Making your brand authentic

Traditionally, when the word authenticity was mentioned by senior executives, it was defined by the term ‘the genuine article’.  It was a reference to official goods as opposed to counterfeits.  Authority was conferred on a product through the enforcement of intellectual property and the use of legal force in terms of both criminal and civil sanctions. Thus authenticity was conferred on products by their manufacturer.

Today, authenticity is conferred through the perception of consumers.  To develop an authentic brand story, you must buy in to the perceptions of your target consumers and fit within their concept of the truth.

What recent political campaigns have shown is that something doesn’t need to be true or factual to confer authenticity.  Leave won the EU referendum campaign through the widespread dissemination of lies and myth.  They plastered a bus with a false and misleading statements about “£350 million a week for the NHS”.  This was a lie as the UK only ever paid a fraction of that sum to the EU as its membership fee.  Donald Trump continues to send out false and misleading messages.  For example, this week he tweeted about a large rise in the crime rate in Germany.  In truth crime in Germany has fallen to its lowest level in over a decade.

Obviously there are laws to prevent the dissemination of false or misleading statements about products (e.g. the Consumer Protection from Unfair Trading Regulations 2008) and there are far less robust controls in politics.  However the Trump and leave campaigns won because their messages fitted best with the perception of the truth amongst the target audience.  Common sense and facts did not matter, the misleading messages fitted with the target audiences beliefs.  Both Trump and Leave cynically targeted the less well-educated and the politically dispossessed with fairy stories and the creation of a false Utopia.  In the long run the lies told by Trump and Leave will be exposed and the effects of a policy based on lies will be felt.  But politicians aren’t trying to maintain a product over decades.  Their concern is for the immediate campaign, not the campaigns of ten years time.  They are quite happy to deliver a prospectus which contains false authenticity because by the time the effects are felt, the ‘product they sell will be gone.

That is not an appropriate strategy if you are trying to develop brand authenticity in the long-term.

However, as with politics, something doesn’t need to be true to be authentic.

Charles Morgan, of the Morgan Motor Company, which makes ‘classic British sports cars’ said:

“Rather than a brand, I think it’s an attempt to interest the cult and to keep the cult going.  we like telling stories people can tell in the pub and that makes them feel part of the family.  And so the brand is made up around a series of myths; some of which are true, some of which are owned – The one about the wooden chassis in France, we have tried and tried to get rid of that, but it still persists; and I think eventually we’re going to have to say, “Okay, yeah, yeah, it’s true”.

Of course, parts of a Morgan car are constructed from wood, but the chassis is not and never has been.  The wooden chassis myth is part of the subjective nature of brand authenticity.  The fact Morgan talks of myths, truthful and owned, is part of the firm’s creation of an alluring mystique which is authentic in the minds of its target customer group.

So why does brand authenticity matter:7

  1. Consumer brand choice is an extension of their desired self.  They use brands to achieve self-actualisation (the peak of Maslow’s Hierarchy of Needs.  Consumers use brands to confirm a preferred identity but they also go further and use brands to connect with a preferred community.  A brand is a connection to those who think alike.
  2. Authenticity can increase brand equity.  Brands considered authentic are often viewed more favourably by consumers and therefore are seen to have greater worth.  Authenticity can lead to greater loyalty, more word of mouth communication, helps to create brand communities, makes consumers more tolerant of failures and often acts as a defence in tougher times.  In market research, if consumers see a brand as authentic, it is an indicator of purchasing intention.
  3. Authentic brands are often long-lasting.  Their product life cycle is long or cyclical.  Brands seen as authentic can persist for decades.  The UK has two of the oldest brands in the world, Lyon’s Golden Syrup and Bass beer.  Both these brands have persisted for nearly two centuries.

Developing authenticity provides an ongoing point of difference.  It can also provide excitement and élan.

For example, Lexus cars are seen by consumers as technically excellent but boring.  Alfa Romeo cars have a record of inconsistent performance (particularly electrical faults) but they are seen as having soul.

Here are five strategies for building brand authenticity:

