Do you have an Integrated Communications Strategy?

A couple of weeks ago, I watched a BBC4 documentary on the history of the electric guitar and effects pedals in rock music.  Included in the programme was a short interview with Uli Jon Roth, the former lead guitarist with the German heavy rock band, Scorpions.

Two of Roth’s comments in the interview stood out.  The first was that he felt restricted with the five note pentatonic scale often used in rock music.  He wanted to use the seven note chromatic scale more often seen in classical music. He wanted to spread licks over two or more octaves rather than one.

Secondly Roth commented that he saw musical notes as colours. he experiences aural synaesthesia.

Roth is known as the ‘King of Shred’.  The man who created a monster that would dominate rock music in the 1980s; shredding.  Roth, like Baron Frankenstein despaired of his creation.  He feels that guitar solos became an exercise in technical proficiency and fitting as many notes in a stave as possible.  Rock music began to forget melody and metre.

So what has an interview with a Euro-rock guitarist got to do with Marketing Strategy?

Let’s take the second point.  Roth’s synaesthesia is a clear indication that people process information in different ways and they react differently to communication triggers.  Some people prefer and will react to visual stimuli, others to aural stimuli.  Some people prioritise touch, others prefer smell.  So if you are limiting your communications triggers to one of the ‘five’ senses, your message may not be getting through to those consumers who prioritise the other senses.  Much of the internet is a visual medium; like this blog; therefore when designing marketing communications, consider the other senses, use sound, smell and touch to get your message into media.

Well, Roth has a point about limiting your options.  Why limit your marketing and communications activities to a few expected promotional channels when there is a wider palette of channels available?

I see lots of tweets on social media praising the use of digital promotional channels as a panacea; a magic pill to all your promotional needs; it is nothing of the sort.

I regularly get criticised that I don’t understand how digital marketing works.  Well I do.  I just believe that digital is one channel amongst many and by restricting yourself to that channel you are ignoring communications options which may provide better return on investment to your business.

Clearly it would be unwise to totally ignore digital marketing channels and social media in your promotional mix.  However, these channels must be used with a strategic purpose which matches the expectations of your target market.  Clearly, if you are selling high street fashion to teenagers, you will need to have digital as a prominent part of your promotional mix.  However, what if you are selling mobility scooters to pensioners? Wouldn’t more traditional promotional channels make more sense?

Digital channels are not a cheap option.  To get equivalent returns to that of traditional media, you may have to spend more on digital.  Before choosing communication channels you need to carefully examine costs and press providers to the level of return on the potential investment.

For SMEs operating locally, it may well be the case that traditional communications channels are a more effective way to get your message across.

Marketing academics are still not convinced of social media as a sales promotion channel.  However, they do see it as useful for customer retention and developing ‘electronic word of mouth’.  It is also good for developing advocacy.

When it comes to digital, you also have to remember Zipf’s law; P(x)≈1/x.  You can optimise your position on search engines to your heart’s content but if you’re not within the top four links on a page your chances of picking up significant numbers of clicks are dramatically reduced.  Firms like Amazon can put huge resources into securing the top links on a search engine page, irrespective of the alterations ISPs make to search engine algorithms to compete head on against those resources may a highly inefficient use of promotional budgets.

So when developing a promotional mix do not put all your eggs into one basket. Don’t do what is ‘expected’ in your chosen segment; do something different to your competitors.

Marketing as a science is a fairly young discipline.  Academic rigour only began to be applied to it in the 1950s.  It is a developing field where theory and models are continually evolving.

For many years the presumption was that different promotional channels had to be dealt with by separate professional consultants.  You went to a direct marketing agency for printed matter, you went to an advertising agency for TV and radio advertising (in fact there were/are specific agencies for radio advertising).  If you wanted press attention, you used a PR agency and exhibitions were often the remit of your sales department.

In the 1980s, academics began to promote integrated marketing communications.  This was the delivery of a single consistent group of messages across media channels.  Prior to IMC, different communications media were used to deliver different parts of the promotional mnemonic DRIP.  Advertising was used differentiate your products from those of competitors; sales promotion was used to persuade customers to purchase.  PR was used to remind customers of your existence and print media was used to inform customers of your products attributes.

Under IMC, a single message was used to deliver all the aspects of DRIP.

