First of all, do you know what I mean by value proposition? It’s a pretty straightforward concept. Essentially, it’s why people or companies buy from you. They give you money, you give them…something in return.
That’s where some people go astray. You must think like a customer and put yourself in the mind of your customer now. As the old cliche goes, guys at Home Depot aren’t really buying drills, they are buying the ability to put a hole in something. I’d also argue that they’re buying a few moments of peace and quiet in “guy land.”
So it’s more than just the laundry list of features you or your product manager or your product engineer say comprises your product or software or (heaven forbid) “solution.” To keep things simple, I’ll be referring to all of these categories as “products.”
Customers buy products because their perceived value of the product equals or exceeds the sum of the investment required to acquire it plus all of the risks associated with purchase and use of the products. This formula is highly individualized and probably not very useful except in the abstract.
We can break it down to simplify. First of all, value is the sum of all of the benefits a customer gets from buying and using your product. Those may include:
- Solving a problem
- Preventing a problem
- Saving money
- Avoiding loss (not quite the same as saving money)
- Reputation/ego enhancement (think iPhone)
- Meeting a standard, requirement, or law
- Assurance of risk reduction – guarantee, warranty, trade-in value, etc.
Next, the investment required for acquisition might include:
- Cash price
- Lease, loan, or other financing terms
- Opportunity cost of the money being spent
- Installation cost
- Training cost
- Write-off cost of product being replaced
- Cost to research the acquisition (can be substantial for capital purchases)
- Ongoing support and maintenance costs
Finally, the risks of buying a product from you could include, among other things:
- Incompatibility with existing systems or processes
- Failure to perform to requirements (poor quality)
- Failure to perform consistently (poor reliability)
- Support (training, repair, maintenance, updates) not available or not to expectations
Now you can see all of the factors that make up a decision to purchase.
The value proposition is that the Purchase only occurs when Benefits are equal to or greater than the Costs plus the Risks of acquisition.
Your job then, as a startup CEO, Product Manager, or Business Unit Head, is to identify the benefits that your target customers need, then turn them into physical features, then price the product attractively while still making a fair profit, and also design programs and safeguards to mitigate the customer’s risk.
Seems simple? I don’t think so, either.
By the way, these concepts apply just as well to businesses as to individual consumers. After all, businesses are nothing but individuals working together.
Think of a medical practice considering the purchase of a new Electronic Medical Record system. They probably have an existing system with which they are not happy. Price is a factor but there are many, many other factors that will influence their decision.
- Put yourself in the mind of your customer.
- Never forget that customers buy benefits.
- A purchase doesn’t occur until perceived value equals or exceeds perceived costs plus perceived risks.
- As the saying goes, perception is everything.
Next time, I’ll take a look at the different types of buyers involved in a medical device purchase.