6
Defining a Unique Value Proposition
Netflix was at a crossroads in 2011. Founder and CEO Reed Hastings was considering a strategic pivot away from the company’s successful policy of providing DVD rentals to subscribers by using the US mail service. Over the previous decade, Netflix had disrupted the video rental industry with a cheaper, more convenient alternative to brick‐and‐mortar video stores. However, Hastings correctly recognized the future of video rentals was online streaming, and he was anxious to stay on top of the trend by phasing out mail delivery of DVD movies and investing in streaming capabilities. To facilitate the online strategic shift, Netflix publicly announced it was separating DVD rentals from its four‐year‐old streaming business and increasing monthly subscription fees for customers who wanted to continue to receive DVDs. Longtime Netflix subscribers revolted at the sudden change. Over the next few months, Netflix lost 805,000 of its 20 million subscribers and its stock plunged 77% to below $65 a share. In 2010, Hastings had graced the cover of Fortune magazine, having been named “Business Person of the Year.” In 2011, he was parodied on Saturday Night Live as a clueless executive.
Fast‐forward to December 2015: Netflix claimed more than one hundred million subscribers and had a market valuation of $60 billion, with its stock trading at $124 a share (the equivalent of more than $700 a share after a 7:1 stock split a few months earlier). In the interim, Netflix had pivoted toward yet another new business model, offering subscribers original streaming content that was receiving both critical and customer acclaim. Not only had Netflix become the first Internet content distributor to win a major TV award for its original series, House of Cards, but it was posting the highest revenue per employee among all of the mega cap technology companies, including Apple, Facebook, Google, and Amazon.
Why did these two strategies provoke markedly different responses? The answer lies in how Hastings evaluated his customers’ needs and Netflix’s ability to meet them. This process is called defining a unique value proposition and is critical for any media enterprise because it enables a company to craft strategies that give them long‐term and sustainable competitive advantage. In this chapter, we consider the following questions:
- What is a value proposition?
- What research techniques and tools help you decide how to improve your product?
- How do you create value that matches your target customers’ wants and needs?
- How do you set pricing and translate value into profit?
The Netflix Story: Three Value‐based Strategies
Early one morning in 1997, Reed Hastings discovered a copy of the VHS tape Apollo 13 in his bedroom closet. When he returned the VHS tape to a rental store, the software entrepreneur learned he owed a $40 late fee. As he pondered how to break the news to his wife, Hastings began imagining a better model for at‐home entertainment—one without late fees that capitalized on newly‐created DVDs. Hastings’ insights led to the founding of the video‐streaming company Netflix. During its short history, Netflix has adopted three different business models. At each turn, Hastings has attempted to follow the technology, follow his customers, and follow the money—the key components of any successful digital media strategy. Netflix began as a mail service, disrupting the market leader Blockbuster by focusing on providing timely delivery of DVDs through the US mail. Hastings next moved to phase out DVDs and deliver movies and television programs directly to a customer’s TV or mobile device via streaming. Most recently, Netflix has become a creator of original television shows and movies. In formulating the company’s strategies, and in recovering from potentially disastrous business missteps, Hastings has continually reconfigured the unique value proposition offered to customers, as he attempted to differentiate Netflix from its competitors.
Disruption One: Sidelining Blockbuster
In the late 1990s, most at‐home movie watchers rented VHS cassettes from a local video rental store, such as those in the large Blockbuster franchise. Video stores lacked a wide selection of DVDs because people balked at the initial $600 price tag of a DVD player, introduced in the United States in March 1997. In setting up his company, Hastings hoped to appeal to this high‐income customer base—the early adopters of this new, expensive technology. But he first had to crack how to deliver DVDs. Hastings explained to the Financial Times, “I went out, bought a whole bunch of CDs and mailed them to myself to see how quickly they would come back and what condition they would be in. I waited for two days—and they all arrived in perfect condition.”
Armed with this solution, Hastings launched Netflix in August 1997. However, Netflix struggled to retain new customers. Movie‐watchers grew frustrated they were spending in‐store prices for a slower delivery time. So, Hastings rolled out a subscription‐based service, allowing customers to rent an unlimited number of DVDs for a monthly fee of $18. This compared favorably with the price a consumer would pay for renting just four DVDs from Blockbuster during a one‐month period. Netflix tapped into customers’ desire to watch as much as they wanted for as long as they wanted, avoiding late fees associated with in‐store entertainment. Netflix also introduced a proprietary recommendation system that suggested older in‐stock movies that were often unavailable at local video stories.
