Tag: marketing

A word or two about value

I want to tell you about a guitar. The instrument in question is a 1969 Fender Stratocaster in black with a white pick guard. It was the standard model and was purchased in Manny’s Music in New York. It was purchased because an airline had mislaid a band’s instruments and the guitarist needed a new ‘axe’ to complete the US leg of the band’s world tour.

Over the next two decades the guitar suffered massively through its use and the guitarist’s numerous alterations to it. The white pickguard was replaced for a black one. The tuners wore out and were replaced. the guitarist shortened the tremolo arm with a hacksaw. The pickups and potentiometers were replaced on numerous occasions. Several necks were bolted on to the body as frets wore out or as the guitarist searched for different tones. the guitar’s owner decided to try a Kahler tremolo system, an alteration which required a large chunk of the body being chiselled away. Eventually the guitar was retired having, its owner thought, seen its working life through.

However, after a few years, the guitarist decided to restore his old guitar. The hole for the Kahler bridge was filled with a new piece of wood and a standard Fender bridge installed. New pickups were installed and the rest of the guitar cleaned and repaired.

The guitar saw a few more outings on tour and on a couple of new records. Then, to support charities, the musician decided to sell his black Stratocaster. That musician was Dave Gilmour of Pink Floyd. The black Stratocaster was the instrument used on Dark Side of the Moon, Meddle, Wish You Were Here and all the bands classic albums.

In the charity auction held at a major London auction house, the ‘Black Strat’ sold for $3,975,000. At the time the highest price ever paid for a guitar at auction. A price only beaten when Kurt Cobain’s Fender Jaguar was sold a few years later. That’s not a bad price for a guitar where, it is thought, the only two remaining original parts are the pickup selector switch and the bridge plate.

For comparison, if you want to by a 1969 Fender Stratocaster, not formerly owned by one of the World’s greatest rock guitarists, you’d pay between $5,000 and $8,000. If you want to buy the new equivalent of a standard American Strat, you’d pay $1,300.

So how did the buyer of Gilmour’s guitar decide its value and the limit of his bids?

Today, particularly in mature markets, it is argued that customers are a rare commodity. Customers therefore have strategic value. You need to win customers and once you have won them you need to keep them. You don’t just consider the exchange of products and services, you need to consider the value which is created by that exchange.

So how do customers calculate value?

Accountants (and some economists) would only consider the economic value, the value in use, of goods and services. This isn’t just the cost of purchase but other costs such as switching costs, maintenance and repair, cost of disposal, etc. Through showing lower cost in usage, it is therefore possible to justify a higher initial purchase price.

However, if we were to consider just the cost in usage of Dave Gilmour’s black Stratocaster, no one would pay such a vast sum. We’d either buy a 1969 Stratocaster for $5,000 or we would pay $1,300 for a brand new Pro model.

However, the buyer of the Black Stratocaster wasn’t just concerned with its economic value, they were concerned with its perceived value. Perceived value is the qualitative element of a product or brand. Whilst products may function in a similar manner, the customer may perceive one to be superior to the other. For example, Ford and Vauxhall have for years tried to gain a foothold in the executive car sector. They have had little success in disrupting the market share of brands like BMW and Mercedes. Simply, the buyers of BMW’s and Mercedes cars perceive those brands as having higher value than cars from Ford or Vauxhall.

So the purchaser of the black Strat wasn’t buying a functioning electric guitar. The guitar may never be played again. It will sit in a glass case attached to the wall of a millionaire’s mansion. Even more likely, it will sit in a highly secure bank vault where it will receive occasional visits from its proud owner.

Value is about more than price and exchange is about more than goods and services. Value is the solution to a formula expressing the differences between a customer’s perceived benefits resulting from their purchase and their perceived sacrifices from the transaction and future ownership of the goods or services.

So the customer who purchased the Black Strat perceived that he would gain greater benefits from purchasing the guitar in terms of owning a piece of history, the guitar that created lasting art, like Rembrandt’s easel or Da Vinci’s brush, than he would sacrifice in paying the huge cost of the guitar or the security needed to retain it.

The purchase of the black Stratocaster satisfied the higher Maslow’s hierarchy needs of its new owner. The guitar is now an expression of that individual’s self actualisation in terms of bragging rights, self image. It is an expression of their wealth and self image. It is also an expression of their generous nature as the profits from the sale of the guitar go to charity. In that respect it is worth far more than, in the words of Richard Thompson, “A block of wood with some wires on it”.

Integrated Marketing Communications and Strategic Focus

The Oxford Dictionary of Marketing defines Integrated Marketing as:

An approach that influences transactions between an organisation and its existing or potential customers, clients and other consumers connecting all marketing channels. Integrated marketing is more of a marketing management approach than a different type of marketing. The focus of integrated marketing is to ensure that all communications, the brand’s positioning, propositions, reputation development, brand personality and brand messages are delivered coherently and with impact across every channel. This means a holistic approach to marketing communication including PR and internal marketing. This is necessary because of the fragmentation and globalisation of media channels. It may also mean a move away from mass advertising to a more targeted approach where a similar message would repeat across channels.

To achieve integrated marketing communications you need strategic focus. That means:

  1. Measuring the effectiveness of marketing communications;
  2. The growth and increased visibility of the corporate identity, status and reputation;
  3. Corporate governance and ethical behaviour.

A strategic role of the brand is required given the need to add value and differentiate your organisation in the market. You need to understand how your entire organisation communicates not just the role of the marketing department. You need to know the impact that such communication will have. Communications must be managed at all levels of an organisation and you must commit to that management function. Communication is everyone in the organisation’s concern: It isn’t a matter solely for the marketing department. You need professional communicators across your organisation not just tucked away in a management silo.

