A company chooses how to compete in a given industry with its business model – also known as its plan to make big money! A business model states a firm’s logic, operations, and value. Companies must navigate between two considerations to shape its business model:
1. The first consideration is the value proposition. What is the main value your company brings to its customers? [quote]A value proposition can be based on low cost, differentiation, and in some cases, a combination of the two.[/quote] A value proposition can be based on low cost, differentiation, and in some cases, a combination of the two. A firm based on differentiation offers a product or service that appears to be more desirable than alternatives, and therefore, customers are willing to pay a higher price. Whereas, a firm based on low-cost attracts its customers by offering a product or service at a better value than alternatives. The third value proposition, a combination of low-cost and differentiation, is more difficult to offer because providing a higher quality product or service is a larger investment.
Here are some examples of the types of value propositions to give you a better idea of where your company may fit:
- Lululemon: Differentiation – Lululemon provides high quality, unique fitness and lifestyle apparel that customer’s are willing to pay for at a premium cost.
- Walmart: Low-cost – Walmart is a mass merchandiser that has everyday low prices.
- Trader Joe’s: Combination – TJ’s offers a one-of-a-kind experience in store and a compelling brand while maintaining low-cost products.
2. The second consideration is the target market. A target market can be defined as either a mass market or a niche market. Typically a firm that is focused on low-cost targets a mass market, while a firm focused on differentiation focuses on a distinct market. For example, Walmart is able to offer products at the lowest prices because it targets a mass market. This results heavy store traffic and high purchase volume that are required to operate at low gross margins.
Which business model does your company follow? Contact our strategic marketing agency today, and we will help to showcase your company’s value!
Source: Casadesus-Masanell, Ramon. September 4, 2014. “Introduction to Strategy”. Retrieved from Harvard Business School.