Defining value proposition is key to success

Published in UT San Diego, October 21, 2013

Lots of users and no revenue is not a viable business. Instagram is the exception to the rule. Most companies get sold or go public after they have sales. So the entrepreneur needs to figure out how their company is going to make money, and the process starts with defining your value proposition — what unique product or service you offer — and then getting customer feedback as quickly as possible.

For example, with Proflowers.com (started in 1998), our value proposition was fixing an inefficient supply chain of nine to 12 days (during which the flowers were dying) by selling flowers that came direct from the grower so they were fresher and lasted longer. In addition, because we sold to consumers all over the United States and had centralized sources of flowers, we could offer more types and colors than a stand-alone flower shop. This allowed us to promise, “what you see is what you get” along with a seven-day freshness guarantee — then unheard of in the floral industry.

Entrepreneurs often ask us, “What is more important early on — generating revenue or developing a complete product?”

Our answer: Get out there with a Minimum Viable Product to get customer feedback before you spend millions of dollars. This is known as the lean startup process, although it’s not really a new concept. Before we formally launched Proflowers, we conducted a test a few days before Valentine’s Day 1998 by running a few online ads, putting up a one-page website with only one dozen roses, and contracting with a floral distributor in San Francisco to ship the flowers.

After this success, we inexpensively developed a few prototypes of our website that we tested with consumers to learn how they shopped for flowers. This led us to put the gift card message first in our order process — before asking the customer for his name and credit card information. Analysts later told us that we had one of the highest e-commerce conversion rates in terms of people finishing the order process, and this may have been one reason why.

We learned a lot more from our customers. For example, the growers told us that we only had to sell red roses and perhaps one other color. However, our customers told us that they liked red, yellow, orange, white and multicolored — and together these comprised more than half of our rose sales.

We also learned about customer service. When we launched our first website in April 1998, you could only order online and contact customer service by email. That department was one person during the week with the remainder of our six-person team taking turns on the weekends.

This frustrated many customers who wanted to talk to a real person for help in ordering (flowers are an emotional purchase), to make sure that their flowers were being shipped and had been received (since these were usually not going to the purchaser), and to complain if there was a problem.

First, we added a toll-free number to the home page, and next, we worked with FedEx, our sole shipper at the time, to develop an application programming interface that linked our two systems so that emails were automatically sent to customers based on a FedEx scan when the flowers were shipped and when they were received.

In contrast with Proflowers, a software company in which we invested didn’t follow the MVP route. Instead it focused on developing a very complex product that had a long sales cycle because it was so complicated. The result: The company was sold but not for as much as we originally hoped.

Neil’s note: We could never explain in one sentence what the company did. If it takes me a paragraph to explain the company, then I should know better than to invest in it.

Rule No. 325: Charisma and buzz are no substitute for a rational business model.

Update

At the recent The Atlantic Meets the Pacific Conference held in La Jolla, Mick Ebeling, the founder of Not Impossible Labs (the subject of an earlier column), announced Project Daniel.

Ebeling and a group of hackers with no medical training are flying to South Sudan with 3-D printers and laptops to develop prostheses for Daniel Omar, a young man who lost both arms in a bomb attack.

The goal is to use Daniel’s story to help many, so the American group will teach workers in South Sudan how to use the equipment and will return in six months for additional training.

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