Introduction
The creators of the Balanced Scorecard, Robert Norton and David Kaplan, view the customer value proposition (“CVP”) as the “heart of strategy”. They very succinctly stated that:
“Strategy is based on a differentiated customer value proposition. Satisfying [your] customers is the source of sustainable value creation.”[1]
A customer value proposition is an offering that helps customers do an important job more effectively, conveniently, or affordably than the alternatives. [2]
In addition to being “the heart of strategy” it is one of the 4 key components of a business model (which include: 1) customer value proposition, 2) revenue/profit formula, 3) resources and 4) processes such as manufacturing).[3]
In my opinion, successful customer value propositions have certain common characteristics, are inextricably linked to the offer(s) and need to be supported by the people, processes and technology geared towards delivering on the CVP in a manner that conveys an intimate understanding of the customer’s requirements.
Successful businesses that exist in a competitive industry environment know all too well about the need to gain and maintain sustainable points of differentiation in the form of a superior customer value proposition. They also understand the nature of customer value proposition – that it is not a single undertaking as a customer’s experiences, preferences wants and needs, fluctuate, evolve and change over time.
Furthermore, developing and maintaining a superior CVP is a “C” level activity, not to be pushed off to marketing and/or sales as an exercise in positioning.
The traditional marketing exercise for developing a customer value proposition was to consider the following “tweaks” (i.e. improving, transforming or reinventing the CVP) to the generic product or service:
- Raising benefits.
- Reducing costs.
- Raising benefits while lowering costs.
- Raising benefits by more than the increase in costs.
- Lowering benefits by less than the reduction in costs.
While this is certainly a step in the right direction, it is a bit too simplistic, it is geared narrowly towards improving an offer, and is missing a few essential elements. Creating an effective value proposition or, making a good customer value proposition better, requires a review of these 7 essential elements.
The 7 Essential Elements of an Effective Customer Value Proposition
A truly effective customer value proposition has the following 7 essential elements:
1. The CVP is Created by Conducting a Thorough Needs Analysis – starting with a complete understanding of the customer, determining what their needs, preferences and requirements of an improved solution would be (that meets or exceeds these needs and/or preferences). Again, determining how these identified needs are currently being satisfied, and applying the litmus test to an improved product or service in the areas of: effectiveness, affordability and convenience (per the definition of CVP above). Ultimately, the CVP creators must determine the elements that deliver (and will continue to deliver) the greatest value (or “bang for the buck”) amongst the alternatives that a customer has access to. A complete customer profile analysis can assist a business in identifying your best customers (and the least valuable customers).
2. The CVP is Truly Customer Experience driven – an effective value proposition is expressed in terms of real benefits, as defined by the customer, through their experience from the actual or expected consumption of the product and/or service. CVP must be integrated into all customer-facing activities, marketing materials and messaging. When developing the CVP, you should heed the advice of the McKinsey Quarterly authors (who wrote an article that challenges the traditional sales funnel entitled: The Customer Decision Journey):
“Marketers must move aggressively beyond purely push-style communication and learn to influence consumer-driven touch points.” [4]
When developing your CVP you must consider the phrase they have coined the customer decision journey, each point of contact along the way and the relative influence the CVP has on the customer and their decision making process. In other words, can you determine how marketing and sales can leverage the CVP to influence or motivate trial, purchase, repurchase, and advocacy elements of the customer decision journey?[5]
Jeff Bezos, CEO and Founder of Amazon.com has embraced this concept well and stated: “if you do build a great experience, customers tell each other about that.”[6]
3. The CVP is simple, yet distinctive and all encompassing. By this I mean it should reflect 2 aspects of what are called value elements: 1) points of parity and 2) points of difference.[7] Points of parity are elements (i.e. functionality and performance) in common with the next best alternative whereas points of difference are elements that make your product better than the next best alternative. The third value element is called points of contention; they arise when you and the customer disagree as to how the elements compare to the next best alternative.
To demonstrate value elements, you simply need to present clear proof of your product or service value versus the competition (to ensure an apples-to-apples comparison) by articulating the points of parity and differences between your product and the known alternatives. Internet Security software companies do this well in comparing the “free” software to the paid subscription service and then against the most popular brands. BMW-chasing companies (such as Hyundai) also do this well by demonstrating and documenting their value proposition in terms of tests related to safety, speed, duration of warrantee, handling, affordability, quality, re-sale value and customer satisfaction levels.
Many companies have adopted the Net Promoter Score which simply asks what the author, Fred Reichheld, calls The Ultimate Question: “would you recommend this company to a friend or colleague?” The metric it produces is called the Net Promoter Score where P – D = NPS”[8] where:
P = Promoters are loyal enthusiasts who keep buying from the company and urge their friends to do the same. (Passives are satisfied but unenthusiastic customers who are easily wooed by the competition) and
D = Detractors who are those customers trapped in an unhappy relationship.[9]
4. Your CVP Is Measurably Better than the competition’s Customer Value Proposition – all customer value propositions should be based upon tangible points of difference, expressed in both qualitative, quantitative and ultimately, monetary terms. An effective CVP has a “resonating focus” on one or two points of parity and/or points of differences.[10]
5. Customer validation and substantiation – to avoid being considered marketing puffery, your value proposition must be substantiated by actual case studies and/or testimonials. You need to demonstrate instances where the customer not only decided to purchase your product or service but did so from your company for reasons that you can substantiate. Customer testimonials are critical and must be expressed from a customer’s viewpoint. They help to substantiate and authenticate the customer value proposition.