By 2000, the price of DVD players had dropped below $100; by 2003, they sold for less than $50. As DVDs increasingly replaced VHS cassettes, Netflix achieved its first operating profit in 2003. The year before, Netflix went public, with its stock debuting at $15 a share. By 2010, Netflix had more than 20 million subscribers and a DVD library with 100,000 titles. By comparison, the typical video rental store had only 3,000 titles. So, while the price of Netflix stock climbed, shares of Blockbuster tumbled. In 2010, Blockbuster was delisted from the New York Stock Exchange when shares hit an all‐time low, and shortly afterwards it filed for bankruptcy.
Disruption Two: Flubbing the Transition to Streaming
Even as Netflix massed an unparalleled DVD library, customer preference was shifting toward watching programs delivered over the Internet, instead of through the mail. In 2006, Amazon launched a streaming service, and in response Netflix began offering streaming in 2007. By 2011, two more services—Hulu and Vudu—had been founded. Hastings realized that the future was online and announced in a blog post that he was separating DVD rentals from the streaming service. But Netflix’s streaming capabilities lagged behind that of its competitors. While Netflix had an extensive DVD library of more than 100,000 tiles, it had only 20,000 titles available for streaming, compared to more than the 110,000 streaming titles offered by Amazon. (Amazon Prime customers, who paid $75 a year in 2011, could view 10,000 of those titles for free, and they paid as little as $2 to view other streaming titles.) In order to continue to have access to Netflix’s extensive DVD library, customers had to create two accounts with two different domain names, pay two credit card billings and navigate two sets of ratings and preferences. Further antagonizing longtime customers, Hastings effectively increased the price of a monthly subscription by 60%. Prior to the split, Netflix customers paid $10 a month ($120 a year) for unlimited access to both the DVD and streaming libraries which had a total of 120,000 titles. After the split, they had to pay $8 a month for each service, or $16 a month to receive both services. Netflix customers abandoned the service in droves, enticed by the lower subscription and rental prices on other streaming services, as well as the larger availability of their online libraries.
Disruption Three: Using Unique Content to Create Value
Scrambling after the public flop, Hastings considered a new way to promote the Netflix brand. He decided to create original content, much as a television or movie studio would. In a 2016 interview with Business Insider, he admitted, “It seemed crazy…At that point, we were still buying DVDs.” But he hoped making and owning shows would give the company an advantage over other streaming competitors. In 2013, Netflix unveiled the critically acclaimed House of Cards, an American political drama that it produced for $100 million. A number of other shows quickly followed, included including Orange is the New Black, the most popular streaming series of 2016. The company also revised its pricing, offering three subscription options—ranging from $8 a month to $12—based on a customer’s preference for the quality of the streaming video and the number of screens that could be watched simultaneously.
The company’s annual revenue rose to $8.8 billion, as Netflix surpassed Time Warner’s HBO as the biggest subscription‐video service. Hastings told CNBC that the company would spend as much as $6 billion yearly on original content to counter the “awfully scary” Amazon, which had also begun to create original movies and television shows. In an attempt to strengthen its content, Netflix acquired the comic‐book publisher Millarworld in August 2017, allowing it to capitalize on the popularity of characters such as “Kick Ass” and “Old Man Logan.” As of 2017, Amazon Prime boasted more than 20,000 TV and movie titles that Prime subscribers, who now paid $99 a year, could view for free. While Netflix had only 7,000 titles, it offered more television shows than Amazon, and its programs earned more awards giving Netflix a unique value proposition that enabled growth in both international and domestic markets.
Why All Companies Need Unique Value Propositions
As the Netflix example illustrates, if you want to win customers for a product or service, you first need to understand their needs and wants. Only by deeply knowing customer needs and wants can you position yourself to offer unique value. Reed Hastings understood this when he created a DVD by‐mail business, allowing customers to easily access movies not available at their video stores. In describing this process, Hastings said: “When there’s an ache, you want to be like aspirin, not vitamins. Aspirin solves a particular problem someone has, whereas vitamins are a general ‘nice to have’ market. The Netflix idea was certainly aspirin.”
