.

Recycling of plastics and paper. Then, producing environmental friendly products.

But how do you develop an effective value proposition for your own company?

For a CEO, being able to explain a value proposition to customers, employees, and shareholders is the most important part of his or her job. Many times, a company will start out with a very clear, strong value proposition, only to have it gradually become diluted as the company matures. New products or services are often developed based on cash needs, new major partnerships, or at the request of large customers. As companies expand, value propositions become a murky affair. We have all been to conferences in which CEOs have stood up to explain their businesses, taking five minutes or longer for what should be a fairly basic, straightforward task.

The following points will help avoid this conundrum and "discover" a strong value proposition:

  1. A value proposition is not usually determined, it is discovered. It grows out of need. If you set out to create the "best possible business," you may or may not end up with a great business. If you set out to solve the needs of your customers, your business will naturally evolve into something valuable.
  2. Avoid a sales-driven approach to product development. You should develop products for the market. A taxi driver drives around looking for fares. Microsoft researches the market and the competition and develops products years in advance.
  3. Refine your value proposition until you can articulate it in one sentence. You should be able to communicate who your customers are, what you provide to them, and why they buy from you.

    For example, even though this company may serve a smaller market, it has a better chance of being successful:

    "XYZ Corp is the exclusive provider of patent-pending project management software for paving contractors, saving U.S. contractors over $34M in 2005."

    Than this company:

    "ABC Corp is the premier B2B portal for small businesses looking to grow."

  4. Ask yourself why someone should buy from you instead of a competitor. If your answer is "best selection," "best customer service," or "fast shipping," you potential success may be quite limited. These qualities do not make a business unique.
  5. The simple ideas are the easiest to execute. Google's idea was to "be the best search engine." They succeeded because, even though there was competition, they did create the most useful search engine. It produced the most relevant results and was clear from clutter and ads.

    When Google said they were the best search engine, that statement in itself was no guarantee that they had a strong value proposition. Every other search engine was saying the same thing.

    The difference is that Google IS the best search engine.

    This is a key issue with a value proposition. It has to be what you DO and ARE. It can't be just what you SAY or WANT.

    All too often companies write value propositions and mission statements that attempt to cover up the cracks in their actual business... with words.

    That doesn't work. Your value proposition is not what you say... it is what you are.

Keeping these guidelines in mind will help you create a Unique Value Proposition for a new business or "discover" one for an existing business. And remember, if your UVP can't fit on the back of a napkin, you probably haven't found it yet.

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(*1) Why Small Businesses Fail (SBA):
http://usgovinfo.about.com/od/smallbusiness/a/whybusfail.htm

RELATED MEC REPORTS:

About This Brief

Credits:

Editor — Flint McGlaughlin

Writers — Brian Alt
Nick Usborne

Contributors — Jalali Hartman

HTML Designer — Cliff Rainer

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