My Favorite Value Proposition Is Admittedly Boring
It’s only taken 16 years in the investment business for me to discover my favorite value proposition. And, I admit, it’s a boring selection. First, some context. A value proposition is the value a business offers its customer such that the customer decides to buy that company’s product. To be fair, there are many categories of value props that all have great merit and can be the basis of building a valuable company. So, one is not by definition greater than another. But, we all have our predispositions, and I have a positive predisposition for one value prop in particular. I favor this value prop because, if it is structurally sustainable, it can be equally transformative as it is predictable – and those usually don’t go hand in hand. So, without further ado, my favorite value proposition is offering a customer the opportunity to buy something they already buy, but at a structurally lower price. Yes, if the options are better, faster or cheaper – I like cheaper. Why do I like this value prop? Because there’s little fundamental market risk. If a customer is already buying a product, then you know they want that product and that product benefits them in some way. You know they are ready to buy it now because, well, they already buy it now – so you’re not taking market timing risk. Whether there’s even a market or whether the market is here now is a profoundly underestimated risk undertaken by many emerging technology companies. And, in this example, you meaningfully mitigate those risks. Then you layer on top of a large existing market, a very clear reason to buy with you – you’re selling to them the very thing they already buy, for a lower price. Who doesn’t want that? The key to a company with lower price as its fundamental value prop being a good investment, is their basis for having a lower price must be structurally defensible and sustainable. It can’t be that they’re doing exactly the same thing as their competitors, just charging a lower price. That’s the definition of unsustainable. There is usually some disruption in the supply chain or some technology innovation, which they can take advantage of above and beyond their competitors which is why they’re able to offer sustainably lower prices to their customers and quickly take market share of a large existing market. When I look at our current and historical portfolio, where the ingredients of a structurally sustainable lower price value proposition is true, those companies have an inordinate propensity to be worth $1B+ in enterprise value. Xoom went public last year by offering online global money remittance at a lower price than folks like Western Union because they have an Internet front-end. Prosper offers loans to consumers at a lower interest rate because they use the Internet to cut out the banks who take a margin in the normal lending process. Globaltranz offers businesses access to trucking capacity at a much lower price due to the efficiency of their agent network, technology and buying capacity. Cortera is offering business credit data at a much lower cost than Dun & Bradstreet because of its proprietary data acquisition platform. And Chewy offers pet owners high quality pet food at a lower price than bricks and mortar competitors because they have no bricks and mortar. These companies are all taking significant steps in transforming their respective industries on the core value proposition of lower price. While I can easily fall in love with companies that have other value propositions such as convenience, selection, revenue enhancement, service, etc., lower price is a tried and true value prop which while admittedly boring, can be extremely effective if it’s sustainable.