IMC was seen as having significant drivers:

  • it increased the efficiency of promotional activities
  • it increased the accountability of marketing managers
  • it promoted the need for ‘cross-border’ marketing and changing communications structures
  • It coordinated brand development and the creation of competitive advantage
  • it allowed for more efficient use of management time
  • It provided direction and a sense of purpose for employees
  • It anticipated greater levels of audience communication literacy
  • It foresaw media and audience fragmentation
  • It allowed for stakeholders increasing needs for diversity of information
  • it reduced message clutter and allowed for media cost inflation
  • It accounted for competitor activity and low levels of brand diversification
  • It allowed for the creation of relationship marketing as opposed to transactional marketing
  • It allowed for network development, collaborative marketing and the creation of alliances
  • It allowed for technological advances and new communication channels e.g. social media.
  • It aimed to increase message effectiveness through consistency and the enforcement of core messages
  • It allowed for the development of more effective consumer triggers and recall of both messages and the brand identity
  • It aimed to develop consistent and less confusing brand images
  • It developed a need to build brand reputations and to provide clear identity cues.

IMC sounds wonderful doesn’t it.  Most importantly it was seen as a way to create a customer-centred promotional strategy.

IMC was seen as having the following advantages:

  • Efficient use of promotional budgets
  • A synergy to communications
  • Competitive advantage through clear positioning
  • Coordinated brand development
  • Employee participation and motivation
  • It allows for the review of communications activities
  • fewer agencies were needed to support a brand.

However, there were some downsides to the creation of integrated marketing communications strategies:

  1. It was a strategy that promoted centralisation of activities and the development of bureaucracy.
  2. It promoted the uniformity of a single message (difficult if your aim to target two or more distinct market segments)
  3. It leads to ‘Mediocrity’ as all communications activities are in the hands of a single agency.

So like Uli Jon Roth’s approach to the rock solo, IMC became a bit of a monster.  Some marketing academics felt that it lost the ‘melody and metre’ of promotional activities.

Today, most marketing academics promote a nuanced form of IMC.  Yes messages should be used to promote all aspects of DRIP and promotion is a role for all the stakeholders in an organisation, not just the advertising department.

Today it is advocated that promotional strategies is the creation of a promotional mix using tools which best fit the expectations of your target customers.

 

Finding and Communicating a Market Position

To develop a strategic marketing plan, there are a number of stages.

  • You need to analyse the environment in which you will operate.  This is the wider macro-environment of politics, economics, societal trends, technology, environmental concerns and legal concerns.  It is also the micro-environment represented by Porter’s five forces model of organisational stakeholders – competitors, suppliers, staff, stakeholders and new entrants.
  • You need to analyse the internal operations of an organisation, its skills, resources and capabilities.
  • Once you have analysed the environment, you need to analyse the market.  You need to examine where market gaps exist and you need to confirm that those market gaps can offer sustainable competitive advantage.
  • You then need to analyse the consumer base of the market.  Who buys the products in the market?  What is their spending power?  What are their expectations and perceptions of the market?  How will their needs be satisfied?
  • Only once you have carried out all this analysis can you develop you’re preferred market position.
  • Once you have decided on a market position and you design a marketing mix aimed at meeting the consumer need whilst fitting the competitively advantageous market gap.  And remember, the mix is two-pronged; it has to be able to compete against other market players; but it must also defend your place in the market.

Crucial to the development of a marketing mix and its associated communications strategy is the development of a positioning statement which fits your chosen integrated marketing objectives.

A positioning statement must be clear and concise.  It should clearly state what your brand stands for and differentiate your offer from that of competitors.

There are two approaches to a positioning statement:

  1. A functional statement which clearly shows brand benefits, e.g. Gorilla Glue is the strongest adhesive on the market
  2. An expressive statement – which shows the ego, social and hedonistic satisfactions of a brand, e.g. Smirnoff vodka being the spirit of choice for party people.

In managing positions, you need to:

  • Determine the positions of your competitors: using tools such as perceptual mapping
  • Examine the position of a focus brand in a market (the market leader or the brand with the greatest share of voice; the brand which consumers will use to evaluate your offer).
  • Confirm that your desired market position is feasible.  Can you defend it, do you have the resources to achieve it and will it offer sufficient returns in the long-term?
  • Develop your positioning strategy
  • Implement your marketing mix and communications programme to achieve the desired market position
  • Continue to monitor consumer perceptions so as to evolve with the market.

There are three broad approaches to developing a position based on the market, the customer profile and the appeal of the brand.

