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.

Developing Competitive Advantage

Different industries offer different competitive opportunities: therefore different strategies are required.  There is no one catch all strategy that will be successful across all industries.

So to develop an appropriate strategy for your market, you need to identify the appropriate competitive advantages and hence develop appropriate strategies.

There are three steps to identifying competitive advantage:

  1.  Define the Industry:  What are the market boundaries? What are the ‘rules of the game’? Who are the other players?
  2. Identify the possible competitive moves so as to exploit competitive advantage: What is the life cycle stage of the market? If the market is mature there will be different competitive advantages to a market which is in its growth stage; and therefore different strategies will be applicable. How will the actions of your competitors affect the market?
  3. What is your generic strategy? Differentiation, Cost focus or niche?

Remember successful strategies are the successful completion of a series of competitive moves

The first step, identifying the boundaries of an industry is not as easy as it first appears.  Take a farm shop with a cafe and children’s petting zoo.  Is that business a food retailer and producer; or is it part of the catering industry, or is it part of a wider leisure sector?

In assessing an industry’s boundaries each identified business activity should add perceived value in the minds of potential consumers. That perceived value is the string of benefits accrued by obtaining a product or service.  Some of these benefits can be abstract such as self image. The price is determined by what people are willing to pay to accrue those benefits.  If consumers place low perceived value on goods or services, they will expect those goods and services to come with a low price.

The ‘game’ is to create a disequilibrium between perceived value and the same price offered by competitors. Two factors can be adjusted, the perceived value and the price. this leads to three main options:

  1. Offering more perceived value for the same price as your competitors
  2. Offering the same perceived value as your competitors for a lower price
  3. Offering significantly more perceived value but for a higher price.

We do not live in a world of perfect competition where price is the only differentiating factor between market offers.

Obviously every activity to produce goods or services has a cost. The accrued costs of production and supply set the minimum price level at which products can be marketed.  Your business system must remain profitable. External factors such as tariffs and taxes can affect that profitability.  UK businesses currently exporting in a tariff free environment will likely face pressure on profit margins if, as seems likely, not trade agreement can be agreed with the EU and the country reverts to trading on WTO schedules.

The best approach in a market is to offer the highest possible levels of perceived benefit for the lowest possible delivered cost.

In assessing the ‘rules of the game’, you also need to take into account the logic of the business system; how business activities coordinate to achieve a common goal.  Resources needed to achieve common goals also need to be examined e.g. People, technology and finance.

When assessing competitors you need to look at all market entrants, not just core competitors.  that means suppliers, distributors, retailers etc.  You need to know which market players will sub-optimise your whole business system.

Competitive moves are defined as the best way to utilise your defined business systems to provide perceived value.  This is achieving superior performance in at least one business system activity e.g. best after-sales care; or through the innovative combination of several activities i.e. your marketing mix. This is the basis of all successful marketing strategies.

In assessing which competitive moves you need to make, you need to know the stage of the life cycle the market exists in.  Competitive moves will be different in a new emerging industry than in a mature of declining industry.

To identify strategic groups use perceptual mapping.  Plot consumers perception of value (not product quality) against cost.

There are two forms of generic strategy: one dimensional strategies and out-pacing strategies.

One dimensional strategies affect either perceived quality or price.  They are a repeated single move with the intention of retaining a static market position.  They are defensive strategies.  Short life cycle industries, such as fashion will use one dimensional strategies focused on high perceived value.

Businesses with long life cycles such as commodities (gas, electricity, water, etc) can look at low delivered cost strategies.

Using one dimensional strategies in other circumstances can be dangerous.

Out-pacing strategies do not repeat the same strategic move over and over.  You outpace your competitors by moving from one strategic position to another through altering value options.  The timing of outpacing strategies is crucial.  This is very much a dynamic strategy option.

Pre-emptive outpacing strategies are often used by industry leaders to avoid attacks by competitors. Again this is predominantly a defensive strategy option.  this could include shifting the industry life cycle through the development of product standards.  You need to create a pricing reserve so as to invest in process improvements to allow a shift to low delivered cost strategy until the new industry standard is adopted.

Price can be leveraged to prevent market followers from generating cash flow needed to transition to the next industry stage. For example, many saw Betamax video recorders as the premium product but VHS was cheaper and VHS was able to become the industry standards for home video cassettes. Price can be used to prevent new market entrants; possibly through the creation of fighter brands.

Again, the timing pre-emptive outpacing strategies is crucial.

Pro-active outpacing strategies tend to require market maturity and lower growth rates.  The are used to escape maturity stalemate and to avoid destructive price wars. In effect you are changing the rules of the game.

Unbundling perceived value is a common outpacing strategy.  This is achieved through the use of value chain analysis.  You then remove unacceptable costs which do not add to perceived value.  this may be moving from high street stores to out of town warehouses, or even moving to internet distance shopping from traditional retail. Ikea went from a traditional furniture retailer to a supplier of flat pack self-assembly furniture.

