Helping Manufacturers And Distributors
Improve Sales Performance And Profitability
Published by the Industrial
Performance Group, Inc.
No. 33

What Is Your Value Proposition?

Everyone in business should be able to answer the question, What is your value proposition? Yet as we rolled out our economic justification sales training program, we discovered that many organizations haven't given this topic much thought. And since economic justification selling is based on identifying, quantifying and communicating how customers derive economic benefit from one's value proposition, we thought it would be helpful if we dedicated this issue of Channel Focus to this topic.

1980s: Defining the Value Proposition

The notion of the value proposition has been evolving for the past 25 years. In his 1980 book, "The Marketing Imagination," Theodore Levitt introduced the concept of the "augmented product," which he described as a cluster of tangible and intangible customer expectations that surround a generic product. Levitt firmly believed that there is no such thing as a commodity, but rather products that have not been differentiated in the mind of the customer.

In 1984, Michael Lanning expanded on this concept in a white paper titled "Delivering Profitable Value," in which he described value as the customer's total experience with a product. From Lanning's perspective, once this total experience could be defined, an organization should focus all of its efforts on delivering it to the customer. Lanning was the first to use the term "value proposition."

The developing concept of the value proposition didn't gain much traction for the next seven years. This was primarily due to the fact that the dominant business strategy during this period was growth through acquisition and profit improvement through downsizing. From a financial perspective, mergers and acquisitions appeared to be the solutions for achieving profitable growth.

However, there were two notable, and unanticipated, outcomes produced by this strategy. Many of the large companies that were formed as a result of mergers and acquisitions began to experience the diseconomies of scale: a growing disconnection between what the company was trying to accomplish — servicing its debt — and understanding and meeting the needs of its customers.

1990s: Delivering the Value Proposition

By the late 1980s, it had become obvious that the majority of companies created through mergers and acquisitions weren't delivering value to their shareholders or their customers. What was needed was a management tool that could help companies achieve profitable growth by doing a better job of focusing all of their resources on meeting the needs of their customers.

In 1991, Robert Kaplan and David Norton introduced the Balanced Scorecard. Kaplan and Norton realized that having the ability to mobilize and manage intangible assets — people, knowledge, skills and information — was critical to success. They coined the term "customer value proposition" and defined it as what a company must deliver in order to attract, retain and deepen its relationships with customers.

Beginning in 1993, businesses became enamored with technology. The emergence and rapid growth of the Internet was touted as something that would forever change the way we do business. Billions of dollars were invested in technology during this period.

In 1999, CIO magazine reported that information technology (IT) initiatives had reached a 75 percent failure rate. The primary reason was that money was being spent on technology that had no real connection with the true profit drivers of the business: attracting and keeping customers. As a result, IT professionals began to demand that their suppliers present cost/benefit analyses on proposed projects. This cost/benefit analysis became known in the IT industry as a project’s value proposition.

Today: Your Value Proposition Is More Important Than Ever

Having a well defined and managed value proposition is more important than ever before, due to the parity in most industries resulting from excess capacity, market saturation and customer access to information via the Internet. Due to the convergence of several long-term trends, quality and/or discount pricing no longer guarantee a competitive advantage.

Despite the importance of the value proposition, many companies have a hard time describing what their value propositions are and how their customers derive benefit from them.

In reality, every organization has a value proposition. Your business's value proposition stems from all of the activities you perform in designing, producing, marketing, selling, delivering and supporting your products. It is the net impact all of these activities have on the customer. A value proposition usually evolves over time, based on the organization’s culture and capabilities.

Unless you question and redefine your value proposition on a regular basis, there's a good chance that what you are currently delivering to the market — or what you think you are delivering — is out of concert with what your customers actually need.

If you are interested in determining the extent to which members of your organization understand your value proposition, engage them in a discussion of the following questions.

#1 Describe what you believe our value proposition is — in other words, what do we do as an organization to attract, retain and deepen our relationships with customers?

#2 How does our value proposition differ from our top 3-4 competitors?

#3 How do customers derive economic value $$$ from our value proposition?

#4 What is the monetary worth of the economic value customers derive from our value proposition?

For additional information on defining and managing your value proposition, call 800.867.2778.

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