  1.  Become part of the community:  Assimilate the psyche of nations and sub-cultures.  What is Australia without Vegemite? What is France without Champagne?  What is London without the red double-decker bus?  What is Scotland without Tartan?  Being part of the community makes it difficult for new market entrants to gain a foothold.  If you are part of the community, buying your product is an act of identity, not just loyalty.
  2. Challenge conventions:  It is often authentic to go against conventions; although admittedly that sounds counter-intuitive.  For example, nineteenth century Britain the accepted culture was one of modernisation and technological advance.  William Morris, patron of the arts and crafts movement went against the zeitgeist.  Through Liberty he chose to champion artisan skills and a culture of craft.  He espoused a simpler age based on nature, tradition and emotion.  Liberty still exist to this day.  Punk arose in the late 1970’s as a reaction to the convention’s of progressive rock.  Where many saw the future of popular music as complex and taking influence from classical music, Punk looked to the simpler three chord structures previously seen in fifties rock and roll.  these simpler structures were seen as more authentic than prog.  Dyson are all about challenging convention.  Dyson’s technology is seen as authentic because it challenges vacuum cleaner designs which hadn’t changed in decades.  It is authentic to target the rebellious spirit in all of us.
  3. Stick to your roots:  Authentic brands are stubborn.  It is often a convention in marketing that to sustain a brand over time, you need to adapt to changing environmental, societal and technological factors.  However brands recognised as authentic often ignore societal change and stick to their roots.  In fact there could be a consumer backlash if they do not.  For example, Irn Bru recently changed its recipe.  It reduced the sugar content as a result of a tax introduced by the government on sugary soft drinks. Barr’s faced a backlash from its customers in Scotland who were unhappy at the recipe change.  In contrast, Coca Cola accepted the new tax and raised prices rather than lower the sugar content.  Perhaps Coke was ‘once bitten, twice shy’ following the failure of the New Recipe Coke in the late 1980’s.  Brand history is critical to authenticity.  Heritage, sincerity and love of production are central to consumers’ perception of authenticity.
  4. Love of craft:  Are your people passionate about your products and services?  Do senior managers spend time on the shop floor?  Consumer’s see authenticity when a firm shows true love of their craft.  Morgan cars are one such example.  It has retained the craft of hand-built coach work when other car manufacturers have factories filled with robots.  The firm is family owned and its managers own and drive its products.  Currently there is a group of Star Wars fans who want to remake The Last Jedi ‘properly’.  They feel the latest film in the series didn’t fit with the values of the ‘Star Wars’ brand and with its established conventions.  Brands run and staffed by enthusiasts are seen as authentic.
  5. Business Amateurism:  Authentic brands are often run by people who the general public see as amateurs.  A fine example is Ben and Jerry’s Ice Cream.  In the minds of many consumers, Ben and Jerry are two hippies who decided to sell ice cream.  They are not seen as hard-nosed businessmen.  The impression is that such firms reject market research and use gut feeling.  Of course, this is nonsense but the brand is seen as authentic as it has developed the myth of the amateur.  Amateurs have redeeming features.  They do it for love rather than remuneration.  They think differently (often through a lack of training).  Amateurs are often unconcerned about fame, paying bills or meeting targets.  They are viewed as grounded, humble and playful.

Authenticity is shown, not described.  Overt claims of being authentic are often seen as hype.  Such claims may make genuine brand claims seem fake.

For cultural immersion, small details and one-off experiences can count as much as extensive research programmes.  It is appropriate to immerse yourself in the market culture.  I have just watched Darkest Hour, the film-based on the early days of Churchill’s premiership during World War 2.  The critical scene is where Churchill takes a short journey on the London underground and ask the opinions of the commuters in the tube car.  This is what he bases his policy on, not the statistics produced by his civil servants.  Ugg, the sheepskin boot manufacturer takes a great interest in the views of its ‘brand fans’.  Ugg invites these fans to have work experience in the company where their individual views can be examined. Ugg fans directly impact decision-making.

Employing a brand historian can help develop authenticity.  A brand’s past can inform its future.  authenticity can be built through a company’s history and the colourful characters associated with a brand.  How many firms advertise themselves through the quirks of their creator?  For example, Huntley and Palmer biscuits sponsored Captain Scott’s expedition to the south pole.  Despite the expedition being a disaster, it is seen by many British consumers as an expression of British bulldog spirit and bravery against adversity.  Huntley and Palmer’s exploit  their history to develop brand authenticity.

Authentic brands are not afraid of letting their consumers in on their processes.  It is often critical to firms to get their consumers’ views on new technological innovations, new recipes and new products.  For example many software manufactures use beta testing.  They get trusted consumers to use prototype software and to identify bugs and potential improvements.  Showing you trust your consumers with your ‘in development’ products builds the impression of partnership, shared values and thus authenticity.

Authenticity can be developed through the exploitation of lucky breaks.  Ugg boots started life as a specialist product for male surfers.  they were designed to keep surfers feet warm when they got out of the cold ocean.  The brand got a lucky break when young female consumers saw the boots as comfortable and fashionable.  Dyson took advantage of a market where product design was assumed to be unchanging.  He was also lucky in that the market leader, Hoover, was in financial difficulty following the Sinclair C5 debacle and a disastrous free flights offer.  Dyson took advantage with new technological designs and fashionable design.

Creating and developing brand authenticity is a challenge.  It is critical to develop open-ended and rich stories rather than technical position statements.  It is important to espouse enduring values, emphasise love of craft and to develop a powerful organisational memory.

Establishing Goals; Setting Objectives and Targets

Few organisations have a single objective.  They have a range of objectives which compete for the attention of managers and stakeholders.  These include profitability, sales growth, retention of market share and risk containment.

These objectives are influenced by a range of cultural factors:

  • Environmental factors –
    • Societal values
    • Pressure groups
    • Government policy
    • Legislation
  • Organisational culture –
    • History and age
    • Leadership and management style
    • Structure and systems
  • Nature of business –
    • Market situation
    • Nature of products
    • Technology
  • Expectations of stakeholders
    • Shareholders
    • staff
    • customers
    • suppliers
    • distributors

Stakeholders cannot influence an organisation’s strategies without the existence of an influencing mechanism; they must hold some power over the organisation.  Power can be exerted on an organisation in a number of ways.  It could be shareholders voting down the pay awards of senior management; consumers boycotting your products; retailers refusing to stock your goods, etc.  Different markets have different power dynamics.  For example in the market for milk, the supermarkets and dairy processors hold the power to determine the price of milk.  In the oil market, OPEC states virtually control the price by managing extraction.

Organisational objectives have traditionally been afforded a central role in influencing strategy.  This often leads to rigid strategies incapable of amendment.  The expectations and influence of stakeholders, both internal and external need to be taken into account when setting goals and objectives.  Also ensure that strategies are open to adaptation and amendment during development to take account of stakeholder concerns.

