Did your profits meet your expectations this year? If not, perhaps you should look more closely at your Value Proposition. One of the most common mistakes I see and correct for my clients is their understanding and use of “Value Proposition”. I hear the phrase Value Proposition tossed around with light regard. I mostly hear this from people that think of Value Proposition as simply a sales or marketing term.
Those with serious operational backgrounds are often left out of the discussion of Value Proposition in their firms. The reality is that Value Proposition IS your business model, and it is of great concern to both marketing and operations. When operations and marketing coordinate and work together as a team around Value Proposition, higher profits are guaranteed.
Real-Life Example of Value Proposition
To see a clear example of Value Proposition, look no further than the automotive industry. They have mastered the use of Value Proposition. Mercedes clients want a car that exudes prestige, comfort, and performance. Mercedes manufactures (operations) an elegant automobile with high-end materials, finishes, and features.
Mercedes markets (marketing) to affluent individuals (Ideal Clients) that are willing to pay an above-average amount for their automotive transportation. Honda clients, on the other hand, want a nice car that is reliable, comfortable, and affordable. Honda manufactures a reliable automobile with run-of-the-mill materials, finishes, and features. Honda markets to middle-class individuals looking for a nice car at an affordable cost. Both companies know exactly who they are selling to and build their product accordingly. Mercedes does not cut prices to meet the needs of Honda clients in order to gain sales, and Honda does not market to Mercedes clients who they know will have little-to-no interest in their product.
How To Define Value Proposition
Think about Value Proposition as a business equation, where the needs of the client (sales) must equal the cost structure of what’s produced (operations). When this equation is in balance, maximum profits are made. When out of balance, profits start to decline. Here is how I use value proposition:
- Identify the needs and level of sales of your ideal clients.
- Build an operation that delivers an appropriate amount of product that meets your ideal clients’ needs, at a margin that achieves your ROI objectives.
- Sell only to ideal clients.
I see many small businesses that build their operation to meet the needs of their ideal client, and they have some success in selling to their ideal clients. Then, to fill excess capacity, they start to sell to non-ideal clients. These non-ideal clients don’t understand the value of the product or service, and thus are difficult to serve or make margin on. Now capacity is full, but this leaves no room to take on more ideal, profitable clients, and Operations starts to feel the strain of having to “deal” with these non-ideal clients. This selling to non-ideal clients is what I call a mismatch in value proposition. A mismatch in value proposition leads to terminally low profits.
The solution to this problem is to implement a client-based management process: a system to rank clients from least to most ideal/profitable. The basic way to do this is to pick three to six attributes (with criteria) that make an ideal client, and score each of your clients by how they stack up against your criteria (low being weak, high being strong). Once scored, list your clients in order of highest total score to the lowest total score. High scoring clients are your “A” and “B” clients (ideal/profitable), low scoring clients are your “C” and “D” clients (least profitable). Once this process is in place, sell only to A and B clients. If your capacity is still not filled, invest more in sales or cut capacity.
This is how you will maximize your profit. If you find that you have a significant number of C or D clients, then you may consider starting a new profit center where you bring a completely different set of operational assets and processes to the table to meet their specific needs. This will turn them into A and B clients. In the next post, we will detail how to implement a client-based management process that will give you the information you need to start making more profitable decisions.