Published: 28. 11. 2017 in President word

Value proposition as basis for business model innovation

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Business is not going so well, and you are the new boss or owner. Now what? The results are getting worse, the competition is getting more and more aggressive, and the customers are getting more and more demanding. The situation needs to be turned around. But how? How can we make sure that what we are offering is still being bought?

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Or – the company is successful, but new competitors are entering the market. Their influence is still not too significant, but they are taking away a certain market and income share. They have few employees, they use the Internet as the only channel for all processes, their business is automated, their prices are low, their customers are satisfied, and their brand is getting stronger on the market. How to prepare a good defense?

Or – big global brands are entering the local market and taking over the business segment. What to do?

You are starting a new project, but you are not sure of your success. How can you make sure that the project will be profitable?

There are two possible approaches - number one: the CEO or the owner has a gut feeling and follows it. How many restaurants and bars have changed owners without changing much else about their business or offers, and still, the new owner is hoping to have better luck and success.

Another way would be to focus on innovating the business model through the new possibilities of digital economy. The starting point is to define the business model and formally introduce it.

Definition: a business model describes how an organization creates value (in simpler terms – how it makes money).

For ease of understanding and communication, we need to choose the rules of describing the business model. The rules must be intuitive, simple and clear, but also comprehensive. They must enable the description of a great variety of business models. Here we are using the rules that Alexander Osterwalder and Yves Pigneur have explained in their book “Business Model Generation”, published in 2010. They create a business model by putting up a canvas on which there are pre-marked places for 9 basic blocks – the elements. 

The blocks can be described and linked as follows:

Our organization serves one or more customer segments, and through its value propositions, solves their problems and needs using channels of communication, sales and distribution, maintaining contact with each customer segment through customer relationships. The income structure is the result of a successfully executed and customer-accepted value proposition, using key resources through the performance of key activities or through collaboration with important partners. For all elements, the cost structure is calculated, and in order to make the business model financially positive, the income structure must bring more in relation to the cost structure.

The canvas and the process of creating and innovating the business model carry the artistic part of it, but through the 9 elements and their definitions, they allow for a systematic approach and team work in analyzing existing business models, and creating and innovating new business models.

Using these rules, we need to analyze the business model of a company (or models, if there are several), and compare them with the business models of competitors or those that are the result of best practices of the most successful companies around the world. Even though it's not easy to put the innovation of a business model into a mold of a formal process, we need to continue working systematically on each of the 9 elements, and analyze the possibility of increasing the value of the business system through the application of the new opportunities of digital economy. It's important to simultaneously watch the entire business process and test the uniqueness of the offer, competitiveness and the increase of value of the business model in each step. In the rest of series of texts we will attempt to go through all 9 elements and analyze the most important changes based on the opportunities of digital economy and establish their effect on the entire business model and its value.

VALUE PROPOSITION

During the process of innovating a business model we should start with the value proposition (VP) and return to analyze it within the analysis of every other step. We should note that VP is always very closely connected to the customer segments, as it needs to be defined for every segment separately, and it is usually different in each of the customer segments.

It is very important to analyze the proposition presented to customers in the right way, whether it is an existing or new proposition, as is the case with describing the value that the proposition brings to a specific customer segment.

Let's start by adopting a definition for the value proposition: A value proposition (VP) is a combination of products and services on the market that brings unique value to a specific customer segment. Value proposition is in the center of every business model and represents the basis for the process of innovation, whether it's a brand-new start-up or an existing company. If we take a look at the market we can easily see that there are companies that seemingly don't have anything unique in their offer, and their competitiveness is based only on their price or advertising. It is also easy to spot the companies that haven't defined and presented the value proposition well.

Here are a few examples for slogans and value proposition descriptions:

1) “Moo to wow!”- Eis-Greissler.at – they control the entire process from free range, naturally fed cows on their own farms which provide organic milk, to the fruits and spices obtained from local partners under the control of the brand. They are addressing the customer segment interested in organic products (who don't believe in Italian powders and industrial production of milk) and see value in complete control of the production process. They want something new and modern and are willing to wait in line for it. The value is in the product made of local organic ingredients which guarantee excellence of quality and flavor.

2) “A great shave for just a few bucks a month” - Dollarshaveclub.com offers a low-price subscription service for razors, cartridges and shave supplies which they send to the customer's home address, so they never have to shave with a dull cartridge or go to the store. They are addressing the customer segment that doesn't want to have to think about purchasing new razor cartridges every month, nor shave with dull cartridges if they forget to buy new ones, are not preoccupied with brand names, and consider the cartridges of the big brands to be unduly over-priced. They offer them a simple, low-price way of forgetting about these purchases while always having sharp razor cartridges in reserve.

3) “All the benefits of a car without owning one – parking, refueling and insurance inclusive”: Car2go offers an inexpensive car sharing service in 30 cities all over the world. They offer conveniently located parked cars which customers can book and use through the Car2go app and the Car2go card. After use, they can leave the car at any designated parking spot in the city, and usage is paid by the minute. It's a good alternative to owning a car, using a cab or public transport.

Image 1. The business model canvas with 9 elements and value proposition in the center.

4) Start selling today” – Square – Business owners get a free device for accepting credit card payments, and the cost is 2,75% of each transaction, but they can immediately accept credit cards as payment methods for goods or services.

5) “Skype keeps the world talking, for free” Free audio and video calls, messaging and file sharing 1-to-1 or in a group.