Analysing the competitive advantage options in your industry is critical to the achievement of successful strategies.

 

 

 

 

Communications Strategies and the Communications Mix

Fill (2002) outlined four strategic approaches to the marketing communications mix; the Promotion element of the marketing mix.  These are:

  1. Positioning
  2. Audience
  3. Platform
  4. Configuration

A positioning strategy uses market analysis and segmentation to create communications strategies focused on the achievement of SMART marketing goals.  This approach aims to target finite resources efficiently and direct communication effort to the most valuable markets.  This approach has three parts; segmentation of the market; selection of target segments and positioning within markets.

To successfully achieve a positioning communications strategy, you need choose the market segments most attractive to your firm; matching your organisational goals so that you maximise returns.  A positioning strategy should position your products and your brand to meet the perceptions and expectations of target audience.  You therefore need to know your consumers needs.

You must also recognise that everyone has four states of identity:

  1. The Worry Self
  2. The Actual Self
  3. The Idealised Self; and
  4. The Fantasy Self

So which of these identities do you want to target.  Insurance firms target the worry self; Firms selling family hatchbacks target the actual self. Firms selling designer clothes target the idealised self; luxury brands often target the fantasy self.

A positioning strategy is key for developing brands. You develop a brand position which shows what the brand does, what the brand means and how the brand gives value.

FMCG (fast-moving consumer goods and other highly competitive, low margin sectors often favour a positioning strategy.

Positioning is an audience focused, not a product focused activity.  It is focused on brand meaning, brand values and differentiating your brand from that of your competitors.

Audience based strategies focus on the different ways items are purchased and the supply chain.  For example, the audience for consumer goods tends to be individuals whereas the audience for industrial goods tends to be buying groups which contain influencers. the decision to purchase a new piece of machinery will be made by a group within an organisation but that group will contain ‘influencers’ who initiate and advise on the purchase e.g. the Production Manager.

So your communications strategy will alter depending on the audience your message is intended for.  Your audience could be the end users of your product such as consumers, it may be your suppliers and retailers or it could be other stakeholders in your business such as shareholders and financiers.

This means there are three audience-focused communications strategies:

  1. Push strategies intended to target supply channel members.
  2. Pull strategies which target end users.
  3. Profile strategies aimed at third-party stakeholders.

Push and pull strategies work in relation to how product is drawn through the distribution chain.  You use push communications, such as sales representatives and trade press advertising to push your production onto the shelves of retailers and wholesalers (this can include using communications to attain prime locations in stores such as eye-level shelves.  Pull strategies , such as television advertising, target the generation of demand in the end users of your production i.e. you target consumers who then demand that retailers stock your goods.

Profile advertising is similar to a positioning strategy as you use communications to secure your identity in the minds of third parties.  This could be using PR and your corporate website to attract investors.

An audience strategy is about using the right communications tools to lock your products and brands in the minds of the intended audience.

All too often I see firms, particularly SMEs focusing much of their communications budget on social media advertising.  Some of this, like YouTube advertising is Pull advertising no different to traditional TV and Cinema advertising.  However, much of social media communication is push or profile communication.  It’s intention is to build a brand identity and develop customer retention.  It is a pretty poor way to lock your brand identity into the needs of consumers or to attract new customers.

You cannot operate solely on a pull strategy or a push strategy.  You need a bit of both.  You need to communicate with end users to generate demand and you need to communicate with intermediaries to ensure that that demand can be satisfied.

A platform strategic approach aims to express a brand promise through brand values and differentiated claims.  But to do so it must be consistent and be anchored in corporate principles.  It involves the development of a brand theme which is made up of consistent promises.

There are three platform types:

  1. Creative – Messaging consistent big ideas across different communications channels.
  2. Brand Concept – Which are routed in the brand identity but use different creative ideas (Guinness advertising is a brand concept strategy)
  3. Participation Platforms – using interactive channels such as social media to engage in dialogue with end users.  the aim is to integrate the brand into people’s lifestyles.

The final strategic approach is a configuration strategy which focuses on the way communications are structured.  This strategy is based on the form and format of communications e.g.

  • The frequency of contact between parties
  • The direction of communications either vertically down distribution channels or horizontally across a market.
  • The modality of the communication – how it is to be transmitted e.g. print, digital, TV, Radio, person to person, etc. Whether communication is formal or informal; regulated or spontanious.
  • The content of the communication is it a direct advertisement or is it indirect communication such as PR and social media chat? Does the message directly focus on a subject or is it a ‘nudge’ to alter behaviour.
  • The exchange relationship – Is the communication aimed at creating a long-term collaborative relationship or is it an ad-hoc, one off contact?
  • The climate within which the communication is sent e.g. the level of trust between parties, compatibility between parties, etc.
  • The power dynamic: Who holds the power in the relationship, you or your customer?