From these three basic approaches a range of strategies can be developed.  Often there is a need to develop a hybrid approach using one or more of these strategies.  Examples are:

  1. Product Features:  This is a commonly adopted approach.  Examples include Dyson promoting vacuum cleaners on the basis of improved suction or the Halifax promoting the ease of making small payments with their debit card.
  2. Price/Quality:  Again a commonly used approach.  Examples include Aldi advertising how much you can buy in their stores compared to buying branded goods at other supermarket chains (for no apparent loss of quality).  Price itself can be a good indicator of quality.  Sainsbury’s used to advertise using the slogan ‘Good Food Costs Less’; Stella Artois Lager is ‘Reassuringly Expensive’.  An Audi car costs more than the equivalent Volkswagen despite both brands sharing hundreds of components.
  3. Use: Informing consumers as to how a product should be used. For example, Readybrek was ‘Central Heating For Kids’, a nutritious hot breakfast for winter mornings.  Kellogg’s are currently trying to reposition Corn flakes as not a breakfast cereal but a snack food which can be eaten at any time of day.  Belvita is doing the opposite and trying to make biscuits a breakfast food.  After Eight chocolates are the wafer thin mint to finish off a dinner party. Wash and Go is the shampoo that is quick and easy to use and suitable for people with busy lifestyles.
  4. Product Class Dissociation:  This position is often taken in markets which appear humdrum or boring.  It is often used where competitors have taken all available positions.  You disassociate yourself from your competitors.  So if you produce margarine, you compare your product to butter, not other margarines, e.g. I Can’t Believe it’s Not Butter.  You compare your brand to a higher quality offer.
  5. User:  You position yourself by clearly defining target users.  So Sheila’s Wheels was car insurance specifically for women drivers.  Often celebrity endorsements are used as a shortcut to defining the user.  Hence the proliferation of fragrances which use the names of pop stars.  Sports endorsements often try to link brands to users.  Nick Faldo used Mizuno golf clubs, Tiger Woods links to Nike, Justin Rose uses TaylorMade, etc.
  6. Competitor:  You position yourself against your main competitor.  Pepsi uses its ‘taste challenge’ to directly place itself against Coca Cola (and does so without naming Coke).  Avis Car Rental ‘Tries Harder’ i.e. is better than Enterprise.  Qualcast advertised their lawn mowers as ‘A lot less bovver than a hover”; a direct comparison to Flymo.
  7. Benefit: You position your brand by proclaiming a benefit.  So Sensodyne toothpaste reduces or eliminates sensitivity from hot and cold foods. Voltarol gel relieves pain and allows you to be active.
  8. Heritage or Cultural Symbol:  Some brands use coats of arms to indicate heritage (although this can be a risky tactic as UK heraldry bodies regularly prosecute for the misuse of heraldic symbols).  Bass beer’s red triangle is the oldest registered trademark in the world.  Lyle’s Golden Syrup and ‘From Great Strength Comes Forth Sweetness’ is a similarly long-lived brand.  Many businesses state ‘Established since’ in advertising.  Kronenberg 1664  lager uses the date in the brand name to indicate longevity. These dates and symbols infer permanence and depth of experience.

Whatever position you choose, it must be supported and expressed across your communications and across your marketing mix.  You must be consistent.

If you promote a high quality position, your product and service quality must be better than your competitors.  Land Rover markets a position as a tough off-road access all areas vehicle, yet they also have a reputation for mechanical faults. Land Rover’s position has often differed from the experience of consumers. A troubling situation.

If you are promoting a position of exclusivity, that will directly affect your communications mix.  You will be less likely to use sales promotion and advertising will be in carefully chosen publications.  Your messages will infer affluence, particularly visually.  A family car will be shown being driven down a local high street; A luxury car will be shown motoring in the Cote D’Azur and arriving at an exclusive restaurant or nightclub overlooking a marina of luxury yachts.

Dimensions of your position must be relevant and important to the target audience of your communications.  Image cues must be believable and considered credible.

Market Positions must developed over the long-term if they are to prove effective; but they must also be flexible enough so as to cope with changes in the market environment and consumer expectations.

Often it is necessary to reposition a brand within a market.  Technology means that consumer tastes are changing rapidly as is their behaviour.  Market positions therefore must evolve at an equivalent pace.  technology also allows new substitute offers to proliferate.

Market positions are frequently being challenged in the minds of consumers.  If your position has strong foundations and it is continually reinforced; if your position can be communicated by clear, simple messages, there may be little need to change your original market position.  otherwise, situations will arise where you will need to reposition.  This may be as a result of market opportunities and developments such as takeovers and mergers.  Buyer preferences change.  This may make an existing position untenable.  Repositioning will therefore be necessary.

