Value Propositions

Identifying a Strategy for Sustainable Value

Drew Jackson

Oct 23, 2024

Hello!

Thank you for reading the Brainwaves newsletter. I’m Drew Jackson, your content curator, and today I’m writing about marketing the value of your business’s products/services to customers. Let’s dive in.

Before we explore today's topic, a quick reminder: Brainwaves is published every Wednesday, covering a range of subjects including venture capital, economics, space, energy, intellectual property, philosophy, and more.

I'm not an expert, but rather an eager learner sharing thoughts along the way. I welcome feedback, differing viewpoints, and healthy discussions that expand our horizons. If I make mistakes, please feel free to politely clarify or correct me.

If you enjoy this newsletter, please share it with friends, colleagues, and family. Now, let's delve into this week's topic.

Credit CPA Practice Advisor

Thesis: A business’s value proposition is one of the most critical portions of its strategy as it defines the marketing, sales, customer success, finance, and product development portions of the company. Customers only purchase a good/service when the value provided is the most of all of their options and companies have the opportunity to propose this value—to convince customers of this value.

Value Proposition

A value proposition is a statement describing the benefits a product or service offers to its target customers. The term “value proposition” is believed to have first appeared in a McKinsey & Co. paper in 1988 titled “A business is a value delivery system.” The proposition was that companies deliver value to their customers in order to incentivize them to purchase their goods and services.

The McKinsey piece opens with the following:

Customers select the product they think is a superior value (benefits minus price). Competitive advantage is delivering a superior value to enough customers at a low enough cost to generate wealth. So a business is a system for superior value delivery: choosing a superior value proposition, and echoing it through the business system by providing and communicating it. And managing this delivery is top management’s primary job.

There’s a lot to unpack there, so let me break it down into a couple of different buckets:

I’ll discuss each of the following in the sections below.

Coming back to our mission of defining a value proposition, Wikipedia writes the following:

[A value proposition] is part of a company’s overall marketing strategy which differentiates its brand and fully positions it in the market.

This builds nicely on the McKinsey piece, as it shows how value propositions are a source of competitive positioning for companies where companies can express their differentiation to build up a brand, attract customers, and hopefully provide more value than their competitors.

With that, let’s jump in and dissect all of the different aspects of value propositions.

Credit Discover Magazine

Value Creation & Value Capture Framework

Customers select the product/service that provides them the most value

The McKinsey piece defines a value proposition as "a clear, simple statement of the benefits, both tangible and intangible, that the company will provide, along with the approximate price it will charge each customer segment for those benefits."

To explain in other words, a value proposition is the difference between benefit and cost for consumers.

This thought is best explained through the economic value creation and value capture framework, an example of which is detailed below:

As you can see, nothing in the above graph says “value creation”, “value capture”, or “value proposition.” So how do those terms fit in?

These things are always easier to understand when you put actual numbers/words to them.

For example: let’s say currently you want a rare playing card. The maximum you would be willing to pay for this card would be $200. Anything above that and you wouldn’t choose to purchase the card. Let’s say a company in your area is selling the card for $100. This would mean the consumer surplus that you would be getting by buying the card would be worth $100. Say that the company purchased the card from its previous owner for $90. This would be their cost, meaning that profit would be $10 for the company in this scenario.

In this case, the value being created through this transaction would be $110 ($200 - $90). The business captures $10 of that value as profit and the consumer captures $100 of that value as consumer surplus.

Great, but where does a value proposition fit into all of this?

At first, naively, I thought a value proposition would be the same as consumer surplus. Yet, this isn’t totally the case. While both concepts relate to the perceived value of a product or service, they have distinct meanings:

The key differences between the two are the following:

However, this line of reasoning isn’t entirely faulty.

A strong value proposition aims to create consumer surplus by promising benefits that exceed the price. An effective value proposition anticipates potential consumer surplus.

In relation to business strategy, companies that can accurately predict and then deliver high consumer surplus through their value propositions are likely to be more successful.

To quote my previous self:

Customers select the product/service that provides them the most value

Alternatively phrased, the company that provides the most value to its customers will attract the most customers. That is to say, the company that has the highest value proposition will gain market share as others lose it.

That is, only if the value proposition can be sustained for a long period of time.

Credit The CEO Magazine

Sustainable Value Proposition

Competitive advantage is creating a source of sustainable value for your customers

The Wikipedia article on value proposition states the following:

Strategy is based on a differentiated customer value proposition. Satisfying customers is the source of sustainable value creation.