Communications can be seen at three levels:

  1. Strategic External Integrated Marketing Communications: Top level communications promoting the organisational vision and values, corporate objectives and Corporate Strategies. Strategic communications to build reputation, image and brand.
  2. Internal Marketing Communications: Communication across your organisation involving all business functions including HR, Finance, Productions, R & D, etc. Internal behaviours aligned to organisational goals.
  3. Tactical External Integrated Marketing Communications: Communications to ‘push your products through the supply chain and to increase customer demand (‘pull’ communications). Communications intended to promote goods and services provided by your organisation.

A major issue with integrated communications is that people are different. We all have different views and we perceive the world differently. Particularly in service industries these differences matter. So you need to ensure a consistency of customer experience.

What really matters is communication consistency not difference. If fact difference could be an asset. However, if your communications and customer experience of them is inconsistent you have a big problem. If a single customer can experience good, bad or indifferent communication experiences with your organisation, you may lose not just one customer but many. your customers and prospective customers talk to each other; particularly in these days of social media. Word of mouth means one customer’s perceived bad experience can be used to persuade many other potential customers to avoid your business.

What is Internal Marketing

Over recent years I have seen lots of organisations trying to improve their internal communications. I have seen organisations with poor to terrible internal communication. I have seen organisations with them and us cultures, poor management and dictatorial leaders. Often these organisations play at internal marketing. They go through the motions, put out poor quality newsletters, send long-winded emails and offer poor quality staff away days.

At one organisation, the senior management locked itself away. They went from bunker mentality to an actual bunker. At another, if a member of senior management went onto the ‘shop floor’ it was akin to a royal visit. When the ‘visit’ was over, the staff sighed with relief; well, it would be another couple of years before they would be bothered again.

The problem with these organisations was that they saw staff communication as an un-necessary hindrance on their grand plan. they viewed internal marketing solely as a communications issue not as a core part of service delivery. After all, the best policy, like the security services was need to know.

These organisations also tended to have top down heavy, ‘do as I say’ management styles. They rejected the more modern, policy down/plan up approach to management.

Last week I discussed the marketing of services and stated that good internal communication processes were critical to service competitive advantage.

Internal marketing goes further than communication. It is the creation of an open, information-sharing organisational culture.

To offer superior customer service you need make a concerted effort to communicate better. Your staff need to know what is expected of them in terms of behaviour and attitude. They also need to know how superior customer service will be measured and evaluated.

Internal marketing should be seen as a powerful tool in managing your organisation. It helps align organisational stakeholders to your organisation’s values and goals.

Internal marketing is knowledge management, not just better communications. It communicates management intentions and expectations. It informs, educates and persuades employees to follow your intended course of action. It should aim to motivate employees and to clarify their responsibilities.

The aim should be to unite stakeholders behind your organisational goals. You shouldn’t only rely on formal communications channels. Informal channels should also be leveraged. Don’t just rely on formal communications plans and team meetings, one to one communications with staff are equally important,

The aim of communications should be to reduce conflicts, not to ignite them. Better informed staff are better motivated staff. Using a ‘Intentions down – Plans up’ approach means staff gain ownership of organisational goals.

You are not simply moving data around your organisation. the aim of internal marketing is to inform, educate, persuade, motivate and enthuse. If you view corporate communications as solely a data process you may end up with data overload.

The following are key factors in internal marketing success:

  1. Clear Objectives: Clear objectives unite the workforce behind organisational goals. They promote organisational change and customer focus. they allow the clear communication and sharing of organisational values. Clear objectives commit staff to a total quality approach and they develop a commitment to customer service. Interdepartmental relationships improve when objectives are communicated; as is organisational knowledge and information sharing. Obviously to be clear objectives need to be SMART.
  2. Identify your Stakeholders: You need to identify their perceptions and expectations; their needs and wants; their concerns and motivations. You need to establish how your organisation objectives deal with those stakeholder criteria. you also need to know the status of interdepartmental relationships.
  3. Communications: What is to be communicated? What is the purpose of the communication? How will a communication affect the expectations of different stakeholder groups. Expectations need to be managed and it is important that you establish feedback mechanisms. You need to avid information overload whilst providing trustworthy, honest, timely communications. You need to avoid an information vacuum where gossip and rumour will fester.
  4. Alliances: You need to create alliances across your organisation. This could be through personal exchanges. Avoid an ‘us and them’ culture; the management ‘bunker’. You need to encourage stakeholders to see issues from various points of view.
  5. Training and Development: You need to equip stakeholders with the knowledge and skills required for them to do what is expected of them. Appraisals should specify internal marketing goals.
  6. Control: Internal marketing and communications need a budget, a schedule and performance control mechanisms. Messages should be aligned with the communication norms of different organisational departments e.g. HR, Finance, Marketing, etc.

Marketing Services

Marketing services requires a different set of tools than when you market goods. This is because services are different to goods.

When Philip Kotler first defined the marketing mix, he named four criteria; Product, Price, Promotion and Place. Today we talk of the extended marketing mix adding People, Physical Evidence and Process to the mix. These are the service elements of a marketing plan. We apply the extended mix to goods because these days, very few goods are sold without additional services. You do not buy a car, you buy a car with finance, a servicing package, roadside assistance, wi-fi connectivity, a warranty and a host of other additional services.