Authors Robert Kaplan and David Norton underscore that a customer’s perceived value in a product or service creates the “essence of strategy.” Marketing professor Irvine Clarke calls unique value propositions the “fulfillment of customer needs.” Similarly, business theorists Alexander Osterwalder and Yves Pigneur define value propositions as “creating products and services customers want.”
All of these definitions speak to the importance of unique value propositions for both start‐up and mature organizations. For start‐up organizations, as Netflix was in 1997, the challenge is to invent new products or services for a particular customer segment. In contrast, existing organizations, as Netflix was in 2011, must develop ways to either improve their value proposition or invent a new product. Improving an existing bundle of products or services for a particular customer segment is the most common approach. This involves the same steps as creating a value proposition, but employees consider how they can leverage current resources and capabilities.
There are several frameworks for evaluating the potential value of a product or service, and how it compares to other products in your own portfolio or those of competitors. Some of the concepts—such as the BCG grid and the Product Life Cycle—are best applied to existing organizations. Others—the checklist of value components and value‐proposition mad‐lib—can be applied to all organizations.
Frameworks for Existing Organizations
In the 1970s, the Boston Consulting Group’s (BCG) founder, Bruce Henderson, developed a two‐by‐two matrix that plots a product’s market share against the industry’s annual growth, called the BCG grid. Henderson originally created the BCG grid to analyze an entire business portfolio of a multi‐product or multi‐business corporation. The matrix enables business units, brands or products to be evaluated on the basis of market share and annual growth, to plot the relative positions. Those business units that enjoy high market share and high growth are identified as stars; those business units that have low market share and low growth are identified as dogs; those business units that have high market share and low growth are identified as cash cows; and finally, those business units that have low market share and high growth are identified as problem children. Henderson posited that a product was “high” growth when its cumulative annual growth rate was 10% or higher, and it had a “high” market share when it achieved 25% or higher.
BCG consultants used this framework to recommend investment strategies. Revenues generated by cash cows were used to fund problem children in the hopes they would become stars. Dogs would be divested and the money also would be reinvested into problem children. Using this framework, entrepreneurs in established companies can either attempt to turn a dog (a product or service with low profits) into a star (a product or service with high profits), or divest it entirely.
In addition to the BCG framework, Raymond Vernon’s product life‐cycle theory is a key concept for understanding revenue potential. The life‐cycle (Figure 6.1) charts products from “birth” to “death,” using the stages of “introduction, growth, maturity, and decline.” The life‐cycle stages are similar to the BCG grid in that products in their initial (introductory) stage are often “problem children” (as pertains to the BCG matrix) and require the highest resource commitment, if they are to survive. Using the product life‐cycle to evaluate your portfolio of products provides the same guidance as the BCG framework: products in the mature stage fund products in the introduction stage and declining products are divested to invest in new products.
Figure 6.1 Product life‐cycle.
Frameworks for All Organizations
Whereas the BCG grid and product life‐cycle are best applied to existing organizations, you can use the questions and frameworks below to more critically examine entrepreneurial ideas. Start‐up organizations can draw on these tools to solidify their unique value propositions and mature organizations can also use them when considering how to launch a new product or reinvent an existing product’s value proposition.
- Is your product or service newer than others on the market?
- Does your product or service perform better than others already?
- Is it better customized to a target audience than other products?
- Is your product or service less expensive? If not, what justifies the additional price?
- Is your brand stronger than your other competitors in the market?
You can also use the “mad‐lib” approach to test your value proposition. Management consultant Geoffrey Moore introduced this approach in 1991 in his book Crossing the Chasm: Marketing and Selling High‐Tech Products to Mainstream Customers. In this scenario, you fill in the blanks, completing two sentences:
My product is for (short description of your target customer)who (short description of the problem vexing your customers). Our company (short description of the solution your product provides) so that (short description of the value created by the new product).
Here’s how we could apply the “mad‐lib” approach to Hastings’s 1997 idea to launch Netflix:
Netflix is:
For high income customers
Who recently bought a DVD player and cannot find DVDs in video stores.
Our company will mail DVDs to your door
So that you can enjoy a wide selection of rental DVDs.
Steps to Creating a Value Proposition
Using the above frameworks, you can begin to understand how your goods or services might appeal to customers. Now let’s examine how to create a unique value proposition. First you identify your potential customers’ wants and needs, and then you need to design products and services that create perceived value for your targeted customer.