In the business setting, you often hear words like “competitive advantage” or “differentiation” thrown around, but what do they mean and how do they relate to value proposition?

A strong value proposition is based on a combination of competitive advantage and differentiation. If a product or service can offer unique benefits superior to those offered by competitors, it can create a compelling value proposition.

In the cycle of product creation and business success, it would look something like this:

Diving deeper into the idea of sustainable value, a competitive advantage is about providing something that customers consistently find valuable over time. This means that the unique feature or benefit offered by the product or service is not easily replicated by competitors.

A key term to discuss here is the idea of “value arbitrage”. Value arbitrage in the context of competitive advantage and value propositions refers to a business’s competitors attempting to diminish or neutralize the unique value a company has created. Essentially it’s competitors trying to close the gap between their offerings and those of the market leader.

Competitors do this by first identifying the features or benefits that give the market leader a competitive edge. Once identified, competitors can develop strategies to either match or surpass it. This may involve any of the following:

The trick to business success is to create sustainable value—value that persists over a long period of time. Put differently, just because your company can provide value to someone today doesn’t mean it will be successful.

A sustainable value proposition is one that meets the needs of customers today and continues to be relevant and valuable in the long term. This isn’t an article diving deep into that concept, but businesses interested in creating sustainable value (and proposing it to customers) should focus on creating value in the following areas:

This is an incredibly difficult task, one that many businesses—even the most successful, have struggled with.

Credit Brown Advisory

Each Business Needs a Value Proposition

Each business needs a value proposition. It’s as simple as that. Businesses need to propose value to their customers to provoke their customers to want to purchase from the business.

How do you determine what value you offer to customers?

Let’s begin with the idea of identifying and determining what value a business offers to its customers. Here’s a breakdown of the steps that happen to determine a business’s value proposition:

The first step to identifying a business’s value proposition is to understand the market your business is in. This includes understanding what resources and capabilities your competitors have. From there you can identify where each player sits in the market—understanding the breakdown by geography, pricing, quantity, scale, and more.

Once the competitive landscape has been identified, your business can begin to identify where you are positioned within the landscape. That includes identifying what unique value your business can offer in comparison to competitors. What benefits does your business provide customers that they can’t get elsewhere? How does your cost structure compare to that of your closest competitor? The factors and more combine to be the beginnings of a company’s value proposition.

Credit Pam Prior

A key part of identifying what value you provide to existing and potential customers is to identify what value you provide at different steps of the value cycle. Value elements (portions of the value proposition) can be created in each portion of the value life cycle. All of the stages in the value cycle are detailed below:

Value Creation: As discussed in the section above, value is created by companies using their available key resources and activities to create a product/service with a higher consumer willingness to pay than the company’s cost for the product. This involves developing new products, services, or processes that address customer pain points and provide value.

Value Appropriation: Value can be created in this stage by developing, improving, and facilitating the buying experience of existing and potential customers. There are two ways this can happen: Improving the transaction process (making it quicker/easier to make a purchase) or improving the fulfillment process (making it easier for customers to get a product/service).

Value Consumption: Customers see and feel value through the actual use of the product or service. Value is maximized when the value proposition’s aspects match the customer’s actual needs—this is known as consumer satisfaction.

Value Renewal: With some products/services, it’s possible to renew and/or create value during or after use (when the original value intended is already used up). This stage also includes continuously developing new products or services to maintain relevance and competitiveness—steadily updating value for customers (e.g., adding new features to an existing value proposition). Products and services are adjusted to changing market conditions and customer preferences.

Value Transfer: This stage includes the transfer of value from the producer to the consumer through a transaction. There is the possibility that a customer transfers the acquired value after its consumption (e.g., resale of a second-hand product).

Through this, a value proposition can be developed. There are usually five core value propositions upon which companies can position their products or services:

Once your business understands what value you are offering to existing and prospective customers, you can propose this value to customers and potential customers.

Credit Shopify

Once a product/service’s value has been identified, how do you “propose” it to existing and potential customers?

The entire field of sales and marketing is dedicated to this process—the process of trying to convince your customer (or prospective customer) that you create the most value for them (in comparison to their other options).

This process generally happens through five steps:

Creating a Clear and Compelling Value Proposition: Clearly articulating what sets your business apart from your competitors. Emphasize how your product or service addresses customer needs and solves their problems.

Tailored Communication: Companies should research their target market to understand customer’s specific needs, pain points, and preferences. Communication is tailored to resonate with different customer segments. This involves leveraging market research, customer data sources, and case studies.

