Value proposition

WHY IT IS NEEDED

If you can’t describe what tangible value you provide to the customer, you shouldn’t plan anything else and you shouldn’t build any products yet. Defining your value proposition is a vital and most important step. The essence of a successful startup is not about the modern technologies, fancy innovations, venture capital investments, or large media coverage. The value proposition is the critical element for startup success. Generally, it is the main reason why a customer would choose to engage with your company instead of your competitors. It is a concise statement that highlights the relevance of a product offering by explaining how it solves a problem or improves the customer’s situation.

Great value proposition will help you attract investments (which might be necessary for creating and delivering the value proposition), earn consistent revenue and profit and even get viral word of mouth recommendations to help grow your business fast.

WHAT IS VALUE PROPOSITION

The value proposition should be seen from a wider perspective than just a listing of what benefits you can offer the customer. Usually, there are three levels of value emphasised in value proposition:

Though it’s not very effective, a list of features is the easiest way to construct a customer value proposition. You simply list all the features the offering might deliver to target customers. But don’t be mistaken thinking that the more features can be listed the better. It’s not always the case. This approach requires the least knowledge about customers and competitors and, thus, it is the least effective.

Regardless of the product or solution, customers always have the option to buy a similar product at a competitor or solve the need in another way. Therefore, you should focus on how to differentiate your product or service from alternatives in the market by citing your points of difference. Listing the points of difference is a bit more efficient method to create a value proposition rather than just a list of features.

Customers are more likely to buy from those providers who fully grasp critical issues and deliver a simple but powerful value proposition that is most appealing to their current needs. You can create such customer-oriented value proposition by making the offering superior on the few attributes that are most important to your target customers and show the exact value this offer can deliver to the customer. We will discuss 5 steps how you could build such value proposition.

List of featuresPoints of differenceCustomer-oriented value
Consists of:All the benefits customers receive from an offerAll favourable points of difference compared to competitorsThe key points of difference which deliver the greatest value to the customer
Answers the customer questionWhy should I buy it?Why should I buy from you instead of your competitors?What true value will I really get? Why is this offer so beneficial for me?
RequirementsKnowledge of own offersKnowledge of own offers and closest best alternativesKnowledge of how own offer delivers superior value to customers, compared with closest best alternative
Potential pitfallBenefit assertionValue presumptionRequires customer value research and should not be built just on assumption

When you create your startups’ offer to a customer, you should always try to understand how the customer perceives the value you offer. The offerings are usually the WHAT you sell and deliver, and the experience is the HOW you do it. So it’s not enough to just write down a great commercial offer or give an appealing promise to the client. You must deliver it in a manner that brings the best experience for your customer. Sometimes you shouldn’t even inform the customer, you should just do it. As an example, there is no point in telling your customer that you are very helpful and provide outstanding customer support. Customers will feel and see how helpful you are from the very first interaction, whether they are visiting the website, downloading your app, or meeting with your sales executive. To succeed with your innovative business idea, you must fully understand the rational, emotional, social and sometimes even political elements of the value you deliver.

The best way to understand the value you deliver is to put yourself in your customer’s shoes and to involve the customer in the creation of your value proposition. As Steve Blank and Bob Dorf (2014) noted: “in a startup, the founders define the product vision and then use customer discovery to find customers and a market for that vision”. You should craft your value proposition in the very first stage and then test if it is meaningful and appealing for your customers. If it’s confirmed, you can build your business model around it. If not, you should go one step back and redo your value proposition.

It is impossible to be the best choice for everybody. If you try to do this, in the best case you will end up being a mediocre, average provider of average products or services. Instead, you should choose a targeted group of customers to whom you can be the best provider. If this group is large enough and you are able to create a value the customers will pay for, your business will have a strong foundation for success.

Start by identifying your main target customer group and focus on them. Later on, you can develop additional value propositions for your secondary targets. Divide the whole market into smaller segments in order to identify the group of target customers you want to attract the most. If you clearly define and choose to serve a particular segment of target customers, you will be able to make more effective marketing decisions, create more appealing and more effective marketing materials, choose more effective communication and advertising channels, thus saving money.

Use “Customer persona” template to describe the customer for whom you are developing a solution.  Not all segmentation criteria are equally important in every situation, thus focus on criteria that are helpful defining your ideal customer:

Finally, it’s time to identify all possible gains the customer would appreciate. Think about as many as possible gains, outcomes, and benefits your customer would be happy to receive. Be as specific as possible. For example, instead of “Customers would like to spend less on upgrades” consider “Customers would like to reduce the cost of upgrades by 30%”. List as many gains as you can, but again keep in mind, those gains must be real and important to your target customer, not just to you.

Geographic criteria include either your location or the location of your target customers, where your product or service will be used.

Demographic criteria are the statistical characteristics of your target market, such as age, gender, education, household size, socio-demographical group (e.g., student, pensioner, disabled).

Psychographic criteria describe target customers by psychological or emotional traits, (e.g., risk-taker versus risk-averse, early adopters versus late-stage buyers, introverts versus extroverts).

