Segmentation is critical to your business

If you have ever watched the television programme Dragon’s Den, which has just begun a new series on BBC2, you will see may businesses fail to get and investment from one of the dragons.  Only a minority of the entrepreneurs are successful and many are told, “There is no market for your product”.

The problem is that many of the investors enter the room thinking they can create a market for their product or that they can create new market segments.

These businesses have a problem as the dragons are well aware that markets ‘;just are’. They already exist as an entity and cannot simply be created, however good the entrepreneur thinks their idea is, if there isn’t a pre-existing market for it, it will fail.

Of course, there are exceptions to this position particularly with new technologies, but even then new technologies are usually new answers to old questions.  They represent a technological shift in a market which already exists.

Markets also have a life of their own. You cannot invent a market and you cannot create market segments out of thin air. Busineses do not create market segments, markets segment themselves. Markets and market segments are made up of living, breathing people.  Those people have presumptions, assumptions and emotions and it is very dangerous for you to project you assumptions about market behaviour on a pre-existing market segment.

It is very dangerous to create grand theories as to how a market will segment.  It is also dangerous to prepare ‘ideal’ segmentation bases.  Segments shift and morph they are not set in stone.

Markets do not reform themselves to match your pre-conceptions. it is a real mistake to build concrete boxes and tr try and fill them with the population of a market.

I am reminded of the episode of Some Mother’s Do ‘Ave Them where Frank Spencer faces an RAF intelligence test. Spencer had to fit shaped wooden blocks into a chart on a wall within a set time period. Rather than selecting the right shape for the right hole, Spencer tries hammering any shape into any hole.  The result is disaster.  The shaped wooden blocks are jammed in the chart and when Spencer tries to remove them he pulls the chart from the wall taking bricks and plaster with it.  Spencer’s attempt to force the blocks (pre-existing segments) into his choice of holes (his concrete boxes) is equivalent to total business failure.

Rather than trying to create a market and develop new segments, you need to analayse the existing marketplace and adapt your offer to meet pre-existing segments.

To do this, you must:

  1.  Decide exactly what business you are in.
  2. Do appropriate qualitative research as to the issues affecting market segments and the market as a whole.
  3.  Do appropriate quantitative market research, measured using cluster analysis as to market demographics, consumer attitudes, and product usage (who owns what, who uses what)
  4.  Find common needs so as to define segments.
  5.  Define segments in terms of demographics and usage
  6.  Populate segments in terms of demographics
  7.  Prioritise those segments which are a best fit for your business
  8. Test segments before launch

When considering entering a market segment, You must ask:

  • Is the proposed segment identifiable?
  • Do target customers recognise the segment?
  • Do you have the resources to reach the segment?
  • Is the segment viable over the longer-term?
  • Do distributers and retailers recognise the segment?
  • Is your offer distinctive within the segment
  • Does your offer attract a price premium? If not, is it worth entering the market?
  • Does your offer attract higher than average profit margins? (this is the asset test as to whether a market segment is worth entering).

When marketing to different segments you need to prioritise segments on two factors; the attractiveness of the market segment to your business; and the skills are resources within your business that can be used to deliver customer needs.

This is where tools like the GE Matrix and the Shell Directional Policy Framework become incredibly useful.

In presenting products to market you have three options:

  1. Undifferentiated marketing: where the same offer is made to all market segments
  2. Focused marketing: where you specialise you offer to meet the wants and needs of a single market segment.
  3. Differentiation; Where you develop different marketing mixes (different offers) for different market segments.

In the modern economy, if you aren’t talking in terms of segments, you aren’t talking of markets. For the modern economy segmentation is difficult but necessary.  In may ways, the mass market is dead.

Think of the music industry.  In the early 1960s, you had a few mass markets, Popular Music, Classical Music, Jazz, and Folk Music.  Fans were pigeon-holed into these broad categories. Over time, these mass markets have splintered into a multitude of different sub-genres.  Take rock, you now have classic rock, indie rock, grunge, prog, metal, etc.  Each of these sub-genres have segments.  Heavy metal has thrash, death metal, Nu-metal and even prog-metal.  No one in the music industry talks in terms of pop fans or jazz fans anymore.  (this is also because the music consumer is likely to have access to and listens to many different forms of music).

But you also have to beware not to micro-segment.  Gibson guitars got into real financial trouble last year and part of the reason was the production of a massive number of different products trying to cope with micro-specialist markets.  They did this without putting in place the mass customisation processes common amongst manufacturing businesses.  The result was a confused product offer and huge manufacturing costs which directly impacted profit margins.

Gibson was a prime example that business is a profits game, not a revenues game.

Another important aspect of successful segmentation is to choose segments which are easier to defend. You are defending your ability to maximise profits.

