The Value Proposition
Market Research
April / May 2009
Volume 7 Number 2
Having just read dozens of business plans, I was amazed that most entrepreneurs focus almost entirely on their technologies and their perceived wonders. Often, I was not able to ascertain what the products did or what the market opportunity was. I was also not able to tell what comparable products competitors offered. I was forced to read entire business plans to piece together my own ideas of the product potential in the plans, and in developing my own ideas, I may not have produced the results the entrepreneurs intended but did not state.
This is an important issue for entrepreneurs hoping to secure venture capital funding. Venture capitalists have notoriously short attention spans and are not likely to meander through an entire business plan as I did to try to figure out market potentials. Venture capitalists also do not care about your technology, which is a shock to most technical entrepreneurs. They care about making money, and without the prospect of that healthy return on their investment, they won't fund a project. In order for them to believe that they will get that healthy return, they need to know what the market opportunity is and how potential customers will benefit from your products. That gives them a glimpse as to what they might gain from investing in such an idea.
This brings us to the value proposition, or how your product is different in a meaningful way to potential customers. Your business plan and executive summary, and indeed any pitch you make to venture capitalists, should succinctly state your value proposition. The verbiage is important, and the conciseness of the verbiage is equally important. You need to be able to briefly state your value proposition without waxing eloquently on the virtues of your technology! Think of this as your elevator pitch.
There are a number of tools that can help you arrive at your value proposition, but the ones that seem to work the best for technical entrepreneurs are the competitive matrix and the SWOT (strengths, weaknesses, opportunities, and threats) analysis.
A SWOT analysis helps you look at your company and market through strengths, weaknesses, opportunities, and threats. This is a time tested, effective tool to figure out how your product or company stacks up in the minds of potential customers. Strengths and weaknesses are internal to your company, and opportunities and threats are external to your company.
Patent protection that could prevent your competitors from offering the same technology or application, at least for a period of time, is an example of a strength. An example of a weakness is a dependence on a material that is experiencing rising costs. An example of an opportunity might be a new regulation that your product helps customers meet, but that may also be a weakness. You need to list as many of each category as is relevant, and you should do this for at least a couple of your competitors. Of course, now you have to analyze the information. If you have planned well, something will stand out to differentiate your product from the pack in meeting customer needs.
A competitive matrix looks at your major competitors, either those that dominate your proposed market or newer companies/products with the potential for doing so. From your market research, you should also have an idea of the feature/benefit sets that are most important to potential customers. These might be things like ease of installation, cost, reduced manufacturing defects, ability to meet regulations to avoid penalties or increased efficiency. These should also be quantified wherever possible. Once you've identified these items, prepare a matrix—€”or plot a graph—€”with the names of your competitors down one side and the feature/benefits going across the top. Put a green check by those benefits you think you provide better than the competitors, a yellow check by those in which you are about equal to your competitors, and a red check by those in which your competitors are better. Repeat this for each competitor, and be as realistic as possible. If all goes well, you should have more green checks than your competitors. As with the SWOT analysis, the next step is to stand back and analyze the information.
With these two exercises under your belt, you can now start to craft your actual value proposition. Try to get it down to just a few sentences. The first sentence should be a clear description of the customer problem and should be quantified if possible. The next sentence should be a brief description of your product that solves the customer problem; the sentence should not focus on the technology but rather on how it solves the problem. The last sentence should be the value of your product from the customer's perspective, and should also be quantified to the extent possible. A very generic example of a value proposition might read something like this: The 1000 widget manufacturers worldwide are not able to detect manufacturing defects until the third phase of the manufacturing cycle, costing each one an annual average of $10 million in defective products. Our widget fault detector is the only one on the market that detects faults at the beginning of the second phase of manufacturing cycle. Our widget will not only save each customer that $10 million, but with the earlier detection and associated reduced equipment downtime, they can also produce more products and increase revenues by an additional $2 million per year on average.
This succinct value proposition will tell a venture capitalist that there is a large, unmet problem in your industry and that you have a product that will solve the problem. Further, by explaining the value of your product in customer terms, you are telling the venture capitalist that there is a compelling reason for customers to buy your product. The venture capitalist should be able to tell from that that there is a prospect for a healthy return on investment, and you might even pique the interest enough for him or her to contact you.
Betsy Gillette is director of market research and planning for Technology Ventures Corporation.
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