Objectives should be set under a range of headings and then each category should be managed.  Objective management needs predetermined planning and control processes.

Every management textbook will tell you that objectives should be SMART (Specific, Measurable, Achievable, Realistic and Time-bound).  Other guidelines also need to be adhered to:

  1. There should be a hierarchy of objectives.  You should weight your objectives from the most important to the least important.
  2. Objectives should be quantitative.  You must satisfy the measurable part of SMART.  An objective shouldn’t be to increase market share, it should be to increase market share by a pre-determined percentile.
  3. You shouldn’t be guilty of wishful thinking.  The realism in your objectives should come from careful analysis and research.  Analysis should be carried out according to pre-determined and documented processes.
  4. You need to be consistent in your objective setting.  It is impossible to offer the highest level of quality in the market and simultaneously maximise profits.  Quality costs.

It goes without saying that your marketing objectives should be derived from and should reflect your corporate objectives.

Organisations have primary and secondary objectives.  For many years it was perceived wisdom amongst economists that profit maximisation was the sole primary objective of a commercial enterprise.  However, management science has now evolved to recognise that professional managers pursue a far wider range of goals.

It is also recognised that many objectives defined as secondary have a direct influence on an organisation’s primary objectives and to ensure the achievement of your primary objective, you must first achieve your secondary objectives.  In certain circumstances, secondary objectives may shift to become primary objectives.  For example, in times of economic downturn, organisational survival or retention o market position may overtake the profit maximisation objectives.

Drucker (1955) suggested eight areas in which organisational objectives need to be developed and maintained:

  1.  Market standing
  2. Innovation
  3. Productivity
  4. Financial and physical resource
  5. Market performance and development
  6. Worker performance and attitude
  7. Profitability
  8. Public responsibility

In recent years, public responsibility has become more important.  In the 1980s, the concept of the triple bottom line was developed.  This is often referred to as the alternative 3 ‘P’s’; People, Planet, Profit.

This approach to organisational goal categorisation was popularised by firm such as Bodyshop and its late creator, Anita Roddick.  The triple bottom line places environmental quality and social equity on an equal footing as profit maximisation.  Bodyshop’s mission statement includes the corporate view on social justice and human rights as an integral part of its business practice.

The theory of the triple bottom line argues that highlighting social issues and taking responsibility for the effect your business objectives will have on them will increasingly be the strategy of choice to enable sustainable competitive advantage

House of Fraser: Victim of the Retail Apocalypse?

The story which has dominated the business news headlines in the UK over the past week is the woes of House of Fraser, the department store chain.  The company has announced the closure of 31 stores as part of a CVA (a creditors’ voluntary arrangement) as it bids to stave off bankruptcy.  The closure announcement was an indication of quite how deep House of Fraser’s problems are as it is more than half their store portfolio.  The Midland is particularly badly hit by the closures and the firm are even closing their store in the centre of Birmingham.  This is a company in serious financial difficulty.

Talking heads discussing the story in the media have pointed to the closures as yet another example of e-commerce destroying the traditional retailing business model.  I have no doubt that the problems being faced by House of Fraser are impacted by internet shopping but e-commerce is only part of the story and there are a range of factors which have impacted Fraser’s.

One talking head even talked of the poor internet offer of House of Fraser.  Personally, I feel that this is nonsense.  I have used Fraser’s e-commerce site and it is comprehensive.  A far greater impact is the history of Fraser’s including the many ownership battles the company has faced in the last thirty years.

House of Fraser began its life in Glasgow during the 19th century.  the group expanded through the purchase of its competitors.  In the space a century, over seventy department store brands were purchased, from Binn’s and Arnott’s to Beattie’s and Jenner’s.

House of Fraser was at the forefront of the development of department store chains rather than towns and regions having its own department store brand.

As the concept of the department store became more popular with consumers, many of Fraser’s stores were extended or knocked through into neighbouring properties.  The firm’s last purchase, Jenner’s in Edinburgh is a fine example.

The Jenner’s store on Princes Street in Edinburgh consists of the original purpose-built 19th century store.  This was then extended with the addition of a second gallery.  Then it was knocked through into a post-WW2 extension and then a bridge was built across Rose Street Lane extending the store into a separate building.  A further extension was then added in a further building on Rose Street.  As a child, I spent many a happy hour playing hide and seek in Jenner’s and I suspect the Hide and Seek world championship is considering the building for its next tournament.

The state of the company’s product portfolio was directly referenced in the closure statement.  It stated that the maintenance and redevelopment costs of the company’s product portfolio was a significant element to the company’s debts.

It is also worth mentioning that the vast majority of House of Fraser’s stores are in town centres, not out-of-town malls. So consumers have to pay for parking and business rates tend to be higher.  Significant elements on both footfall and the company’s cost base.

House of Fraser operates on the basis of in store brand concessions.  The company does have its own brands, most notably Linea, but the vast majority of the goods sold instore are on space allocated/rented to brands such as Phase Eight and Henri Lloyd.

Whilst studying for my marketing diploma, I had to complete a case study on Ugg, the sheepskin boots brand.  One element of that study was a change to Ugg’s retail strategy.  Instead of selling via third-parties and in department stores, Ugg were developing their own brand stores and selling more of their products to consumers directly.