Effective Storytelling: Companies should develop a story connecting their brand with their customers' aspirations and challenges. Testimonials, case studies, and reviews from satisfied customers should be leveraged to promote further customer purchases.

Demonstrate Value: Companies can offer free trials, samples, tastings, or other demonstrations to allow potential customers to experience the products/services in person. In addition, companies can informational content (generally in the form of ads) to demonstrate expertise and provide value to their audience.

Strong Customer Relationships: Companies can establish trust with their customers through open communication, transparency, and reliability. This includes going above and beyond to meet and exceed customer relationships to encourage repeat purchases. Companies should seek feedback from customers to understand their needs and improve their product/service offerings.

Credit CIO

Customer’s Value Proposition

Up until this point, I’ve only been discussing value propositions from a company’s standpoint - how they provide value to their customers. Yet, customers have a value proposition too.

A customer’s value proposition is the perceived subjective value, satisfaction, or usefulness of a product or service.

To dissect that further, let’s dive into where the customer’s value proposition is being derived from.

A Customer’s Value Proposition is Subjective: Unlike a company’s value proposition which is often focused on objective features and benefits, a customer’s value proposition is heavily influenced by personal preferences, social values, and the perceived benefits of the product/service relative to other available options.

Remember that a customer’s value proposition is the following:

Perceived benefits the customer believes the product/service will bring minus the perceived cost of the product/service

Diving deeper into the perceived benefits the customer believes the product/service will bring, here’s a list of the various components that could impact the perceived benefits of a product/service:

Product or Service Attributes:

Customer Needs and Preferences:

Social Factors:

Marketing and Communication:

Credit Shopify

Diving deeper into the perceived cost of the product/service, here’s a list of the various components that could impact the perceived cost of a product/service:

Pure Monetary Cost:

Non-Monetary Factors:

Marketing and Communication:

Credit CIO

Bringing this back to our main topic, company value propositions, let’s compare how company value propositions compare with customer value propositions. Here is how the math breaks down for business & customer value propositions:

The equations above aren’t exactly the same, so there is often a discrepancy between what a company’s value proposition is (what benefits they think the consumer will get from the product/service) and what the customer’s value proposition is (what benefits the consumer actually gets from the product/service).

Where does this discrepancy come from?

Relating this to the math above, a company’s value proposition (proposed benefits the business thinks a customer would receive - the price the customer pays for the product/service) is a lot more black and white than the customer’s value proposition (perceived benefits the customer believes the product/service will bring - the perceived cost of the product/service). See, the company’s value proposition generally can be calculated easily as the proposed benefits relate to the willingness to pay of customers minus the price of the product. However, the customer’s value proposition is much more subjective as it’s specific for each consumer—it’s all about perception which is difficult to put a direct number to.

Credit Stax Bill

Takeaways

Value perception is incredibly subjective and differs person-to-person and business-to-business. Because of this, it’s difficult to articulate a perfect set of takeaways for this article.

If I had to consolidate this article into four main points, they would be the following:

1) A business should strive to create the most value for its existing and prospective customers as it possibly can.

2) The business with the highest value proposition will eventually win the most customers (it may take time to change consumer behavior or build a brand in the market).

3) The key to lasting business success is to create sustainable value for your customers over a long period, value that isn’t arbitraged away by the competition.

4) Identifying your value proposition is the backbone to deciphering the optimal pricing strategy of your products/services

See you Saturday for The Saturday Morning Newsletter,

Drew Jackson

Twitter: @brainwavesdotme

Email: brainwaves.me@gmail.com

Submit a topic for the Brainwaves newsletter here.

Thank you for reading the Brainwaves newsletter. Please ask your friends, colleagues, and family members to sign up.


Dive deeper into Venture Capital, Economics, Space, Energy, Intellectual Property, Philosophy, and more!

Brainwaves is a passion project educating everyone on critical topics that influence our future, key insights into the world today, and a glimpse into the past from a forward-looking lens.

To view previous editions of Brainwaves, go here.

Want to sponsor a post or advertise with us? Reach out to us via email (brainwaves.me@gmail.com).

Disclaimer: The views expressed in this content are my own and do not represent the views of any of the companies I currently work for or have previously worked for. This content does not contain financial advice - it is for informational and educational purposes only. Investing contains risks and readers should conduct their own due diligence and/or consult a financial advisor before making any investment decisions. Any sponsorship or endorsements are noted and do not affect any editorial content produced.