So what makes services different from goods when delivering them to customers:

  1. Service Intangibility: Services cannot be seen, or touched, or tasted or smelled. You cannot handle a service before you purchase it. So before you sell a service to your customers you need to transmit signals which declare service quality only then can consumers define service quality.
  2. Service Inseparability: Services cannot be stored. You cannot have a warehouse filled with spare services. Customers don’t just buy a service; they play a part in its delivery. Services need provider-customer interaction. Both the customer and the provider are affected by the service outcome.
  3. Service Variability: Even the best actor has a bad performance. Services rely on people. People vary. Their mood varies. A hotel receptionist can be bright and breezy one day and in a bad mood the next. If you staff’s mood can vary, so can your service quality.
  4. Service Perishability: As stated, you cannot store services. Once a service has started, you can’t add more customers to that service. When a jumbo Jet has taken off, you cannot put more passengers on that plane. When a restaurant sitting has finished, you can’t fill those empty tables. That is why most service firms aim for 100% capacity. that is why package travel firms and budget airlines operate flexible pricing strategies.

So what strategies are suitable for the marketing of services?

The aim of service marketing strategies is to leverage the service profit chain:

  1. Develop internal service quality through training and improving service standards
  2. Create employee satisfaction. Satisfied employees leads to satisfied customers
  3. Develop greater service value
  4. Encourage increased customer satisfaction and loyalty.
  5. Leading to better levels of turnover, profit and growth.

This profit chain is an extension of the Kaplan and Norton Balanced Scorecard which has already been discussed in this blog.

There are three main aspects to services marketing:

  • Internal Marketing: You need to orientate your staff to your organisational vision and values. You need to support service providers through your admin and support staff. You need a charismatic leadership group. You need to develop a customer centred organisation.
  • Interactive Marketing: You need to develop the provider-customer interface. That means dialogue not monologue. It means involving your target customers with your organisation. This means forums, social media groups, customer events. Your customers need to be involved in the setting of your service standards. Customers need to help define your service quality. Your loyal customers should matter. They should see your organisation as having a ‘passion to serve’.
  • External Marketing: You need good external marketing as you would if your business was supplying goods.

It is often difficult to differentiate services in the market place. How do you differentiate a boiler service, or a haircut, or a restaurant meal, from the offer of your competitors?

But to stand out in the marketplace, you need to differentiate your offer, how it is delivered and your corporate image.

By providing innovative service features, you can differentiate yourself from the competition. For example, the Japanese restaurant chain, introduced sushi conveyor belts into the UK, a new way of delivering food to UK diners. Others have tried to install self-service beer taps (and faced issues with UK licensing laws). Cinemas introduced ‘bonkettes’ and leather arm chairs. One of my favourite cinemas re-introduced the intermission and bar service at your seat. Tyre fitters and vehicle valets began mobile services where they come to your home or place of work to di car maintenance. Services can be differentiated through the physical evidence of your brand e.g. logos, brand statements, etc.

It is important when delivering services that you aim for consistent service quality. Service standards and their communication are critical. You should aim for consistently higher standards than your direct competitors. Your target customers must drive your service quality. So customer feedback and retention statistics are crucial measures of service standards. You should strive for zero defects. A service standard of 98% sounds good, but if Royal Mail operated at such a target, that would be millions of misdirected parcels and letters annually. One of the most reliable services in the world is the Mumbai tiffin tin lunch service, where Indian office workers have a homemade lunch delivered in a stacked series of tins. If the tiffin service can use the Indian railway system and porters with little or no modern technology; and achieve staggering levels of service quality; so can you.

It is also important to have good service recovery processes. On the odd occasion something goes wrong, you need to be able to reinvigorate the customers trust in your brand. You need more than an apology. You need to explain what has gone wrong and how you intend to put things right. You need to offer suitable compensation including gifts and discounts off future purchases.

You need to continually improve service productivity. This means staff training, recruitment processes and your technology needs to continually improve. Marginal gains are important. Often small changes in service efficiency leads to big increases in productivity and customer retention.

But don’t push productivity so hard it harms service quality. The more you rush staff, the more work you pile on their plate, the more likely service standards will slip. It is amazing how often efficiency drives and cost-cutting backfires. Rather than improving productivity you harm service provision and your brand promise.

the aim of productivity changes should be to create customer value and so, once again, tools like value chain analysis are useful.

The Power of Packaging

This time last year I bought a new guitar.

When I bought my my first instrument buying a guitar by distance means was a big no-no. You bought an instrument from a music shop. You walked in to what often appeared to be a imposing environment: and yes, someone was always thumping out Smoke on the Water in the background! (n.b. many music retailers now ban anyone who starts the infamous riff).

By actually going to a music retailer, you handled the instrument, you played a few notes and you could be assured that the instrument was properly set up.

In those days, mail order guitars, and mail order was the only distance selling route, were seen as poor quality, badly constructed and lacking a set up process which made them difficult to play.

The growth of internet shopping means that the most successful music retailers have a big internet presence. In the UK probably the biggest exponent of this is Andertons, who have grown from a single music shop in Guilford to being the most prominent instrument retailer in the UK on the web.

Manufacturers have recognised that a large proportion of their sales will be through distance selling, so manufacturing standards have risen and instruments arrive properly set up (and even in tune!).

However, I think many retailers and manufacturers in the musical instrument sector are missing a trick when it comes to the marketing of their products. Guitars arrive in plain brown cardboard boxes. They are not leveraging the communications power of their packaging.

What is the role of a products packaging?

Well obviously, packaging holds the goods, it stops them being spilt. It protects goods and stops them from being broken. It can be a barrier to stop goods from spoiling. It can allow for efficient transportation of goods. It can act to prevent theft and is why many small goods such as camera memory cards come in oversize packaging.

But packaging also has a communications role. It can convey information e.g. assembly instructions, safety information and certification marks.

But communication goes beyond simply advising purchasers that goods are safe and how they are to be used. Packaging can be an opportunity to upsell and to advertise acessories.

