Tuesday, February 16, 2010

Value Proposition

What is a value proposition?  I’ve seen it defined and used many different ways in both industry and business school.  I like to define the value proposition as the amount of benefit your customer receives for the price he or she pays compared to competing products or services.  It is an economic concept, and can be stated in terms like, “more for less” or “less for much less.”

We recently had an assignment to develop a marketing strategy for a technology company that served two distinctly different target markets with two separate software offerings.  The client recently took a seminar at a well-known business school and had been exposed to new terms and buzz-words for the first time: value proposition, social media, CRM, etc.  He wanted to start working on his new strategy by communicating his product’s “value position.”  We quickly learned that our client, like most of us, used “competitive advantage,” “positioning” and a “value proposition” almost interchangeably. 

I am currently teaching my tenth or eleventh Marketing Principles class at a small state college in New Jersey. To be a successful teacher, I need to present concepts to beginning business students in clear and unambiguous language.  We teach that the purpose of marketing is to facilitate exchange.  Exchange is when a party gives up something of value for something else they would rather have.  Marketing is what we do to create, communicate and deliver the value that a company’s customers are willing to pay for.

I like to think of the value of a product or service in terms of relative price and benefit. Price is what is charged for a particular product or service, and benefit is what I receive in exchange for my money.  In this school of thought, there are three levels each for price and benefit: more, same, and less.  The level selected describes your product relative to its competitors.  Does what you have to sell offer more benefits for more money than your competitors, or do you offer less but charge much less? 

We can use auto manufacturers to illustrate the concept.  When advertising its high-end luxury cars like the S-550, Mercedes-Benz acknowledges the fact that their model is more expensive than the competition.  However, they assure you that no other automobile offers the same quality of workmanship, comfort, safety-level, and driving experience as the S-550.  For those seeking the highest level of amenities, the S-550’s value proposition is “more for more.”  Hyundai, on the other hand, argues that their new Genesis boasts the same features and performance as other luxury sedans offered by Acura or Lexus, but at a much lower price.  The Genesis’ value proposition is “same for less.”

Wholesale clubs like Sam’s and BJ’s do not have the selection and variety of regular grocery stores, but you get much more product for a much cheaper price.  This is a “less for less” value proposition.   High-end grocers – Whole Foods, for example – advertise better-quality organic products that are more expensive than similar items found in a wholesale club or a chain like Shop Rite.  Similar to Mercedes-Benz, Whole Foods purports to offer food of a much higher quality for more money than its competitors, or a “more for more” value proposition.

Using this approach, how do you define your products or service’s value proposition?  Do you present a competitive benefit over your competition, or do you need to rethink your price-points or service-packages to present a greater value?

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