Developing the customer value proposition

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The customer value proposition roadmap is a tool that any organization can use to assess and adapt its value proposition for its customers. You can use it to identify new and emerging threats as well as new opportunities to create value for your customers. It will help you synthesize those findings into a plan to create new, differentiated value in a changing landscape. Above all, if your company is under pressure, the tool will force you to challenge your assumptions, step back from focusing on defending your past business, and use your customers’ perspective to imagine new ways forward.

The Value Proposition Roadmap uses a six-step process to map out new options for your business. Let’s look at each of the steps in detail.

Step 1: Identify Key Customer Types by Value Received

 The first step is to identify your key customer types for different pricing strategies, distinguished by the different kinds of value they receive from your business.

For a hypothetical University XYZ, for example, the key customer types might include undergraduate students, their parents, alumni, and employers (looking to recruit students and alumni). Note that each of these customer types gains somewhat different value from the university. For undergraduate students, the value may be a mix of education, social environment, and certification to help in job seeking. For alumni, the value of their ongoing relationship with the university may be based more on career networking or a sense of pride in the school’s athletics, research efforts, or reputation. For employers, the value of the school may be in preparing graduates with certain skills (topical knowledge, critical thinking, or technical skills) as well as credentialing and assisting in finding the right recruits.

If you are having trouble identifying different customer types, look to differences in customers’ motivations or jobs to be done (For what different reasons do they do business with me?) or in their use cases (In what different circumstances do they do business with me?). Looking at these is more useful than looking at differences in demographics (students come from all over the world; alumni are of all different ages; neither of these factors is as critical to their relationship with the university as the different kinds of value matrix they receive).

Step 2: Define Current Value for Each Customer

The next step is to define your current value proposition for each customer type.

This starts with a list of value elements the various benefits that each customer type gains from the relationship with your business. After listing the value elements, write a summary statement of the value that this type of customer receives from your business the overall value proposition.

In table, you can see value proposition definitions for University XYZ’s:

Notice that nowhere in the university’s value propositions is there a list of products or services or a list of fees paid or ways that it will monetize each customer type. Your value proposition should always be defined in terms of benefits that matter to your customers.

Notice also that each of the university’s customer types has a distinct overall value proposition. Customer types may have some value elements in common (undergraduate students and alumni both care about a career network; [mindfulness in the workplace] parents and employers both care about credentialing). But no two customer types should have identical lists of value elements. If you arrive at identical value propositions for two customer types, dig deeper. If you still don’t find a significant difference in the value they receive from your business, combine them into a single customer type.

Step 3: Identify Emerging Threats

Now that you understand your current value to customers, it is important to understand emerging threats that could undermine it. They could do so by competing with the value you offer, substituting for it, or simply making it less important to your customers.

At this point, you are not looking for factors that you know will undermine your business but simply ones that might have the potential.

Following are three sources to consider for potential threats to your current value proposition:

New technologies: Look for emerging technologies that seem relevant to your industry and your customers’ experience. For the recorded music industry, the MP3 compression format was one such technology. For pinball machine maker Williams, early video games like Pong were identified as a potential threat to established games.

Changing customer needs: These can include changes in consumers’ habits, lifestyles, and social behaviors. Facebook recognized the shift in its users’ computing time from desktop to mobile devices as a potential threat. For B2B companies, changing customer needs may include changes in laws, regulations, or the business environment [How will AI affect your business strategy]. Think of Mohawk Fine Papers and the shift in financial reporting rules, which meant that its client businesses had less need of printed documents.

New competitors and substitutes: A threat to your current value proposition can often come from an asymmetric competitor entering from another industry. For Encyclopædia Britannica, Inc., that included Microsoft, when the software maker bundled a free encyclopedia with its operating system. Other times, the new entrant may substitute for your value proposition by meeting your customers’ need in a new way. The publishers of The Deseret News saw this as websites like Craigslist filled the need that used to be met by newspaper classified ads.

Step 4: Assess the Strength of Current Value Elements

At this point, you should return to the lists of value elements you developed for your customer types in step 2. You can now assess the strength of the specific elements of value that you provide.