After all, most guitar manufacturers also make and sell strings, plectrums, amplifiers, effects pedals, T-shirts, lesson packages, tuners, straps, baseball hats, etc, etc, etc…

Packaging has a promotional role. It attracts consumer interest on the supermarket shelf. Why else would packs of breakfast cereal be covered in cartoon characters like Tony the Tiger?

Packaging conveys brand messages and allows consumers to make brand choices. Packaging is an important source of marketing messages particularly with fast-moving consumer goods.

Packaging is particularly important where consumers are making low involvement purchase decisions. It can provide promotional cues. this can be the colour of the packaging e.g. Cadbury purple. It can be an identifiable brand character e.g. Mickey Mouse. It can be logos, fonts, tag lines and colours. Packaging has the power to attract consumers and to hold their attention.

Take as an example a can of Coca Cola. The brand name is in a particular font. The can is a particular colour of red. The can is marked with an identifiable swoosh design. Coca Cola even trademark their distinctive bottle shape. All are distinct brand identifiers and provide strong points of differentiation from those of competitors.

There are cultural aspects of the communication role of packaging. Colour often implies a particular class of product. Dark coloured packaging is often viewed as expensive or classy. Red packaging acts as an appetite stimulant. White packaging implies purity and cleanliness. Blue packaging implies freshness. Green packaging implies environmental concerns.

But colours also have cultural implications. In China, red is the colour of luck and happiness. In Germany, products for infants are often in brightly coloured packaging whilst in the UK it is far more common to see infant products in pastel shades.

Pictures can have cultural implications. In Europe we put a picture of a baby on infant formula and baby foods. In Africa, the practice is to put an image of the contents of the pack on the label. So sales of infant formula did not go well in Africa when a baby is shown on the label.

The shape of packaging can give communications cues. Look at the perfume and fragrances market where perfume bottles come in fancy shapes e.g. high heeled shoes, a fist, a woman’s torso in a corset etc, etc. The packaging of these products becomes an attractive ornament on a dressing table or the bathroom shelf. The packaging of the fragrance becomes a product in its own right.

Attractive packaging get re-used. Fancy biscuit tins have been used for marketing since the days of the Victorians. Who hasn’t got an old jam jar or Lyon’s golden syrup tin repurposed to hold coins, nails, paper clips, pens or other bric-a-brac. Every time you go to put something in the tin you get a reminder of the brand message.

The size of packaging can operate on the basis of Gestalt Theory, i.e. the whole is greater than the sum of its parts. So you can buy ‘sharing’ bags of sweets and crisps. The message being that our product helps with social coherence. Value packs offer diversity and can influence product desirability. Big containers also take up more shelf space leaving less room for competitors products

Packaging directly affects a products market position. So if you buy a ‘value’ guitar it will be packed in folded cardboard whereas a premium guitar will have a travel case and come with ‘case candy’ owner’s certificates, a cleaning cloth, booklets about the guitar and brand, and even memory cards with photos of your guitar being made.

Cheap goods are sold in cheap packaging whereas expensive goods have glossy and robust packaging. toys and Easter eggs often have packaging that can be used as part of the toy or which includes activities like puzzles and games.

Increasingly, re-useable packaging is increasingly offered by manufacturers of household goods.

Packaging sometimes has to harmonise with the in-store appearance e.g. supermarket own brand labels or Apple electronics.

So your packaging is not just a container for your goods. It offers instructions. It contains regulatory information and compliance marks and it is a promotional tool.

If your packaging is passive, you need extensive and widespread promotional activity.

If your packaging is active it provides its own advertising and promotion. Active packaging works in a synergistic approach to marketing communication.

The Customer Value Ladder

It is obvious that a business’s customer base is its source of income.  Customers spend money with businesses: You hope!

But your customer base in more than a supplier of cash.  Your customers are your primary source of marketing data.  Marketing and business are knowledge-based activities. If you know your customer base, its attributes and opinions, you can predict its movement and they ways it may change.  You can identify what your customers see as best value and develop your organisation to deliver that value.

Customers have both financial and information value. To capture those customers in the first place, you also need knowledge.

Previously in this blog, I have discussed the concept of the customer value ladder.  A similar concept is the ‘ladder of advocacy’.

There are five ‘rungs’ on these ladders:

  1. Prospect
  2. Customer
  3. Supporter
  4. Advocate
  5. Partner

At each stage up the ladder we have different expectations as to the actions of customers.  At the lower levels it could just be purchase or re-purchase.  On higher rungs it could be partnership sharing and referring your business to others.  Obviously if you expect different actions by consumers as they move up the ladder, you will need to employ different tactics and use different promotional techniques and channels.

It is also worth considering that it isn’t only the customer who is moving up the ladder; so are the people they are talking to about your company.

Cross and Smith (1997) advocate that you bond with your customer in different ways as they move up the ladder:

  1. Prospect: Develop Awareness bonding to move them to;
  2. Customer: Where you concentrate on identity bonding to move them to;
  3. Supporter: Where bonding focuses on relationship development so that the customer becomes an;
  4. Advocate: Where bonding concentrates on creating a community. As the community becomes closer, customers become:
  5. Partners: Where you develop partnership bonding

Developing customer relationships is a two-way process.  Simply pumping out emails, newsletters or social media posts is not building a relationship.

On the first rung of the ladder you create a bond through brand and product awareness.  You need to invest in obtaining ‘share of mind’. Once you have obtained a share of mind you need to work to keep it.  You need to work to build on the target customers needs and wants.  This is often best achieved through traditional promotional techniques and channels, e.g. advertising or visits by representatives.  You also need to adapt your marketing mix to meet those customer expectations.

