Editor’s note: this is an excerpt from our forthcoming book UX Strategy; it is part of a free curated collection of chapters from the O’Reilly Design library — download a free copy of the Experience Design ebook here.
Value! Value! Value!
The word seems to be used everywhere. It’s found in almost all traditional and contemporary business books since the 1970s. In Management: Tasks, Responsibilities, Practices, Peter Drucker talks about how customer values shift over time. He gives an example of how a teenage girl will buy a shoe for its fashion, but when she becomes a working mother, she will probably buy a shoe for its comfort and price. In 1984, Michael Lanning first coined the term “value proposition” to explain how a firm proposes to deliver a valuable customer experience. That same year, Michael Porter defined the term “value chain” as the chain of activities that a firm in a specific industry performs in order to deliver a valuable product.
All these perspectives on value are important, but let’s fast-forward to 2004 when Robert S. Kaplan discussed how intangible assets like computer software were the ultimate source of “value creation.” He said, “Strategy is based on a differentiated customer value proposition. Satisfying customers is the source of sustainable value creation.”
There are a lot of things in that quote that align with what we just learned [earlier in the chapter] about business strategy — differentiation and satisfied customers. But there’s one thing that we didn’t discuss — the fact that we are designing digital products: software, apps, and other things that users find on the Internet and use every day. Often, the users of these digital products don’t have to pay for the privilege of using them. If a business model is supposed to help a company achieve sustainability, how can you do that when the online marketplace is overrun with free products? Well, we learned how many companies, like Waze, found a sustainable business model: sharing their crowdsourced data made them lucrative to other companies like Google. But in order to get the data, they had to provide value to their customer base for mass adoption, and that value was based entirely on innovation.
“Innovative” means doing something that is new, original, and important enough to shake up a market. As W. Chan Kim and Renée Mauborgne describe in Blue Ocean Strategy, value innovation is “the simultaneous pursuit of differentiation and low cost, creating a leap in value for both buyers and the company.” This is accomplished by looking for ways that a company can reduce, raise, lower, and eliminate factors that determine the cost and quality of a product.
When we transpose this theory to the world of digital products, the value proposition manifests itself as a unique feature set. Features are product characteristics that deliver benefits to the user. In most cases, fewer features equals more value. Value can be created by consolidating features from relevant existing solutions (i.e. Meetup and Evite) and solving a problem for users in a more intuitive way (i.e. EventBrite). Value can be created by transcending the value propositions from existing platforms (i.e. Google Maps + crowdsourcing = Waze). Sometimes it’s consolidated from formerly disparate user experiences into one single solution (one-stop shop for a user task), i.e. sharing a video you made with your phone on YouTube, into one elegant simple solution (i.e. Vine and Instagram). We will deconstruct these complex techniques in Chapter 7: Storyboarding Value Innovation for Digital Products.
In a blue ocean, the opportunity is not constrained by traditional boundaries.But for now, let’s discuss the most important reason that we want to be unique and disruptive with both our products and our business models. There are bigger opportunities in unknown market spaces. We like to call these unknown market spaces “blue oceans.” This term comes from the book Blue Ocean Strategy that I mentioned earlier. The authors discuss their studies of 150 strategic moves spanning more than 100 years and 30 industries. They explain how the companies behind the Ford Model T, Cirque du Soleil, and the iPod chose unconventional strategies rather than fighting head-to-head with direct competitors in an existing industry. The sea of other competitors with similar products is known as a “red ocean.” Red oceans are full of sharks that compete for the same customer by offering lower prices and eventually turning a product into a commodity.
In the corporate world, the impulse to compete by destroying your rivals is rooted in military strategy. In war, the fight typically plays out over a specific terrain. The battle gets bloody when one side wants what the other side has — whether it be oil, land, shelf space, or eyeballs. In a blue ocean, the opportunity is not constrained by traditional boundaries. It’s about breaking a few rules that aren’t quite rules yet or even inventing your own game that creates an uncontested new marketplace and space for users to roam.
A perfect example of a company with a digital product that did this is Airbnb. Airbnb is a “community marketplace” for people to list, discover, and book sublets of practically anything from a tree house in Los Angeles to a castle in France. What’s amazing about this is that their value proposition has completely disrupted the travel industry. It’s affecting the profit margins of hotels so much that Airbnb was banned in New York City. Its value proposition is so compelling that once customers try it, it’s hard to go back to the old way of booking a place to stay or subletting a property.
For instance, I just came back from a weekend in San Francisco with my family. Instead of booking a hotel that would have cost us upwards of $1,200 (two rooms for two nights at a 3.5-star hotel), we used Airbnb and spent half of that. But for us, it wasn’t just about saving money; it was about being in a gorgeous and spacious two-bedroom home closer to the locals and their foodie restaurants. The 3% commission fee we paid to Airbnb was negligible. Interestingly, the corporate lawyer who owned this SF home was off in Paris with her family. She was also staying at an Airbnb, which could have been paid for using some of the revenue ($550+) from her transaction with us. Everybody won! Except, of course, the hotels that lost our business.
Airbnb achieves this value innovation by coupling a killer user experience design with a tantalizing value proposition. A value proposition is the reason why customers accept one solution over another. Sometimes the solution solves a problem we didn’t even know we had. Sometimes it creates an undeniable desire. A value proposition consists of a bundle of products and/or services (“features”) that cater to the requirements of a specific customer segment. Airbnb offers a value proposition to both sides of its two-sided market: the people who list their homes and those who book places to stay.
Value innovation is about changing the rules of the game.Airbnb chose not to focus on beating the existing competition (other subletting sites and hotels) at their game. Instead they made the competition irrelevant by creating a leap in value for all of their potential users. They did this by creating a marketplace that improves upon the weaknesses of all of their competition. Airbnb is more trustworthy than Craigslist. It has much more inventory than HomeAway and VRBO because listings are free. They provide value along the way — from the online experience (booking/subletting) to the real-world experience (showing up on vacation/getting paid for your sublet).
To create a blue ocean product, you need to change the way that people think about doing something. Value innovation is about changing the rules of the game.
Airbnb did this by enabling a free-market sub-economy in which quality and trust were given a high value that spanned the entire customer journey from the online experience to the real-world experience. And they catered to both of their customer groups (subletters and renters) with distinct feature sets that turned what was once a potentially creepy endeavor (short-term subletting) into something with incredible potential for everybody involved.
There are many other products causing widespread disruption to the status quo. Uber, which matches drivers with people who need rides, is threatening the taxi and limousine industries. Kickstarter is changing the way businesses are financed. Twitter is disrupting how we get news. And we can never forget how Craigslist broke the business models of local newspapers by providing a superior system for personal listings.
Jaime Levy, author of UX Strategy, can be reached through her Twitter handle, @JaimeRLevy.
Editor’s note: this is part of our ongoing exploration looking at experience design and the Internet of Things.