Intro to value propositions for entrepreneurs
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Transcript of 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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