Repositioning is difficult, and risky, but it can be successful.  often consumers have entrenched positions as to brands.

To reposition successfully, the old market position needs to be suppressed so that consumers no longer relate to it.  Consumers also need to learn the new position.

These two processes can be complimentary as by weakening the old position you can reinforce the new position.

 

Is Distribution Part of Your Marketing Strategy?

When I see many organisations defining their marketing activity, I find that their definition is often limited to two areas, Promotion; and the incorrect definition of marketing as sales.

As I have discussed in previous blog entries, marketing strategy involves a far wider mix of subject matter.  The extended marketing mix has seven elements which affect all aspects of your business; Product, Price, Promotion, Place, People, Process and Physical Evidence.

When you consider distribution, you are dealing with the fourth of those elements, Place.  If you are a retailer place would include the location of your shop premises.  But the vast majority of businesses are not retailers.  For them Place has a different definition.  For non-retail businesses Place refers to distribution and supply networks.  It is the relationships you develop with suppliers, logistics firms, wholesalers and retail chains such as supermarkets and department stores.

Often achieving commercial success isn’t only about the relationship you have with consumers; the end users of your products and services; but about how frictionless and efficient are your distribution channels.  That is why such channels are often called ‘marketing channels’.

Good distribution channels and strategies can contribute strongly to developing strong links with your customers and help build your competitive advantage.  Distribution channels are an important part of your value delivery network.

To build strong distribution channels you need to build strong relationships with key suppliers and resellers.  This extends marketing functionality beyond your customer base.

Marketing channels include your upstream and downstream partners, your suppliers, your logistics contractor, your wholesalers and your retailers.  Your downstream partners are the vital link between your firm and your consumers.

The term supply chain is limited.  It implies that raw materials, production inputs and factory capacity should be the starting point for marketing activity.  Many businesses decided to use the term demand chain instead.  It was felt that demand chain was a better fit to the serve and respond view of markets.  It emphasised the process of identifying consumer needs and the response of producing a chain of resources and activities which produce customer value.

However, today the term demand chain is also seen as limiting.  It limits marketing channels to a step-by-step linear model of purchase, produce and consume.  The term now used to define distribution channels is Value Delivery Network: a network of suppliers, distributors and ultimately customers who partner to improve performance of the entire system in delivering sustainable customer value.

Few manufacturers sell goods directly to the end consumer. Although direct sales are more common in industrial markets and increasingly thanks to the internet.  In the majority of markets, manufacturers need to develop strong and reliable channels as the effectiveness of their distribution activity will affect every other aspect of their marketing mix.  Pay too little attention to your distribution channel and your distribution partners and you can cripple your business.

Your distribution network will be affected by retailers.  You will have different distribution arrangements and expectations if you work with discount retailers compare to working with luxury retailers.  These differences will affect the price of your products.

Innovative distribution can create strong competitive advantage.  Why do you think Amazon is investing in drone technology and truck manufacturers are looking at self-driving and convoy vehicles?

Creating strong distribution channels takes long-term commitment.  It is far easier to adapt your product range or to change your promotional strategy than to build strong distribution channels.  Building reliable channels cannot be done overnight.  Channels have to be built not only with regard to current practices but with one eye on the future.

So how do strong marketing and distribution channels add value?

  1.  Information:  Your distributors and resellers are critical to the gathering and distribution of marketing information.  They are the direct contact between your firm and your consumers, your competitors and other market actors.  Their knowledge of market forces are critical to business planning and exchange.
  2. Promotion: Your distribution partners are often a crucial messenger for developing and spreading persuasive communications about your products and offers
  3. Contact:  Your distribution network are a good way to find and communicate with prospective buyers.
  4. Matching:  Distributors can help to develop your products to meet customer expectations through activities such as packing and product bundling.  They may be involved in the assembly of your products e.g. most cycle shops need to  part assemble and test a bicycle before it can be ridden by the customer.
  5. Negotiation:  Often members of your distribution channel are given the ability to negotiate with customers on issues such as price and timescales for delivery.  They allow ownership and possession of products to be transferred.  Remember, in law, a price indication is an invitation to treat, not a contractual offer.
  6. Physical Distribution:  Obviously, your distributors are responsible for the physical movement of goods and components.
  7. Financing:  Often your distribution partners are crucial in acquiring and raising funds to cover the cost of the channel.
  8. Risk-Taking:  Often the risk of carrying out the distribution network is, in full or in part, transferred to the distribution partner from the business core e.g. in franchise models.  Often critical decisions need to be made as to who carries out certain distribution channel activities.  It is a question of who carries out that work, not that the work needs to be done.  The shifting of tasks from a manufacturer to intermediaries can lower costs and increase profitability.  Channel intermediaries may have more technical expertise than a manufacturer.  Distribution channel partners may increase your productivity and efficiency trough their knowledge and resources.