What motivates your target customers? What frustrates them about current goods and services? Before launching a new business or line of services, you need to dive into your target customer’s needs, wants, emotions, and motivations. This will give you a complete view of your customer and strengthen your value proposition.
Table 6.1 Research methods to understand your consumer.
| Type of research | What it is | Best when |
| Secondary and syndicated research | Analysis of previous research on a target customer and analysis of data performed by a firm. Syndicated research is often purchased by multiple clients who share costs and results. | Seeking contextual information, such as demographic, behavioral and attitudinal data. Looking to minimize and/or share costs with other companies. |
| Ethnographic research | Primary research observing customers in their own environments using products and services to do or complete certain jobs. | Have a long time horizon and need to understand how existing products and services are used. Helpful for spotting customer wants and needs. |
| In‐depth interviews | Interviews between a respondent and an interviewer where interviewer asks probing questions to understand behaviors, attitudes, and motivations. | Hoping to produce an “empathy map” to immerse yourself in a user’s environment. |
| Focus groups | Discussions led by a moderator of small group participants with common characteristics to understand behaviors and attitudes | Want to uncover participant needs, wants and emotions. |
But how do you dive into your customer’s head? Table 6.1 is a brief overview of four research methods. With information gleaned from any of these research methods, you can use a series of tools to create a unique value proposition. In 2014, authors Alex Osterwalder and Yves Pigneur published a sequel to their book on Business Model Generation (discussed in the Chapter 5), called Value Proposition Design: How to Create Products and Services Customers Want, which featured a “value proposition canvas.” The “canvas” was a two‐part diagram that allowed entrepreneurs to visualize the process of creating value for customers, and then determine what features mattered most. We’ve modified Osterwalder’s and Pigneur’s canvas by posing an additional question, “What is the purpose of your product or service?” This question acknowledges the key role in communication that media companies play in informing and entertaining society. In the exercises below, let’s apply this model to the value proposition for Netflix in 2011, as Hastings weighed which type of streaming and DVD strategy to pursue. First, we will create a value creation customer profile for Netflix, then a value offering map and finally attempt to align the wants and needs of the customer with the value map of the products and services Netflix designed.
Step One: Creating a Value Creation Customer Profile
This exercise helps identify the target customer’s wants and needs, emotions, and motivations by asking some questions:
- What does the customer want and need to accomplish? As you answer this question, keep in mind that economists define a want as a desire and a need as anything needed for survival.
- How do your customers feel when they are trying to solve a problem? How do they want to feel? Answering these questions highlights your customer’s emotions. When considering emotions, you should think about both their “pains”—obstacles frustrating them—and their “gains”—what they are hoping to accomplish.
- Why is the customer acting in a certain way? This is the most difficult, but also the most crucial question to answer: What is your customer’s motivation? Motivations can be emotional, social, and economic. Customers can have more than one motivation.
Putting all these factors together allows you to create a value creation customer profile, as in Figure 6.2. In his research on the value creation customer profile, Osterwalder instructs that after you have fully identified the three domains, you should prioritize them from strongest to weakest. He also recommends segmenting your target customers into various groups, and using complete descriptions for wants and needs until you have a robust narrative of each target customer segment. (We’ll discuss customer segmentation in Chapter 7.)
Figure 6.2 Value creation customer profile for digital media companies.
If you apply the model in Figure 6.2 to the Netflix example, you can imagine what a value creation customer profile might look like for a Netflix customer in 2011, prior to the separation of the DVD business from the streaming service. In Figure 6.3, notice how the value profile answers the key questions about Netflix customers: (1) What do they want and need in a DVD/streaming subscription? (2) What are the positives and negatives in the customer experience? (3) What are the factors motivating Netflix customers?
Figure 6.3 Netflix value creation customer profile prior to split of streaming and DVD business.
Step Two: Creating a Value Offering Map
A value offering map applies your product to the target customer’s wants and needs. The value offering map (Figure 6.4) has three parts: products and services, emotions, and motivations. Successful value offering maps address the most important customer wants, needs, emotions, and motivations.
- Why are you offering your products or services? Motivation provides grounding to the proposed product or services. Again, you should focus on the motivations that are essential to the product or service and omit those that are non‐essential.
