Wednesday, September 29, 2010

Understanding and defining the value proposition

One of the most important elements of the business model is the value proposition. But while we intuitively all know what it means, writing it down for a concrete case can be a challenging and confusing exercise. So I decided to do some research to get some advice and ideas on this. Surprisingly, while value propositions are widely discussed, I found it hard to find literature discussing more in depth what a value proposition actually is. Most interestingly, the most prominent hit is Kaplan and Norton from the Balanced Scorecard.

According to Kaplan and Norton (2000) the customer value proposition describes ‘the unique mix of product and service attributes, customer relations, and corporate image that a company offers.’ It defines how the organization can differentiate itself from competitors to establish and develop relationships with its target customers. Kaplan and Norton argue that a value proposition is critical for linking the internal organization to improved customer outcomes. They differentiate between three types of differentiators based on the value disciplines of Treacy and Wiersema(1993): operational excellence, customer intimacy, and product leadership.

Anderson, Narus and Van Rossum (2006) state that when value propositions are properly constructed, ‘they force companies to rigorously focus on what their offerings are really worth to their customers’. This will also enable companies to make smarter choices about where to allocate their scarce resources in developing new offerings. Anderson et al. discuss a classification of three types to sort the value elements of a company’s offering: points of parity, points of difference, and points of contention. They have identified the three ways in which companies use the term ‘value proposition’: all benefits, favourable points of difference, and resonating focus. In the first approach companies simply list all the benefits the target customers receive from the company’s offering. In the second approach the company explicitly recognize that the customer has an alternative and they list all favourable points of difference that the company’s offering has relative to the next best alternative. In the third approach the company shows a full understanding of the critical issues of their customers who are often managers with ever-increasing levels of responsibility and pressured for time. The company makes their offering superior on a few elements that matter most to target customers and convey this in a communicative and evidence-based way.

Anderson, J. C., Narus, J. C., & Van Rossum, W. (2006). Customer value proposition in business markets. Harvard Business Review, 84(3), 91-99.
Kaplan, R. S., & Norton, D. P. (2000). Having Trouble with Your Strategy? Then Map It. Harvard Business Review, 78(5), 167-176.
Treacy, M. E., & Wiersema, F. D. (1993). Customer Intimacy and Other Value Disciplines. Harvard Business Review, 71(1).


Erwin Fielt said...

See also a related post on Anders Sundelin's Business Model Database blog.

Patrick Stähler said...

Dear Erwin,
yep the value proposition is the most difficult part of the business model since it is less clear than products.

I define the value proposition as the answer to the question: Which value do you create for whom?

So to define the value proposition you need know who your customer is and what value or utility you create for him/her. But the value proposition is not just for the customers but also for your partners you need in the value process. Why?

Think about Napster. They had a great value proposition for the users but none for the right holders of the music. Therefore they failed.

Check my old paper from 2002 (originally published in German in 2001 in German) at

Best regards