How To Develop A Compelling Value Proposition - Forbes

Silicon Valley entrepreneur and author Eric Ries calls startups “human institutions designed to create a new product or service under conditions of extreme uncertainty.”

With that apt description, he captures some of the challenges early-stage companies face: Besides inadequate understanding of markets, competitors and customer preferences, startups often struggle to define what value their innovation brings to the market.

Acknowledging and addressing this challenge is a critical first step in helping startups commercialize successfully. Unfortunately, many promising entrepreneurs don’t have the resources or know-how to assess market opportunities. At NorTech we have recognized that need and are working with our cluster members to assist them with developing their value proposition, conducting market research and collecting voice of the customer feedback – and how to use these tools to engage an anchor customer.

Developing a clear and compelling value proposition is the first phase of an effective market opportunity assessment. In many ways it is the most important part of the process. After all, how can you sell a product or service if you can’t articulate its value?

So how do you develop a compelling value proposition?

The process consists of three stages:

1. Identifying customer benefits


2. Linking these benefits to mechanisms for delivering value


3. Mapping the basis for differentiation or market play

Brainstorming the benefits you believe your product or service offers to customers is as simple as making a list. It is helpful to review this list of benefits with as many members of your organization as possible to get an accurate picture. At the heart of the exercise is putting yourself in your target customer’s shoes and identifying from his perspective what value your product or service holds.

The leap for many entrepreneurs is to be able to distinguish between what excites them about the technology and what value the product actually brings to the customer.

Keep in mind that your customer and the end-user of your product or service might not be the same. You might be selling to an original equipment manufacturer or a distributor, for example. Differentiating between what your customer and the end-user perceive as value can help you communicate your value proposition more effectively.

Broadly speaking, all businesses deliver value in one or a combination of three categories of differentiation: cost, technology and service. These bases for differentiation include many value delivery mechanisms such as warranty, performance and accessibility. Identifying which of these categories your product benefits fall into allows you to effectively differentiate yourself from your competition.

Once you have completed this exercise for all of your product’s benefits, you can map your company’s value proposition on a chart with three axes for each of the bases of differentiation. You can then identify where your strengths are. Your product, for example, might deliver superior performance and have a long shelf life, which means cost and technology are its major advantages.

Disruptive products or services lean towards one of the three differentiators. Few, if any, address all three of them.

“The biggest ah-ha, for most participants, is that they don’t have to try to compete on all three fronts – as a matter of fact that would weaken their position in the market place,” says Nicole Paolozzi of Bush Consulting Group^[1] . “Relief is usually shared by all when they realize they can or should build their value proposition statements on what they do best.”

The final step is writing the value proposition statement. It should address what market you are targeting, what product or service you are delivering, how you are delivering it and why. Chances are you will develop more than one value proposition for various markets. We tell our cluster members to focus on one sector first, go through the market assessment, collect voice of the customer feedback and validate their value proposition. They can then repeat the process for another market.

One company we have assisted with developing a value proposition is MegaJoule Storage Inc. The company “offers grid level energy storage systems that significantly reduce utility costs for commercial and industrial electricity users. It does so by shaving peak electricity demand and shifting consumption of electricity from the grid to lower-cost off-peak periods.”

“The method of extracting that statement was fascinating,” says MegaJoule President Herb Crowther. “You spent a lot of time thinking about how to tell your company’s story. It’s important to figure this out quickly. Having a structured process helps.”

In his book, “The Lean Startup,” Ries writes that too many young businesses lack a tailored process. They take a “just do it” approach that avoids all forms of management, he writes. Ries provides his own approach to get a product into customers’ hands faster.

“Lean isn’t just about failing fast, failing cheap,” his website^[2] states. “It is about putting a process, a methodology around the development of a product.”

Developing a compelling value proposition should be one of the first steps in whatever process companies decide to implement. It is an important tool in ultimately capturing your first customer. The point is to make use of that tool to engage potential customers and remove some of the uncertainty under which startups operate.

“Too many startups begin with an idea for a product that they think people want,” Ries writes on his website. “When they fail to reach broad uptake from customers, it is often because they never spoke to prospective customers and determined whether or not the product was interesting.”

In my upcoming columns, I will address the next steps in the market opportunity assessment process. In the meantime, I would like to hear your thoughts on how you developed your value proposition.

References

1. ^{^} Bush Consulting Group (www.bushconsultinggroup.com)


2. ^{^} his website (theleanstartup.com)