In the context of contemporary global business environment, a good business model describes the logical functioning of a business/organization and it pronounces the specific manner in which a business makes profit. Principle description of a business model helps to understand, analyze, and communicate the key factors of success or failure of a business. Principally, a well-developed business model is comprised of three major components i.e. value proposition, value chain structure, and revenue model. The value proposition is the first and the most significant component of a business model as it directly communicates the business value to the customers. The value proposition of a business model describes the benefits and value, the customer and value partners receives from a particular business model. Therefore, having a delineated and precise customers/value partner segmentation is fundamental for effective value propositioning of a business (Osterwalder & Pigneur, 2013). Considering these particulars, this paper focuses on discussing the significance of appropriate customer segmentation for developing a good value proposition. It primarily articulates the examples of some good and bad value propositions from the real life business and also explains the significance of adequate customer segmentation for crafting a winning value proposition.
Why a Business Model Need Value Proposition?
Value Proposition (customer value creation) is a special blend of product, price, service, special relationship, and image factors of a business to the customers (Payne & Frow, 2014). As discussed above, a value proposition is lifeblood of a business model. Value proposition primarily aims at two major segments that are mentioned below:
Targeted Segment/s of Customer: The value proposition describes the benefits obtained by the customer. The business model is defined not on an existing product but on the benefits generated and the satisfaction of customers’ needs. By consciously determining what needs to be satisfied, the value proposition also implies the activities that should not be exercised by the company. This ‘negative’ selection is critical to preserving the business focus (Campos, 2014, p.243).
Value Partners: Part of the value proposition is not only the description of the benefits for the end customer but also for partners of the value chain. The value proposition includes the benefits to the value-added partner i.e. pull or complementary suppliers.
Hence, a value proposition is fundamental for a business in order to determine the segments of the customers that will be precisely served and the partners that will be involved in the value addition. This is essential to be considered in order to know what benefits would arise in the business model from the product/service provided by the integration (Corvellec & Hultman, 2014).
Example of a Good Value Proposition
Value Proposition is an assurance of benefit/value to be recognized and delivered to the customer. The value proposition can be practically applied not only to a part or the entire organization but also to the products, services, and customer accounts. The foremost component of a corporate strategy is the creation of a value proposition. A good value proposition is founded on the cost/benefit analysis and the value that a business can offer to its existing and potential customers, as well as, other members within and outside the value chain. Considering the examples of real life business, there are numerous business organizations that have successfully nailed their unique value propositions such as Google, iTunes, Intuit, Scribd, Stripe and Viggle. One of the most common examples of the good value proposition is of Google Inc. (Osterwalder et.al, 2014, p.237).
Google Inc. offers an extensive range of free services such as Google Search, Google Mail, Google Finance, Google Talk, Google News, Google Voice, Picasa, Google Sites, AdSense, and AdWords. Each of this service line of Google Inc. has a precise value proposition with a defined set of targeted customers. For instance, the value proposition of Google Search is “Google Search allows pin point accuracy with the state of the art search engine developed by the innovators at Google”. Likewise, the value proposition of Google AdSense is, “To allow advertisers to display advertisement in the Google content network. These ads are displayed along the search results when someone inputs a query into the Google search engine” (Osterwalder & Pigneur, 2013). The business canvas model of Google Inc. (Appendix I: Image, 1) further elaborates the value propositions of difference services of Google against its targeted segments of customers.
Example of a Bad Value Proposition
Sometimes, business organizations and especially marketers need to realize that their value proposition is not at all delivering value to its customers (Chandler et.al, 2014, p.250). For instance, the value proposition of CloudFlare (See Appendix I: Image, 3) is appalling as it completely relies on a video and does not contain any words, which means that if the customers don’t like to play video, they will remain unaware of their business value and benefits they offered. A business should not depend merely on a video because it is a supplementary factor. Therefore, the value proposition has to be in the word for long-term affectivity. Moreover, the only statement they use is, “We will supercharge your Website”, which actually does not deliver any sense that what their product or service will be all about. They need to deliver the value they offer as the value or use of a product/service is the motive why customers goes in favor of or against a brand. It satisfies a need of the customer or solves a problem.
Another example of a bad value proposition can be taken from the ‘Continuum Financials’ (See Appendix I: Image, 4). The website drastically wastes the precious attention of the customers through the headline ‘Welcome to Our Website' instead of placing a catchy phrase, slogan, or a tagline on the top. Secondly, the entire text mentioned is written in the context of ‘First Person’; however, a value proposition must be written by keeping customers in mind i.e. it has to be in context of ‘Second or Third Person’. In the case of Stripe, they specifically defined their customer segment by using the word ‘Developers’. The above-mentioned examples of value propositions do not clearly designate the products/services that make up the value for a specific segment of the customer (Campos, 2014, p. 244).
Significance of Customer Segmentation Effective Value Proposition
The above-discussed examples elucidate that a value proposition is only considered to be good if it successfully put forth the unique benefits of unique products/services and stand out the business from its competition while stimulating consumers to buy (Emerson, 2003, p.39). It is also noticeable that every value proposition has a defined set of the customers, which make it easier for the business to maintain its operational, functional and financial focus. Precise customer segmentation is extremely important for developing an effective value proposition as it represents the different target groups for the organizations who the business want to achieve. Moreover, the customers are the heart of every business model and a business cannot survive permanently without profitable customers (Keränen & Jalkala, 2014). To better serve customers, it is essential to adequately segment them in order to find out their specific needs, behaviors, or other attributes. Therefore, a value proposition in a business model defined in the rule, one or more, large or small customer segments (Lindic & Marques da Silva, 201, p. 1697). Then, it is a decision that a business needs to find out that on which segments it wants to concentrate and which are to be neglected while keeping the financial resources in mind (Christopher et.al, 2013). Based on these customer needs, a business model is then developed to fulfill those needs through their unique product or service. The use or value arises from the totality of the products and/or services related to the requirements of a specific customer segment.
Additionally, appropriate segmentation is significant for developing a winning value proposition as it facilitates a business identifying its target market, defining the relevant market as a whole, determining the relevant submarkets, and locating the neglected parts of markets (market gaps, market niches). By doing so, it enables an organization to satisfy customers’ needs in a better way while achieving a competitive advantage over its competitors (Barnes et.al, 2009). Suitable segmentation can also help an organization in the aspects like avoiding the substitution effects between markets in their own product range; timely evaluating new products of competitors and the timely application of countermeasures; overall brand positioning compared to the positioning of competitors; correct positioning of new products; clarifying target groups of imported brands (possibly repositioning); forecasting (segment specific) market development; derivating market reaction functions; using selective marketing instruments; optimally allocating marketing budgets to individual segments and increasing the levels of target achievement (increase in profit or turnover) (Frow & Payne, 2011, p.223).
In a nut shell, the benefits of appropriate customer segmentation are not only restricted to the development of a winning value proposition but they are actually endless. The discussion and the real business examples of good and bad value proposition elucidate that if a business has established the solid foundation, it will remain steadfast, focused, and stringently aligned to its target market. In other words, value proposition is the core pillar of the entire business model and similar customer segmentation is the mainstay of value propositions. Therefore, in order to develop a successful business model and a winning value proposition, delineated customer segmentation is imperative (Pisano, 2015, p.45).
References
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Appendix I
Image 01: Retrieved From: https://bmimatters.com/tag/business-model-canvas-examples/
Image 02: Retrieved From: https://sumome.com/stories/value-proposition-examples
Image 03: http://conversionxl.com/value-proposition-examples-how-to-create/
Image 04: Retrieved From: http://conversionxl.com/value-proposition-examples-how-to-create/
