Maximizing Your Online Business: Part One, Core Value Proposition

This is an extension of an earlier post, which covered how one goes about calculating customer lifetime value (CLV). In this series, I'll be examining the key levers you use to maximize your business, seen through the perspective of CLV. In my previous post around customer value, I reduced the CLV equation down to two key components:

• How much profit you make off each transaction with the customer - i.e. monetization
• How many transactions you get with the average customer - essentially, retention

To transition this a bit more to a customer-centric, rather than monetization-centric, view, your typical business has three key components:

1. The core value proposition to customers - what do they expect to get out of interacting with the company, service or product
2. The monetization of that interaction - how does the company make money off of delivering the core value proposition?
3. Customer acquisition - how does the company find and acquire new customers that find its value proposition compelling?

I'd argue that for most web businesses, it's all about these three components. Everything else is a support function. Any successful business will have to necessarily address all three of these, at least implicitly - you may not have an active acquisition strategy, for example, but that just means you're implicitly depending on word of mouth or another passive method. If you don't have a value proposition, well, that's somewhat more troubling. I'll cover these each in separate posts. I'm going to start with value proposition, because not only is it the heart of the business, but it's also the one component you can't take a passive approach to, whereas there is at least (some) argument that you can leave the mechanics of acquisition or monetization until after you've solved the central value proposition question.

Core Value Proposition

Once, at a tech meetup here in New York, someone's five-minute technology demo of their newest lovingly-built, social-media-javascript-powered web service was utterly crushed by a single, plaintive question shouted from the back of the auditorium. "WHY????" Why should customers care? Why should someone patronize your business, visit your web site, or download your application? There are lots of answers - but there should be one primary one for your business, and it should always be kept in focus.

Examples:

• Utility value: the service allows the customer to do something more easily or more conveniently - e.g. Google
• Information value - e.g. the Wall Street Journal online
• Entertainment - online games, reading, etc
• Emotional - e.g. luxury goods - this value proposition is well-understood by marketers, but often deeply discounted by technology-centric folks who are generally not heavily emotional buyers themselves

The list goes on, of course. There are as many value propositions out there as there are types of businesses. What's important is understanding the value proposition of your business. This allows you to:

• Communicate to potential customers why they might be interested, and why they might be willing to pay for it (if is a for-pay service)
• Deliver on the value proposition to your customers
• Continue to incrementally improve the value proposition over time
• Understand what the real "competitors" are in terms of alternate ways customer might achieve the same result as your core valuation
• For monetization, knowing how much value you deliver to customers can help you determine appropriate pricing strategies

Keeping a focus on knowing your value proposition is particularly important for those developing new web services and software. The great thing about building computer software is you can make it do whatever you want - and that's also the terrible thing. Failing to keep a focus on value proposition often leads to a lack of prioritization when it comes to features, resulting in a sprawling, over-featured product that end-users don't understand, and don't find compelling. Ever visited a web site or downloaded software and found that you just didn't know what you supposed to do with it? That's what happens when folks lose sight of their core value proposition. Obviously, the issue of executing on the concept of the core value proposition are largely determined by domain-specific knowledge related to your business. I know how to do it for web sites and software, but I wouldn't claim to have any idea how to do it for a retail clothing store. Generally, however it's not the execution where new businesses run into trouble - it's in defining exactly what that execution is going to achieve. There's a basic question I pose to a lot of early-stage entrepreneurs - "10 seconds, 2 sentences - what does your business do for its customers". If they were given a sound bite on CNBC, what would they say about their company? Too often, the answer is about the product, rather than what it does for customers. Customers don't care about your product. They don't care about how you thought it up. They care about what it promises to do for them, and how well it delivers on that promise.

Next: Monetization

Comments

[Chris Hopf]

Appreciate the post Tom, well done.

Startups need to be completely honest with themselves about the realistic potential for their solution to generate a profitable return that is sustainable.

Is it a business or a hobby/charity ?

Sure, there may be "customers" out there who like your solution . . . but will they actually pay for it? If yes, will they pay enough to sustain a profitable business.

Even in beta, and even if taking the freemium approach, you must communicate the value and benefits (not just features) from the very beginning.

Examples: Twitter has created value but no reference pricing (they should have launched with at least three offerings, even if one was free and two were just there for future reference), while Producteev has reference pricing (nicely done) but questionable value.

We'll see how both play out. :)

[Tom Karlo]

Well, although I agree that it's problematic that Twitter hasn't found a monetization model, I also think it's a red-herring to use a service like that because its popularity is so freakishly large. Any site that gets that kind of traffic can probably muddle its way to an after-the-fact monetization scheme (see: Facebook.) But for more normal sites (of the size that would represent the other 99.9% of successful outcomes) that don't have remotely as much traffic, not having a well-defined monetization scheme is a disaster at more common "successful" traffic levels.