Behavior-based criteria focus on the activities of target customer in any environment and situation (e.g., what the customer is doing at work and at home, what hobbies and vacations they choose, and when, how, and for why they use the product).

Segmentation based on demographic and psychographic criteria is sometimes called pre-existing segmentation and it is the most basic way of creating market segments. In pre-existing segmentation, the market is split according to pre-existing demographic or geographic criteria such as age, sex, social economic status, location, and type of living place. Demographic and psychographic criteria combined can describe the life stage that groups have in common: for example, college and career, young families, empty nesters, etc.

Pre-existing segments are easy to define and easy to target with advertising and media in classical marketing. But it doesn’t tell much about how these different target customers will perceive the value your startup wants to deliver and how they will respond to your marketing message. The world is changing: today we often see the same product being used by different age groups, e-commerce has made the location of the customer nearly meaningless, and digital products can be instantly delivered to nearly any place in the world with an internet connection.

It’s a bit more difficult to do segmentation based on psychographic and behavior-based criteria. It requires some additional effort to measure the size of segments if they are not directly related to existing statistics. But customer needs and behavior-based segments are typically the most actionable forms of segments because you already know what drives your customers and how they’re currently solving their problems. That allows you to create the most appealing value proposition and most effective marketing communication.

To make the process easier, it is recommended to the value proposition canvas introduced by Alex Osterwalder, Eves Pigneur and Greg Bernarda in Value Proposition Design (2014). This tool helps startup founders design, build, test, and manage their customer value propositions. You are free to choose any methodology for creating your value proposition, but if you want it to be effective, the value that you intend to deliver must be:

  1. important to the customer
  2. unique and hard to copy
  3. strong enough to initiate word of mouth

Your customer should be able to read and understand your value proposition in about five seconds. It has to communicate the concrete results a customer will get from purchasing and using your products or services and it must differentiate your product from your competitors. This is like the master blueprint from which all sales stories, marketing messages, and individual offers will be developed.

The next step is to identify and document your customers’ most painful problems. Evaluating your customers’ real problems and needs is an important step if you want to create a really great value proposition. Write down all the challenging issues your target customer has to face, including risks and obstacles. It might be helpful to have in mind that Steve Blank and Bob Dorf distinguished four types of problems customers can have:

  • latent problemthey have a problem but aren’t aware of it yet and don’t think about it
  • passive problem they know of the problem but aren’t motivated to look for opportunities to solve it
  • active problem they recognise a problem or passion and are searching for a solution but haven’t done any serious work to solve it
  • the vision of solution – they have a problem, they want to solve it, and may even have a workaround, but are prepared to pay for a better solution.

It is important to describe the customer’s problems as precisely as possible. For example, when a customer says “I hate to wait for videos and photos to be uploaded on a mobile device,” you should also ask about their tolerance for an upload time. A more precise description of the problem would be, “customer doesn’t want to wait more than 3 seconds for the video and photo content to upload on their mobile devices.” When you can precisely measure the target customers’ problems, you can create better products and services to solve those problems.

List as many problems as you can. But keep in mind, those problems must be real and important to your target customer, not just to you. You can use sticky notes for each problem during the discussion, but later it is best to list them as shown in Table . It is advised to rate the importance of each problem in scale from 1 (meaningless issue) to 10 (an awful disaster). The table also shows some example questions you can use during your interviews and discussions.

Discovery of customers’ problems

TARGET CUSTOMER: ________________________________________________________
PROBLEMSImportance

1-10

QUESTIONS
What makes customers feel frustrated and annoyed?

What requires too much time, efforts, or nerves?

What costs too much? And how much is too much?

What risks do customers fear most?

What are they afraid to lose or not to achieve?

What’s lacking in current value propositions on the market? What features and benefits are missing?

The next task is to identify all possible jobs and tasks that customer is trying to complete. Jobs describe the tasks your customers are trying to get done in their business, at home, or even during their leisure time. A job could be a simple, routine task they are doing every day (downloading media, for example) or something more challenging and complex they are trying to implement and complete (selecting and implementing a new CRM, for example). Jobs sometimes depend on the specific context in which they are performed, therefore you may also have to make note of the specific context in which the job is performed (for example, only during non-production hours or on weekends).

Just like customer problems, not all jobs will have the same priority and importance to your customer. Some may have a higher priority because failing to get them done could cause other major problems. Others can seem totally insignificant in the current mindset of the customer. Alex Osterwalder, Eves Pigneur and Greg Bernarda in Value proposition design (2014) summarised all possible customer jobs into four main categories.

