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Embarking on a business journey without a clear understanding of your value proposition is like setting off to climb Everest without a map or a compass. Whether you are catering to businesses (B2B) or direct consumers (B2C), your value proposition—essentially, the unique value you promise to deliver to customers—holds the key to your success. Just as any expert mountaineer knows, the secret to a successful climb lies not just in physical readiness, but in detailed preparation and understanding of the terrain.
Unpacking B2C Value Proposition
In the business-to-customer (B2C) arena, the terrain is shaped by Maslow’s hierarchy of needs, which range from fundamental needs like security to higher-level needs such as personal growth and recognition. Successful businesses are those that fulfil multiple needs. The more needs your product satisfies, the more invaluable it becomes.
Digital businesses, in particular, have the edge here. They often provide more value than traditional brick-and-mortar stores, especially in functional areas. Take Amazon for instance. It's like a shopping mall, library and entertainment centre all rolled into one, ticking off multiple elements in the value hierarchy. It provides value across eight elements, most of them functional. To put it simply, businesses that create more value are like well-stocked supermarkets, offering everything a customer might need under one roof.
Researchers like Eric Almquist and his team have identified 30 different elements of value in B2C as shown in Exhibit 1. Successful companies use these elements to plug any gaps they have in their value proposition, outperforming competitors in the process.
B2B Value Propositions: Beyond the Rational
Moving on to the business-to-business (B2B) landscape. The common perception is that B2B decisions are purely rational, dominated by factors like price, service level and warranties. However, research by Bain & Company paints a different picture, revealing a significant emotional component in the B2B decision-making process.
Beyond the financial aspects, B2B sellers must meet specifications, comply with regulations, and follow ethical practices. The analytical process is akin to a forensic investigation—rigorous and thorough, ensuring that rational criteria around price and performance shape the final decision.
Bain's B2B Elements of Value Pyramid displays 40 distinct kinds of value that B2B offerings provide to customers, organised into five levels as shown in Exhibit 2. The base of the pyramid represents the most objective types of value, while the higher levels house the more subjective and personal types of value.
Of course, B2B sellers still need to optimise prices, comply with regulations, and uphold ethical practices. But remember, procurement teams are not just robots crunching numbers. They evaluate vendors rigorously, ensuring that rational, quantifiable criteria guide their analyses.
The B2B vs B2C: Understanding Key Differences
Navigating B2B and B2C markets is like trying to speak two different dialects of the same language. There are distinct nuances that need to be addressed:
Despite these differences, the economic impact of B2B marketing is colossal. Consider the e-commerce space, where US B2B sales accounted for 85% of total e-commerce dollar volume in 2016. Forrester estimated that B2B e-commerce generated over $1.13 trillion. The Chinese market followed suit with B2B e-commerce transactions reaching $3.07 trillion in 2017, an increase of 22.75% year-on-year.
What Fuels Value Creation?
Value creation is propelled by several factors:
- Inputs: These are the resources and capabilities unique to a company that it uses to create value.
- Pattern of activities: This is the business model that transforms inputs into outputs.
- Outputs: These are the value propositions offered to the most important partners.
- Interactions: These include scale and scope across transactions.
Whether you are a new market entrant, a start-up, or an established player, once value is created, it is crucial to check if this value is disruptive, discontinuous, and defensible (the 3Ds). One approach is to map out different value propositions using the value chain framework in Exhibit 4. Most importantly, value creation is not just about offering a unique product or service. It is also about efficiency: doing more with less.
The Financial Implications of Value Propositions
From a financial perspective, value creation is about generating sustainable, adequate returns on capital. Companies strive to create value by investing the capital raised and generating cash flow that exceeds the cost of capital. Companies like Amazon and Walmart create value by maximising capital turnover and minimising profit margin, thereby putting pressure on smaller retailers.
This concept can be expressed through the equation:
To evaluate a company's value creation, three financial metrics come into play:
- Net Operating Profit After Tax (NOPAT): A company’s after-tax operating profit for all investors.
- Invested Capital: Total cash investment made by shareholders and debt holders.
- Return on Invested Capital (ROIC): Measures how well a company utilises the capital invested in the business. There are many factors affecting ROIC as shown in Exhibit 5.
Value creation occurs when a company’s capital provides higher returns than it costs. Simply put, when ROIC > WACC (Weighted Average Cost of Capital), there is value creation.
The real trick, though, is not just creating value but capturing it. In the marketplace, the company (seller) and the customer (buyer) divide the value. The buyer captures the difference between their willingness to pay (WTP) and the price. The seller captures the difference between the price and the cost of the product. The aim, then, is to maximise the value captured by the firm through effective pricing strategies.
In conclusion, crafting a compelling value proposition is a blend of understanding customer needs, leveraging unique capabilities, creating and capturing value effectively. It is not just a rational process but an emotional one as well, weaving together factors that resonate with the customer, be it in a B2B or B2C context. Just like in sports, success in business comes from practice, planning and a keen understanding of the terrain.