What is certainly true, is that if you don’t have an accurate picture of what your target segments are, you won’t win the game.

So market segmentation is a key tool in the battle to gain customers.

Ask yourself:

  • Do you know the current state of segmentation within your business?
  • What are the key target segments for your business that make up your target market?
  • Do you know what segmentation does for your business?
  • Are your chosen segments durable?
  • Have you prioritised certain segments?
  •  Are there appropriate targets you need to target?
  • Do you want to target multiple segments and how are you going to do that?

 

 

Strategies to Grow a Brand

Last week I discussed the strategic options for market leaders and I pointed out that in most first world countries, most markets for goods and services are mature.  This means that options were restricted to three main choices:

  1. Growth through increased usage by existing customers
  2. Growth through taking competitors’ market share
  3. Growth through finding new uses for existing products

Here are some examples of brands being built through these strategies and associated tactics.

The first example is Bailey’s Irish Cream liqueur where the brand was built through building volume of use per capita.  This strategy involves shifting usage of the product from low volumes to higher volumes.

Bailey’s was a mature brand and it had developed a restrictive image.  It was seen as a drinks for special occasions, particularly Christmas and New Year. Bailey’s was a drink for little old ladies and due to it’s sweet taste it was served in small measures.

For Bailey’s to improve its market position and to have long-term survival, this image had to change as did the way in which Bailey’s was used.

An extensive marketing campaign making massive changes to Bailey’s marketing mix was instigated. Advertising promoted the liqueur to young women.  They were encouraged to consume Bailey’s over ice in large glasses. New Bailey’s glassware was sent to pubs and nightclubs. Consumer packs containing the larger glass were distributed to retailers. Bailey’s was promoted as a drink for any occasion, not just Christmas, a beverage for a night out on the town.  Bailey’s took the opportunity to sponsor Sex and the City, at the time the most popular television programme amongst women in the 18 to 35 age demographic.  the drink was reimagined as one for those who are outgoing and as one of fellowship.

This new image significantly increased usage and sales of Bailey’s amongst target segments.

There are three levels of growing usage per capita which were leveraged in the Bailey’s campaign.

  1. Abandoning Cost-Plus Pricing: Prices are set based on the price point of the most popular product in a geographical area.
  2. Gaining Local Monopolies: This does not mean gaining more than 35% of the market (the traditional definition of a monopoly situation).  Local monopolies are created by flooding the marketplaces with opportunities to purchase and consume the product.  Everywhere the target consumer goes or congregates, they should have an opportunity to purchase.
  3. Adapting Prices to the Buying Situation: So the prices for Bailey’s in a night club will be more than in a pub or bar. The price of Bailey’s in a retail situation will be lower than at a venue.

Specific marketing plans need to be created for each purchase opportunity.  For Bailey’s this could mean different marketing mixes for supermarkets, bars, restaurants, vending machines and hotel mini-bars, off licences and general stores.

Coca Cola, the long time market leader in the soft drinks market has continually developed and amended such segmental strategies for decades.

In addition Coke has two critical alliances to grow sales; with Macdonald’s and with Bacardi.

The McDonald’s alliance targets young consumers and looks to continually refresh Coca Cola’s customer base.  It aims to build the habit of consuming Coke amongst teenagers who will hopefully continue to consume the cola for the rest of their lives.

The alliance with Bacardi, which includes pre-mixed bottles of rum and coke, targets adult drinkers and the use of the cola as a mixer. Bacardi Rum is the world’s most consumed spirit drink.

The second way to grow a brand  in a mature market is to address barriers to consumption.

Surprisingly Coca Cola were slow to address the issues consumer’s had with their product, in particular health concerns and concerns that the soft drink contained too much sugar.  Sugar free soft drinks like Tab and even Coke’s main rival Diet Pepsi, were established in the market long before Diet Coke arrived.

However, Coke has used its market position to launch a series of healthy option to break down consumer’s reluctance to buy the drink.  They now produce a range of low sugar and sugar free options such as Coke Life (with added vitamins), Caffeine Free Coke, Diet Coke, Coke Zero (No sugar) and Caffeine Free Diet Coke.

However both these strategies only go so far.  The easiest and most cost effective option is to get your existing customers to consume more of your product.

There are two ways to increase existing consumers consumption. To get them to use more of the product and to get them to use the product more often.  You want to turn consumers who only buy a small amount of your product into customers who are medium consumers and medium consumers into heavy consumers.  You want to turn occasional customers into regular customers and regular customers into ‘dominant customers who will only purchase your brand)

Every marketer should be aware of the Pareto Principle (80% of your returns come from 20% of your activities). Similarly the heavy use/dominant customer group represents 10% of brand buyers and 50% of brand volume.  To grow this heavy/dominant group you need to use behavioural segmentation to target particular consumers.