I feel this may have been a contributory factor to House of Fraser’s problems.  Some of the concessions in House of Fraser stores have struggled.  For example, East, the womenswear brand went bust.  If I walk in my local town centre I see brand stores for Phase Eight, Joules and Barbour right next to the existing House of Fraser store.  Why would a fashion brand with its own store on the high street want a separate concession in a neighbouring department store.

Fraser’s has been described as being ‘caught in the middle’.  At one end of its offer, the company is offering own brand products at prices to compete with discount brands such as Matalan; at the other end it offers high-end fashion brands such as Gucci and Ralph Lauren.  Fraser’s has products for pensioners as well as teenage fashion.  It is a company trying to be all things to all people.

As previously discussed in this blog, Michael Porter describes three generic marketing strategies; Niche, Cost Focus and Differentiation.  He also stated that companies trying to operate two or more of these strategies simultaneously enter a costly marketing ‘no man’s land’.  So Fraser’s was trying to compete on a cost focus basis with its own brand and teenage fashion lines but also trying to offer a differentiated strategy with offers to all sectors of the community.  This isn’t only a financially expensive approach, it means that there is no clear identity in the minds of consumers.

So Fraser’s were operating an expensive range of marketing mixes, on top of an ageing and costly property portfolio.  Then there was the company’s historic debts.

The House of Fraser is a brand which has long been fought over.  Since the 1980s it has been the subject of many hostile takeover bids from the likes of Tiny Rowland’s Lonrho, Mohammed Al Fayed and Tom Hunter.  The cost of defending these corporate raids has meant the firm building significant historic debts.

The result of these debts means that for many years, there was minimal investment in the group’s stores.  In recent years, Fraser’s has spent money revamping some of its stores, for example, the company spent £12 million redeveloping its Telford store, to create a more modern and consistent shopping experience.  It may be argued that this spending was too little too late.

Finally, there is the state of the UK economy.  British consumers have had nearly a decade of wage stagnation and public service austerity.  Productivity is low.  Years of below inflation pay awards has meant that consumer debt is rising and consumers are far more choosy about their purchases.  This is a very toxic environment for retailers who may be seen as operating a staid and old-fashioned retail model.

It must also be noted that a number of discount retailers, most recently Poundworld are struggling as the devalued pound makes it difficult to maintain slim margins.  A lot of House of Fraser’s products are made in the far east and imported.  Currency devaluation added to the flat economy means profit margins being stripped away and as a result a difficulty in maintaining debt repayments.

The term retail apocalypse is often used to describe the collapse of high street retailing in mature economies.  This term is usually applied to the impact of internet shopping on traditional retail models.  Some academics feel the term is over used and a better description is retail revolution.

In the 1990’s there was a big increase in the number of mall developments and existing retailers expanded into these new outlets.  It could be argued that there were too many retail outlets and what we are now seeing is firms which have over-extended their store presence reacting.

So who will survive on the high street?  I suspect, in the department store sector it will be company’s which target specific niche offers, e.g. Harvey Nichols high-end fashion, or those which develop distinct shopping experiences, such as Selfridge’s and Liberty.  Firms that are in danger are those that try to capture the whole market, which rely on traditional retail models and which try to capture all the consumers in the marketplace and not distinct demographic groups.

 

Minimising marketing plan risk

A fortnight ago I wrote about the types of risk inherent in marketing and business plans.  So how do you minimise such risks?

The answer is to plan for such risks.

Macdonald identified three principal areas of risk:

  1.  Market Risk:  That the market you are targeting doesn’t exist or it is too small to be viable.
  2. Share Risk:  That the level of market share you are targeting is unavailable or it is financially unviable to obtain that share.
  3. Profit Risk:  That the levels of profit available in the market are less than your target; that the profit pool in the market is smaller than forecast; and that costs in the market are higher than estimated.

Each of these risk areas was then sub-divided into five categories of risk.

Your sensitivity to market risk varies dependent on your growth intent and your share position:

  • If you plan for high levels of market growth but you have low market share, you are moderately sensitive to market risk
  • If you have low market share and low growth intent, you have low sensitivity to market risk
  • If you have high market share in a high growth market, you have high sensitivity to market risk
  • If you have low growth intent and high market share, you have moderate sensitivity to market risk.

Therefore it is important that you do not make poor assumptions about the growth rate of the market.

Your sensitivity to share risk varies with growth intent and competitive intensity in the market:

  • High growth intent combined with low competitive intensity means a moderate sensitivity to share risk.
  • Low growth intent combined with high competitive intensity also means a moderate sensitivity to share risk.
  • Where there is low competitive intensity if you have low growth intent, you have low sensitivity to share risk.
  • If you have a high growth intent in a competitively intense market, you have high sensitivity to share risk.

Share risk occurs when you have made poor assumptions in your strategic planning.

Strategies are sensitive to profit risk if you make poor assumptions about prices and costs.  A fine example is the failure of the East Coast rail franchise operation by Virgin/Stagecoach.  In the words of Chris Grayling, the Transport Secretary, “They got their sums wrong”.  Virgin stagecoach underestimated the costs of running the line and the potential profits available.  As a result they overbid for the franchise and found it impossible to run the line and break even.

Sensitivity to profit risk arises from growth intent and level of profit margin:

  • High growth intent in a market with high margins means moderate sensitivity to profit risk.
  • Low growth intent in a market with high margins means moderate sensitivity to profit risk
  • Low growth intent in a market with low margins produces a moderate sensitivity to profit risk.
  • High growth intent in a market with low margins means a high sensitivity to profit risk.  A clear example would be the collapse of Carillion.