  • functional jobs – customers try to perform or complete a specific task or solve a specific problem (e.g., brush their teeth in the morning, prepare breakfast, wash the car);
  • social jobs – customers want to look good or gain power or status, to be perceived by others in a specific way (e.g., to look fashionable, to be popular at school);
  • personal/emotional jobs – customers seek a specific emotional state (e.g., feel more secure, get rid of the feeling of regret, confirm a decision they made);
  • supporting jobs – the customer has different roles (buyer, co-creator, the transferor of value) therefore additional supportive jobs arise. These jobs can be related to buying value (e.g., comparing offers, deciding which products to buy, bringing products at home), to co-creating value (e.g., posting product reviews, participating in focus group during the design of a product or service), and to the end of a value proposition’s life cycle (e.g., canceling a subscription, disposing of or reselling used product).

List as many jobs as you can, but keep in mind, those jobs must be real and important to your target customer, not just to you. It is advised to rate the importance of each job for your customer in scale 1 – 10.

Discovery of customers’ jobs

JOBSImportance

1-10

QUESTIONS
What do customers have to do to every day in a job or at home in the context of a product or service?

What do customers have to do to achieve their goal?

What do customers have to do for other people or together with them?

Which tasks and activities are unpleasant for the customer? What would customer like to avoid doing?

Finally, it’s time to identify all possible gains the customer would appreciate. Think about as many as possible gains, outcomes, and benefits your customer would be happy to receive. Be as specific as possible. For example, instead of “Customers would like to spend less on upgrades” consider “Customers would like to reduce the cost of upgrades by 30%”. List as many gains as you can, but again keep in mind, those gains must be real and important to your target customer, not just to you.

Discovery of customers’ gains

GAINSImportance

1-10

QUESTIONS
What do customers dream about? What they desire most, even if it seems not realistic at the moment?

Which savings (money, time, efforts) would make customer most happy?

What would make the customer’s life easier?

What makes customers look good and feel great?

How would customer like to feel?

What would encourage customers to try and adopt this value proposition?

Next, you want to sort the problems, jobs, and gain by the importance or priority to the customers. Pay particular attention to the method you use to rate the importance. You can do it in one of two ways:

  1. Based on assumptionsthe evaluation is based on your assumptions, guesses, or one of the potential customers’ subjective understanding. It is far better to have in mind your customers’ assumptions instead of yours, but in either case, they are just assumptions that might be far from the truth.
  2. Based on real factsthis means that the particular statement is proven by statistics, technical specifications, or some other kind of facts. Sometimes you can find secondary data proving one or more statements, but for startups, it’s typical for the initial concept of the value proposition to be based on assumptions which have yet to be validated.

It is helpful to arrange the problems, jobs, and gains from the most important ones at the top, down to the least important to the bottom. It is much better to focus your value proposition on solving one really painful problem instead of few minor problems. The same applies to jobs and gins. Focus your attention on the most important ones and build your value proposition addressing them.

Now that you have a clear picture of the customers’ problems, jobs, and gains, it time to describe which of their problems you intend to solve and what extra gains you plan to create. Once you are absolutely clear on what you are going to address, try to cross-references those pain relievers and gain creators with your ideas for your products and services (fill in template No.3). It might just be that one product or service will solve multiple problems and provide multiple gains. Don’t forget to evaluate the importance of each pain reliever and gain creator for the customer. A best practice to focus your products and services based only on those pain relievers and gain creators which rate at least an 8 out of 10 in importance to the customer.

Now that you have identified what solutions and gains your products or services will offer to your customer, it’s time to define your main value proposition. There are more than few different recommendations for how to write a value proposition, but at the very least, it has to address three main questions:

  1. What exact value you will create?
  2. For whom will it be delivered?
  3. How will you do this or how is it different from other alternatives available to your target customers?

Explain your value proposition in one simple sentence that even your grandmother could understand. Don’t use jargon, slang, or acronyms. It might be helpful to just start writing the sentence and work iteratively until you are satisfied. Or, work collaboratively with some other members of your team until you all agree that you have captured the essence of your value proposition.

THE RESULTS

After successfully finishing these tasks you should have completed the following:

  • have defined the target customer for whom your value proposition is designed
  • brainstormed about product or service addressing at least one main problem or desired benefit of your target customer
  • explained how your product or service solves your customer’s problems and creates gains for them
  • have proposed a solution that is unique or very different from current offers in the market
  • written a simple, one sentence value proposition that clearly and concisely communicates what value your proposed product or service will provide your customers.
Name: TomGender:  maleAge: 30
Occupation:  project  managerEducation: college degree
Work location: business centre in cityLiving location: condo in suburb
Monthly income:  €1,200Family status: married, 1 child
Other details:

Family monthly income € 1,500 – 2,000

Have one or two family cars, but use public transport as well

Number of similar customers:12,000Potential revenue in segment:€ 1,200,000
Description:

·         cares about family and healthy lifestyle

·         would like to spend more time with family

·         goes to the gym at least 2-3 times a week

·         loves travelling with family to new places of interest

·         reads professional and lifestyle magazines,

 

 

Motivation for purchasingDemotivation for purchasing
·         spend more time with family in nature

·         being proud of being a good father

·         quality leisure with family

·         being in the fresh air is good for health

 

·         sceptical to new things

·         doubts about durability and maintenance

·         price