You need to ask consumers why they are reluctant to buy your product and address their specific barriers to consumption. You need to build a marketing mix based on specific product improvements and higher experiential benefits.  It is very rare to find that consumers reluctance to purchase a product is simply to do with the product’s image.

You also need to ask why consumers prefer other brands.

The third way to grow a brand in a mature market is growth through addressing new uses and situations.

You have to ask:

  1. Your brand is for what?
  2. Your brand is for whom?
  3. Your Brand why?
  4. The brand against whom?

Consumers want solutions to particular problems. They want a five millimetre hole, not a five millimetre drill bit. Can your product solve multiple problems e.g. Listerine began life as a household detergent now it’s sold as mouth wash.

A Porsche 911 isn’t the car for the school run or going to the supermarket but the Porsche Cayenne 4×4 can be used for those purposes and provide sport’s car performance. Car firms often enter into joint venture to allow brands to meet new uses.  For example, Aston Martin have a joint venture with Toyota to produce a small, fuel efficient city car.

Growth can also be obtained through getting existing consumers to ‘trade up’.  This is why, when you go to a Volkswagen dealership you are bombarded with a multitude of options for your car. Brompton Bicycles go one further and allow consumers the opportunity to effectively design their folding bike from a dizzying array of product options. You can produce gift packs or extend your brand to related uses e.g. the Christmas box of fragrances which contain aftershave, deodorant, shaving balm, shampoo, shower gel, etc.

Special editions of products can also help consumers ‘trade up’.  Fender guitars produce special edition models of their guitars which are produced in small numbered batches. For example, the alternative reality series where each month a short run of guitars is produced with novel body shapes, different neck woods, different switching options and pick up configurations.

Most whisky distillers give consumers to trade up to 10, 15, 20 and 25 year old maturations, they produce cask strength whiskies and age their brand in different casks e.g. bourbon or sherry casks.

Growth can be developed through line extension.  Think of the number of formats and sizes in which Coca Cola is sold.  Coke’s largest sales are not in bottles or cans, single items or in multipacks, it is the sale of syrup to bars and caterers for mixing with carbonated water at the point of sale.

You can provide incremental variance (e.g. Volkswagen’s huge choice of engine options)

You can multiply the physical forms of your product, so Ariel washing detergent comes as a powder, a liquid, in tablet form and as a gel sachet.  You can provide different versions of your brand for different purposes; so Dettol produces an all purpose cleaner but also specific product options for bathrooms and kitchens.

Line extensions represent 85% of new products placed on the market.

However, when creating line extensions you should beware hyper-segmentation.  New line extensions must have mass appeal.

To manage line extensions well you need to:

  • Improve cost accounting to minimise additional costs in the value chain
  • Prioritise resources to high margin extensions
  • Your sales force should be able to describe the reason for the each extension in a few words
  • You withdraw products as consumers move over to line extensions (you will likely need to encourage such withdrawal).

Finally, you can grow a brand through innovation.  Colgate toothpaste is regularly reformulated with new innovative options such as sensitivity relief, whitening and gum health solutions)

Colgate is an example of incremental innovation so a premium product moves to being the standard product over time as innovations are introduced.

Some firms are seen as innovation champions and they are aware of the benefits and impact of an innovation from its inception.  these innovation champions know they can leverage higher price points than their competitors confident in the knowledge that the innovation provides real customer benefits.  Innovation champions also work to gain more prominent shelf positions, such as eye-level and aisle ends.  They will be willing to pay supermarkets for these locations.  Innovation champions will also clearly advertise innovation benefits including prominent display of innovations on packaging.

Strategies for Market Leaders

In this blog, I have already covered strategies for businesses targeting a specific market niche. I thought it would be worthwhile looking through the other end of the telescope and examining likely strategic choices for market leaders.

So what is an appropriate definition of a market leader? Is it all to do with scale?

Well, many market leading firms are big companies, but that situation is not always the determinant of a market leader.

A better definition of a market leader is typically the firm with the largest market share.  Through its pricing; advertising intensity and share of voice; and its rate of new product introduction, a leader dominates the marketplace. The market leader becomes the benchmark for the industry.

So it is perfectly possible for a small or medium-sized firm to be a market leader.  As one wise owl once said, “There is no such thig as a small business; only businesses which haven’t got big yet”.

Market leadership is not determined by a company’s size.  This is particularly true in fields such as cutting edge new technologies.

Market leadership is a measure of an organisation’s ability to determine the nature and bases of competition within a particular market.