To mitigate such sensitivities, you need to develop a marketing due diligence process that considers market size, market share and profit assertions of your plan.  The outcomes of marketing plans need to be moderated by your sensitivity to the risks existent in the market.

So what steps do you take to reduce risk?

The most common way to mitigate market risk is to gather increased information about the market therefore reducing the number of risk inducing assumptions.  For the five sub-categories of market risk the following are typical steps:

  1.  Product Category Risk:  Target another well established product category within the market and use the data that exists about that product
  2. Market Existence Risk:  Target another well established segment within the market or use data about another product used by your target market segments.
  3. Sales Volume Risk:  Either reduce the expected sales volumes produced by the plan or ensure that sales volume targets are supported by solid market research data.
  4. Forecast Risk:  reduce the forecast increase in market growth below historical levels or use market research data to support your forecasts.
  5. Pricing Risk:  Either reduce planned pricing levels or gather market research data on acceptable pricing.

The following are typical steps to avoid Share Risk:

  • Target Market Risk:  Use research to develop needs-based segmentation and use this to manage your product portfolio.
  • Proposition Risk:  reduce this through better informed market segmentation and targeting decisions.  Use the 7 Ps of the marketing mix to adjust your proposition.
  • SWOT Risk:  Use SWOT analysis and strategic management tools aligned to SWOT analysis such as a TOWS matrix.
  • Uniqueness Risk:  Target different segments using different value propositions.  This is expressed in the seven farmers segmentation example of Professor Malcolm Macdonald.
  • Future Risk: Identify environmental factors and their implications for strategic business units.  This can be achieved through PESTEL analysis.

The following steps help to reduce profit risk:

  1. Profit Pool Risk:  Careful assessment of the profit pool available in the market and its trends.  Target markets with large and growing profit pools.
  2. Profit Sources Risk:  Assess in detail the sources of profit in the market.  Increases in profits are better coming from a growing profit pool in the market as opposed to gaining profits at the expense of competitors.
  3. Competitor Impact Risk:  Assess the impact of proposed strategies on your competitors.  Focus such impact on smaller, less powerful rivals.
  4. Internal Gross Margin Risk:  Make realistic assessments of the core costs in a market.  Use similar products or services existent in the market or in similar segments.
  5. Other Costs Risks:  Make realistic assessments of the costs involved and refine costs estimates based on those assessments.

Whilst it is impossible to eliminate market or business risks entirely, it is possible to mitigate them to a practical minimum.  This is achieved through the use of accurate and scientific marketing planning.

 

 

A Word About Pricing

I was going to write about the control of marketing risk this week but I am going to postpone that for a week.  Instead I want to talk about a pricing trap many businesses seem to fall into, commoditisation.

I was speaking to a local agricultural supplies firm during the week and noted that they didn’t have any prices on their business to business websites.

Their response was as follows:

“We don’t put prices on our business to business website because we have really complicated pricing structures and in any case, if we displayed our prices, our competitors would deliberately undercut them in an effort to drive us from the market.  Our competitors can withstand selling at below cost better than we can.”

UK law in relation to pricing, The Price Marking Order 2004, does not apply in the case of business to business transactions.  Sot there is no legal duty on a business who only sell to other businesses to display prices.  However, if a business is willing to sell goods to a consumer, a full VAT inclusive price indication must be displayed.  For goods sold loose from bulk, or for goods sold required to be sold with an indication of quantity; in ‘large’ retail premises; a unit price must also be shown.

The Business Protection from Misleading Marketing Regulations 2008 states that there must not be false or misleading statements in business to business transactions including in relation to price or the method of calculating price.

it is also worth remembering that under UK law, a price indication is not an offer to sell, it is an invitation to treat, or in Scotland, a willingness to enter into negotiation.  A price indication is therefore not a fixed determinant of final price and traders are free to discount or treat customers on an individual basis.

So if business to business traders are not required to show price indications, why was I surprised not to see them on the company trade website? (the company also had an e-commerce site where bot VAT inclusive and VAT exclusive prices were shown)

I suppose it was because, as a marketer, I am aware of what an important element of the marketing mix price is and how price transparency is an important factor in relation to building trust with your customers.

I am also aware that many firms have now abandoned complex special offers and discounting schemes and replaced them with simplified pricing structures and more fixed pricing strategies.  An example is Asda Walmart’s ‘everyday low prices’ policy and B & Q are currently advertising ‘new lower prices’ whilst reducing the number of special offers in store.

The comments by the company I visited about the possibility of a price really astonished me.  They were in direct contradiction to what I have been taught as a marketer and represented an outdated view of retail as one of selling commodities at the lowest price.

Levitt stated that there are no  such things as commodities, goods sold at the lowest price and where price is the only determinant of purchaser choice. As a result, there is no such thing as commodity marketing.

So:

  1.  Commodity markets are not a foregone conclusion
  2. Commoditisation is not outside a firm’s control
  3. If others are reducing prices you do not have to follow
  4. Continual price reduction is not an immutable law that you must follow
  5. Customer’s do not buy on price alone
  6. You are not serving your organisation, or its stakeholders, if you allow prices to continually slide – even in an effort to retain market share
  7. Lemmings are not the brightest animals
  8. If the market price, and the profit pool available, collapses on your watch, and you reduce prices to match that collapse, you are at fault.  You have got sucked in to an ever downward price spiral.