On the second rung of the ladder, you need to build the relationship with your customer group beyond awareness.  You need to attract ‘share of heart’. A bond developed out of shared values and aspirations.  You develop this bond through ’cause marketing’.  this could be through charity support, environmental standards and issue sponsorship.

Berry (1995) defines four types of relationship you can have with a customer:

  1. Legal:  You have a contractual relationship with your customers and that contract provides legal obligations.  You have statutory responsibilities towards your customers such as their sale of goods rights, product safety standards and responsibilities with regard to product description. You have data protection responsibilities towards your customers.
  2. Fiscal:  You have mutual financial relationships with your customers.  You may offer credit or deferred payment.  Credit terms can be a method of financial bonding.
  3. Social:  Businesses have social links with their customer base.  Football clubs offer stadium tours and opportunities to ‘press the flesh’ with current and former players. Venues offer patron-only previews of concerts.  Shops give valued customers ‘pre-launch’ opportunities to view new products. Restaurants offer ‘soft opening’ opportunities to regular diners to test new menus and at new restaurant locations.
  4. Organisational:  In business to business markets there are often organisational relationships between customers and suppliers.  These often develop into ‘partnerships’.

On rung three of the ladder values begin to be exchanged and deep knowledge of customers begins to be developed.  The relationship itself has value at this point.  Customers at this point are now getting something out of their relationship with your firm. This is the beginnings of building a community.  This is where owners’ clubs, social media groups and internet forums begin to have value.  You need to encourage feedback and information exchange.  Loyalty programmes can develop relationships at this point.  Bear in mind that, like many coffee outlets, a loyalty programme has little benefit if you offer membership to everyone!  You cannot ignore customer feedback and keep customers on this rung.

The value to your brand is:

  1.  Having knowledge of your target segment and the wider environment
  2. Your developed ‘share of heart’ and,
  3. The ability of customers on this rung to support those on lower rungs of the ladder

On rung four of the ladder you need to bond through creating social relationships with customers.  Here is the true and proper use of social media in marketing.  But you need to go further.  You need to offer opportunities for your customer base to meet not only your organisation but each other.  This is where customer conventions and fan events are useful.  You can develop product owner’s clubs and offer members discounts on things like servicing and accessories.  Community members need the opportunity to bond

Rung five is the development of partnerships.  This is a further development of developing a community.  An example is Ugg the sheepskin bootmaker who offer ‘brand fans’ opportunities to work for the brand and to help design their footwear.  As a result the customer develops very deep loyalty for your brand.  In business to business markets things go even further where suppliers offer onsite maintenance and service and locate employees in the premises of their customers.  Suppliers may get involved in their customers product design e.g. Rolls Royce helping to design the planes where their engines are to be located.  Suppliers may take over the running of a customers stock control processes and develop systems to help their customers produce products e.g. Just In Time supply software.  Partnership requires mutual respect and the integration of value chains.

At each stage of the value ladder you need to collect different data, use different marketing techniques and promotional tools.  It takes marketing skill to move your customers up the value ladder and to keep them on its higher rungs.

Designing and Delivering More Customer Value

One of the secrets of successful marketing is developing your organisation so that it has fewer, smarter people to deliver more value to customers faster.

However, things are not that simple in complex, mature, competitive markets.  All players in such markets are after the same thing and they are all fighting for the same set of customers.

Some economists will place price as the primary or sole factor in customer value.  this is the perfect competition model. It may be acceptable in simplified economic modelling but it bears no relation as to what happens in real life.

Consumers do not just buy products.  If a product solution was the only factor in consumer purchases, all goods would have the same features and price would be the sole factor in consumer decision making.

The only markets where price is such an over-riding concern are bulk commodity markets, such as steel or oil. Certainly consumer product markets are rarely decided on price alone.

Consumers form brand preferences.  They value things like customer service. Their self-image projected by the use of brands is important to them.  They like to develop brand loyalty.

These brand preferences drive customer expectation.  For example, consumers expect BMW cars to be superbly engineered; They expect Marks and Spencer’s clothes to be well made and good value; They expect McDonald’s burgers to be of a consistent quality and consistency.

When these customer expectations do not match the delivered product, then customers are dis-satisfied and seek alternatives.

More and more, as technology drives product conformity, brands are using halo services to differentiate their products from those of competitors.  Brands today represent more than physical products. Increasingly brands look to expand beyond their traditional product categories. Caterpillar isn’t just a maker of earth moving equipment, they are a clothing brand.

Brands are not only product; they are services, values, promises made by the seller.  They are an amalgamation of aspects which leads to the creation of a ‘personality’.

Smart marketers do not look to sell products: They sell benefits packages. They don’t sell purchase value, they sell usage value.  So if, for example, you are in the seed business, you don’t prioritise the cost of a bag of grain, you sell the likely value of the yield from that pack of grain.

Porter state that there are three ways to deliver more value to customers and to beat your competitors:

  1.  Charge a lower price than that of your competitors
  2.  Help customers reduce other costs
  3.  Add benefits which make your brand more attractive than that of your competitors

To win through price leadership means having an aggressive pricing strategy.  You must become the low cost option (again not just purchase price but usage price). Such a strategy requires organisational scale, market experience, inexpensive locations (outsourcing), superior cost control and supply chain bargaining power.

Often price leadership means offering fewer options in the market.  Lower prices are often driven by not offering free delivery or making the customer do more of the work.  For example, if you forget to print your boarding card at home, they will apply a significant surcharge to print it at the airport.  Ikea make you assemble their furniture.

Such a low cost strategy means relying on tight profit margins and selling in bulk.  It is difficult to sustain such a position over the longer term.