Market leadership is also a question of definition. Bot Aston Martin and Fiat make motor vehicles; but is Aston Martin in the same market as Fiat. The latter makes mass market family cars. The former makes luxury sports cars. Are those the same market?

So what are the primary strategies for a market leader?

They are:

  1. How best to expand the total market
  2. How best to defend the existing market share
  3. How best to increase market share.

Market leaders will generally gain most by expanding their market. For example, in the 1960s and 1970s Honda looked to expand the market for motorcycles to consumers not normally associated with bikes such as women and commuters.

Another way to expand the market is to find new uses for existing products. A fine example is Goretex; a product normally associated with waterproof clothing but now being applied to Elixir guitar strings to make them last longer and remain ‘bright’.

To increase market size you can try to increase usage of products. Hence bottles of shampoo suggest two applications rather than one and chocolate biscuits are sold in packs of five or six; meaning the average family needs to buy two packets rather than one.

Predominantly being a market leader is a defensive position. Leaders are the target for others to attack. To remain in the lead you must repel those attacks and stop market share leakage.

That means the creation of fighter brands to stop competitors undercutting your primary product range. It means horizontal and vertical integration to deny competitors resources.

The large coffee shop chains have been accused of pushing out independent competitors by opening multiple stores in the same area.  Who would buy from an independent where there are three stores of a well-known brand within walking distance of each other?

Think of the cereal or washing detergent aisles in supermarkets.  You will find multiple product options from market leaders which denies market followers shelf space and eye-level product locations.

Market leaders need to set the pace of the market e.g. through product innovation and new product launches.

Being a market leader costs.  It is rare for a market leader to be the most profitable firm in the market (although turnover may be higher than that of competitors).  Profit margins are often lower because of additional spending needed to fund defensive strategies.

So market leaders will try to minimise profit margin losses through efficiency and cost minimisation programmes. This could mean just in time stock control and distribution channel efficiency.

To expand market share several possible strategies are possible.

A market leader can expand its share through the heavy rotation of advertising to increase share of voice.  A leader can improve and expand its distribution channels or introduce price incentives to increase sales.  Mergers, takeovers and exclusive distribution deals can also be used to expand market share.

Market leaders need proactive strategies; they cannot be passive in the market.  Over the longer-term, the most important factors affecting a market leaders performance will be the quality of its products or services relative to those offered by competitors.

A leader’s market share and its profitability is strongly related to:

  1. Return on investment matching market share increases
  2. Above average rates of investor turnover (i.e. there is a thriving market in the organisation’s shares); and,
  3. There is a lower ratio of marketing expenses to sales revenue i.e. there are marketing economies of scale.

Market leaders often experience high investment activity which is a drag on profitability. This commitment to project investment intensity means it is harder to sustain growth of the firm.

Often the analysis of market leaders product portfolio shows profits are generated through ‘cash dogs’ and ‘wildcat’ products not from cash cows (where cash generated need to be reinvested to support new product innovations).

Being a market leader should be the aim of all businesses.  In the game of commerce, that is the goal. However, some firms can be happy being in a ‘strong second position’. Being a strong second means profits can be generated but the costs associated with market leadership can be avoided.

The Life Cycle and Arthur D. Little

Every business owner should be aware of the product life cycle. They should be aware of the standard model of the PLC and where each of their products exist in their life cycle. they should also know if products in their mix have the ability to deviate from the standard model.

In the standard model of the product life cycle, there are four stages:

  1.  Introduction:  It takes time for a new product to be accepted by consumers. When a product is first introduced sales may be slow and the costs of promotion and distribution may be high. It is highly likely that new products will be loss-making.  The role of marketing is to increase sales and build the market. Price skimming or penetration strategies predominate.
  2.  Growth:  Sales rise. The rise in sales may be rapid; which may cause issues with having sufficient manufacturing capacity to meet demand. This is currently an issue with Elon Musk’s Tesla model 3.  Marketing’s focus shifts to brand building and creating offers which result in customer retention and brand loyalty. The business looks to new customer acquisition and expanding its base.
  3. Maturity:  This is the longest stage of the product life cycle.  Sales plateau. Profits may fall as efforts are made to defending and maintaining your market position. Products are innovated and reformulated.
  4. Decline:  At this stage sales fall.  It could be that a product is no longer seen as fashionable. New products in the market may be seen as a better option. Advances in technology may make existing products obsolete. Marketing activity on products at this stage may be minimal. Products may be abandoned, replaced or harvested for cash.

Of course not all products follow the standard model of the product life cycle. Some products become staples. Others may have cyclical or seasonal appeal. Often new uses can be found for old products. Lucozade was a brand of soft drink for invalids but it was reformulated and is now sold as a sports energy drink. Listerine began life as a household detergent but is now sold as mouth wash. Lyle’s Golden Syrup has been sold under the same branding for over 200 years.