You have to look out for phrases such as, reducing prices, becoming more competitive and employing aggressive pricing strategies.  These may mean that you are actively pursuing a route to commoditisation and failing in your duty to maximise returns for stakeholders.  You may have entered a commodity slide where you move from a highly differentiated brand market to a commodity market where all competitors offer the same products at the same price.

As Paul Fifield states in his book Marketing Strategy, you are on a continuum from ‘Brand to bland’.

Think of markets which may have once been considered as commodity markets.  My mind immediately goes to utilities such as gas, electricity and water.  Are these products sold as commodities today?  Are all the companies operating in these markets offering the same pricing structures?  The answer in no.  Utility firms now offer customers a range of pricing options.  They market their products not only on the delivery of the goods, they bundle that delivery with a product halo of brand promises, customer service, maintenance products, insurances and guarantees.

If price is the only difference in your market offer, then that is the only thing affecting customer choice.

It is common for boards dominated by financiers to become overly focused on price.  They will argue that the firm must pursue a cost focus strategy to gain market share.  They ignore Porter’s other generic strategies of niche and differentiation.

The most recent example of a board following a small margin, lowest bid strategy is Carillion; and we all know where that strategy lead.  It is no accident that the CEO of Serco, one of Carillion’s main competitors keeps a toilet brush on his desk.  It is to remind him not to bid on any contract where the mark up was less than 6%, the standard margin for an office cleaning contract.

Where a board is overly fixated on price, you enter the self-fulfilling prophecy of commoditisation.  You are on the downward slide to the dreary and depressing end of the market.

Marketing scientists have carried out extensive research into consumer attitudes to price.  This research confirms the segmentation model expressed by Professor Malcolm Macdonald in his seven farmers model developed for ICI Agrichemicals.

What the research shows is:

  1.  In developed markets, 90% of customers prefer to buy on non-price value issues.
  2.  In developed markets, 10% of customers will buy on price because they care little about the product category.
  3. In undeveloped markets, a large proportion of customers (about half) would like to buy on the basis of non-price value issues.
  4. In undeveloped markets, a proportion of customers appear to want to buy the cheapest option but their latent needs have not been identified, explored or met, by suppliers.
  5. In undeveloped markets, about 10% of customers will buy on the basis of price because they care little about the product category.

So in both developed and undeveloped markets, only around 10% of customers are driven by price.

In Macdonald’s seven farmers segmentation, his customer profile of a price driven customer, Arthur, made up about 7% of the market for agricultural fertiliser.

If you are operating solely on the basis that you sell a commodity in a commodity market, your focus is that you must be able to produce at the lowest cost.  If you only aspire to be the lowest cost producer; or you assume that you are the lowest cost producer; your chances of success are nil.

In commodity markets, only the producer with the lowest cost base will survive.

It is a mistake to assume that you operate in a commodity market or that your consumers are only interested in price.  You have the whole marketing mix at your disposal and you do not need to follow the market like a lemming.

It is also a mistake to assume that your competitors will always look to undercut you on price and that they are willing to start a trade war.

Selling at below the market floor price:

  1.  Breaches a board’s duty to maximise returns for stakeholders.
  2. Will affect all players in the market, not just one firm you are trying to drive out of business.  Such actions may lead to retribution from competitors that the aggressively pricing firm cannot withstand.

Most importantly, aggressive pricing strategies can be negated through the other elements of the marketing mix such as product, promotion, place, physical evidence, process and people.

 

 

 

Assessing Marketing & Business Risk

In the last week, other than the royal wedding, the news in the UK has been dominated by three stories; the parliamentary committee report into the collapse of Carillion; Stagecoach and Virgin losing the east coast rail franchise which has been taken back into public ownership; and the report into building control regulation following the Grenfell tower fire.

What links these three stories are businesses who acted recklessly or who did not properly assess the risks to their strategies.

Two of these stories, Carillion and Grenfell clearly involve criminal recklessness which should result in prosecutions and censure of senior board members.  The east coast rail story is a clear case where the bidding firm overestimated potential earnings and underestimated costs.  The result was that Stagecoach/Virgin overbid for the franchise and could not meet expected levels of turnover.  In the words of Chris Grayling, the lamentable transport minister (who causes chaos in whichever department he leads), “they got their sums wrong”.

The assessment of risk is central to the development of marketing and business strategies.

So where do you start?  After all there are a multitude of potential risks in such strategies.  And we can all repeat Murphy’s Law: That anything which can go wrong, will go wrong.  Such a multitude of potential risks means that appropriate assessment of them may seem impossible.

In the book Marketing Due Diligence, McDonald et al. argue that there are three common points in all business and marketing plans:

  1.  The market is this big.
  2. We’re going to take a share of that market
  3. That share will produce this much profit.

These points lead to three risks:

  1. The market isn’t as big as forecast
  2. The planned strategy doesn’t provide the expected share of the market
  3. The target market share doesn’t provide the expected level of profit

These three points therefore capture all the variables that can go wrong in a strategic marketing plan.

Assessing these risks is fundamental to marketing due diligence. It is not a case of counting all the risks with a plan.  It is accurately assessing the potential of these generic risks in your plan.

McDonald breaks each of the three generic risks; market risk, market share risk and profit risk into five sub-categories.