Many firms operating in business to business markets focus on lowering their customers other costs.  this could be through having longer service schedules, energy efficient machinery, easier repairs.  They market by showing customers that the cost of usage over time is lower than that of competitors products. Others offer to share the customers risk by selling on consignment, having low minimum order quantities or issuing exceptional guarantees e.g. no win no fee litigation.

Some firms go further by actively helping their customers lower costs.  Such companies want to be considered a business partner not just a supplier.  they offer customers training and support.  They may locate staff in customers premises to offer functions like on-site maintenance.  They offer services such as computer software and automated re-stocking.

Inventory cost can be lowered through matching customers Just In Time stock control procedures or through providing inventory outsourcing.

Through helping to reduce customers processing costs many firms become the preferred option in a market.  This could be through improving yields; reducing waste and reworking; reducing customer’s labour costs, reducing accidents and lowering energy costs.

Many firms analyse their production chain using customer value analysis.  Offering to lower costs away from that value chain, such as reducing administration costs or the costs of legal compliance can be a profitable marketing opportunity.

Some firms are successful in markets through offering value added.  This could be through a ‘more for more’ strategy where additional features and functions are added for a slightly increased price.  The trick is to bundle features and services which customers value but which come at a relatively low cost.

This could be the offering of product customisation, increased convenience, faster services such as delivery time, adding free coaching or training, offering consultancy services, issuing extraordinary guarantees and member benefit programmes (e.g. executive lounges at airports).

Sources of Marketing Opportunity

Over the past couple of days I have been looking at replacing my rather elderly car.  it has got to the stage where the cost of annual servicing exceeds the cars value.  One of the cars I have looked at is a successor model to a car I owned thirty years ago.  the new car has a bigger fuel injected engine that that old car.  In fact in the model range, it is a significantly superior model version when compared to the old car.

Yet the new modern car offers a far lower nought to sixty time, a lower top speed and only marginally better fuel consumption.

I was astonished.  Surely after thirty years, improvements in these categories would have been made.  Yet it seems that, in terms of performance, things have gone backwards.

That got me thinking.  How was this new model of car a superior marketing offer than its predecessor? How does it provide marketing opportunity?

Philip Kotler, in his breakthrough book Kotler on Marketing describes three sources of marketing opportunity:

  1.  Supply something that is in short supply
  2. Supply a product in a new or superior way
  3. Supply a new product or service (including an IMPROVED product or service)

When goods are services are in short supply buyers should be queuing up to buy them. So in the middle of a pandemic, things like face masks and surgical gloves will be in short supply.  This situation requires the least amount of marketing talent.  the opportunity is obvious to all.  The product is price inelastic so suppliers can charge high prices.  However, such shortages tend to be short-lived; so the market opportunity does not last.

When supplying an existing product you need to examine how you can IMPROVE that product. It doesn’t seem that the manufacturer of the car described above has properly considered what is an improvement.

There are three ways to identify product improvements:

  1. Use the Product Detection Method
  2. Use the ‘Ideal’ method
  3. Use the ‘Chain’ method

The problem detection method assumes consumers are accepting the current versions of goods but that they are not fully satisfied with those versions e.g. I like my new car but it uses too much fuel or I like my new car but I wish it had better acceleration.  Such statements create marketing opportunities.  problem detection is the primary method for product improvement but it is less helpful in terms of new product innovation.

The ‘ideal’ method involves asking consumers what they see as the ideal version of a product.  However consumers creating an ideal product wish list can create contradictions.  When using the ideal method, you may be faced with overcoming these contradictions.  For example, Consumers may like the taste of high alcohol but want them to be lower calories.  However consumers also reject low calorie beers as they have too low an alcohol content and a bad taste.  You can make a low alcohol beer tastier but only by increasing its alcohol content and you can only lower a high alcohol beer’s ABV by reducing its taste.

The consumption chain method examines the steps consumers take to acquire, use and dispose of products.  Are consumers satisfied with the way they consume products and can those steps of consumption be improved.  This could be through changes to the product itself or changes to the ancillary services which surround a product.

By analysing the customer activity cycle around your goods you can inform product improvements.  You also look beyond purchase value and look at your long-term relationship with those consumers (lifetime value).

When supplying a new product or service, you may not be able to rely on customer opinion,  They will not be aware of their need for the product until it appears on the market.  No one foresaw the home computer market. In the 1960’s it was expected that every major city might have a computer.  When desktops arrived they were tools for businessmen and engineers, not a domestic product.  When Apple produced the iPad, people forecast disaster as they saw no market for tablet computers.

Again, there are three models for assessing new product ideas:

  1. First use your company organisation to derive promising opportunities.  This is your sales force listening to customers and investing in blue sky research and development.  This can be a high risk approach
  2. The second method is to create the role of an Ideas Manager.  This is a senior role in an organisation who is tasked with managing product improvement and new product development.  They should lead a multi-disciplinary team with members from across your organisation including engineers, operations managers, marketers and finance.  It is this team who follow a formal process of idea assessment.  This can be new product proposals or improvements suggested by staff through systems like Kaizen and Total Quality Management.  The Ideas Manager should champion the concept of an Ideas Organisation and should take ownership of the decisions of the ideas committee.
  3. The Strategic Breakthrough Model:  This involves even more improvement thinking targeted at breaking through market growth pinch points and blockages.  this could involve finding new customer groups and new market segments.  It could mean geographic expansion of your firm or new sales strategies.  It could be new pricing strategies or financing solutions, e.g. most cars are now bought via leasing agreements as opposed to the old method of hire purchase. It could also mean adding new product features or developing completely new products.