The product life cycle is a critical analytical tool for product portfolio and product mix management.

It isn’t just individual products that have a life cycle. Brands have a lifespan and so do industries.

In 1973, Arthur D. Little created his Strategic Condition Matrix.  This measured industry maturity and a companies position in its chosen market.

Little defined four stages of industry maturity:

  1. Embryonic
  2. Growth
  3. Mature
  4.  Ageing.

Note that these stages mirror those of the product life cycle.

Little also defined five categories of competitive position:

  1.  Dominant:  It is rare for a company to find itself in this position.  It often relies on having a monopoly or having protected technological leadership.  A firm in a dominant industry position can exert significant influence on the behaviour of others in the industry and therefore has a vast range of strategic options.
  2.  Strong:   A firm is not as dominant but still has a significant level of strategic choice. A firm can act without its market position being unduly threatened by competitors.
  3.  Favourable:  The industry is fragmented but there is a clear market leader. Firms can exploit particular strengths through the use of appropriate strategies.
  4. Tenable:  Firms are vulnerable to increased competition in the market. Few options exist for a firm to strengthen its position.  Profitability is driven through specialisation.
  5. Weak:  Firms struggle to compete and possibly have unsatisfactory performance.  If you cannot improve your situation, you will be forced out of the market.  This position may be the home of inefficient firms and small traders who fight every day to make ends meet.

Other academics have added a further category of competitive position, Non-viable, where withdrawal from the industry sector is the only strategic option.

For each combination of competitive position and industry life stage, Little suggests the following strategy options:

  1.  Dominant Market Position: 
    1. Embryonic: Here the aim is to grow fast and to build barriers to market entry by potential competitors. Firms should act with offensive strategies in mind.
    2. Growth:  Again you look to grow fast through cost leadership.  You balance strategies between defence and attack.
    3.  Mature:  The aim is to defend your existing market position.  Cost minimisation is increasingly important. You attack weaker competitors.
    4.  Ageing: You again defend your market position and focus on profitable sectors. You consider abandoning unprofitable parts of the market.
  2.  Strong Market Position:
    1. Embryonic:   Grow fast and differentiate you offer from those of competitors.
    2. Growth:   Lower costs and differentiate your offer. Attack smaller and weaker firms
    3.  Mature:  Lower your cost base, differentiate or focus your offer.  Note these are Porter’s generic marketing strategies.
    4.  Ageing:  Harvest the market for cash.
  3.   Favourable Market Position:  
    1.  Embryonic:  You grow fast through differentiation
    2.  Growth:  Lower your cost base, differentiate your offer, attack smaller and weaker firms.
    3.  Mature:  Focus on particular market sectors and differentiate your offer. Hit smaller and weaker firms hard.  Create barriers to entry.
    4.  Ageing:  Harvest the market for cash
  4.  Tenable:
    1.  Embryonic:  Look to grow the industry and focus on profitable sectors
    2.  Growth:  This position is that of a problem child in the BCG matrix. You have the choice of holding onto your existing market position, you can look to a profitable niche or you can aim to grow the market. You may want to harvest the market for cash.
    3.  Mature:  You either hold on to your existing position in the market of you withdraw from the industry
    4.  Ageing: A managed withdrawal from the market is required.
  5.  Weak:
    1.  Embryonic:  Search for a profitable niche and attempt to catch others in the market.
    2.  Growth: Find a profitable niche or withdraw from the market
    3.  Mature:  A managed withdrawal from the market
    4.  Ageing:  Withdraw from the industry

Most western economies, USA, Europe, etc. are mature.  As a result, for many small firms, the most profitable strategy is one of niche marketing.

Fancy a game of risk?

Life is risk. Every day we take risks.  We take risks with the choice of what we buy. We take risks when we decide to cross the road. Every decision we take has some level of risk.

Building a business is all about weighing up and taking risks.

Business stakeholder value links the level of risk involved in an investment with the required level of return needed for the investor to take on the investment. This is referred to as the risk-return relationship.

Imagine a graph with two axis. One axis is the perceived risk; the other is the level or required return. Zero risk could be considered as investments in a stable economy in instruments such as government bonds. These offer low returns but those returns are all but guaranteed.

Investing in a company with a volatile history will be considered to have greater risk than a company with a calm history.  For the investment in the volatile firm to occur, a greater rate of return would be required.

For many investors the risk associated with an investment will be assessed through extrapolating past performance on the future value of shares.

This results in the capital asset pricing model where the cost of equity capital (the return demanded by investors) increases with the perceived risk of the investment.  Risk is measured in terms of the volatility of the investment over time.

The OED definition of an entrepreneur is, “the owner or manager of business enterprise who through risk-taking and initiative attempts to make a profit”.

