Understand Value Spots
During the Internet Hype market share seamed to be the guarantee for solid revenues. The downturn showed that it pays off to focus on solid earnings instead. Profits returned on the agenda.
But profitability is not simple to sustain. Technology and buyer behavior change, competition erodes value propositions. The Value Spots Concept provides a viable approach to ensure long term profitability.
A Value Spot defines why a customer would be willing to pay a premium above competitive services. A Value Spot is achieved by matching market forces and customer’s priorities, business model and core competence(s).
A purchase platform for example generates value for the buyer through consolidation of purchase power towards the seller. Typically the prices negotiated improve for each buyer. On the other hand the platform becomes attractive for the sellers as they might reach more buyers with less effort. To achieve attractiveness the platform requires a reasonable amount of users from both sides. In the Retail Industry Aldi would be a well known example using the Platform approach.
It is important not to mix the Value Spot with the Business Model. The later describes how the money is charged, i.e. membership fee or transaction based. The Value Spot identifies the reason, why a customer would be willing to pay the membership fee for this and not another platform.
To identify potential Value Spots, it is necessary to understand the customer’s priorities. Serving these priorities leads to the Value Spot.
Identify Value Spots
SAP was seen as the ERP-company, Oracle as the database company. Both recognized that after the Hype their customer’s priorities shifted from “Getting things automated” to “Managing the automation”. A major driver of this change might have been the IS cost cutting as the result of the enthusiastic spending during the Hype.
However, the new priorities identified resulted in new value propositions aligned with new products such as: employee communication (SAP Portals), process efficiency and better information supply (enterprise application integration, SAP Netweaver).
SAP understood adapting to shifts in customer priorities
Based on SAPs core competence “Creating excellent Standard Software” – as well as probably the excellence of technology monitoring and strategic acquisitions – and the understanding of the new customer priorities the new product suit was launched.
But SAP did not just provide new infrastructure components. It also identified a new Value Spot in the form of iViews. iViews are little prepared pieces of code, allowing access of selected R3 information and functionality in the portal.
Backend access is a common functionality of all portals and iViews would have been functional with other portals as well. But iViews on the one hand established the link to the installed base of R/3 systems and on the other promised an additional value in form of implementation speed (ROI) of SAP Portals over other professional portals such as BEA.
Addressing shifting customer priorities, typically driven by technology development and changes in the business environment, prevent the dilution of value propositions.
Therefore it is essential to continuously monitor the customers served and clearly examine their priorities. If the priorities start changing, it is time to redefine the Value Spots.
Analyze Value Dynamics
While the understanding of customer priorities is a prerequisite to identify potential future Value Spots, it is also necessary to understand the Value Dynamics of the business. The Value Dynamics identify the determinants of profitability.
Adobe identified its Value Spot within an authors need to distribute write protected information. The company developed and patent protected a document format covering this need.
But instead selling the Writer and the Reader, Adobe understood well the Value Dynamics: Charging for both tools would have limited the circle of users to direct customers. The Key Value Determinant in this case was the number of existing Reader installations, generating a valuable audience for the Writer. Therefore Adobe sold the Writer charging a premium over other text editing Software but spread the Reader for free.
It does not matter whether the Value Spot follows a time, experience, key asset or whatever based model: To turn each of these models into profitability it is essential to isolate the Key Value Determinants.
Whether HP sells its printers at lower price or Rockefeller provided oil lamps for free. Both aim to increase the amount of devices in the market generating a need. The business model is to sell supplies. The Value Spot is the quality / availability of the supply. The Key Value Determinant is the number of devices out in the market creating the demand.
Understanding the Key Value Determinants is essential to drive profitability
The Key Value Determinant is identified by searching for the variable that increases the total turnover or even better the price per unit. While the first allows understanding where to focus on (what actually to sell), the second indicates how to influence the Value Dynamics.
Summary and Conclusion
The Value Spots Concept is a methodology to guide the thinking about business into profitable directions. However, the core challenge of each company is to identify the shifting priorities of their customers.
Therefore it is essential to clearly identify your customer groups and assess their priorities one by one. If you are not clear about whom you are serving, it will be hard for you to see a profitable future!
Especially technically driven companies often fail to complete this step. The sweet illusion that everybody might want to apply their cool technology is very strong. But those who are not willing to turn into the bowling alley will hardly find a chance to grow.
Growth is possible through your customers only. Combining customer insights, core competence and business model will allow you to identify your sustainable Value Spot.
Those companies spending energy on identifying and implementing Value Spots will be highly rewarded by their customers allowing them to charge a premium and gain the relevant strength, to become a valuable player in their market.