For each value element that you listed, ask three questions:

Are there any ways that this is a source of decreasing value to the customer? This decrease could come from one of the emerging threats identified in step 3 (a new technology, customer need, or competitor). Other factors could include declining relevancy to the customer, cheaper options, and underinvestment by your business (e.g., if cost cutting has led you to deliver less value here than in the past).

Are there any ways that this is a source of increasing value to the customer? New innovations by your business may mean you are increasing the value you deliver through this particular element. Or the value may be increasing due to this element’s growing importance to the customer, scarcity in the market, or differentiation compared to your competitors.

What is the overall verdict? Based on these combined factors, you should now make an overall assessment for each value element. Is it strong (still a powerful source of value for your customer); challenged (under threat and perhaps not as strong a source of value as in the past); or disrupted (no longer relevant or meaningful to this customer type and uncertain to recover in value).

This process should provide a clear assessment of the strength of your current value elements. Table 6.5 shows University XYZ’s assessment of value elements for its undergraduate students.

Step 5: Generate New Potential Value Elements

Your next step is to try to identify new value elements that you could offer to this customer type. This is a chance to examine some of the external forces that may be weakening your value proposition and use them as a source of opportunity for new value that you can create for your customers.

To generate new value elements that you could offer to your customers, look in three areas:

New technologies: How could new technologies allow you to create additional elements of value for your customers?

Trends in your customers’ sociocultural or business environment: Consumer lifestyle and business trends may provide new opportunities for you to create value, even with the same products.
Unmet customer needs: Get close to your customers. Observe them directly. Talk to lead users. You’re sure to find some unmet needs that no one is fulfilling; one of them may be an opportunity for your business to add new value.

Step 6: Synthesize a New Forward-Looking Value Proposition

The final step of the Value Proposition Roadmap is to synthesize everything you have learned about your value proposition for each customer type.
Review your value elements, and place each into one of four columns:

Core elements to build on: These elements are a source of strength that you plan to use as a focus of continuing innovation.

Weakened elements to bolster: These are current value elements that are losing their impact for your customers and that you have chosen to try to reinforce and improve.

Disrupted elements to deprioritize: These are former sources of value that have lost their ability to deliver for your customers and that you have chosen to move away from and drop from your strategic business agility and focus.

New elements to create: These are new value elements that you have identified as opportunities to add more value for your customers and that you have chosen to invest in for future growth.

Now you can craft a revised overall value proposition for each customer type. This should be a forward-looking statement of how you intend to create value as you continue to evolve your offerings for this particular customer type. Finally, list any ideas you have for specific initiatives (new product features, service offerings, etc.) you can use to deliver on your revised value proposition.

When you have finished, you will have in your hands a complete roadmap for adapting your value proposition. This roadmap includes a strategic analysis of emerging threats, an innovation brief that can be used by those working on your next-generation products and services, and a customer-centric analysis of where your business is today and where it is going in the future.

If applied as a regular part of strategic planning, the Value Proposition Roadmap can be a helpful tool for anticipating customer needs, assessing new technologies proactively, and applying resources to new strategic opportunities.

Challenges in adapting the customer value proposition

The benefits of continuously adapting a business’s value proposition may be clear. But that does not make it easy. It requires the business to step outside the inward-looking habit of focusing on its own products and processes and, instead, to take the point of view of the customer. It also requires the business to imagine a version of itself that is different than what perhaps worked very well in the past. In particular, a larger or longer-established organization may find it much harder to gain a clear view of its value to the customer and of the opportunity, and necessity, to adapt while it still has the chance.

Dedicating Leadership

The first challenge for value proposition adaptation is leadership. Who will be in charge of making the change happen? Even when a pricing strategy team [How to fight a price war] is effectively set up to identify opportunities for evolving the business’s value proposition, someone needs to be in charge of acting on the new opportunities. For years, the U.S. Postal Service has struggled to balance its finances as technology has changed the needs of customers for its services (When did you last send anyone a post card?). In 2014, its inspector general released a report arguing that the USPS should move into providing nonbank financial services (bill payments, money orders, prepaid cards, international money transfers, etc.) to its customers, many of whom are underserved by traditional banks. The report was praised in the press, on Capitol Hill, and even in the pages of American Banker. But more than a year later, no action had been taken, despite support for the idea from the American Postal Workers Union. A newly sworn-in postmaster general had focused on the current value proposition (e.g., whether to trim Saturday mail delivery), but no one appeared to be in charge of turning innovative ideas for new customer services into a reality.