- How will you stoke the customer’s positive emotions and quell negative ones? Emotion solutions describe how you will relieve the customer’s pain and help them achieve their goal. When examining this aspect, it is important to focus on solutions only for emotions that are essential.
- How will you address the customer’s wants and needs? This is reflected in the products and services, which include tangible and intangible items. As you apply your product or service to the framework in Figure 6.4, you should ensure you are adding only the products and services that apply to the customer target and hone in on the most specific emotions and motivations. Successful value propositions are about making trade‐offs, regarding which wants, needs, emotions, and motivations will be addressed and which should be omitted.
Figure 6.4 Digital media value offering map.
Let’s apply this to the Netflix example in 2011 when Hastings wanted to transition customers to streaming. As you can see in Figure 6.5, Hastings miscalculated and did not offer any “pain relievers” for customers who wanted to order DVDs and have access to streaming through Netflix.
Figure 6.5 Netflix value offering map after the split of streaming and DVD business.
By mapping the Netflix value offering, you can identify: (1) the purpose of the offering; (2) how you might address customers’ negative emotions; and (3) how you might address wants and needs with products and services.
Step Three: Aligning the Customer Profile and Offering Map
Once you’ve produced a value creation customer profile and value offering map, you are ready to determine how the two overlap. You should align or adjust the two until they work together. Alignment occurs when meaningful customer wants, needs, emotions and motivations are addressed by a solution customers care about. If alignment cannot be achieved, then you need to go back to the drawing board.
Compare the value creation customer profile in Figure 6.2 with the value offering map for Netflix in 2011 (Figure 6.3). In the Netflix customer profile (Figure 6.3), you can see that customers were previously happy with the combined streaming and DVD monthly subscription. They had relatively few points of “pain.” However, Netflix’s value offering of splitting DVDs and streaming services did not alleviate their pain. Instead, it created a new source of pain and frustration. Now customers who wanted access to the DVD library, as well as online streaming, had to create a separate account, login, queue, search, billing, and subscription for their DVD account while maintaining their old information for their streaming account. Moreover, Netflix increased its monthly subscription price for customers receiving both DVDs and streaming content by 60%, charging more for the increased hassle. While customers will generally resist any price increase, it is worth noting that increases accompanied by the removal of “pains” or the creation of meaningful gains will generally make it more palatable—which is not the value proposition Netflix created in 2011. After hundreds of thousands of people canceled their subscriptions and Wall Street responded by punishing the company’s stock, Netflix CEO Reed Hastings formally apologized on September 19, 2011:
I messed up…It is clear from the feedback over the past two months that many members felt we lacked respect and humility in the way we announced the separation of DVD and streaming, and the price changes. That was certainly not our intent, and I offer my sincere apology. I want to acknowledge and thank our many members that stuck with us, and to apologize again to those members, both current and former, who felt we treated them thoughtlessly.
On October 10, 2011, Netflix dropped Qwikster. “It is clear that for many of our members two websites would make things more difficult, so we are going to keep Netflix as one place to go for streaming and DVDs,” CEO Reed Hastings wrote in his announcement. “This means no change: one website, one account, one password…in other words, no Qwikster.”
Since the customers’ needs and wants (the value creation customer profile) did not match the value Netflix was offering with the new streaming service (the value offering map), a new strategy was needed—both to entice current DVD customers to switch to streaming and to attract entirely new customers to sample and subscribe to its streaming operation, which in 2011 was much smaller than Amazon’s. Hastings therefore needed to go back to the drawing board. He enhanced the value proposition by adjusting both the product and price. By offering original award‐winning content—not found on any other service—he gave customers a reason to sign up or stay connected. Additionally, he revamped his pricing options, making them more comparable to competitors such as Amazon Prime and Hulu.
Translating Value into Profit
Let’s now consider pricing, which is an integral part of the unique value proposition. Customers expect products with higher price tags to connote higher quality and deliver greater value. There are three primary pricing models: cost‐based, demand‐based, and value‐based.
