Value Proposition Budgeting—Smart Spending to Build a Business
Updated · Jun 09, 2022
Budgeting is a crucial part of running an ecommerce business.
By carefully tracking income and expenses, businesses can make sure that they are operating optimally financially.
Such information can also be used to make informed decisions about where to allocate resources to maximize growth and profits.
There are various types of budgeting, but in this blog, we’ll be looking at one that’s good for fine-tuning a business.
What Is Value Proposition Budgeting
This is a budgeting system that businesses use to consider each item on a budget list and whether or not it will generate value.
The aim is to ensure that all money spent generates positive value for the company. To do this, businesses first need to identify their key objectives and then map out how each expense will help achieve those goals.
This is done by asking a set of questions.
Value-based budgeting can be complex, as there are several different factors to consider. Businesses need to identify “value drivers” and start allocating budgets to specific activities that will improve those drivers.
An example of a value driver could be an informative ad campaign. A business can notice a high amount of engagement from this campaign and so focus on it.
Another value driver could also be an aspect of a company’s sales strategy, like bundling, where products are offered at a lower price to customers when bought together through a smart budgeting process.
It could even be something “less direct,” as the speed of a website making the customer journey easier or having extra staff on hand to talk to clients via live chat tools 24/7.
This process can be iterative, as different strategies may need to be tested before finding the right fit. However, by asking the right questions and carefully planning, it is possible to create a value proposition that delivers results.
What Is the Budget?
The first and arguably most important question that must be asked is, "what is the total budget?"
This will determine the scope of what can be realistically accomplished with the available corporate budget.
Once the budget has been set, the next step is to identify the key value drivers for the business or product. These factors will have the most significant impact on customers and/or ROI.
Why Is This Item Included?
This is where key drivers are identified. Businesses must go item by item and figure out why each one is on the list.
The main question for this part of the budgeting process is whether this item creates value for the company or the client. If the answer is yes, then the item is a value driver.
Why Is This Item Allocated This Amount?
The amount of money allocated to each item must also be justified in terms of the value it creates.
Businesses must work out whether the value the item generates outweighs its cost.
If the answer is yes, then it’s a worthwhile driver.
If the cost outweighs the value, there’s still a chance it’s needed.
Can the Expenditure Be Justified in Some Other Way?
In corporate budgeting, if the item’s cost outweighs its value, businesses must ask whether the expenditure can be justified in some other way. Perhaps some spending now could set up a value driver later on, but this could be a slippery slope.
Smaller businesses with less budget are best served by focusing on more immediate gains.
Advantages and Disadvantages of Budgeting Based on Value
This budgeting method has many advantages, but these are balanced out with a few disadvantages too.
Advantages of Value-Based Budgeting
The advantages center on being able to track, optimize and save money.
The main advantage of this approach is the possibility to track where money is being spent specifically.
This gives companies a more granular view of their business and how exactly it’s performing. It also allows them to identify areas for optimization.
Optimization of Spending and Business
With value proposition budgeting laying out everything in terms of value, businesses can decide what to cut, and what to focus on in order to improve profit margins and strengthen the business as a whole.
Potential to Save Money
Additionally, this style of budgeting has the potential to save businesses money in the long run by helping them to avoid wasteful spending.
Remember, many free open source ecommerce alternatives to paid SaaS solutions exist.
They are an option for cutting spending while gaining value.
The disadvantages are mainly due to administrative considerations.
Difficult to Measure Value
Measuring value can be difficult, because “value” can be an abstract concept. When a business thinks of value, does it mean pure profit?
Increased customer satisfaction?
Greater brand recognition?
For this reason, it’s important for a business to decide what’s valuable to it, and then quantify that so it forms a standard to work from.
Requires Constant Reassessment
Businesses must constantly reassess their priorities and value drivers to do value-based budgeting correctly.
Due to changes in trends and the market, what drives value this month, may not do so next month.
As such, businesses must constantly reassess and reorganize spending. That in itself can be an expense.
Value proposition budgeting is a strong tool for businesses that want to optimize, but it requires a thorough analysis on a semi-regular basis.
If done correctly, it provides a good overview and shows businesses precisely what’s driving value and dead weight.
If you want to experiment with value-based budgeting today but don’t want to go all-in on it, practice it by applying it to one aspect of your business.
This approach will allow you to get to grips with it and minimize any mistakes.
Garan is a writer interested in how tech reshapes the environment, and how the environment reshapes tech. You'll usually find him inoculating against future shock and arguing with bots.