The following factors must be taken into consideration when selecting distribution channels:

  1.  Market Factors:  Your buyers may expect your products to be sold in a particular way.  A failure to meet buyer expectations through the way you organise distribution will have serious consequences for your business.  Often consumers need product information such as technical specifications and installation advice.  Often the provision of this information is the responsibility of channel intermediaries.
  2. Geographic Location:  Are you remote from your customers.  Do you need to employ territory agents to sell and distribute your products in distant locations?
  3. Producer Factors:  Do you lack the resources to carry out all channel functions?  Do you have the finances, skills and other resources?  Do you make a wide range of products that means distribution activity can be brought in-house?  Or do you make a single product and therefore rely on others as direct distribution is cost ineffective?  How much control do you want or need over your distribution channel?  Levi’s jeans are a good example.  Levi’s has very tight control over the distribution and reselling of their clothing.  they even control how their products are displayed on the shop floor and the type of retailer they want to sell their products.  The retailer is part of Levi’s brand image.  As a result, Levi’s fought a long legal battle with Tesco over the supermarket chain’s purchase of ‘parallel import’ clothing for sale in its supermarket.  If you make hazardous or bulky products you may have no option but to develop direct distribution to end users.  Retailers may not want to stock your products as they are difficult to display.
  4. Competitive Factors:  You may operate in a market sector where your competitors own or control the major distribution channels, through vertical integration or market power.  Often you may have to disrupt the distribution channels through the use of alternative technology.  Much of the disruptor activity is driven by new distribution technologies.  We live in the age of the digital download and soon 3-D printers will be common domestic appliances.  My father recently needed a small plastic plumbing part for a DIY repair.  He bought it over the internet.  In a few years time he will purchase the computer code for the component and print the part himself.

Distribution channels are a critical part of your marketing strategy and planning.  They should be a central part of your SMART marketing objectives.

 

Customer Service – Why it Matters

I have spent the vast majority of my career working in the field of consumer protection and trading standards.  As a result I have dealt with literally thousands of consumer complaints relating to poor customer service.

Marketing is about developing a customer-focused organisation.  Therefore developing strong customer service capabilities is crucial to commercial success.

Customer service is critical to the development of successful strategic marketing processes.  The development of strong customer service policies and procedures are critical to the development of a strong brand image.

We live in a world where the core of a product offering is becoming increasingly commoditised.  If you are seeking to add value to your core products and you wish to differentiate your products from those of your competitors, product halo elements such as the development of differentiated and strong service elements is a prominent option.

Previously in this blog I have discussed the work of Treacy and Wiersema.  In particular, the three potential strategies for excellence, Product focus, Managerial Excellence and Customer Intimacy.  Managerial excellence is an inward looking strategy and developing excellence in product focus can be expensive and risky.  Therefore for many firms, particularly SMEs, the development of customer intimacy through the development of excellent customer service provision is critical to success and growth.  Developing excellence in customer service is critical to the creation of customer intimacy.

In his book, Marketing Plans, Professor Malcolm Macdonald describes the service profits chain; how the development of strong customer service strategies can be central to the growth of a firm’s profitability:

  1.  Employee Satisfaction:  Satisfied employees provide better service quality. If you have satisfied employees, you have less staff turnover.  This means your staff are better trained and more knowledgeable about your products and services.  Satisfied employees are more productive.  Satisfied employees have a greater commitment to the company and they present themselves better.
  2. Improved Service Quality:  Satisfied employees provide better quality service which leads to greater customer loyalty.
  3. Service Quality:  If you have satisfied employees you have better service quality.  Customers exhibit greater satisfaction with your brand.  They buy more.  They buy more often.  They are retained for longer.  The exhibit greater loyalty.
  4. Customer Retention:  Increased customer loyalty leads to greater customer retention.  This creates an opportunity to increase profitability.  Loyal customers are less likely to switch to your competitors simply because of a change in price.  They are willing to spend more as they have familiarity with your products and processes.  Loyal customers cost less to serve.  They can offer opportunities to lower marketing costs through lower promotional budgets than those required to gain new customers.  The longer a customer stays with your firm, the greater their lifetime value.  Customer retention also creates greater shareholder value through improved revenues and reduction in risk.
  5. Positive Feedback Loop:  Satisfied customers treat staff better.  They develop a positive relationship with your employees and with your brand.  There is a positive correlation between customer satisfaction and employee satisfaction.

