Tuesday, April 20, 2010

Why your customers buy – Understanding the value proposition

One of the key things for businesses to understand is why their customers buy their product. Statements such as the following ones are meaningless.
  • We are the best at what we do.
  • We give great service.
  • We have a great product selection.
  • We offer a great value.
The first two are meaningless because they are vague. Your business may be the best, and it may be great, but what is it that you do? What are your customers purchasing? Another important problem is that they are focused on the business. The next two are slightly better because they begin to describe the products. Where they miss the mark is that they are not specific, and they are not focused on the customer. If this sounds familiar, it is because companies use the same concepts to develop their brand strategies.

A value proposition is a statement explaining why a customer should buy a product. Good value propositions articulate both the costs and the benefits of purchasing a product. For example, assume that you sell cars. What are you actually selling? Are your customers purchasing reliable transportation? Are they seeking a status symbol or making a statement? Do they want comfort and luxury? Are they looking for high performance? Mercedes and BMW are both German luxury that command a premium price. However, the Mercedes emphasizes luxury and the BMS emphasizes performance. Mercedes and BMW have different value propositions. At the other end of the price spectrum, Ford and General Motors both offer more affordable products, albeit without the performance features and without the luxury. This too is a different value proposition and a different set of customers. Companies that ignore their value propositions do so at their peril. Cadillac seriously damaged its brand when it introduced a small relatively inexpensive car hoping to attract economy minded buyers because buyers no longer automatically assumed that Cadillac meant large comfortable car and status.

Restaurants provide good examples of different value propositions too. Consider the difference in fine dining establishments, family restaurants, and fast food restaurants. Consider the values that customers might seek:
  • Fast, low cost
  • Family friendly, budget oriented
  • Leisurely, elegant, cozy, gourmet, price is not a big factor
Is it pretty obvious which set of values belongs to which market segment? Would McDonalds be successful if it dimmed the lights and sold $25 steaks? Would Ruth's Chris be successful if it introduced value meals?

Remember when crafting a value proposition, customer value is not just about low price or the product. Customers are buying what the product provides. For example, people shopping for jewelry can make their purchases in many places from discount stores to department stores to jewelry stores. If it was all about price, then Tiffany & Co. would not be in business. Instead, the Tiffany Blue Box is a status symbol. Tiffany & Co.'s value proposition says exactly what they do.
Since 1837, Tiffany & Co. has been the world's premier jeweler and America's house of design.
That is not to say that prices do not matter. Wal-Mart's value proposition is:
Everyday low prices
Price does matter. The trick is to figure out how it matters. If your product is a commodity, then value means low prices. If your product is status, then high prices may indicate value. This introduces another part of the value proposition. What exactly is the customer buying? Obviously if the customer is purchasing a computer, that is what the customer is buying. But what does that mean? Is the customer buying the box or the components? The customer is purchasing the ability to store and manipulate data. The customer is buying reliability. If you are selling televisions, the customer is not really interested in the device. The customer wants to watch TV. The customer is buying the ability to do that with vivid color and great sound. The customer is buying a viewing experience. If you are selling cars you are either selling transportation or you are selling a driving experience. That is why BMW advertises its value proposition as:
The ultimate driving machine
Even this blog has a value proposition. It is to help you grow your business by giving you useful information and sharing ideas. So now that you understand the idea, go write your own value proposition. Remember to answer these two important questions.
  1. What exactly is the customer purchasing? Remember, their goal is not just to own the product; their goal is to get what the product provides. That could be a lot of things.
  2. Why is the customer buying it?

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