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.”
A customer value proposition is an offering that helps customers do an important job more effectively, conveniently, or affordably than the alternatives. 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). 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 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 a start in the right direction, it is a bit too simplistic, geared narrowly towards an offer and is missing a few essential elements.
The 7 Essential Elements of a 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.”
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?
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.”
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. 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 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 warranty, 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” 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.
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.
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 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. 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, communicate to your people what the next value proposition is going to be.
7. The CVP Should be Tied to Businesses 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, the formal management performance review process should include an evaluation of the 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.
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. Is sustainable – now and in the future.
7. Is tied to the business review and performance evaluation process.
Additional Online Resources related to CVP that you may find helpful:
1. Powerful Value Propositions, Thursday, 16th of October 2008
2. Ed Barrows – Customer Value Proposition
4. Developing Strong Value Propositions, in Selling to Big Companies, by Jill Konrath, 2009.