I see a parallel between the positive feedback loop of the service profit chain and the feedback loop of the balanced scorecard developed by Kaplan and Norton. The theory of the balanced scorecard is that improved organisational learning leads to better internal processes; better internal processes leads to better customer service; better customer service leads to improved financial performance and in turn, better financial performance means that you can invest more in improving your organisational learning and development.

Macdonald outlines five dimensions of service quality:

  1. Tangibility:  This is closely linked to the physical evidence elements of your marketing mix.  Good service quality is linked to the physical equipment used by customers and to the appearance of your staff.
  2. Reliability:  Quality service provision must be performed dependably and accurately.  It must be accurately repeated.
  3. Responsiveness:  You must show willingness to help your customers and you must serve their service needs promptly.
  4. Assurance:  Your staff must be knowledgeable and courteous.  They must have the ability to inspire confidence amongst your customers.
  5. Empathy:  Your employees must care about customers concerns and offer them individual attention.  They must show that customers concerns are important to them.

These five dimensions of service quality are critical if you are following the principles of SERVQUAL.

Today, it is often said that consumers, in particular the incorrectly defined market segment ‘millennials’, buy experiences not goods or services.  Consumers now want products which are engaging, robust, compelling and memorable.  Customer experience goes beyond the development of service.  To develop quality experiences, you need to go beyond exceptional service quality.  You need to recognise:

  1.  Usage Processes:  This is how customers access  and use your goods and services. Usage processes influence how your customers think about your firm.  Their concept of product value develops through their use of your goods and services not at the factory gate.
  2. Peer to Peer Interactions:  The interactions between your customers are important.  They are an important part of developing robust experiences.
  3. Relationships:  Too many satisfaction/service quality services erroneously focus on individual customer transactions and encounters.  they do not examine longer term relationships over time and across multiple transactions.
  4. Brand Image/Communication:  People don’t own an iPhone or a BMW because of their functionality.  They own them because those products make a statement about the owner.
  5. Emotions:  Customers are not entirely rational.  Emotions have a big effect on their relationship with a firm and their rating of the experience you offer.

When developing a marketing plan, you need to be cognisant of customer service needs and concerns in each of the above areas.

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.

 

 

 

The marketing of services

On his deathbed, Albert Einstein was still puzzling over the problem of a unified theory which allowed for the physical laws of the macro universe and the frankly bizarre behaviour found in quantum theory.  He never completed his theory and to this day physicists are still trying to unify the two sectors of physical science.

In marketing theory, there is a similar split between academics: those that believe that goods and services can be marketed in the same way and those that believe that there are crucial differences in how services and goods are marketed.

Marketing theory for many years was focused on the sale and supply of goods.  That reflected the prominent position that manufacturing had in advanced economies.  Today, certainly in the UK, the economy is focused on service provision (UK economy is 80% services-based).  Today when you buy goods, they also tend to come with a services element.

Philip Kotler developed the concept of the marketing mix in the 1960s.  Kotler’s mix contained four elements; product, price, promotion and place.  This mix sat well in economies based on goods manufacturing.  it doesn’t fit so well in the provision of services.

Other academics have extended Kotler’s marketing mix to match a services environment.  they have added three further ‘Ps’; process, people and physical evidence.  This creates a seven ‘P’ marketing mix for service providers.

The fact that in today’s markets, every product, including goods can provide a services outcome.  When you buy a drill, you buy a hole boring service. When you buy a music download or a DVD, you buy an entertainment service.

There is a marketing continuum for services ranging from basic goods, such as builder’s sand, which may have a service element in its delivery, to pure services such as life insurance, where the physical element of the product is an email document.