All of all these examples show that the goal is to define value for the user, and not the functions and options of the product or service. Another observation would be that in these examples, certain elements have been innovated through changes that utilize the possibilities of digital economy, but other elements of the business model have also been innovated based on the traditional ways of business process innovation. Certain companies, which are 100% digital, are searching for possibilities to make contact with customers in the physical world. Amazon is testing its Amazon Go stores, and has invested in the acquisition of the health food supermarket chain Whole Foods. The ING-DiBa Bank in Austria has, after many years of operating only through the Internet and Post Office, opened a customer center in downtown Vienna in order to improve communication with customers.

The analysis of the value proposition is the first step and basis for innovations, and therefore we will take into detailed consideration everything related to creating, defining and testing of a proposal that brings the most value. 

TASK – JOB – PROBLEM OF A CUSTOMER SOLVED BY THE PROPOSITION

Let’s analyze the value proposition of the Car2Go company. It is not easy to ascertain who the direct competitor is, in order to compare the proposal value. Is it the car manufacturers, taxi cab, rent-a-car or bike rental companies, public transport, or all of them together? What is the real reason why customers use Car2go automobiles? They are going downtown for dinner with wine, and are therefore unable to drive back home, so they use Car2go in one direction, and a taxi in the other, or they use it instead of owning a car. Car2go is very useful when something needs to be transported, it's much more convenient than public transit (especially when it is far away), or in the case of bad weather conditions, it can be used to drive to work. To understand the real reasons, it is necessary to know for which job – task a certain customer segment is using Car2go, and how the service can help solving that task. How can this way of completing the job be compared to other proposals and what are the values that the Car2go proposition brings?

Their proposition offers all the advantages of a privately-owned car without actually owning one, and without having to worry about parking, fuel, repairs, washing and insurance.

If it can be clearly understood which customer segment can solve which task with the proposition, what is unique about it, how it brings more value compared to other propositions – if all this is explained and presented well in the proposition, the chance of success increases significantly. If the proposition is unique and able to solve important jobs for the customers, the value increases even further. The term job implies tasks, problems, difficulties and gains that the customers achieves with the proposed solution, service, or product.

The tasks can be menial – what is the best way to cool off in the summer heat, or how to walk 2 or 3 city blocks in the rain without getting too wet, or how to best utilize the time spent in public transportation. They can also be very important tasks and jobs such as changing your place of residence or choosing a life partner. For each of these tasks we «employ» a product or service to secure progress in its execution. An umbrella is «employed» to protect us from the rain; a less useful alternative would be newspapers used to cover the head, but the newspaper can also help pass the time in public transport.

We can meet a partner through an Internet portal or through a mutual friend, we can search for a new job through a job hunting agency, through a portal or through friends and colleagues. Each of these methods can do a part of the job and each of them has a certain value depending on the group of users we belong to. The customers actually «employ» a solution to help them in their task or job, and if they are not satisfied with the result, they can easily «fire» the solution and never use it again. If the users are not satisfied with the Car2go service, they will look for another solution depending on which part of it they weren’t happy with. That’s why it’s important to really deliver on what we offer. If you haven’t experienced a “wow” effect, you will not wait in line to buy the ice cream next time.

In the process of value proposition analysis, we need to reevaluate the VP for each customer segment it addresses and verify if the values are still unique and if there are any competitors who offer more value. Are there any solutions in other industry branches that could be carried over or are there any digital economy possibilities that can be applied? For example, can the digitalization and automation of certain elements increase the value of the proposition for some or all customer segments? Dollarshaveclub.com has succeeded in quickly developing and increasing their customer numbers using the Internet as their base channel for marketing and sales, targeting customers who feel comfortable with shopping on the Internet. This way they have significantly lowered the cost of marketing, sales, and support. On the other hand, they have simplified production, procurement and shipping by using partner companies. This simplified supply chain has significantly lowered expenses, and finally reducing the price for the customer as well, which altogether increased the value proposition.

First, we need to analyze the possible innovations or changes in services or products offered, and ascertain if this increases the value proposition or opens up a new customer segment.           

SERVICES AND PRODUCTS

The examples of value proposition we have cited are a result of individual changes in services and products, which have arisen under the influence of digital economy. Skype is using the possibilities of internet, and through its program offers a completely digital service. In the past, phone lines and mobile phone systems were used for communication, and Skype has introduced voice and video conferencing through the Internet. Standard communication through Skype is free, and if the calls are routed outside the network to a landline or mobile phone, the user can pay for those conversations. The value of their proposal is significantly larger than the standard proposal of telecom companies based on service prices (mostly free), and performances and new possibilities (video calling).

Car2go has transformed automobiles, an industrial product, into a digital service. They charge car usage by the minute, and with other benefits, significantly increase the value proposition in comparison to their competitors.

Dollarshaveclub.com has given the production over to partners, shortened the supply chain and used digital economy for marketing, sales, and customer communication. They use the value information as their basic resource. All of these components have led to a significant decrease in price and increase in value proposition.

Greissler ice cream uses value information to bring their philosophy to the customers. They have brought the changes they made in the manufacturing of their ice creams and raw material control reflected in their “moo to wow” slogan to their web page and succeeded in increasing their value proposition.

Square has made a new product and offered it through a service which enables small business owners to easily and simply accept their customers’ credit cards, even though their turnover isn’t very large, and to make the price per transaction reasonable. Their value proposition has increased significantly for a certain customer segment.

Stay tuned, second part of this article coming soon...!

Branislav Vujovic

Branislav Vujovic

President New Frontier Group
Strive to become better

Branislav Vujovic is founder and also president of New Frontier Group and has overall responsibility for the New Frontier Group, with special focus on Innovation, M&A strategy, group strategy and investor relationship.

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