6. The CVP Is Sustainable – not easily copied, substituted or subject to rapid obsolescence or, if it is, then the new and improved customer value proposition should be in the process of simultaneous development. To satisfy this requirement, you must be able to execute on this value proposition for a significant amount of time (which varies depending upon the intensity of your competitive environment). And, to avoid morale issues, you must constantly communicate to your people what the next value proposition is going to be, lest they think that you are “resting on your laurels”.
7. The CVP Should be Tied to Business Reviews and A Performance Evaluation Program. One of my “pet peeves” is accountability. A CVP review should be conducted in conjunction with monthly and/or quarterly business reviews. In addition to the typical business unit performance measures, a management performance review process should include an evaluation of eahc manager’s performance in delivering the customer value proposition to each target segment and key client(s) they serve in their role within the company.
From the HBR.org article: Customer Value Propositions in Business Markets by James C. Anderson, James A. Narus
and Wouter van Rossum, March 2006.
Conclusion
To be effective a Customer Value Proposition should be distinctive, have a resonating focus and possess the following 7 elements:
1. Should be based upon a thorough customer needs analysis and enhances effectiveness, affordability and convenience vs. alternatives.
2. Is customer experience driven.
3. Is simple by design, yet distinctive and has a “resonating focus” on a few value elements.
4. Is measurably better, expressed in monetary terms.
5. Is authentic – through validation, substantiation, data and documentation.
6. Each value proposition is best delivered by a tailored value chain – that makes it sustainable – now and in the future. [11]
7. Is tied to the business review and performance evaluation process.
8. Choices in the value proposition that limit what a company will do are essential to strategy because they create the opportunity to tailor activities in a way that best delivers that kind of value.[12]
And finally, this post represents the 10th in a series of The Savvy Strategist articles in as many months. It covers one of the most fundamental business performance topics: making a good customer value proposition even better. As always, I would appreciate everyone’s viewpoints, comments and input.
Yours in strategy,
Bill Tyson, CEO, Strategic Marketing Plus, LLC March 27, 2011.
Additional Online Resources related to Customer Value Proposition (CVP) that you may find helpful:
1. Powerful Value Propositions, Thursday, 16th of October 2008 at: http://www.marketingexperiments.com/improving-website-conversion/powerful-value-propositions.html
2. Ed Barrows – Customer Value Proposition – http://www.edbarrows.com/Resources/briefs/valueProposition.pdf
3. HBR.org – see various articles cited here. Customer Value Propositions in Business Markets by James C. Anderson, James A. Narus and Wouter van Rossum, March 2006.
4. Developing Strong Value Propositions, in Selling to Big Companies, by Jill Konrath, 2009.
http://www.sellingtobigcompanies.com/file_redirect.jsp?siteObjectID=99998&fname=ValueProp09.pdf.
Footnotes:
[2] The New M&A Playbook, by Clayton M. Christenson, Richard Alton, Curtis Rising, and Andrew Waldeck. Harvard Business Review, March 2011 edition, page 50.
[3] Reinvent Your Business Model by Mark W. Johnson, Clayton M. Christenson, and Henning Kagermann, Harvard Business Review, December 2008 edition, page 50.
[4] Customer Decision Journey, by David Court, Dave Elzinga, Susan Mulder, and Ole Jørgen Vetvik. McKinsey Quarterly, 2009 Number 3. Page 5.
[5] Ibid.
[6] The Ultimate Question, Driving Good Profits and True Growth by Fred Reichheld, Harvard Business School Press, Boston, MA 2006. Page10.
[7] Customer Value Propositions in Business Markets by James C. Anderson, James A Narus and Wouter Van Rossum, Harvard Business Review, March 1, 2006.
[8] The Ultimate Question, Driving Good Profits and True Growth by Fred Reichheld, Harvard Business School Press, Boston, MA 2006. Page 10.
[9] The Ultimate Question, Driving Good Profits and True Growth by Fred Reichheld, Harvard Business School Press, Boston, MA 2006. Page 19.
[10] Customer Value Propositions in Business Markets by James C. Anderson, James A Narus and Wouter Van Rossum, Harvard Business Review, March 1, 2006.
[11] Magretta, Joan (2011-11-22). Understanding Michael Porter: The Essential Guide to Competition and Strategy (Kindle Locations 1537-1538). Perseus Books Group. Kindle Edition.
[12] Magretta, Joan (2011-11-22). Understanding Michael Porter: The Essential Guide to Competition and Strategy (Kindle Locations 1544-1545). Perseus Books Group. Kindle Edition.
Related articles
- Making a Good Customer Value Proposition Better (thesavvystrategist.com)
The Savvy Strategist (tm) 
Question on #7 and Accountability:
When you say accountability is one of your pet peeves, what has experience taught you? I’ve noticed that successful business leaders so often fail to surround themselves with people that really challenge them, be it Boards of friends and relatives, sycophantic direct reports, etc. It’s an odd thing but common, and inevitably bad for the long-term prospects of the enterprise. Is that what you’re referring to as well or something else?
Great insight.business leaders always surround themselves with sycophants and people who dont challenge them
It’s not just about the numbers. As I wrote in my previous post on Accountability, experience has shown that a fully committed team in this context is working together towards the pursuit of lofty ambitions (i.e. achieving an industry leadership position) based upon a common set of performance goals (quantitative and qualitative) and clear-cut metrics that have real meaning – to them. To be effective, the goals are necessarily supported by rewards and recognition programs and a well-conceived communication plan to ensure the team is constantly motivated to achieve continuous improvements in performance.
Yep. Understood. What makes the issue a ‘pet peeve?’ Trying to learn from the mistakes of others. I sense that you are alluding to ‘issues’ you’ve seen in the past. Can you go into those issues that make Accountability a pet peeve?
very nice blog, good read A+