For products at the services end of that continuum, the following characteristics are often exhibited:

  1.  Intangibility:  The service product cannot be touched.  This makes them difficult to evaluate prior to purchase.  Services tend not to allow consumers to try before they buy and the cannot be sold on.
  2. Inseparability between production and consumption:   These happen at the same time: you watch a concert as the performance is being made.
  3. Variability:  Services tend to be produced on an individual basis so they are often variable in their nature.  This can be an advantage to the consumer e.g. the ability to vary the cooking of a steak from rare to well done.  The service can be varied at the request of the customer.  But what if the service provider is having a bad day?  The chef who overcooks the vegetables of the singer with the sore throat.
  4. Perishability:  Services cannot be stockpiled. Once a plane taxis out onto the runway, no more passengers can be put on board.  That flight can no longer be provided.  Manufacturing is also changing with Just in Time stock control and consumers being able to design their own version of a product (trainers, bicycles or cars).  This adds an element of perishability to their manufacture.

The planning and marketing of services requires the input of your employees.  They are the people who are tasked with delivering them.  They must buy into the marketing process.

You must also take into account the loading element of the demand on service delivery.  This must be managed.  Low cost airlines use variable pricing strategies to ensure that every plane leaves its gate full of passengers.  Such tactics can also be used to managed demand at peak times or to increase demand at off-peak periods.

The reason that the three further elements, process, people and physical evidence were added is the additional degree of contact between the service provider and the consumer.  Your brand name can also affect how consumers see your product e.g. Speedy Plumbers.

There are four characteristics needed for a successful brand name:

  1.  Distinctiveness:  It must immediately describe your service in the minds of consumers and distinguish your company from competitors.
  2. Relevance:  It must communicate the nature of the service and the benefits of the service.
  3. It must be memorable:  Brand names must be easily understood and remembered.
  4. Flexibility:   A service brand name must fit with existing service provision but be flexible enough to account for expansion into new service areas.

Word of mouth between consumers is crucial to the marketing of services because of their experiential nature.  Often personal influence will be crucial in who consumers choose to purchase services from.

There are four approaches to developing word of mouth.

  1.  Allowing satisfied customers to inform others of their satisfaction e.g. the use of testimonials
  2. Developing materials that consumers can pass to one another
  3. Targeting opinion leaders through advertising
  4. Getting potential customers to talk to existing customers.

Berry describes a seven point model for successful services marketing:

  • Marketing should happen at all points in your organisation from product design to after-sales service.
  • Service flexibility must be introduced.  You must customise services to meet individual consumer needs.
  • You must recruit high quality staff.  And you must communicate clearly with them.
  • Ensure that existing customers increase their uptake of your services.
  • Develop a quick response facility to rapidly deal with consumer issues and complaints.
  • Use new technology to improve service efficiency and to lower costs.
  • Use branding to differentiate between different services and to differentiate your services from those of your competitors.

 

Carillion: Script for an Outsourcer’s Tears

The news headlines over the last week were dominated by the collapse of Carillion, the civil engineering and public service outsourcing firm.

Carillion began as a civil engineering and construction firm but diversified into public service provision.  It held major contracts with local authorities and national governments.  It was involved in major PFI projects to build schools and hospitals.  It built roads and was a major contractor in the HS2 high-speed rail project.  It ran prisons and provided school and hospital catering.

The collapse of Carillion also opens a wider debate into the way public services are outsourced and the business practices of outsourcing firms.

So what went wrong with Carillion?

The answer was that the firm’s directors pursued an extremely risky growth strategy and they forgot the principles of contract bidding.  Getting the contract for cash flow was more important than ensuring sufficient profit margin.

A few years ago, Carillion was a star of the stock market.  It’s share price was high and the company was offering attractive dividends.  However, not everyone in the city was convinced of Carillion’s merits and several hedge funds bet against the firm.  Carillion’s collapse has proven those fund managers right as successive profit warnings were issued and the share price collapsed.

The hedge fund managers betting against Carillion saw the firm for what it was, a form of outsourcing Ponzi scheme.

A Ponzi scheme is named after the American fraudster Charles Ponzi and it is a form of ‘long con’.  It is an adaptation of a pyramid scheme.  A Ponzi scheme is a form of investment vehicle which offers incredibly attractive returns.  Investors may be told that their money will be doubled in a relatively short time.  The scheme then relies on the exponential attraction of new investors.  Money gathered from new investors is used to pay the returns to existing investors.  However, as exponential growth in investor numbers is required, soon there simply aren’t enough new investors to keep the fund going and to pay the investors the promised income.  Unlike a traditional pyramid scheme, which tend to collapse very quickly, a Ponzi scheme can stave off collapse by getting existing investors to put in more money.  But the truth is that it is inevitable a Ponzi scheme will collapse.