None of the above strategies are mutually exclusive and you will find many organisations using a combination of all four strategy types in their communications mix.

In Times of Strife

I sit composing this blog under lockdown due to Covid 19.  Like millions of others, I am stuck at home, only allowed out for daily exercise or to buy essentials.  At my local supermarket, only 10 people are allowed on the store at any one time and the queue of people, standing two metres apart, stretches right around the car park.  At my local pharmacy, it takes forty five minutes to collect a prescription.  Restaurants, leisure centres and thousands of ‘non-essential businesses are closed.  It is likely these restrictions are going to last weeks and even when the strictest restrictions are lifted, the virus will have an effect on our lives for the next year.

The economic effects of the pandemic are likely to last far longer than the outbreak.  Some economists have calculated the economic fall out of Covid 19 will last a decade.  Governments are printing billions upon billions of currency in an attempt to shore up their economies.  Previous plans for extensive infrastructure spending and tax breaks will likely have to be shelved.

Covid 19 will lead to a recession and in the UK that recession may be deep and lengthy.  Economic growth in the UK since the 2106 EU referendum has been slow. Productivity has fallen off a cliff.  In the 3 months to March, the UK economy was stagnant with zero growth. Add the effects of the pandemic on the economy and the economy declines. Add the economic effects of Brexit and that decline spirals downwards. If we only agree the type of deal favoured by Boris Johnson, the calculated effect on UK GDP growth is between 6.8% and 7.6%.  A no deal scenario would have a larger negative effect.  For comparison the equivalent effect of the 2008 crash was 1.3%.

A mix of pandemic, a flatlining economy and Brexit could easily result in a depression.  The only comparable downturn would be the economic stagnation of the 1890s: and Britain no longer has an empire to soften the blow.

Niccolo Machiavelli, in The Prince, says of a recession: “Luck decides half of what we do; the other half is more or less up to us”.

He then talks of how to survive a shock or emergency.  Machiavelli was writing during the Italian renaissance.  Italy was not one country but a group of independent city states. Wars and conflicts between these city states were common.  It was a time to trust no one. Even in your own court, rivals to your throne could be found in your own household. Family conflicts exploded into assassinations and coup d’états.  This was a time when a ruler could gain power one day and lose it the next.

Machiavelli compares emergencies like Covid 19 to a river in spate. A raging torrent which destroys everything in its path.  Such torrents are common in Northern Italy in the Autumn and spring as water sheds off the Alps down narrow valleys.  He states that with such torrents the initial reaction of the majority is to run for high ground and safety.

Machiavelli states that good leaders will prepare for such torrents.  They will build banks and dykes to control the flood when river levels were low.  So he advises repairing the roof whilst the sun shines.  It could be argued that the UK governments policy of austerity has done exactly the opposite.  That is why we now see an NHS with fewer beds, high staff vacancies, a lack of appropriate PPE and too few ventilators.

In his writings, Machiavelli despairs of the ability of the Italian states to withstand turmoil and invasion. He argues that they are only strong and able to withstand such shocks if they are united with common purpose.  So the UK is facing a massive economic shock just as it isolates itself from its nearest markets and neighbours.  And the UK government isn’t helping matters by ignoring joint ventures such as the EU plan to collaborate on the purchase and supply of medical equipment (a plan which both Norway and Switzerland were happy to join).

So a deep and destructive recession is likely: but don’t panic.  Don’t simply use this time to fight fires and short-term problems.  Yes, ensure your business survives the initial economic shock but also plan for the longer-term.

Do not become infected with ‘Anorexia Industrialosa’ (a term invented by Andrew Lorenz).  This is an excessive desire for a business to become leaner and fitter.  This excessive desire can lead to emaciation and death of a company.  Cost cutting leads to poor customer service and excessively limited offers.  Which in turn is rejected by customers.  Earnings suffer and so you cut again leading to even more limited offers and even worse service.  A downward spiral accelerates.

And closing outlets and factories to try and maintain margins can also be a serious error.  You may end up concentrating fixed costs on fewer outlets damaging your ability to maintain margins and making your business unviable.

In modern markets the businesses that do best are those which maintain the interest of their customers and which maintain their customer focus. Excessively reducing your market offer and damaging your customer service is directly against this goal.

So in times of recession you need to put marketing centre stage.  Customer-focus is your prime strategy. You need to concentrate on segments and customers which fit your long-term goals.

