The Business Model & the Value Proposition

2018-04-17T10:41:49+00:00 01-05-2013|

The business world abounds with terms so heavily used they now border on meaninglessness. Before, during and after the recent boom and bust of Internet-based and other high-tech companies, questions about the attractiveness of a company’s “value proposition” and the potency of its “business model” dominated the discussion of perceived winners and losers. Yet what was called a value proposition or business model during the recent frenzy – when just about any “me too” product or company could get funded – was nothing more substantive or thoroughly developed than the fanciful dreams of charismatic visionaries.

An effective, credible “value proposition” describes the fundamental attractions that will draw consumers to a product or service. It represents the unique combination of offers– both real and perceived – that when taken together constitute “value” in the eyes of the consumer or client. The value proposition identifies and powerfully articulates exactly what will make the product or service attractive in the marketplace. It is succinct and self- evident. Consider the following:

“…Delivery of time-sensitive documents and parcels at a fraction of the cost that would be incurred by late or non-delivery…”

Just twenty words are sufficient to paraphrase the essence of FedEx’s original value propositions. Yet this short description is remarkably potent. What FedEx realized was that the value of what the company proposed to do was intrinsic not to using the service but to not using it.

Whereas once it would have been unthinkable to pay a premium of several thousand percents over standard postal rates for overnight delivery, FedEx recognized that in some circumstances the value of doing so was completely reasonable – particularly when a parcel “absolutely, positively” had to be there – because the cost of non-delivery could mean the loss of millions. In that context paying a premium of 3500% (on a 34¢ expense) looks like a tremendous bargain and the value proposition becomes “self-evident.”

Likewise, a robust business model is not pie-in-the-sky. It explains how a company will deliver its value proposition by describing the unique elements, the critical resources, required to produce the product or service and thereby transform an idea or vision into a living, breathing and enduring corporate entity. Consider the following:

“…Creating, deploying and continuously improving a proprietary process that makes on-time overnight delivery logistically possible and economically feasible…”

Anyone old enough to remember when “special delivery” meant nothing more than a few hours saved thanks to a special trip from the post office to the recipient’s address can recognize this brief sentence as one that paraphrases FedEx’s original business model. With less than 20 words it describes just what FedEx intended to do and how the company would do it. The implementation of this model created an entirely new enterprise and an entirely new way of conducting business.

Taken together, the business model and value proposition form the core elements that guide a company in its internal and external orientations. When presented ex-post facto as above,these concepts seem straight forward and almost rudimentary. Yet envisioning, articulating and then implementing them requires a tremendous amount of up-front thought.

Often in the rush to produce a business plan and find funding, entrepreneurs and companies forego the seemingly mundane bench work of fully fleshing out the value proposition and business model. In some cases, as with companies like Webvan or Amazon, the value proposition was so compelling (and new) that a certain expectation arises that the business model will evolve to fulfill the promise of the value proposition. Think of it as the reverse “Field of Dreams” scenario. If they come, we’ll figure it out.

On the flip side, product-centric companies, such as those that populate Silicon Valley, often subscribe to the real“Field of Dreams” strategy; if they build it, they ( the customers ) will come. Certainly this has worked countless times, particularly with breakthrough products where no precursors indicated what consumer acceptance might be. (Think of the first “Walkman.” Would people want to go around with appliances on their belts and headphones jammed in their ears? Who knew!)

Much more often companies have had their “eureka” moments of product discovery followed by the baffling discovery that the market didn’t want what could be produced. Why? Because the equation for success in today’s market is that the value proposition and the business model must be in congruence. This is true for new as well as established companies.

For example, after more than twenty years of dramatic ups and downs, Apple’s value proposition is nearly synonymous with its brand. Although Apple computers have always cost more than PCs, the “value” in Apple’s proposition is intrinsically linked with how users feel about themselves. They are more sensitive to matters of style than price. They see themselves as more interested in creative outcomes than in having to spend time learning how to use the tools required to achieve those outcomes. The “value” in Apple’s proposition comes in saying that the Apple user can get to work right away and do wildly creative stuff within hours.

Despite Apple’s premium prices, a certain portion of the market sees that as a value. (Plus, they may sense a certain psychic value through their belief that using an Apple validates their own self-assessments as more highly evolved, creative beings.) Apple’s limited (and failed) efforts to alter its business model by commoditizing its products were completely out of synch with its value proposition. Imagine if Apple decided to make plain beige boxes with no stylish cachet, no ease of use and no psychic pay-off. The value proposition evaporates.