Learn how to create a value proposition, starting with understanding what investors are looking for and completing customer discovery. A value proposition is an essential tool for startups to convey their product’s unique benefit to investors in a simple and concise way.
Investors in start up companies have a unique set of criteria for investment. The list below details each of the key parts of an investors criteria:
This article aims to focus on the first two criteria, the unmet need and the company’s solution for that need. The combination of these things constitutes a company’s value proposition. All of these things are dependent on the individual company, their product, their team, and their specific business model. However, attractive investment terms are one of the most important parts of a company for an investor, as it is the valuation that ultimately influences their return on investment (ROI) the most.
🔬 Learn more: Business Resources for Biotech Startups
A value proposition is a concise way to summarize your product, including who it is for, what it does, how it works, and why your product is better than the current solution to your customer's problem.
The value proposition essentially boils down to the pains and gains of your customer. Each customer has a job that could be done better. The customer doesn’t want your product to want the product, they want your product so they can use it as a tool to make their job easier. If you can help them do their job better, you are either eliminating a pain or creating a gain for your customer. Some investors refer to this phenomenon as a pill versus a vitamin. A pill you need to take; in this case your customer needs your product to do their job. A vitamin is non-essential, but makes things better, in the same way some products are added benefits but not a necessity to their job.
🔬 Learn more: How to Create a Value Proposition to Attract Investors
The Milkshake Framework was created by Clay Christensen, late author of The Innovator’s Dilemma and former Harvard Business School professor. Clay argues that products and services are “hired” by customers that have a job to be done. Christensen was hired by a company to increase milkshake sales. He approached the problem by trying to answer the questions: What do milkshakes do for people? What problem do they solve? After a sales analysis he found that, counterintuitively, many milkshakes were being purchased in the morning, specifically in the drive through. He interviewed customers and found they were buying milkshakes because other foods were too messy for the commute, and that they wanted a longer drinking experience than other drinks.
Eventually, using the data, Christensen decided that the best way to improve milkshakes was to make them thicker. Thus creating the illusion of a longer drinking experience and giving the customer exactly what they wanted from it.
You may ask how this may benefit a startup looking to create a value proposition. The Milkshake Framework can be applied to any company. First, you need to identify a customer’s needs. Then you need to find a solution that fulfills those needs and encourages them to choose your product over a similar one. It is important not to assume the motivations and needs of your customers. Most might have thought the customers wanted the milkshake because they taste good, but a deeper dive indicates the motivations are actually much different from that.
You can learn more about the Milkshake Framework here.
There are four different types of value propositions: functional, life changing, emotional, or socially impactful. As a business owner, you need to figure out which one of these frameworks your product fits in best. For example, colleges and universities advertise their degrees as life changing; getting a degree can allow you to get a better job, which will increase your income and affords you security. While a university degree might fall into the 3 other categories as well, the core category is life changing. Knowing the correct category will allow you to craft a proposition that is focused and clear.
There are two main ways that a value proposition emerges: observation or innovation.
In the first way, observation, you start with observing your customer. You identify what the customer needs to do and then create a hypothesis for a product that makes their job/tasks easier. Then you perform customer discovery to validate your assumptions.
In the second method, you start first with an invention you want to bring to market. Then, you create a hypothesis about the overall job that requires your innovation to be used as a solution. Finally, as in the first method, you perform customer discovery to validate your assumptions.
The first method is more rare than the second method, as many startups are created after an innovation has already been thought up. While the first method may be rare, it avoids your innovation becoming a “solution looking for a problem.” Customer discovery is essential for any startup, as it avoids this dilemma, making sure that there is an addressable market for your invention before you try to find investors or go to market.
🔬 Learn more: HealthTech-Focused Customer Discovery
While performing customer discovery, there are two many questions you need to focus on, with various smaller questions to supplement this.
The first question is: what is the current state of the problem and the current solution? This question really helps you get the background of the job to be done, and allows you to understand the problems your customer has at the moment with the current solution. This is also a great time to better understand your customer’s budget. Many times there are new innovations that outperform current solutions, but customers are unwilling to switch due to cost restrictions. Beginning with attempting to understand your customers current limitations is a great way to model your pricing strategy. Here are some more supplemental questions to help you get to the core of this main idea:
The second main question to ask is: what is the future ideal state? This question helps you better understand what the customer is looking for in the future to better their job. Here are some supplemental questions to ask that may help you with understanding the desired future state:
Investors might ask you how you performed customer discovery surveys. There are two important rules to follow to ensure they will not be upset with how you performed then.
The most important rule to follow when completing customer discovery is not to mention your solution. Mentioning your current solution can sway interviewers to agree or disagree with your solution, instead of providing open feedback on their current problems. There may be times where you think it would be perfect to inform your interviewee about your current solution - resist the urge!
A second rule for interviewing customers is to avoid asking leading questions. Similar to the above rule, both leading questions or “yes or no'' questions box in the interviewee instead of providing a chance for them to share open ended feedback. Instead, focus on asking open ended questions that allow you to gain their unique perspective.
Another way to improve your customer discovery process is to ask to be introduced to other potential customers at the end. This will allow organic connections and increase the amount of interviews you are able to complete.
🔬 Read more: Implementing Voice of Customer (VOC) in Your Business
Now that you have performed customer discovery and are confident your product can provide an improved solution to your customers, it is time to create your value proposition. While every company needs to have a value proposition, each one will be unique. Below is a general framework that can help guide you in your journey to find a unique value proposition:
“This product is for (insert type of customer), who is (describe their job to be done). We offer (insert your solution). This solution allows them to (explain the gain of elimination of pain). We do it better than competitors because (insert your unique differentiation)”
This formula is essentially a skeleton of an elevator pitch. It might help to change the order or how you say it, but the investor is essentially looking for the answers to all of the above questions in a concise manner.
Here is an example of this formula utilized in a fictitious example:
“For working moms who are taking care of their toddlers, we offer self cleaning diapers. It results in incredible time savings, which allows them to spend more time with their children and feel that they are being good caregivers. We can do it better than our competitors because we are the only company to have the tech to provide that kind of functionality.”
This is an example of a functional-focused value proposition, with some added emotional undertones. This is a great start because it gets the point across and allows investors to immediately see the benefits and customer base for your product.
Creating a value proposition is an essential step for all companies, specifically start ups. However, before creating your value proposition it is important to understand your customer and whether or not your product will eliminate a pain or create a gain for them. After you understand your customer, you can create a value proposition using the outline above, and fine tune it for your specific company/product.
This information in this article is from a webinar hosted by University Lab Partners in partnership with the Small Business Development Center (SBDC) @ UCI Beall Applied Innovation, presented by Laura Beken, a business consultant at SBDC @ UCI Beall Applied Innovation. View the full webinar here.
Laura specializes in working with startups in the tech and healthcare space (life science and medical device/apps). Equity funding, strategy, and SBIR/STTR government funding are her specialties. She has degrees in Psychology, Visual Arts/Media, and a Healthcare MBA.
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