Over the past few weeks, I have become seriously frustrated with analogies used by certain politicians over the impact post-Brexit tariffs may have on UK businesses. Probably the one analogy which annoys me most is the comparison between the UK and German car industries.
This argument, used by Brexit supporters goes as follows:
The German car industry sells lots of vehicles in the UK. They will therefore not want the introduction of tariffs on their exports and they will pressurise the EU commission into signing up to the demands of the UK government as regards free trade.
This argument is ridiculous. Firstly, it overstates the power of both the German government and the German car industry to dictate terms. Any trade agreement will be decided by the Council of Ministers, not the Commission. It will be a vote requiring unanimity in the council. Poland and Cyprus will have the same voting power as Germany. Some nations, such as Holland, may require a public referendum before agreement can be reached. Holland recently blocked a free trade agreement between the EU and Ukraine in such a referendum.
Incidentally, some Brexit supporters are confusing the Article 50 negotiations, our divorce from the EU, which can be agreed by a qualified majority in the Council of Ministers, with the new trade deal which must be agreed by EU member states unanimously.
However, as a marketer, it is not the misrepresentation of the power of certain players in the negotiations which annoys me; it is the assumption that German car manufacturers classify themselves as being in the same market as UK car producers and that the effect of tariffs will impact both players equally.
One of the most important aspects of preparing a marketing strategy is defining the market in which your business operates. Without a proper market definition, you cannot ascertain the size of the market or your share of that market. You cannot have a clear idea of who your competitors are and at what rate your market is growing. You cannot appropriately segment your market or define your target customers.
BMW do not operate in the same market as Vauxhall or Nissan.
That statement may at first glance appear to be untrue. After all, BMW, Vauxhall and Nissan all manufacture motor cars. However, this is the mistake made by the Brexiteers. The are defining the market by product category; not by customer need. Rather than segmenting the market by the limited definition of motorised personal transport, they should be looking at the motivation behind the purchase.
Someone looking to buy a Vauxhall may be in need of a family car to take the kids to school or to commute. Someone buying a BMW is doing so because they want a luxury product which offers a unique ‘driving experience’. BMW are in the prestige/luxury car market. Their competitors are Mercedes, Jaguar and Lexus, not Fiat or Nissan.
Toyota clearly saw this difference when they created the Lexus brand. They saw that the customer need for a luxury car was different to that of other car purchasers and understood as a luxury car badged with the Toyota brand was unlikely to gain traction in that market.
Similarly, Walker’s do not operate in the crisp market but in the savoury snack market. Walker’s view their market as being larger than just crisps; they are competing with biscuit manufacturers and bakeries.
BMW’s market is narrower than motor vehicles. Walker’s market is wider than just crisps.
Using the German car market as an analogy also ignores the effect tariff’s may have on the prestige car market.
The target customer for a BMW is likely to have higher disposable income than someone buying a family car. Price is likely to have a reduced importance to their buying decision and demand will be more price inelastic. A BMW purchaser may actually see an increase in price as an indicator of their status in society and improve the cache of the marque. On the other hand, to the purchaser of a family runabout, the equivalent price increase as a result of a tariff may result in their selecting a Fiat (where no tariff applies) over a Vauxhall where the price has gone up. The family car market being more price elastic.
It is crucial that when developing a marketing plan, you start by correctly defining your market. Not doing so could seriously affect your business through the targeting of the wrong customer groups, you could be missing out on price premiums and you could be seriously affecting your bottom line.