A business strategy is a framework that helps define an organization's vision, objectives, and tactical decision-making processes. Yet, identifying these essential elements can be challenging.
For an organization’s strategy to succeed, its leaders must understand its identity in the marketplace. According to Harvard Business School Professor Felix Oberholzer-Gee in the online course Business Strategy, this requires “a deeper understanding of your company and a profound sense of optimism about its potential for exceptional performance.”
If you want to learn about strategies that can benefit your organization, here’s an overview of value-based business strategy, commonly implemented approaches that can achieve long-term success, and how to choose the right strategy.
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The most effective business strategies are typically value-based, which means prices are predicated on consumers’ perceived value of products and services rather than their cost of production. Value-based business strategies are ideal for companies offering feature-rich products and services, such as Apple and Amazon.
Several components of value-based pricing are best illustrated by the value stick. The value stick comprises four critical aspects to implementing value-based pricing: willingness to pay (WTP), price, cost, and willingness to sell (WTS). The value of a company’s product or service depends on where each component falls.
Customer Delight
The top of the value stick represents customer delight, or the value based on customers’ perceptions of your product or service. Since a value-based strategy is customer-centric, you can drive brand awareness, loyalty, and goodwill by thoroughly researching your target market, creating open lines of communication, and building strong relationships with consumers.
Doing so enables your company to gather feedback about your services’ value and customers’ WTP. It can also help you add valuable features to products that benefit your business.
Company Margin
The middle of the value stick is the value of a product or service from your organization’s perspective, also known as the firm’s margin. Your company sets this value between its cost of production and customers’ WTP. This ensures your company earns the difference between the price being charged for a product or service and the cost of creating it.
It’s important to consider how to balance maximizing profits with customer delight to ensure loyalty and long-term success.
Supplier Surplus
The last section of the value stick showcases the value perceived by your organization's suppliers, or the supplier surplus. This refers to the total cost of producing goods or services, including physical and non-physical costs. Your company should strive to keep costs low and provide higher value to customers.
Although a value-based strategy is one of the most successful over the long term, you may need to adapt your business plan and product value according to your company’s goals and market competition.
“Ultimately, we want our business strategy to create financial success,” Oberholzer-Gee says in Business Strategy.
In the course, he outlines three essential questions your company’s strategy should revolve around:
- How can my business best create value for customers?
- How can my business create value for employees?
- How can my business create value by collaborating with suppliers?
Answering these can set your organization up for success.
3 Strategies Businesses Need to Compete
Beyond understanding the critical components of a value-based business strategy, you must also know how to implement one—especially if you own a small business. Small businesses benefit from value-based strategies because they promote customer and brand loyalty and drive product innovation to meet customer needs.
Here are three strategies you should consider implementing in your business.
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Driving Company Value Using Differentiation
Creating higher product value requires differentiating your services from competitors’. According to Business Strategy, differentiation is one way for smaller businesses to succeed when competing with larger platforms.
The first step to differentiation is considering the type of investment required. A larger competitor, for instance, can produce sizable investments at a lower cost by spreading a fixed cost over several transactions. This means differentiation works best for smaller companies when it's achieved with modest variable costs.
For example, group buying—also known as collective buying—is a strategy in which a company agrees to sell a product or service in bulk at a lower price. E-commerce retailers commonly use collective buying. Smaller companies can take advantage of it by offering products at scale or upgraded feature tiers to like-minded customers.
This method ultimately lowers the fixed cost of customer acquisitions because current customers recruit new ones who benefit from a lower price point. It can also increase value in ways that don't depend on product scale. For example, network effects—when a product or service gains value as more people use it—are beneficial because they increase WTP.
Focusing on Neglected Platform Participants
In addition to differentiation, another approach highlighted in Business Strategy is focusing on the WTP of a consumer group less favored by a competing platform.
Large organizations serve multiple customer groups and subsets, which can make differentiating your product and establishing your ideal customer profile (ICP) daunting. However, it’s difficult for those businesses to ensure every customer is happy because of the scale of their operations.
By targeting neglected customers unhappy with competitors' products or services, you can differentiate your offerings and win their business by better meeting their needs. To do this effectively, return to the essentials of value-based business strategy: Research your target market, gather feedback so you can address customers’ pain points, and develop trust.
Catering to Small Groups of Customers
Another business strategy to consider is focusing on customers who value connection. By doing so, you can significantly increase brand loyalty and develop customer advocates who recruit others and increase retention.
eHarmony, the online dating platform, is used as an example in Business Strategy. Within the competitive landscape of dating sites, customers’ WTP is often pulled in opposite directions as websites attract more members. Yet, an increase in membership can create more competition among users when trying to find someone to date, which can deter people from using the platform and decrease its perceived value.
Consider one of eHarmony’s competitors, Match.com. While Match.com’s membership price is lower than eHarmony’s, its large number of users lowers the value of its services for many consumers. Unlike Match.com, eHarmony sells its services to a small group of consumers to remove the possibility of them experiencing too much rejection when seeking a dating partner. Its users, in turn, pay a premium price for that experience and help the business succeed.
Choosing the Right Business Strategy
Developing a value-based business strategy is one of the best ways for your organization to excel. Once you’ve set your business goals, adapt your strategy by differentiating your products and services from competitors’, marketing to neglected customer bases, and targeting consumers who want a specific experience.
Taking an online course, such as Business Strategy, can help you understand how to implement strategy within your organization and shed light on why some companies are more successful than others.
Are you interested in learning more about business strategies that can improve your organization’s bottom line? Explore our online course Business Strategy and download our free e-book on strategy formulation.