Competitive strategy in Emerging Markets

As the BBC rapidly runs out of content to show due to the pandemic shutdown, it has been showing repeats of Dragon’s Den. One common feature of that programme is entrepreneurs trying to launch a new product or solution in an existing market.  All too often, these pitches end with the Dragon’s rejecting the invitation to invest in the product with the refrain of ‘I’m out’ or ‘there isn’t a market for your product’.

Trying to launch a new solution to an old problem is probably the hardest thing to do in business.  Why invent a new product to dig a hole when solutions like spades and mattocks already exist.  The new product needs to be better than the existing solution. In fact it probably needs to be better over a range of criteria; ergonomics, price, availability, value for money, durability, etc.

That doesn’t mean there aren’t new markets and a space in the world for new product solutions.  New markets emerge all the time.  In the 1960’s no one foresaw the home computer; when apple launched the iPad, they were derided for launching a product no one wanted or needed.

So what is an emerging market?

Generally, emerging markets are defined as newly-formed or re-formed industries driven by technological innovation, shifts in cost relationships, the emergence of new consumer needs or other changes in the economy or society.

A factor of emerging markets is that there tends to be few ‘rules of the game’. How the market is expected operate hasn’t been established.

There are common structural factors which characterise emerging industries.  these relate to the absence of established bases of competition and the initial small size of the industry.

  1.  Technological uncertainty:  What is the best technical configuration of the new product category.  For example which is better, a lithium battery car or one powered by a hydrogen fuel cell.
  2. Strategic Uncertainty:  There appears to be ‘no right’ strategy.  Different market players approach the market in different ways e.g. positioning, supply chains, distribution, customer service, etc. Products are configured differently or different production technologies.  For example, the common layout of the pedals in a car took many years to become established.  Different models of car used to have different layouts of accelerator, brake and clutch. Strategy can also be uncertain due to a lack of information about prospective consumer groups and the actions of competitors.
  3. High Initial Costs but Steep Cost Reductions:  New products in emerging markets tend to begin with small production volumes.  There is a lack of experience in producing the new product so manufacture takes longer and there can be increased wastage.  However, the production learning curve can lessen rapidly and as workers become more experienced in its production. Firms develop better, more efficient processes and procedures.  Productivity can rise rapidly as sales increase.
  4. Prevalence of Embryonic Companies and Spin-offs: New technologies see a lot of new market entrants.
  5. Consumers tend to be first time buyers:  Marketing is focused on product take up or getting consumers to switch to your new offer.
  6. Planning for a short-time horizon:  the pressure in the market may be to meet rising demand for the new technology.  market players suffer production bottlenecks and a lack of production capacity.  The focus in the business is on the now: firefighting current problems; not looking to the long-term future.  For Example, when Tesla launched its 3 model electric car, it lacked the production capacity to meet demand and customers faced long delays in obtaining their vehicle.
  7. Subsidy:  There may be government subsidy of new market entrants particularly in areas of societal concern.  For example, the UK government subsidised the insulating of people’s homes and the installation of solar panels.  Currently the UK government is subsidising the search for a Covid-19 vaccine.  The UK government is also interested in creating ‘gigacities’ large battery farms to store electricity generated through wind and solar.  But beware, subsidy can skew a market and make the market dependent on political decisions.

Emerging markets can experience early mobility barriers.  New markets often rely on proprietary technology and manufacturers may have significant control over supply and distribution channels.  They may hoard access to raw materials e.g. the UK is looking to build factories to produce the batteries for gigacities but lithium, the metal used in the batteries is extremely rare and difficult to obtain.  there may be a lack of skilled labour to produce the new technology and the market may lack cost advantages of experienced workers.  This lack of cost advantages can be made more significant through the newness of the technology needed to produce the product and through competitive uncertainties.  Likely there will be significant risk in the sector and thus the opportunity cost of capital can be high.

The nature of entry barriers in emerging markets is a key factor.  Often success in these markets is less from the need to command massive resources and more from the ability to bear risk.

So what are your strategy options in an emerging market:

  1.  You act to shape the industry structure:  You get to set the rules of the game through your product configuration, your pricing strategy and your marketing approach.
  2. There are externalities in industry development:  there is a balance to achieve between industry advocacy and the self interest as to your market position.  You may have to ensure that industry players are, in some way, interdependent on each other. this can be through setting industry standards, setting up trade bodies and establishing industry codes of practice.  The big supermarket chains are all members of the British retail Consortium which sets standards as to product quality and supply.  Those firms that do not comply with these industry standards can be forced to disappear if they refuse to accept industry norms.
  3. You can change the role of suppliers and channels:  you may be able to shift the orientation of suppliers and distributors by getting them to accept your procedures and standards.

You have to make big decisions when entering an emerging market.  Do you pioneer in the market or do you act as a market follower. Being fist in can be a benefit but it can also be risky.  Sega were first in to the computer game console market but suffered as Microsoft and Sony undercut their pricing structure. This is also an example of existing firms seeing your emerging market as an opportunity and using their existing scale and resources to drive you out.

Pioneering in an emerging market can be high risk.

Entry into a market is appropriate when:

  • The image and reputation of your firm is important to the buyer e.g. Nike entering the golf club market
  • Early entry is to initiate the learning process i.e. get ahead of the learning and experience curves. Experience is difficult to imitate.
  • Customer loyalty offers great benefits and those benefits lie with the first on the market.
  • Absolute cost advantages can accrue through securing the purchase of raw materials.

The following tactical moves:

  • Commit to the suppliers of raw materials – become their favoured customer
  • Finance ahead of actual need.
  • Entry to the market MUST be as a result of careful strategic analysis.

Competitive Forces Shape Strategy

Market analysis is central to strategy formulation. Dealing with competition is the essence of strategy formulation.

However competition isn’t only defined by other market players.  There are a host of underlying economic and social forces affecting competition.