- Cost‐based pricing: With this model, a product is priced to cover the cost of manufacturing it. Therefore, price is determined by calculating the cost of producing or providing it (including expenses related to raw materials, personnel, and delivery, for example). Obviously, a company cannot continually price below the “cost of goods sold” and make a profit. Therefore, all companies rely, in some form, on cost‐based pricing, which serves as a “floor” when setting price. Companies that employ cost‐based pricing as a strategy often have slim profit margins and depend on doing a large volume of business in order to drive both revenues and profitability. Examples of low‐cost firms include Ryanair, the budget airline, or the discount retailer Walmart, which strive to be the lowest‐cost producers in their industry segments.
- Demand‐based pricing: This is based on the consumer’s demand for a specific product or service, and the availability or supply in the market place. This is the classic supply‐and‐demand curve. Under this model, the customer’s willingness to purchase the product at different prices is compared and then a price is set that matches supply with demand. For example, Disney recently unveiled a new demand‐based pricing scheme for its amusement parks. Tickets to Walt Disney World cost up to 20% more during holidays than during slower periods of the year, when families with school‐aged children are less likely to want to visit the park. Similarly, tickets on airlines typically cost less during off‐peak times, such as the weekend.
- Value‐based pricing: In contrast to cost‐based or demand‐based models, value‐based pricing is a relatively new concept. It is based on the value that a customer perceives the product or service providing. Value‐based pricing allows a company to maximize profits by offering different pricing schemes to specific consumer groups. Customers who receive less value, pay less. Those who receive more value, pay more. In order to implement a value‐based pricing approach, a company must understand the value they are actually offering various customer segments versus the customer’s perceived value of the product.
Thomas Nagle, founder of the Strategic Pricing Group, expands on the benefits of value‐based pricing in his (2014) book, The Strategy and Tactics of Pricing. Nagle notes that the purpose of value‐based pricing is “not simply to create a satisfied customer but to price more profitably by capturing more value.” Nagle also clarifies the relationship between value propositions and an effective pricing strategy. He writes that by creating and establishing a clear value proposition, value‐based marketing discourages customers from making easy comparisons between products based on price alone, and instead encourages them to consider the actual value of the product delivered.
There are several examples of value‐based pricing in cases we have already studied. For example, Bloomberg is able to maintain a steep price for its terminals because it is perceived by financial traders as giving better insights (i.e., delivering better value) than its competitors. Similarly, the New York Times is able to charge much more for a subscription than a local newspaper because it is perceived to offer much richer content. However, the New York Times also tiers its pricing, offering lower‐priced subscriptions to students—in the hopes of convincing them to pay more once they start earning a salary.
Table 6.2 highlights four examples of value‐based pricing.
Table 6.2 Examples of value‐based pricing.
| Pricing type | What it is | When it’s used |
| Customized | Adjusting the price according to the value the product or service delivers to the customer | Customized pricing is very common in B2B sales of computer software, for example. Similarly, popular US television shows sell for more in one country than another. |
| Group rate | Dividing consumers into two or more groups or markets having different price elasticities | Newspapers such as the New York Times routinely offer a student rate substantially reduced from the regular rate |
| Tariff‐plus | Charging the consumer a flat or lump‐sum fee for the right to buy a product or service in addition to charging for in‐demand features | Amazon Prime customers paying $99 a year have access to more than 18,000 streaming titles but pay extra for titles outside of the Prime library. Similarly, some amusement parks charge an entrance fee and a fee to ride popular rides. |
| Tiering | Selling goods or services together in a package | This is commonly practiced by cable television companies, which package channels together into cable tiers such as basic or premium |
In addition to these value‐based examples, media companies have also used several other types of pricing models. Cable companies, for example, have employed bundled pricing quite effectively. The idea of bundling and unbundling services can be traced back to the 1960s, when Nobel Prize‐winner George Stigler described how profits could be increased by combining the pricing of two goods. Pricing experts Yannis Bakos and Erik Brynjolfsson considered the bundling of information goods on the Internet in the late 1990s, and concluded that it can be highly profitable, particularly when customers are using a large number of goods and have a difficult time determining and comparing the pricing of individual goods.
It is important to note that when buying a product or service, the bundled price almost always benefits the seller, whereas the unbundled price benefits the buyer, primarily due to the transparency over the particular options. Beyond lack of transparency, bundling also benefits the seller as users are supporting the extensive catalog of other products or services. Cable companies sell bundled packages that include hundreds of channels, even though most households actually only watch an average of 17 channels per week. Having customers simply pick the channels that they would like to watch would make niche programming more expensive and unprofitable. Moreover, whereas a customer may be happy to pay the overall bundled price, once individual prices are provided, the customer may be displeased at the cost of each particular component.