The last instance of a Ponzi scheme was the investment fund managed by Bernie Madoff.  This scheme lasted for several years and attracted a number of high-profile celebrity investors.  For many years, Madoff was seen as a financial wizard.  His investment products were seen as highly successful.  However, When the fund ran out of money it collapsed leaving a number of its high profile clients significantly out-of-pocket.

Here there is a parallel with Carillion.  For years the stock market saw the firm as a success.  Only when its need for exponential contract growth could not be met, did its collapse became evident.

Carillion’s business model was to gain as many infrastructure projects and public service contracts as possible.  This meant it was often the low bidder.  The business model didn’t properly account for the price element of the marketing mix.

The first error in Carillion’s pricing strategy was not to properly account for project over runs and unforeseen costs.

It is normal practice for such issues to be properly accounted for in project bids.  As long as projects went ahead with no issues, Carillion could meet its cost expectations.  However, as the company grew it offered low bids on projects which were subject to long delays.  The company also did not account for delays in payment.  This resulted in the firm building up large debts as it had to borrow to cover running costs.

The CEO of another outsourcing firm, Serco, has a toilet brush sitting on his desk.  The brush is a reminder that his firm should not bid on any public service contract where the profit margin is less than 6%.  This is the minimum mark up on the services of an office cleaner.  Carillion were regularly bidding on contracts where the profit margin was far lower than 6%.  If anything went wrong with those projects, Carillion was left out-of-pocket.  And things went wrong.

By under-bidding on contracts, Carillion’s reputation was also damaged.  When I worked in a local authority, many colleagues held the view that Carillion were a ‘bit crap’.

Carillion got to the stage that any income it made was going to pay off its bank borrowings.  The company also had a significant pension black hole.  It is estimated that Carillion had £29 million in bank deposits but that the company’s debt and pension fund shortfall was £3.1 billion.

As a Ponzi scheme runs out of potential investors, there simply weren’t enough new infrastructure and public service contracts in the market for Carillion to meet its debt repayments.  The banks pulled the plug.

Some of the blame for Carillion’s collapse must be laid at the door of the company’s non-executive directors.  It is their job to act as a critical friend to the business; warning management that policies and strategies were dangerous and presented unacceptable risks.  It seems that Carillion’s non-executive directors were ignored by management or that they did not take proper cognisance of their functional role.  Clearly, the management of Carillion were allowed to carry on with a high risk business strategy that was doomed to fail.

So what lessons are there for SMEs from the Carillion collapse.  The first is that if you are in a contract bidding process, always build in a cost factor for delays and late payment (overrun costs).

Secondly, know you’re market and what is acceptable in terms of margin: don’t be fooled into the belief that it is always the low bidder who gets the contract.  If necessary, use a ‘more for more’ strategy which bundles in additional service features for relatively low-cost additions.  The secret to a ‘more for more’ strategy is to bundle in features which are greatly valued by your prospective customer but which cost little additional cost to your firm.

For example, a landscaping firm I know recently bid for a grounds maintenance contract.  The contract went to a competitor. There was little difference in price between the two bids but the competitor offered detailed seasonal planting schemes on top of the grounds maintenance work.  These schemes cost next to nothing to prepare but it offered additional services which were valued by the client.

Finally, when bidding for a contract do not use simple cost-plus accounting to set your price.  Instead combine the bid price with the probability of achieving the contract.  An example:

A builder is bidding on a contract to build an extension to a house.  The cost of the extension is £10,000.  The trader knows that if they offer to complete the job at cost, there is a 100% probability of getting the contract.  If a 3% profit margin (£300) is applied, the probability of getting the job is 90%.  If a 6% profit margin (£600) is applied, the probability of achieving the contract falls to 80%.  If a 15% margin is applied (£1500), the probability of success falls to 18%.  A 20% margin (£2000) means that there is zero probability of the contract being awarded to the firm.

So:

£0 multiplied by 1 = a notional margin of £0

£300 multiplied by 0.9 = a notional margin of £270

£600 multiplied by 0.8 = a notional margin of £480

£1500 multiplied by 0.18 = a notional margin of £270

£2000 multiplied by 0 = a notional margin of £0

So in the above simplistic example the best combination of profit and probability of bid success is to offer a contract price which includes a 6% profit margin and an 80% probability of bid success.

The standard graph of notional margin sees a gradual fall in the probability of a contract being awarded as the margin increases.  However, eventually there will be a sharp fall in the probability of a contract being awarded as the cost exceeds the expectations of the market.