However, such risk-taking has boundaries. Company directors have a responsibility to maximise returns for stakeholders BUT they also have a responsibility to ensure that the business survives over time.  That means they must ensure that stakeholders investment is secure.  Directors and investment managers need to carry out due diligence and take reasonable precautions.  They need to take time to consider and assess those things which could go wrong.

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

This is where the marketers definition of risk differs from the risk definition of financial managers.  Rather than a backward looking, money-based assessment of risk, marketers look forward to potential risks many of which have no financial basis.

There are four types of risk in a business enterprise:

  1.  Financial Risk
  2.  Strategic Risk
  3.  Operational Risk
  4.  Hazard Risk.

There are also two sources of risk:

  1. Internal Risk – Which should be within the control of the organisation; and,
  2. External Risk – Which is driven by events external to the organisation and where the organisation has little or no control.

Financial internal risks include liquidity and cash flow. Strategic internal risks would include R&D, intellectual capital, and the integration of mergers and acquisitions.  Internal operational risks include accounting controls, information systems, recruitment and securing your supply chain.  Internal hazard risks include public access to buildings and facilities, the safety of products and the effect on the environment.

Financial external risks include interest rates, foreign exchange values and the ability to get credit. Strategic external risk includes the actions of competitors, changing customer tastes, technological change and levels of demand. External operational risks include government regulations, changing cultures and brand competition. External hazard risks include natural disasters and the effect of the environment on a business; contractual demands and the stability of suppliers.

Assessing business risk should not simply be a backward-looking exercise based on previous financial performance. To fully assess risk you should be looking forward to the future and at the social, environmental, cultural and political effects to com.  These elements are at the core of marketing and market analysis.

You should be looking forward to:

  • Create stronger and better growth
  • Ensure a stable business less prone to change
  •  Develop better quality staff
  •  Create customer acquisition opportunities and to ensure customer retention
  •  Develop consistent operations
  •  To acquire lower costs of finance through lower perceived risk
  •  To drive lower costs
  •  To ensure robust supply and distribution chains.

Marketing risk has two main factors:

  1.  Primary Demand Risk:  This is similar to financial risk and is external to the organisation. It is a factor out with the control of marketers. It relates to economic life cycles; currency and exchange rate fluctuations and changes in technology.
  2.  Market share risk:  This is a relative, not an absolute risk. It is the risk of not acquiring a particular prospect or nto retaining a particular customer.

Market share risk is affected by how much time, money and effort a business puts into:

  •  Customer research and the understanding of customer attitudes
  •  Product Research and Development
  •  Price maintenance and preventing price entropy
  •  Brand identity and differentiation
  •  Communications activities

Much of the role of marketers is the assessment of non-financial risk and then putting systems and structures in place to minimise or prevent such risk.  What makes the marketing risk game interesting is that your competitors are doing the same and will no doubt find different solutions and focus on different areas of risk.

The best ways to reduce marketing risk are by getting closer to your target customers, improving the quality of your marketing activities and increasing investment in marketing to a level greater than that of your competitors.

Campaign and the Principles of Advertising

In the current issue of Campaign, the industry magazine for advertising professionals, there is an interview with Nigel Farage, leader of the Brexit Party and MEP.  On the front cover of the magazine is a picture of Farage with a tag line explaining how he ‘used advertising principles to win the Brexit Referendum.

This interview and cover has not gone down well with many in the advertising profession.  One comment on social media states that the cover and article ends Campaign’s status as ‘a serious commentator on the advertising industry’. Other comments state that the editorial team at the magazine should be ashamed of themselves.

So why the anger. Well it begins with the definition of advertising:

“Advertising is paid, non-personal communication from an identified sponsor using mass media to persuade or influence an audience”.

The above definition is now seen as somewhat out of date.  The rise of social media advertising often means that an advert is aimed at persuading an individual to act rather than a group audience. A more contemporary definition is:

“Paid, mediated form of communication from an identified source designed to persuade the receiver to take some action now or in the future”.

The Leave EU Brexit campaign headed by Farage runs into problems with the word “Identified”.

Much of the campaign’s advertising was anonymous. Promotional content would appear in social media feeds with no information as to who it was promoted by.  This allowed messages not directly linked to the European Union to be seeded in the minds of recipients.  Often this related to wider issues such as the effect immigration had on public services.  The anonymous advertising started long before the referendum and was clearly designed to build an atmosphere amongst people not regularly connected to politics which would allow the idea of Brexit to appear realistic.