Market risk is that the market is not as big as the forecasts suggest.  When looking for competitive advantage through a gap in the market, it is always worth asking yourself not whether there is a gap in the market but: Is there a market in the gap.

Market risk arises from assumptions in a marketing plan.  All plans are based on assumptions and if they are not adequately tested the can be found to be erroneous and ill-founded.  For example, many Brexit-supporting politicians quote the work of Professor Patrick Minford on the UK economy as gospel.  However, the vast majority of economists (over 90%) see Professor Minford’s Liverpool model as making huge incorrect assumptions and ignoring advancements in economic science since the model was developed in the 1970s.

The five sub-components of market risk are:

  1.  Product category risk:  The product category is smaller than planned.  This risk is higher if you are producing a new novel product or service.  This risk was at the centre of the Dot.com bubble where share values of new internet businesses rocketed with little or no evidence that the market for novel internet products was large enough to provide expected dividends.
  2. Market existence risk:  This is where a segment is smaller than expected.  This risk is stronger in new market segments and lower in established segments.  I do a presentation based on an airline catering firm who produce high-end restaurant quality food for private jets.  The clear outcome of the presentation is that the owner of the business over-estimated the size of his target segment.
  3. Sales volume risk:  This is where sales volumes are lower than planned.  This risk is lower if you use market research to estimate sales volume potential.
  4. Forecast risk:  The market grows less quickly than forecast.  This often because of the incorrect reading of trend data.
  5. Pricing risk:  Your pricing strategy is wrong and reduces the size of your market.

Assessing market risk requires careful questioning of both written and unwritten business plans.  You need a market risk assessment to moderate market size assertions.

A strong strategy will lead to strong market share.  Weak strategies won’t.  So you must objectively assess what makes a strong strategy compared to a weak strategy.  One example of a weak strategy is one which is ‘one size fits all’ rather than one which offers the customer bespoke products meeting their segment or personal needs.

However, you must not define market segments too tightly or too loosely.  For example many in the press will offer Millennial as a segment; yet the Millennial generation is roughly a third of the UK population.  Equally, if you are only aiming the target one-legged Welsh farmers, then it is unlikely that you will meet your market share expectations.

A ‘one size fits all’ strategy only really operates in quasi-monopolistic situations.

The five sub-categories of market share risk are:

  1.  Target market risk:  Your strategy works for only part of your targeted market segments.  This risk is higher if you use homogenous target market segments e.g. ‘millennials’, as opposed to homogenous needs.
  2. Proposition risk:  The proposition you develop for customers fails to appeal to some of your target market.  This risk is lower if segment specific propositions are delivered.
  3. SWOT risks:  SWOT stands for Strengths, Weaknesses, Opportunities, Threats.  This risk occurs if you do not leverage your strengths, you do not take up opportunities, you do not protect against threats or if you do not remove weaknesses from your business.  Each of the four SWOT categories must be rigorously assessed and leveraged.
  4. Uniqueness risks:  This is where you compete with others in your market head on rather than leveraging difference.  It is higher if you offer identical products nad services to those of your competitors.
  5. Future risk:  This is where you do not properly account for changes in customer needs or market expectations.  A prime example is Kodak who continued to produce 35mm film for cameras when most consumers were going digital.  The Kodak situation was worsened by the fact that the digital sensor for cameras was invented by Kodak.

Profit risk arises by not properly assessing competitors’ response to your strategy.  So how do you assess what your competitors will do?

Again there are five sub-components to profit risk:

  1.  Profit pool risk:  This is where the total amount of profit available in a market is less than forecast.  Therefore your competitor’s actions have a direct bearing on your profits because they do not react as you expected.  This risk is higher if the overall profit pool is static or shrinking e.g. in mature and declining markets.
  2. Profit sources risk:  This risk is higher if your plan is to take your growth in profits by seizing customers from your competitors.  It is lower if you are seeking to leverage growth from new customer segments.
  3. Competitor impact risk:  Profits are less than planned because of the impact of your strategy on an individual competitor.  if there is a single dominant competitor in your market, e.g. Amazon in the case of digital retail, and your strategy affects their survival, you may face stiffer competition, harder reaction and therefore lower profits than you planned.
  4. Internal gross margin risk:  This is where profit margins are lower than planned due to a rise in the cost of making your product or service.  This is one area where Carillion went wrong.  The company’s directors operated on very slim margins and had a policy of gaining contracts by undercutting their competitors’ bids.  When projects began to be delayed and the costs of raw materials rose, those profit margins disappeared.  Similarly, Stagecoach found that by over-bidding to run the east coast rail line, they weren’t able to make their expected margins.
  5. Other costs risks: This is where other costs associated with production, such as the costs of marketing or delivery is higher than expected.  These higher costs impact on expected profit margins.

In summary, the risk of not delivering the promised margins is high if your market is small and shrinking, your market contains one dominant competitor and you are over-optimistic in your assumptions about costs.

 

It’s all about risk

Whilst studying for the Chartered Institute of Marketing qualifications, I was told a possibly apocryphal story about the beginnings of the Starbuck’s coffee shop chain.

I was told that when the first Starbucks café was opened it struggled to make a profit.  Faced with such mounting losses, the owners could easily have decided to close the café.  Instead they opened two more outlets.  The result was that the business took off.  Sales at all three of the businesses premises rocketed.

The result is history, a catering behemoth was born.