Similarly, media and technology companies have tended to employ one of two pricing strategies when introducing a new product. Apple has used a skimming strategy when introducing its new products and innovations. It charges the early adopters a premium price for the privilege of being one of the first to own the latest version of its iPhone, for example. In contrast, other software and hardware companies have employed a different strategy. They introduce the product at the lowest possible price (sometimes below the cost of producing it), in the hopes of gaining rapid market share and displacing existing competitors. The price of DVD players, for instance, declined dramatically over a period of five years, from $600 to less than $50, displacing videocassette players. Netflix was perfectly positioned to benefit from the penetration pricing strategy pursued by makers of the DVD player. By 2003, the year that Netflix turned profitable, half of all households in the United States had at least one DVD player. By 2004, two‐thirds of all households had DVD players.
All customers have a notion of what they are willing to pay for a product or service. We call this a reference price. Using the research methods (depth interviews and focus groups) and the tools described previously—the Value Creation Customer Profile for Media Companies and the Value Creation Map for Media Companies—it is often possible to gain extensive insight into what sort of value customers place on a product or service. If there is a gap between the value that a certain product is delivering compared to the customer’s perceived value or reference price, then a company has two options: it can attempt to educate the customer about the value a product provides or adjustments must be made to the product offering or the price to make it align with customer expectations.
Advertising and marketing efforts have historically played an important role in educating consumers about the value of a product or service. Skillful marketing can create an awareness for the need, desire, and demand for a new product, encourage purchase and re‐purchase, and, perhaps, most importantly, it can differentiate a product from an existing one by attributing more value to it. For example, in the early 2000s, the Harvard Business Review (HBR) was able to substantially increase both newsstand sales of the monthly business periodical, as well as the price it charged, by changing the customer’s perceived value of the magazine and the reference price. Previously, the HBR was displayed on racks at the airport newsstands next to other periodicals, such as Vanity Fair or Fortune, which sold for $4.99. By arranging to display the HBR, which was printed on high‐quality paper with colorful graphics, closer to paperbacks, which sold for $13.99, the circulation marketing executive was able to increase the cover price for each issue to $14.99. Newsstand sales doubled as business travelers looking for reading material for the long flight ahead compared the value in a paperback mystery to the content in a monthly issue of HBR.
If the consumer cannot be convinced that the value offered by the product is worth the price tag, then adjustments need to be made to either the product offering or price to bring it into line with customer expectations. Hastings, in admitting his mistake, made just such adjustments. He understood that Netflix could not compete with Amazon in terms of the quantity of streaming titles. Therefore, he began focusing on quality to justify the subscription price. Although he initially hoped to maintain the monthly $16 subscription price (for access to both the DVD and online library), he realized that he also needed to adjust the price to meet perceived customer value. His solution was to tier the pricing, similar to the scheme used by cable companies, with a basic, intermediate, and premium service.
Disruptors of Media Value Propositions
Netflix disrupted the value proposition of physical video stores in the early 2000s. But by 2011, the Netflix DVD business model was itself in danger of being disrupted by streaming. Let’s conclude by examining how the Internet works to continually alter and, in many instances, undermine the value proposition of existing media enterprises such as Netflix or the New York Times.
For nearly one hundred years, the unique value propositions of traditional media enterprises focused on achieving excellence and competitive advantage in three broad domains:
- Distribution: Traditional media companies such as newspapers and television networks invested in superior delivery platforms to meet reader or viewer wants and needs. Such platforms also allowed them to reach the largest audience possible.
- Performance: They also attempted to differentiate themselves from competitors by creating unique content that the consumer could not find anywhere else.
- Price: Because the actual cost of producing and distributing the content was subsidized by advertising sales, audiences for newspaper, magazine, and television paid an artificially low price for the value they received.
The Internet began to erode these value propositions on a myriad of fronts. It offered even more convenient distribution at the lowest price of all–free. A 2011 Federal Communications Report, The Information Needs of Communities, points to three examples of innovative online products and services that led to the erosion of the financial performance of newspapers: Craigslist and eBay in 1995, followed by AutoTrader in 1997. These three start‐up organizations initially attracted only a niche segment of customers. However, over a decade, the value propositions of all three improved along performance and distribution dimensions such that consumers begin to embrace the new services. Classified advertisers took notice and shifted their advertising online, undermining the profitability of newspapers. Innovative entrants that challenged broadcast media followed a similar pattern, beginning with YouTube and Reddit in 2005.
