What is a Customer Value Proposition?
The Customer Value Proposition is probably the most crucial concept in the marketing of any software product and service (see note [1]). The Customer Value Proposition is the framework used to shape our compelling communication with the market, the basis for calling potential clients and asking for an appointment, and the reason why clients eventually sign on the dotted line.
The formal expression of the value of our product/service is:
V = B – C
The Value is equal to the Benefits of the product/service minus the Cost associated with acquiring, migrating to and rolling out the product/service.
In most cases the value is tangible and measurable over well-defined time periods. In other cases defining value becomes more airy and elusive. (see note [2])
The software challenge
The challenge of bringing software products (and services) to the market is associated with five fundamental characteristics:
- Software is invisible.
- Software has no value per se (the value is derived from using the software and the service).
- The value of the software will often depend on how well we deliver the services required to apply the software to current or new business practices.
- The customer’s implementation, training and adoption levels of the software has a major impact on the value derived from the product.
- The scrap value of obsolete software is nil.
For many software products this means that we need to operate with at least two layers of Customer Value Propositions:
- One, which is generic to the vertical markets, we target.
- One, which is specific to the individual sales situation.
Being successful requires a convincing Customer Value Proposition, which outlines why our product or service is better than all the alternatives available to the client.
Many software products are generic in the sense that they can be applied to many kinds of companies and in many types of industries. However, often enough we come to recognize that certain circumstances make our product or service more valuable. As a result, the same value proposition may be very successful in certain situations, but unsuccessful in other situations.
| N | Need | An attractive Customer Value Proposition must address compelling and critical customer pains for which the customer is prepared to allocate resources. Identifying needs involves industry and/or domain segmentation, understanding the purchasing process and buying center identification, where such needs are easily related to the value proposition. Because these needs differ significantly depending on customer characteristics, this framework element also assists with market segmentation. An important component of the needs definition is the identification of the “Ideal Customer Profile”. |
| A | Approach | A Customer Value Proposition must define the solution components addressing the “whole product” challenge as well as two major parts of the value chain: the sales process and the delivery process. Thus the definition of the Value Chain is a part of the approach definition. When the value chain involves third parties participating in the sales or the implementation process we must also develop a distinct Value Proposition for these players. |
| B | Benefit | A Customer Value Proposition must explain how the benefits of the solution delivered exceed the total cost involved with migrating to and/or utilizing the solution. The more tangible and specific the benefit/cost ratio is defined, the more impact it will have on the market. If we are bringing a new product to the market and/or if we ourselves are a new player in the market, we must consider the risk mitigation issue. The customer will consider our “newness” an additional risk = additional cost, for which we must compensate if we are to win the deal. |
| C | Competition | The Customer Value Proposition must explain why and how the solution is superior to competitive alternatives available to the clients. |
See note [3]
Developing Customer Value Propositions
The following outlines the typical process for developing an effective customer value proposition for products and services, which are already on the market.
Documentation
The Customer Value Proposition must be thoroughly documented including description of the test results from the verification process.
The documentation must enable new sales and marketing people, who are to bring the product and service into a new geographic market to be focused and effective from the first day.
[1] This post is addressing B2B situations where the product/service requires a go-to-market approach with sales representatives driving the sale from first appointment to signing the contract.
[2] If a Customer Value Proposition is airy, you must go back to your “lab” and create something, which is more specific. It’s hard to ask a premium price on something with “nice-to-have” features.
[3] The format for defining Customer Value Propositions is inspired by The Stanford Research Institute, and thoroughly described in the book: “Innovation: The Five Disciplines for Creating What Customers Want” by Curtis R. Carlson and William W. Wilmot.