The owners of Starbucks took a huge risk.  If they had closed the original store, their finances would have taken a hit but they would have ‘lived to fight another day’: If the new outlets had failed, they would have been bankrupt.

Last week, I saw a newspaper article regarding Starbucks opening its first store in Italy.  Again the businesses owners are taking a big risk.  How coffee is drunk in Italy is virtually a religion.  For example, no one would be seen drinking a cappuccino in the morning and most Italians prefer a dark oily espresso which would knock most Starbuck’s customers for six.

Personally, Starbuck’s opening a store in Rome is great PR but I shall be extremely surprised if it lasts more than six months.  The reason the big American coffee chains have ignored Italy so far is that their business model clashes with Italian cultural norms.

Julian Richer, the proprietor of Richer Sounds, the specialist Hi-Fi retailer, has gradually built his business to fifty stores over forty years.  Unlike many retailers who plan to open several new stores a year, with the aim of having a presence on every high street, Richer prefers slow, steady growth over the long-term.

Other specialist retailers, such a Jessop’s and Maplin’s have tried the rapid expansion route and have failed.

So what is the definition of business risk?

Risk is an event or action that may adversely affect an organisation’s ability to survive and compete in its chosen market, as well as maintaining financial strength, a positive public image and the overall quality of its people and services.

A few weeks ago, I was discussing the collapse of Carillion with an entrepreneur who had worked for over 40 years in the construction industry.  He described it as a sector where many businesses “fly by the seat of their pants”.  They take massive risks and the continuation of the business is often reliant on the next contract tender or the next paycheck.  he was wholly unsurprised at Carillion’s collapse.

Of course, the definition of an entrepreneur is a manager or business owner of a business enterprise who through initiative and risk attempts to make a profit.  Disruptors are a specific form of entrepreneur who uses new technological advances to disrupt accepted business practices and models.

In most industries such laissez-faire risk-taking as that taken by Carillion is, in many sectors, no longer seen as acceptable management practice.  Managers are expected to mitigate and predict possible risks through forecasting and business planning.

Fred ‘The Shred’ Goodwin, the former CEO of Royal Bank of Scotland has been vilified for collapsing that bank.  His strategy, if you could call it a strategy, was to turn RBS into an international investment bank, rather than its traditional role of a retail bank, through high risk acquisitions and trading.  The criticism he has received can pretty much be described as his inability to assess risk and to plan for it.

Risk arises from a failure to exploit opportunities as well as from external threats.  There are four types of business risk:

  • Financial risk
  • Strategy risk
  • Operational risk
  • Hazard risk

Risk can be broken down into risks driven internally within an organisation which should be under management’s control; and risks driven by external events which are out with an organisation’s direct control.

Internally driven financial risk includes liquidity and cash flow. Strategic internal risks include research and development, intellectual capital and the integration of cultures after mergers and acquisitions.  Internal operational risks covers areas such as ICT systems, recruitment, supply chain and accounting controls.  Internal hazard risks include public access to the business’s premises, employees behaviour, maintenance of buildings and product and service safety.

Much of my career in consumer protection was taken up with this last hazard risk where I advised businesses on product safety risk assessment, legislative due diligence and product recall protocols.

Externally driven financial risks include interest rates, foreign exchange rates and the availability of credit.  External strategic risks include competitors’ actions, changes in customer dynamics, changes in industrial practices and variation of demand.  Operational external risks include regulators, changes in cultural expectations and board competition.  External hazard risks include contracts collapsing, natural disasters, failures by suppliers and environmental change.

Managing the above categories of business risk better can lead to clear and obvious benefits including:

  • Stronger and better business growth
  • Better business stability with less exposure to market and environmental change.
  • Better quality employees who understand their responsibilities
  • Stronger relationships with your suppliers
  • Better channels to market
  • Better customer acquisition and retention
  • Cheaper finance; and,
  • the driving down of costs

As a professional marketing strategist the process of developing strategic marketing plans plays an important role in risk reduction.

There are two main aspects to strategic marketing risk.

Primary demand risk is similar to financial risk in that it is beyond the control of marketers.  It relates to the general effective demand in the marketplace and customers ability to pay.  It is driven by economic life cycles, currency and exchange fluctuations, government regulators and technological change.

I am furiously opposed to Brexit precisely for its likely effects on primary demand risk.  This is already showing in the UK economy where productivity is in the toilet, retail sales are beginning to collapse, inflationary pressures are developing and interest rates are starting to rise.  Exporters have been able to rely on the fall in the pound whilst stocks of commodities bought with a its higher valuation lasted.  Those raw materials are starting to run out and factory gate inflation has been as high as 18%.

The second aspect of strategic marketing risk is market share risk.  This risk is relative to your competitors, not absolute as with primary demand risk.  This risk can be defined by asking yourself whether you are better at assessing the market than your competitors or whether they have a superior ability.

Organisations which are better at assessing the market tend to garner more market share and make better profits than those which are less able.

Factors which affect market share risk include:

  • Not acquiring your target customers
  • Not retaining your existing customers
  • Allocating too many or too few resources to:
    • Customer research and understanding
    • New product development and improving existing products
    • Price maintenance
    • brand distinctiveness
    • communications

The best ways of reducing marketing risks are:

  1. To carefully research your intended market
  2. To develop close relationships with your target customer groups
  3. To improve the quality of your marketing: and,
  4. to increase your share of marketing investment relative to your competition.