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Price Simplifying Vs. Proposition Simplifying: Understanding Your Options These two strategies for growing a successful business are very different. Find out which would be a good match for you.

By Richard Koch

Opinions expressed by Entrepreneur contributors are their own.

Ezra Bailey

The following excerpt is from Richard Koch and Greg Lockwood's book Simplify. Buy it now from Amazon | Barnes & Noble | iTunes

The two simplifying strategies -- price simplifying and proposition simplifying -- are very different in what you have to do to make them happen, in what your objectives are and in the way you're rewarded for success. By comparing and contrasting them, you can begin to think about which you and your business might be able to execute before anyone else has the same idea.

Let's take a quick look at what these strategies are:

Price-simplifying: Create a mass market -- simplify to make a product or service dramatically cheaper. Simplicity results in the product being easier to make, so simplicity for the producer matters most. The producer operates on low margins but enjoys massive growth in revenues.

Proposition-simplifying: Create a premium market -- simplify to make the product or service dramatically better and a joy to use. Simplicity results in the product or service being easier to use and usually more useful and/or aesthetically appealing, so simplicity for the user matters most. The producer enjoys high margins and growth in both revenues and profits. The premium part of the market will normally be a smaller part of the total market than with price-simplifying, although in some cases proposition-simplifying can create a new mass market, as with smartphones.

At this stage, you're seeking is a rough sense of whether you and your business may adopt either strategy and, if so, which one. Picture what major success might look like with each one, then decide between them.

Three precepts for the price-simplifier

1. Use simplicity to make something much cheaper both to make and to supply. This must always be the primary objective.

2. In making the product cheaper, simplify to eliminate what we call "expensive utility" -- anything the customer can do without. Henry Ford eliminated the variety of car models, features and, eventually, colors. The McDonald brothers dispensed with waitresses and broad menu options. IKEA founder Ingvar Kamprad provided one style of furniture, reduced variety within each product category and eliminated certain transport costs through self-assembly.

3. Increase utility where it can be provided at little or no extra cost. Substitute cheap utility for expensive utility. Henry Ford provided a lighter, more robust car that was easier to drive and maintain, but did so at no extra cost through simple design, lighter materials and an automated production system. Dick and Mac McDonald provided better hamburgers and fries than were available at the local coffee shop, but because they sold so many of them -- and automated production -- they were able to charge only half the price. IKEA sells furniture that's not only inexpensive but well designed, while also providing play areas and crèches, inexpensive restaurants and sometimes entertainment for the kids -- real benefits that pay for themselves by attracting a larger flow of customers.

Deciding which elements of utility to remove and which to substitute requires imagination, and putting yourself in the shoes of the mass-market customer. Think about each of the three categories separately:

  • Greater ease of use. What could this mean in your market?
  • Greater practical usefulness of the product or service. How could you provide this?
  • Greater art -- everything that makes a product or service attractive, yet cannot be reduced to hard usefulness or ease of use. Is this a dimension that is missing in existing products or services?

Two precepts for the proposition-simplifier

1. The primary objective is to use simplicity to make something a joy to use -- to add utility through greater ease of use in the first place, then greater usefulness and/or art.

The Macintosh is a great example of a proposition-simplifying product. When the Mac emerged in 1984, the great thing about it was that it provided an accessible, modern PC, especially when compared with the old type of personal computer where you had to write code to get it to do anything. The ability to access files in a flash by clicking on an icon, to print a page exactly as it appeared on the screen and to scroll smoothly through a document were huge breakthroughs in terms of ease of use, utility and art.

More than half of the battle is knowing what the end result should be. To get there, you either have to make a huge leap in imagining what would make life simpler for the customer or, like Steve Jobs, see an early prototype and realize where it's heading and how it might be improved. The end result for the proposition-simplifier is always a giant vault forwards in terms of simplicity and utility for the customer.