Leadership tenures may be another important factor in value proposition adaptation. As Henry Chesbrough has observed, many large firms move their general managers in two- or three-year rotations among different business units in order to develop their leadership and knowledge of the whole firm. However, undertaking significant change to a unit’s value proposition or business model often takes more than two years. These kind of short-term leadership roles encourage managers to simply continue to optimize the existing model including price optimization rather than pushing the company to adapt for the future.

Allocating Talent and Treasure

Another key challenge for an organization seeking to adapt is the need to allocate the necessary human and financial resources away from existing areas of business and into new, unproven ventures.

New managers with appropriate skills and authority are often the driving force behind new strategic direction. At the New York Times Company, adapting the value proposition of its business for both readers and advertisers required organizational changes as well. The company hired Alexandra MacCallum, founding editor of the digitally disruptive Huffington Post, to lead a unit focused on audience development in an age of social media. Chris Wiggins was named chief enterprise data management scientist and assigned to help guide a burgeoning engineering division. Its job was to harness data and analytics [Big data in retail] to help inform decisions by both editors and publishers on the Times’ content, distribution, audience, and new advertising products.

Often, adapting a business’s value proposition requires changing the lines of reporting of existing employees. When Facebook began its strategic shift to focus on the best mobile experience for users and advertisers, it had to redesign the organization chart for the company’s engineering teams. In the old organization, the desktop team led the development of each new feature, and separate teams handling mobile apps for iOS and Android were left to play catch-up. To support the new penetration pricing strategy, all engineers were reassigned to teams focused on a single Facebook feature (photo albums, group messages, upcoming events, etc.) so they could build it for both mobile and desktop from the very beginning.

Financial resources must also be allocated carefully to support the evolution to new value propositions. This often requires leveraging revenue or assets from existing units to finance the launch of new ones. During Williams’s strategic pricing transition, the firm was simultaneously taking money out of its existing pinball machine business and launching its first casino games. Marvel Comics had to leverage its prized rights to its comic book characters as collateral to secure funding for its move into film producing. This kind of transition is critical. McGrath describes this as a process of “continuous reconfiguration” of assets, people, and capabilities as businesses adapt from one transient advantage to another.

Avoiding Myopia in the customer value proposition

Perhaps the biggest challenge to adapting the value proposition of an organization is that it requires looking beyond the conventional wisdom of its current business. Bold new opportunities (like digital transformation strategy of selling music as digital files over the Internet rather than as physical products, premium pricing strategy) can often provoke a response of “That’s not how we do things around here!” To paraphrase entrepreneur Aaron Levie, “Businesses evolve based on assumptions that eventually become outdated. This is every incumbent’s weakness and every startup’s opportunity.”

Numerous psychological experiments have illustrated the power of confirmation bias. When faced with new information, we have a strong tendency to selectively notice facts that fit our preexisting theories of the world and to discount or filter out the ones that conflict. Think of the pinball machine industry. When computer games first arrived in arcades, pinball machine sales actually improved temporarily because the new games were bringing in more customers. It would have been easy for Williams to have concluded that video games posed no threat to its legacy business. Actually, that is what their competitors concluded; almost all of them vanished while Williams was making its pivot to casino gaming.

Avoiding myopia requires a business to take the customer’s point of view rather than its own. This kind of customer-centric thinking is difficult, as an organization naturally focuses its energy and attention on its own processes, retail pricing strategies, and immediate self-interest. If a company has been making encyclopedias for 200 years, it would be easy for it to focus on all the hard work that goes into making them and to wish customers would just pay for its new CD-ROM version rather than cultivating the perspective to see that its CD-ROM isn’t really the best solution for those customers.