Value-led Growth: Hard & Soft Value Proposition

Value proposition is the most important thing to get right in your business

Recently I forced myself to do a presentation on a topic that I’ve been thinking for a long time (BTW a great way out to stop procrastinating and do something is to have an external deadline).

The topic is motivated by my work of Bolt, where I am responsible for our multi-vertical strategy, but even more so by my interactions with startup founders, in which I constantly have to translate their presentations to my mental model, so I could give good advice and make good investment decisions.

These misunderstandings concern a key element of every business model, the value proposition to customers (or partners and other ecosystem actors). Value proposition is obviously central to a functional business, as that value is directly or indirectly exchanged for payment and allows business to function and thrive.

The specific confusion always concerned the following issues:

1. Value proposition is always relative to market

2. Value proposition can be soft and hard

3. Value proposition can be threshold-based, linear and non-linear.

4. Value proposition can be real or perceived

I will focus on the first two in this post and leave the remaining for a follow-up.

The first item is quite easy to understand - businesses don’t operate in vacuum, so when explaining the value proposition it should always be presented as differentiation from competition, not on a standalone basis.

A bigger issue is that often startups poorly identify their competition, taking a too narrow view on who is offering a similar value to customers or focusing only on newly minted tech companies when it’s far from clear that the value proposition is improved compared to existing players.

As an example there are a lot of attempts to create app-enabled minibus shuttles, but all the proposed value is usually quite weak - like realtime visibility into scheduling and digital payments, without any improvement in the hard value proposition.

Which brings us to the second topic. Generally I split the value created for the customers into two categories: hard and soft.

• Hard value prop is usually highly measurable, has a direct impact on customer satisfaction and is a direct proxy into customer retention

• Soft value prop is often poorly measurable, has an indirect impact

There are multiple models for product management, like Kano, Jobs-to-be-done and Goal-directed design, but unlike these models hard value proposition can be used by everyone in your company and can focus your whole team around a few meaningful metrics that matter.

Generally I expect the teams will prioritise improving hard value prop above all, and focus on the soft value proposition once we run out of leverage in the hard categories.

Let’s examine how we could apply the framework to the ridehailing business:

A few things to note here:

• Price is the primary hard value proposition and like most other businesses best price wins. Price in turn is directly dependent on incurred costs and premium based on the remaining hard value proposition difference and similar factors.

• ETA is the speed of fulfilling the service, in this case how quickly can you get a car.

• Quality here is the physical service quality as opposed to the digital one, it in turn breaks down in multiple direct and indirect metrics most of which need to be over a threshold and hit diminishing returns at a point.

As always in product management the most important thing is what we are not doing.

• User Experience is only important to fulfil hard value proposition. A good example of soft value is splitting fares between passengers - this can be done offline with existing tools and is not a major driver of retention.

• Innovation in itself does not drive customer value. A good example in ridehailing is Pooling, which while on surface seems to improve Pricing can only do so in sustainable manner for a small percentage of rides, but at the same time significantly compromises customer experience by increasing ride time and forcing people to ride with strangers.

When analyzing a business I first and foremost try to understand what is the hard value proposition and how can it be differentiated in the market. There are a variety of scenarios possible:

• Hard value prop can be missing altogether (e.g. most recruitment startups mostly don’t solve the actual issue, which is improving the funnel, but focus on soft value like solving internal tracking)

• Technology might not be adding hard value (e.g. public transport aggregation adds some convenience, but doesn’t really change the experience)

• It can be very hard to differentiate (e.g. package delivery is done quite well and by state companies that don’t really need profitability)

• Hard value prop can be related to network size and it may be very expensive to reach critical mass (search engines)

Another internal advantage on focusing on hard value proposition is that it becomes easier to measure trade-offs:

• We lack features X, Y & Z

• We need to provide a 20% discount to competition

• Therefore value of X, Y & Z is ~20% of our revenue

Most commonly hard value proposition categories are exchangeable with price at some rate, so you can think about your advantages and disadvantages to competition in a structured and quantitative way.

Based on the hard/soft value proposition distinction I have the following mental model that I apply to new businesses:

1. Focus on hard value proposition

2. Only high confidence high ROI activities

3. Hard value proposition drives the user/account growth (acquisition, retention, referral)

4. Sales & Marketing activities should accelerate growth at high ROI, but should not affect hard value prop

By now you should have a good understanding of the first step and I’ll follow on the rest some time in the future.