This anonymous advertising was also used as a data collection tool.  The most egregious example was a competition run during the  Euro 2016 football competition.  This competition appeared in social media feeds and asked entrants to predict every result of the competition. The chances of any entrant winning the monetary prize were astronomical.  The main aim of the competition was to gather personal data in a demographic group potentially malleable to the Brexit message.  NO entrant was told that their data was going to be used for political purposes.

Not only was the failure to identify the advertiser a breach of advertising principles; it was also a breach of political campaigning law.

For many years, it was thought that consumers went through a structured mental process when deciding to buy a product.  This was described by the mnemonic AIDA (Attention, Interest, Desire, Action).  First an advertisement should get the recipient’s attention; it should drive their interest in a product; they should develop a desire for the product; and the advert should then be a call to action for the recipient.

Therefore the content of advertising should have four objectives described by the mnemonic DRIP (Differentiate, Remind, Inform, Persuade). Depending on the recipient’s location on the AIDA journey, one of the DRIP elements would take priority. If a consumer is in the Attention stage of AIDA, differentiating your product from those of competitors may take priority; If the consumer is showing interest, you would aim to inform them of your product’s attributes. If the consumer has developed a desire for your product you give them the call to action to buy it. If they are aware of your product and have previously made a purchase, you want to remind them you exist so that they buy again.

Again, the Brexit campaign, built on lies, exaggeration and misplaced patriotism did not conform with the idea of informing voters.  It was a propaganda exercise designed to misinform and mislead.

In recent years, the idea that emotion plays a part in advertising has developed.  Consumers are not robots. they are emotional beings and you can use advertising to play with their emotions. Some advertising professional consider the role of emotion as more important than factual information processing and a rational message (why do you think the Andrex advertising is built around cute puppies?

The Brexit campaign was clearly successful at this but it was not an exercise in building a positive emotional response.  It was using false patriotism to build a negative emotional response.  It was an exercise in brewing envy, resentment and anger. Few of the social media adverts in the run up to the referendum were about the positive; they were negative messages about how the EU damage the UK.  No mention was ever made of the positive contribution of the EU to the UK economy, infrastructure or environment. Much of the content linked back to a fantasy past; World War 2 and Churchill were common content; it was English exceptionalism on steroids; counterfeit history and dreams of empire.

You could argue that this is where the Brexit campaign succeeded by creating the desired emotional response. Emotion is a powerful tool to change attitudes and the Brexit campaign did this. It successfully created ‘brand memories’; even if those memories were false.

Most advertising professionals complaining about the Campaign article were angry because Farage’s Brexit campaign paid no attention to the ethics of advertising. Despite the comedic trope of advertising executives as rogues, the industry does have a strong ethical code.

Advertising ethics can be defined in the phrase; ‘Legal, decent, honest and truthful’.

Good advertising does not lie to it’s audience.  It does not promote forgery and it lies within the limits of public decency. Advertising should respect the truth and it should not set out to deceive the public. False advertising should never be used. The truth should never be altered by the imposition of illusory elements or by withholding relevant facts.

Exaggeration can be used in advertising as long as it sits within the norms and rhetoric or symbolism which are generally accepted.

Advertising should not exhort negative traits such as vanity, greed or envy.  It should not use techniques which manipulate human weaknesses.

It can be strongly argued that Farage’s campaign did all of the above.

In the UK, commercial advertising has to conform to legislation and codes of practice.  It has to comply with laws like the Protection of Consumers from Unfair Trading Regulations, the Business Protection from Misleading Marketing Regulations, the Consumer Rights Act and the Advertising Standards Authority Code of Practice.

Farage’s political propaganda did not.

That said, the Electoral Commission did issue various warnings to the Brexit campaigns during the run up to the referendum; most prominently about the ‘£350 million for the NHS” lie on the Vote Leave campaign bus.

Farage’s most prominent advert during the campaign was the ‘Breaking Point’ poster.  The poster showed Syrian refugees on the Serbian border. It was false ‘advertising as those in the photograph were refugees, not economic migrants. Syria, prior to its civil war, was a developed Arabic nation and many in the image were highly qualified people including doctors, engineers and academics. Serbia is not in the EU.

What was even more disgusting was that the image and message of the poster was almost identical to NAZI propaganda against Jews from the 1930s.

Farage’s Brexit campaign was built on lies.  It was built on jingoism.  It stirred fear of migrants creating the impression they were all scroungers (even though Treasury statistics clearly show that EU migrant contribute more to UK coffers than the take out).

With regard to the legality of the Leave campaigns, Both Leave EU and Vote Leave have received record fines from the Electoral Commission for returning false documentation as regard to campaign spending. The respective responsible person for both campaigns are currently under Police investigation for false accounting.

The ‘money’ behind Farage’s campaign, the insurance businessman Arron Banks, has seen hid company receive significant fines from the Office of the Information Commissioner for misuse of personal data.  Staff at Bank’s insurance firm Go Skippy used personal data provided to comparison websites for political purposes without informing people as to how their data was used.