2. A secondary objective is to use simplicity to make the product cheaper to make; or at least to ensure that the extra utility far outweighs the extra cost.

Making clever trade-offs

For the price-simplifier, making tradeoffs is fairly straightforward. The central objective is always to reach a very low price -- which the customer will value enormously -- by trading off attributes that your customers think are less important. Imagine a haggling conversation with a typical customer. For instance, the person who invented the supermarket might have said to their target customer, "If you're willing to push a trolley around my big shop, pick the products you want yourself, and take them to the till, I'll charge you much lower prices than your local grocery store." Similarly, imagine the McDonald brothers saying, "If you'll line up for your meal and accept a limited menu, we'll cut the price of your burgers in half."

Yet it's usually not enough to slash prices without providing some other benefits, too. Even grocery chain Aldi offers the convenience of a large parking lot and enticing "job lot" merchandise in addition to rock-bottom prices. Cunning price-simplifiers always substitute cheap benefits for the expensive ones they eliminate. The latter may include staff. There's an implicit deal with the IKEA customer: "Put your back into some of the heavy lifting that's done by our rivals' employees, and you'll get a fantastic price and plenty of other benefits, too."

The principle is slightly less obvious, but equally true, for proposition-simplifiers. They make deals with their more affluent customers, with the latter persuaded to pay a little more for something they believe is much better. The way to square this circle is to go through the complex process of simplifying what's bought. Think of the speed and intuitive nature of a Macintosh or the ease of use and peace of mind in taking an Uber cab.

But the highest form of making a trade-off comes when the trade-off isn't really a trade-off at all -- what we call a "virtuous trade-off."

Virtuous trade-offs

Virtuous trade-offs are different from normal hard-choice trade-offs. If you can make a virtuous trade-off, you end up with two good attributes, instead of one good and one bad. This is really creative simplifying -- ingenuity that trumps iron laws. Many "giving back" attributes of price-simplified products are really virtuous trade-offs in disguise. For instance, if a private art gallery offers visitors a nice big glass of champagne when they walk through the door, knowing that its sales and profits will increase as a result, it's deploying a virtuous trade-off -- between giving away glasses of champagne and profits. Similarly, IKEA's free entertainment and play areas boost revenues and profits. The trade-off is virtuous. The stuff for kids is a genuine benefit, but its cost is illusory -- both customers and the company win.

Therein lies the marvelous opportunity for price-simplifiers. Conventional thinking will never lead you to a virtuous trade-off. You have to be willing to construct a new route to virtue via lateral thinking or a novel argument. For instance, "If we do X, then we should arrive at a virtuous trade-off. We can avoid a trade-off that everyone else thinks is inevitable, such as one between a well-produced popular book and a high cover price."

In your market, can you find a way to increase an important consumer benefit while also increasing your own supplier benefit? Can you see a connection between any one of the benefits in the left-hand column and any one on the right? (Look beyond the benefits that lie next to each other.)

Richard Koch is an entrepreneur who has made over $300 million from starting businesses and investing in early stage venture capital. He is author of many books on business and ideas, including The 80/20 Principle, which has sold over a million copies and been translated into 35 languages, and his newest title Simplify: How the Best Businesses in the World Succeed.

Richard Koch

British Author, Speaker, Investor, and former Management Consultant and entrepreneur.

Richard Koch is an entrepreneur who has made over $300 million from starting businesses and investing in early stage venture capital. His businesses have included Filofax, Plymouth Gin, Belgo Restaurants, Betfair, FanDuel, and Auto1. Formerly he was a consultant with the Boston Consulting Group and a partner of Bain & Company before cofounding LEK consulting. He is author of many books on business and ideas, including The 80/20 Principle, which has sold over a million copies and been translated into 35 languages, and his newest title Simplify: How the Best Businesses in the World Succeed. Richard wrote the foreword to the Entrepreneur Press bestseller, 80/20 Sales and Marketing by Perry Marshall.

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