Harvard Business School professor Clay Christensen called value proposition disruptions the “Innovator’s Dilemma.” Scholars and practitioners have, for the most part, been focused on innovations that disrupt demand patterns by offering customer‐based solutions. This is exactly what such digital entrants as Craigslist and YouTube did. Here are some examples of demand‐side disruptors of existing media companies.
- Platform competition: Today’s media consumers have easy access to the web (at work and at home), mobile devices, free newspapers and on‐board TV, and other alternative media channels. While the Internet enables local newspapers, radio, and television stations to reach long‐distance users from outside the market, national and pure digital media companies, along with other regional start‐up websites, can penetrate into the local market and compete with traditional media for customers and advertising. Additionally, because consumers can easily access content on the web, traditional media outlets can end up competing with their own websites.
- Changes in consumer behavior: The Internet has enabled a seismic shift in the relationships between consumers, retailers, distributors, manufacturers, and service providers. It presents many companies with the option of eliminating the role of intermediaries (newspapers or television shows that rely on revenue from advertisers to cover the cost of the content they produce) and communicate directly with their customers.
- Customers’ willingness to pay for digital content: The Internet has fostered a dramatic increase in consumer‐generated media, desktop publishing, and branded content, for example. As a result, supply has outstripped demand, and consumers become less willing to pay for basic content they can get elsewhere.
Traditional media companies have experienced not only these demand side disrupters of distribution, performance, and price, but also “supply side” disruptors. A supply side disruptor occurs because the response by the organization is only partially pre‐ordained by external conditions. The choices that top managers make are the critical determinants of whether the organization recovers and addresses the demand side disruptors with their own customer‐based innovation. Executives often hesitate to respond aggressively to the demand side disruptions, fearing that they will prematurely undermine their current business (the cash cow in the BCG matrix). Additionally, they are saddled with legacy costs associated with the pre‐digital era—such as capital‐intensive equipment, organizational structures and divisions, and personnel who do not have the skills to make the transition.
Traditional media organizations have evolved to have operationally excellent processes and structure, which breed cultures of administration and analysis, not prospecting. In other words, they are internally focused and defensive of their position, instead of externally oriented and offensive. This internal, defensive focus impedes innovation and often prevents traditional media enterprises from pivoting with agility. The key to recovering from any disruption or misstep is returning to a customer focus and recreating a unique value proposition.
Reed Hastings recovered from a serious business miscalculation in 2011 that could have destroyed his company by understanding that the product and service he was offering did not meet his customers’ expectations. He apologized, then quickly regrouped and created a new unique value proposition for Netflix.
Summary
Successful media entrepreneurs identify and continually reassess their unique value proposition, which can be defined as “the fulfillment of your (current and potential) customer’s needs and wants.” They use tools such as the BCG growth share matrix to decide whether a product is a star and has a promising future, or a dog and should be improved or divested. They thoroughly research the customer target, taking into account their emotions and motivation for choosing a particular product or service.
The key to crafting a unique value proposition is to first identify a customer’s most meaningful wants, needs, emotions, and motivations. This can be done by using a value creation customer profile. After understanding a customer’s set of wants, needs, emotions, and motivations, you should next create a value offering map, focusing on the “pains” or “gains” that the customer will experience by purchasing your product or service. Do the wants and needs of the customer identified through the value creation customer profile align with the value offering map? Are there product or service solutions that can address customer wants, needs, emotions, and motivations? If not, then you need to go back to square one.
Pricing is an important component of value equation. We discussed three types of pricing: cost‐based, demand‐based, and value‐based. Of the three, value‐based pricing (which is based on the value that a customer perceives a product or service provides) has the most potential to increase profitability.
Demand disruptors—such as changes in consumer behavior and the proliferation of delivery platforms—can destroy the business model of both traditional and start‐up media enterprises, and dramatically alter a product’s value proposition. This why it is essential for media companies to constantly update their value creation customer profiles and value offering map, ensuring they are providing a unique value proposition that will enable them to make a profit.