So Farage’s Brexit campaign was, in digital marketing patois, highly ‘black hat’. The phrase referring to early Hollywood westerns where the hero would were a white Stetson and the villain a black Stetson. it paid little or no attention to the truth and arguably it’s mirroring of Nazi imagery exceeded the boundaries of social decency.

Of course, normal advertising ethic played no part in Leave propaganda as there was little or no regard to customer retention.  Farage only had to sell Brexit once.  Once the campaign was one, cognitive dissonance could run rampant.  He knew that once Britain voted out, the terms of readmittance would make re-joining the EU difficult. For example, EU’s terms on acceptance of the Euro, Shengen, and the loss of the UK’s membership fee rebate.

However, commercial advertising does have to have regard for customer retention and brand loyalty. Once you sell your product to consumers, you want to sell it to them again, and again.  You want to develop word of mouth so that you grow your sales and your market.

If you set out to mislead consumers; if you breach their norms of decency; the aim of customer retention becomes impossible.

 

 

What to consider when setting marketing objectives

When you read the business pages of your daily newspaper or watch the business news on television, news of company performance is dominated by financial statistics be they increased turnover, growth in profits or an increase in share value.  This is to be expected as the primary role of a company’s board of directors is to maximise the returns to stakeholders.

Financial data, particularly in the UK where the vast majority of company directors come from banking or accountancy, is familiar, comfortable ground.

This creates a problem for marketers where many metrics do not easily fit with the concept of shareholder value.  You do not see company’s reporting that they dominate media share of voice; or that they have increased customer retention rates.

And so the focus of company boards is often skewed towards the minimisation of costs and the maximisation of financial returns to ensure the shareholder value target is met.

In some companies, this financial focus is so dominant it leads to incorrect marketing objectives being set or defined.  For example, many firms will set the increase of sales volumes as a marketing objective.  This relates strongly with the concept of the ‘Sales and Marketing Department’; a silo approach where marketing is a function of sales rather than sales being a function of marketing.  Some organisations even set the increasing of profits as a marketing objective ignoring the effect of cost minimisation on that target.  All too often objectives are set for an organisation’s marketing team which focus on the short-term ignoring longer-term aims.

That said, marketing objectives do need to be set within the financial resources and expectations of a business.

Marketing objectives need:

  • Financial Rigour,
  • A Strategic Focus (but not limited by annual targets),
  • Resource allocation aligned to business growth (digital marketing projects and internet-based customer service should not be seen as cost-cutting exercise
  • Segmentation to be driven by customer needs and wants.  This should be in line with marketing best practice.  You should not simply rely on easily obtained demographic data but look to psychographic data on customer attitudes.
  • Profitability should be assessed by the examination of individual accounts
  • Customer retention analysis.  There is a lot of research available on customer retention but it is rarely used by businesses.  This ignores the fact that the longer you retain a customer, the more you will earn from them.

In the UK it is a fact that company boards are dominated by directors with a background in finance.  In Germany, boards are often dominated by engineers (Germany also has a large number of family-owned firms).  Across the EU, around 700 million euros is spent annually on market research.  That sounds a lot but compare that figure to engineering research where upwards of 70 billion euros is spent.  One large oil firm recently spent 700 million euros on a single financial IT system.

No company would make a major purchase without carrying out detailed and serious financial due diligence.  Often this will involve the introduction of external expertise, auditors and consultants. Yet often firms will create marketing campaigns and targets based on poorly reviewed research and strategies.

There are two levels to marketing due diligence:

  1. The strategic zone where metrics are defined.  This is where the target market is described and the value proposition created.
  2. A measurement zone where value is calculated and the value proposition delivered.

When creating marketing objectives you align them with shareholder value over three levels:

  • Level One: Marketing Due Diligence:  define your strategy, segment you market, define target customers and create your value proposition.  Does your marketing strategy create or destroy stakeholder value? How can your existing strategies be improved?
  • Level Two: Marketing Effectiveness:  What tactics do you employ in each of your target market segments? Do those tactics create a differential advantage compared to those of your competitors?
  • Level Three:  Promotional Effectiveness:  Are marketing communications meeting targets such as share of voice, consumer recall and product awareness?

You must remember that measuring marketing output is not like measuring factory output.  In factory output you measure the difference between what goes into the production line (e.g. effort and raw materials), compared with what comes out (finished products, wastage).  The effect of marketing activities can only be assessed long after products have left the factory floor.

To properly consider marketing; doing marketing due diligence properly; you must measure the risk associated with a chosen marketing strategy and therefore its potential to affect stakeholder value.