Friday, February 20, 2009

What is a value proposition?

A value proposition is often defined as "what the customer gets for what the customer pays" or "a bundle of products and services that are of value to the customer". My definition on the term value proposition in relation to business models is different; A value proposition is how value is bundled and offered to potential value recipients. The term 'Value' is not limited to products and services, the term 'Value recipient' is not limited to customers and the "Value proposition" is not always tied to the source of revenues. Value propositions are the core of business models; what is the value provided? why is the value provided?

Value is not limited to products and services
Providing something new, something unique, something more convenient or accessible, customized, with higher performance or to a lower price are all common value propositions towards traditional customers. But value can also be to enable risk- or cost reduction for a supplier, provide access to databases or research tools for early-stage university research, provide user data to "upstream" application developers, out-license manufacturing or quality assurance processes to other companies, cross-license technology & IP, bring passangers to remote airports, provide jobs and enviornmental responsibility for a region, pay tax to a government, or take active involvement in a community. When realizing that existing assets and capabilities can have a value for someone else, new interesting business models often emerge.

Value recipients are not limited to customers
Potential value recipients can be customers, suppliers, partners, competitors, industry trade groups, professional associations, actors in other industries, universities, research institutes, non-profit organizations, local or national communities, government, society, etc. Also, internal employees are target for value propositions such as good wages, job security, an interesting place to work, recognition, stock options, free food, social events etc.

A value proposition is not tied to the source of revenues
Even though the business model spells-out how a company makes money, and the value propositions are what the company offers, not all value propositions have the purpose to generate direct revenues. Reasons can be to, increase the value of existing intellectual assets and capabilities, get access to new assets and capabilities, create momentum for a new technology, lower cost of development, reduce risks, build new markets, attract the best people, etc.

Google as an example
Google generated 99% of total revenues 2007, and 97% of total revenues in 2008 from advertising, still most of Google's value propositions are not directed towards its advertisers. Below some of Google's value recipients are listed with examples:
- users (a very large number of value propositions, often provided for free)
- network partners (revenues in return for relevant ads on their sites)
- developers (providing platforms such as GWT for free to enable development of rich content)
- business owners (data on popular search terms to better formulate value propositions)
- libraries (digitizing all or part of book collections to create full-text searchable online catalogs)
- authors and publishers (make books out of print available for purchase in digital formats)
- employees (working conditions, "own time", job security)
- google owners (growth , financial performance)
- society (free tools such as blogs and localized versions of Google in developing countries)

Searching for value propositions
When searching for valuable assets and capabilities to offer, it is important to not only focus on own business model and industry, but also the potential need of others:
• How can we strengthen own value propositions?
• How can we strengthen others' value propositions?
• How can we create joint value propositions with others?

The Value Proposition Hierarchy Explorer is a tool to clarify the space around an originally stated value proposition by broadening or narrowing the scope and identify new ones.

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