There are two elements to market analysis: An examination of the macro-environment and an examination of the micro-environment.

The mnemonic PESTEL (or PESTLE) is often used to describe the analysis of the macro-environment. It stands for POLITICS, ECONOMICS, SOCIETAL, TECHNOLOGY, ENVIRONMENTAL, LEGAL.

SO UK businesses over the last five years should have been examining the effects of Brexit on their market, it’s impact on politics, it’s impact on the economy, how it has changed UK society, what technological effects it brings, its effect on environmental policy and how it is going to change the law.

An analysis of the micro-environment also has to take place.  These are factors directly affecting a particular market or market segment.  Michael Porter described these as five forces: Industry Competitors, New Market Entrants, Suppliers, Buyers and Substitute Products.

These collectively impact the profitability of an industry or market segment.

Some economists model on the basis of perfect competition.  However, perfect competition only exist in those models it does not exist in the real world.  More enlightened economics now apply scientific rigour and evidential standards to their modelling.  Yes, this makes models more complex as factors beyond price need to be accounted for in modelling but the results of such models are more realistic.

If Porter’s five forces are strong, entering a market can be incredibly difficult and costly.  Even if the five forces are ‘mild’ they can combine to hamper market entry.

Market entry by new competitors can occur where there are few economies of scale; where products across a market are homogenous, where capital requirements are low or where cost advantages are independent of organisational scale.

Existing market players can leverage a learning or experience curve to protect there market position.  Where there is no learning curve, or it is short.  Where experience is limited.  These barriers to market entry are low.

Often existing market players will use legal barriers such as intellectual property rights to prevent entry.  For example, for many years Cadbury held the patent on the machinery to make Flake bars, so competitors were unable to make generic copies of the bar.  Muller Dairies hold a patent on the corner yoghurt pot and have successfully sued competitors who developed copycat products.

New market entrants can also be blocked through existing market players controlling distribution and supply chains.  This can occur through forward and backward integration of suppliers and sellers within a market.

Government policy can prevent market entry.  Governments may create licensing requirements within an industry such as the arms trade.  Governments create legislation, safety regulations, environmental standards, etc, which limit opportunities for market entry.

Currently in the UK there is a growing political argument over the lowering of food standards and animal welfare standards.  The Johnson government has legislated to lower UK standards and move away from the high common standards held when the UK was a member of the European Union.  This is seen as preparing for a US trade deal and to allow the importation of food from the USA which is often produced with low animal welfare standards and low food hygiene controls. US practices such as chlorine baths for poultry and using Ractopamine on pork cuts is common in the US but currently banned in the UK.  These US practices are attempts to cover up America’s ‘secret epidemic’ of food-borne disease and food poisoning.  Groups of varying political allegiance, including some cabinet members are opposing lowering of food standards to US levels.

Market incumbents often fight back against new market entrants through the use of discount fighter brands.  This is a common tactic in the golf equipment market where the majority of premium club manufacturers own a fighter brand to combat new entrants.

Where market growth is slower, such as in a mature market, entry can be all but impossible.  In such circumstances, significant market change needs to happen to allow entry e.g. Brexit.

Powerful buyers and suppliers affect a market through the use of their bargaining power.  Suppliers can raise prices and limit supply (as OPEC often did with oil).  Powerful suppliers, such as the large supermarket chains can use bulk purchasing to drive down wholesale prices. The tied house system for many years allowed breweries to control the price of beer and limit tenant landlords profitability.

Suppliers are powerful where there are a few dominant supply companies e.g. petrochemicals and where similar industries do not directly compete (e.g. steel fabrication and aluminium smelting).  They can also be powerful when a market is subject to forward integration (raw material suppliers buying finished product manufacturers). So TATA was an Indian steel maker which purchased Jaguar Land Rover the car maker.

Suppliers are also powerful where the supplied industry is not critical to their survival or profitability.  The Ravenscraig steelworks, built by the nationalised British steel to make plate steel for the automotive industry was a weak supplier wholly dependent on the Leyland car works at Linwood and the Ford plant at Bathgate.  When those car plants closed, there was no market for Ravenscraig’s steel.

Buyers are powerful when purchases are large, concentrated and central.  They are also powerful where large scale purchases are technologically complex e.g. supercomputers.

Buyers are also powerful where products are homogenous e.g. buying potatoes.  they are also powerful where they can buy a readily available alternative e.g. buying cane sugar compared to buying beet sugar.

Buyers are also powerful when the product purchased is not critical and can be easily cut from the buyers systems.

Buyers can also be powerful when they look to integrate back up the supply chain.

Substitute products limit profit opportunities they can reduce opportunities during market boom times and they can temper the ability to raise prices.

Existing competitors often jockey for market position.  Intense rivalries for market leadership exist if all market players are of similar size and there is no dominant market leader.  Slow industry growth (mature markets) can create fights for market share which limit opportunity.  Competitors can be strong where products are undifferentiated or where it is easy for customers to shift supplier.  In such markets, fixed costs can be high, products are often perishable (agricultural goods such as milk) or there could be a reliance on high sales volumes due to low profit margins (high street fashion).  Existing competitors can be powerful where there is overcapacity in a market (such as car production) or where markets are slow-moving such as musical instruments or antique furniture.  For example, once a pianist has bought a piano, how long will it be before they need to replace it (if they ever need to).

Often markets have high exit barriers, such as environmental clean up costs or the need for expensive specialist machinery.  This means competitors may stay in a market when in other circumstances they would have diversified elsewhere.

To succeed where industry competition is strong, you need to focus on market positioning, influencing the balance of the market and exploiting industry change. You also need to build defences so you are less vulnerable to the strategic attacks of other market players.