What is Value Proposition Budgeting?
Value Proposition Budgeting is a method of budgeting that focuses on allocating the ideal amount of financial resources to the product or service that provides the highest value to the customer. As the name implies, Value Proposition Budgeting is really a mindset about making sure that the most important parts of the budget provide the most value to the business.
Another name for Value Proposition Budgeting is Priority Based Budgeting. This type of budgeting not only ensures that everything in the budget provides value to the organization, but it also encourages businesses to prioritize. The most important function gets the most attention during the budgeting process followed by the less important functions.
Value Proposition Budgeting (VPB) emphasizes the connection between the budget and the value being created, rather than simply allocating resources based on historical spending patterns or other arbitrary factors.
Examples of Value Proposition Budgeting
An example of an organization that could benefit from using Value Proposition Budgeting is a local government office. The goal of local government spending is to provide value to its residents, therefore using Value Proposition Budgeting is a good way to evaluate where costs and effort should go.
Let’s say the local government office offers two services: trash pickup and street maintenance. Trash pickup is a basic service that every resident needs, while street maintenance is a premium service that only a subset of residents may value. If the local government office finds that residents are primarily concerned with trash pickup, it might allocate more of its resources to improving and expanding that service. The goal is to maximize value to residents and lead to increased satisfaction, loyalty, and effective use of public funds.
The same can be applied to any business that provides more than one product or service.
The 4 steps to creating a Value Proposition Budget:
1) Identify customer needs by defining your value proposition
Start by identifying the most important customer needs and the value that your company is trying to deliver to meet those needs. This will help you to focus your budget on the areas that are most important to your customers. Then, clearly define the value proposition that your company is trying to deliver. This should be based on your understanding of customer needs and your company’s unique capabilities and strengths.
2) Develop a budget
Based on your value proposition, develop a budget that allocates resources to the initiatives that will most effectively deliver that value. This may involve prioritizing initiatives based on the impact they are expected to have on the customer.
3) Allocate resources
Allocate resources to the initiatives that will deliver the most value to the customer. This may involve adjusting the budget to ensure that you are focusing your resources on the initiatives that are most important to your customers.
4) Monitor, adjust, and evaluate the budget
Continuously monitor the budget and make adjustments as necessary to ensure that you are still delivering the value that your customers need. Regularly evaluate the results of your value proposition budget to ensure that you are achieving your goals and delivering value to your customers.
Differences Between Value Proposition Budgeting and Other Types of Budgeting
Value Proposition Budgeting might sound similar to other types of “non traditional” budgeting such as Zero Based Budgeting and Activity Based Budgeting, but there are some key differences:
Activity Based Budgeting vs. Value Proposition Budgeting
Activity Based Budgeting focuses on a detailed view of costs and helps organizations understand which products, services, or customers are most profitable by focusing on the costs aspect. An activity-based budget disregards prior year values entirely and instead focuses on identifying cost drivers. Activity Based Budgeting, might be good for smaller businesses or those with tight profit margins, while it is less beneficial for established businesses with recurring and mature revenue.
Value Proposition Budgeting on the other hand, is a budgeting method that starts with the value proposition of the organization and works backwards to determine the costs needed to deliver that value. It takes a customer-focused approach, considering the value that the organization wants to deliver to its customers and the costs associated with delivering that value. Value proposition Budgeting can be used for all types of businesses considering that it is meant for focusing on customer facing value, no matter what the size or industry.
Zero Based Budgeting vs. Value Proposition Budgeting
Zero Based Budgeting (ZBB) is similar to Value Proposition Budgeting in that they both aim to avoid unnecessary expenditures, however there are a few differences. In Zero Based Budgeting all expenses start from a “zero base” and must be justified for each new budget period, regardless of whether they were approved in the previous budget.
The focus of Zero Based Budgeting is on finding ways to reduce costs and improve efficiency, as all expenses must be justified in order to be included in the budget. While it is very time consuming, it is good for companies looking to rebrand or make big changes.
This is different from Value Proposition Budgeting where the focus is on value and priorities, instead of a overhaul of the entire budget.
Pros and Cons of Value Proposition Budgeting
Here are some key benefits of Value Proposition Budgeting:
- Improved alignment with business strategy and greater clarity around expenses.
- Increased focus on customer needs and areas that have the highest value.
- A quick way to eliminate excess spending (and it takes much less time than other similar budgeting options that do the same thing).
- Easily prioritize future expenses and see where your current and future cash flow is going.
- Increase the competitive advantage by delivering more value to the customer and getting ahead of the competition.
Cons of Value Proposition Budgeting:
- Value Proposition Budgeting focuses exclusively on existing or past expenses which means companies might miss out on opportunities that they are not thinking of.
- Expense value can be challenging to gauge as the value can change depending on industry and you can’t always quantify everything by a dollar amount.
Regular financial statements don’t always tell the complete picture of the company due to there being so many aspects involved and it being difficult to show how certain investments lead to higher profits. Therefore, figuring out the highest value of your business holistically can lead to pinpointing those important value driven aspects that otherwise may have been missed.
Value Proposition Budgeting is also good for tough economic times as it helps clarify where it is crucial to spend money and where it is less important. By focusing on Value Proposition Budgeting, companies can ensure that their budgets are aligned with their business strategies and goals, and that they are making the most effective use of their financial resources. This can lead to improved financial performance, increased customer satisfaction, and a greater competitive advantage.
Using Datarails to Build Your Budget
Every finance department knows how tedious building a budget can be. Regardless of the budgeting approach your organization adopts, it requires big data to ensure accuracy, timely execution, and of course, monitoring.
Datarails’ FP&A software can help your team create and monitor budgets faster and more accurately than ever before.
By replacing spreadsheets with real-time data and integrating fragmented workbooks and data sources into one centralized location, you can work in the comfort of excel with the support of a much more sophisticated data management system behind you.