Intro to value propositions for entrepreneurs

WHAT IS YOUR BUSINESS’ VALUE

PROPOSITION?

Selena Sol presents…..

What investors want to know

if you are an entrepreneur, you’ve

almost certainly heard the term, “value

proposition”

but what does it actually mean?

take a moment to define it for yourself

come on….don’t cheat…define it before

you skip to the next slide!

if you’re like most entrepreneurs, you

probably came up with something along the

lines of…

a value proposition is, “the value your

product/service has for the customer”

this is a perfectly fine answer

it would get you an “A” in most marketing

classes

however

that definition is not sufficient

actually, it is only 1/5 of what an

entrepreneur needs to know

instead

think of a value proposition as built

from 5 parts

1. valued

2. valuable

3. valunique

4. value chain

5. valuation

let’s review them all….

PART ONEa value proposition is

valued

before anything else

your product or service must solve a problem

some people say, “address a customer

pain point”

the first mistake that many entrepreneurs make (especially the

engineers)

is to build a cool product because it can

be built

and only then, as an after thought, look for

customers

this is obviously backwards

instead, every business must start by identifying a customer

pain point

how do you identify one?

well you need to go and listen to customers

in the wild

(notice that I did not say ‘talk to customers’)

a bunch of them

(In B-School, we call this Market Research because we need to sound fancy. It’s not. Grab any book on surveys, focus groups, or anything

that IDEO puts out for free on the web about Design Thinking)

and ask them why, why, why, why, why

(5 times if you are from 6-sigma)

and then you need to watch them

so that you understand what, why, when, and

how they buy

but

not all customer pain points are born equal

you’ll be looking for between 1-4

interrelated pain points that create a sense of motivation & urgency

in the mind of the customer

(If you are a nerd, check out Maslow’s Hierarchy of Needs on wikipedia)

pains that are so dire that the need to solve

them will provide enough motivation that the customers will get

off their fat butts

and search for a solution

and then fork over money

(that they earned in that job they totally hate)

remember

your biggest competitor is not

another firm

it is your customer’s biological and psychological

preference to do nothing

your biggest competitor is the

status-quo

if you do not find the right set of pain points

you’ve got no hope of motivating the

customer to buy

(of course, there is always brainwashing, blackmail, monopolies, or violent force . Yay military-industrial complex!)

in other words, you need a product that will be valued by a

customer

PART TWOa value proposition is

valuable

unfortunately, we’re running a business

here

so, while solving one person’s pain points is

noble

it does not make for a sustainable business

(Well unless the 1 customer is the US government….of course these days, their accounts payable is sketchy)

what you need to do is find a set of

interrelated pain points

that are shared by a large group of

customers

who, as a group

have loads and loads of cash

that needs to be in your pocket

in fact, better yet

that large group should be growing over time

(faster than the economy at large)

and the pain points should be something

they’ll need solving for many years to come

typically, when you are talking to someone

else about the valuableness of your

value proposition

you’ll explain valuable in steps that narrow your valuableness

down to executable chunks

STEP ONE: TOTAL ADDRESSABLE

MARKET“Our Total Addressable

Market (everyone who could ever buy) is made up of 100 million people, and annually

worth $10 billion”

STEP TWO: TARGET SEGMENT

“we’re targeting customers in SE Asia first. This segment includes 40 million customers and is

annually worth $1 billion”

STEP THREE: MARKET SHARE

“in SE Asia, we’ll capture 5%, 15%, & 30% market share in

years 1, 2, & 3. our expected revenue is $300 million by year 3 & 12 million

customers using us”(including market growth over time)

whatever the case, however you express it, a value proposition must show that you will be valuable over

time

PART THREEa value proposition

makes you valunique

(Give me some vocabulary latitude in the name of alliteration, please!)

more often than not, entrepreneurs come to me and claim that they

have no competitors

my response is to immediately file their plan in the circular file

cabinet*

* AKA, “trash bin”

it is a law of nature

Within 48 hours of the discovery of money in any nook or cranny of

a market place

18 competitors will emerge

if no competitors emerge, it doesn’t

mean you’re a visionary

it means that there’s really no money there

(the best way to identify competitors is to simply ask potential customers during market research who they think your competitors are)

so your fundamental assumption should be

that you’ll need to ready your self for

battle

and the battle will be fought on two fronts

first, the entrenched incumbents will put up entry barriers to try to stop you from entering

they’ll do that with intellectual property, lock-ins at one, more, or all of the points in

the value chain, government or

industry partnerships, etc

so you’ll need a battle plan as to how you’ll get past the barriers

second, once you get some traction,

followers will try to pull you down from behind

and that will happen from now until the end

of time

so you’ll need to put up your own entry

barriers to slow them down

you’ll do that with intellectual property, lock-ins at one, more, or all of the points in

the value chain, government or

industry partnerships, etc

finally, you’ll need to differentiate yourself from the competitors

relative to the customer pain points

and then defend that differentiation

sustainably

to do this, you’ll need to design a solution that is different from

the other options

but

it is not just about being different, or even

being better

you must be different/better vis-à-vis the customer pain points that are valued

and valuable

it is the customer pain points that determine your product/service

features

and not your engineers, or their technical prowess

the most basic & urgent of those pain points define your Minimum Viable Product (MVP)

and the rest of the pain points create the

milestones in your R&D plan.

whatever the case, at the end of the day, you’ll need to be sustainably, and

defensibly valunique

PART FOURa value proposition

must deliver through your value chain

of course, all of this is just a bunch of hot air

until you execute

so a value proposition needs to be executable

you need to know what capabilities are

required to deliver the plan

and how you’ll organize and manage

them

porter would call these core competencies

some refer to them as your value chain

it starts with the supply of raw materials

into the system

goes through manufacturing where you transform supply

into product

outputs through distribution where you

sell and deliver finished goods

and ultimately ends with ongoing after-

sales customer support

linking all these together are logistics, technology, processes,

and your people

usually, all this is expressed as three

separate, but linked, plans

1. The Organizational Plan (people & company)

2. The Marketing & Sales Plan

3. The Operations Plan

at the end of the day, your value proposition must be supported by a value chain that is setup to deliver all

your strategic promises

PART FIVEa value proposition

must address valuation

finally, we need to talk cash

a value proposition must address cash in

three ways

first, you’ll need money to make money

bringing together all the other aspects of the value proposition costs money up front

and you’ll need to convince an investor to

give that to you

for that, you’ll need to clearly explain how

much you need (and why), and how much

equity the investor will get in return

second, you need a financial plan that allows you to build

your firm

so you’ll need to understand pro-forma P&L, Balance Sheet, Cash Flow Statement and accounts payable

& receivable management

third, you and any investors that help

fund the build-out, will want to take cash out – ideally, lot’s more than

you put in

and that means you need a clear and

achievable exit plan (IPO, Trade Sale,

Liquidation)

with a Return on Investment that

justifies the original investment

and one final note about valuation

nobody goes to an investor

and brags, “I’ve got a loss-making plan!!!!”

every plan an investor sees claims ROI

which means that it is not enough just to have a Net Present

Value >0

you actually need an NPV higher than all other NPV-making

competing investments

whatever the case, a good value proposition must include valuation

PART SIXafterword

so remember

a good value proposition

should cover

valuedvaluable

valuniquevalue chainvaluation

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