Defining Business Value: How to Identify and Measure Your Value Proposition
Understanding the value your business creates is foundational to nurturing a successful company. Recently, the concept of “value” has joined the ranks of overused business buzzwords. But developing a deep understanding of value creation and defining a company’s value proposition should not be viewed simply as an academic exercise, an arbitrary step to complete as part of a worksheet or elevator pitch, or a market tagline we can set and forget.
Don’t think of your value proposition as part of your business strategy. It is the business strategy.
It is critical to clearly operationalize the definition of value for your business, in the form of a value proposition. The first thing to realize about value in a business context is that it is measurable and therefore quantifiable. The goal of a value proposition is to define the value your company generates not as an intangible aspiration or mission statement, but as a measurable understanding of why customers interact with a company, which can then serve as the foundation of every process decision a company makes.
What is value?
The basic definition of value is the difference between benefits and cost, leading us to the “value formula”:
value = benefits – cost
This is deceptively complicated (despite its simple-seeming expression), because this formula is always a conversation between two different perspectives–the customer and the business itself–and involves more than just the tangible product with its monetary price tag.
While it is relatively straightforward to think about cost as “$ spent on business goods or services”, how do we quantify “benefits”? Rarely is the total benefit present in the transactional exchange alone, but typically includes all the interactions that surround the transaction, as well as how that total interaction stacks up relative to any possible alternatives. All of these dimensions add up to the total “benefits” that customers receive from a given transaction. (For additional discussion about how to quantify this conversation, check out this blog post on defining value.)
It’s also not enough to understand these elements in theory. In order to truly reap the reward of understanding your business’s value, you’ll need to be able to summarize all of these moving parts into a concise statement for internal and external stakeholders. This is what is known as a value proposition.
The value proposition is the DNA of the business.
An accurate value proposition is important, because it prevents the business from inadvertently focusing on just one dimension of business production and letting that single piece become the business, losing sight of true value creation in the process. While goods, services, or particular customer service dimensions of a business change rapidly over time, the value creation of a company remains stable – which is why it serves as the appropriate anchor point for strategic continuity.
Nevertheless, many businesses lose the ability to articulate their value proposition as they scale, or never bothered to define one in the first place and have been intuitively grasping at market success using the guess and check method (which can only work for so long). And luckily for those businesses that may have forgotten–or never known–their comprehensive value proposition, there is a scientific way to identify and validate it.
How to define your value proposition
Whether your business is a long-established and ready to scale, or just the seed of an idea that you want to validate before launching, there is a consistent method to effectively identify or “derive” its value proposition from research, analysis, and validation.
To go through this process, there are two business dimensions that must be considered in parallel:
- The process dimension (internal): working with the process information that comprises the business; and
- The customer feedback dimension (external): directly discussing and validating the process mechanics from the customer’s perspective.
Understanding the business process from an internal perspective (process dimension) and simultaneously understanding how the customer perceives their interactions with that process (customer feedback dimension) is the basis for articulating a value proposition that marries both internal and external vantage points. This intersection of internal and external perspectives is required for a useful value proposition.
In order to apply this method, you must utilize these two dimensions in lock step throughout, as you must be able to speak to the process elements of a business as discrete variables at each stage of the process before engaging customers to receive their feedback in a meaningful way. Ultimately, the exercise is designed to help uncover the value chain of the business, which will directly identify all aspects of the process customers consider to be “benefits.” From there, crafting the value proposition is a matter of putting the pieces together at the end.
There are many more detailed conversations to be had about deploying process work and market research in tandem to identify and measure a company’s value proposition; however, knowing that it can be done methodically and acknowledging the importance of doing this work is the starting point!
Interested to learn more? Want more depth and detail on identifying and measuring your own value proposition?
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