Professor Malcolm Macdonald gives the following guidelines for operating during a recession:

  1. Customers are attracted by promises but retained through satisfaction.  If you cannot describe the value a product or service required in the mind of your consumers, you cannot deliver that value. So you need to understand your customers needs.
  2. Don’t try to cover too many market segments.  Focus on those segments that your organisation wants to lead in the long-term.
  3. Reduce your product portfolio but be careful in doing so.  Rid yourself of products which do not provide adequate customer value.  Recently Mars, the confectionery giant, did this reducing its portfolio to only brands it considered as market leaders.
  4. Look at your distribution network. Is it flabby.  Is it too big or too slow.  Are there better distribution methods out there.
  5. Improve the productivity of your promotional spend.  If you have a sales force examine their activities closely
  6. Reduce costs in the unproductive areas of your business.  Use value chain analysis.  Don’t incur costs for servicing unprofitable markets or customers.
  7. Identify your key customer accounts.  Don’t rely on your sales team to do this alone.  Assign senior managers to key accounts.
  8. Don’t let your sales force deal with big customers alone. There is a danger they will all receive maximum discounts in order to keep their business.  Large contracts need to be overseen by senior managers.
  9. Selectively attack competitors key accounts that are attractive to you. Don’t worry if you lose unprofitable customers to do so.
  10. Keep the heart of your business: Key products, key customers and key segments

Use this time of lockdown productively. It is a perfect opportunity to plan and prepare for what is to come in the long-term.

Don’t enter a vicious circle of:

  • cutting prices,
  • increasing volumes at low margins,
  • reducing specifications to maintain return on investment,
  •  losing sales
  •  and then cutting prices further

Enter a virtuous benign circle of:

  • Raise prices
  • Have lover volume of sales but at higher margins and revenue
  • Improve your products and promotion
  • Develop higher customer acceptance and therefore volume
  • Allowing for prices to rise again.

 

What kind of Business Are You?

What is your state of readiness to supply your market?  Do you anticipate what consumers need or want? Are you prepared to move your customers to the next stage of the market e.g. electric cars or 5G?

To answer these questions you need to know what type of business you are and what is the position of the market life span.

Only with that information at hand can you adopt a market strategy that is appropriate and get that strategy applied with the correct timing.

You need to forecast your environment: Decide at what point you want to grab the market. Do you want to intercept the market at a certain stage of its life span or do you want to lead and direct the market?

This means that there are several types of company in a market. It also destroys the myth that ‘First in is best dressed’. take the early 80’s home video market: Betamax was first to market, and some still consider it a superior quality option, but VHS was able to intercept the market with a cheaper, better distributed product.  VHS won the home video format battle and Betamax was consigned to the history books.

Being the prime mover in a market is not always an advantage.

In every market there will be a number of companies and as the market life cycle progresses different businesses will rise to prominence as others decline. Like everything else, markets have entropy.

Businesses in a market can be classified under one of four categories:

  1. Market Scopers:  These are the innovators who create new markets and who operate at the start of the market life cycle.  they create new product, services and distribution channels. They have a go to attitude and scope out a market rather than aiming to satisfy it. the following lessons can be taken from Market Scopers:
    1. Know the state of readiness of consumers for the market, the product or the innovation.  Sir Clive Sinclair scoped the market for home computers and had extraordinary success. He tried to scope the market for electric vehicles but did so on false assumptions and the C5 was a disaster.
    2. Know how big the market is or could become.  Focus on realised demand not latent demand.
    3. Know how the market wants to buy the product.  For example, who buys carpets over the internet?
    4. Know what price the market will bear, so as to maximise returns.
  2. Market Makers:  These businesses operate in the early growth stage of the market.  They are the creators of a mass market e.g. Henry Ford with his aim to make motoring a practice for the masses.  These businesses generally garner the largest market share and become market leaders.  They create ‘best value’ but are often insufficiently agile to withstand the pressure as a market segments.  Often these businesses are driven by product development rather than market change. These are growth stage market leaders.
  3. Market Changers:  These businesses aim to move the market elsewhere by forcing their competitors to modify their offer.  Market changers are companies like Tesla which has pushed established car manufacturers into the development of electric vehicles.  These companies focus on technology and price/quality analysis.  They look to provide services unavailable elsewhere. They can force the existing market into decline.
  4. Market Exploiters:  These companies are fast followers of technology.  Many ‘market disruptors’ are market exploiters.  They take advantage of market fragmentation as disparate segments emerge.  They develop ‘new best value’ through branding and new service functionality.  Exploiters follow a market follower or market challenger strategy.

Different types of company need to target different market stages for market entry.  timing into the market is critical where consumer needs and market segments are continually changing.  A major factor is the rate of market progress and its taxonomy. This is how quickly consumers adapt to changing market technology: Do you target early adopters or laggards?  You also need to be aware of how quickly consumers change their definition of best value in a market.  For example, how many consumers would now buy a car that doesn’t have Wi-Fi or an iPod dock?

Knowledge is Power

As the famous proverb says, ‘knowledge is power’.  To be more accurate, Collating verified information so you have correct and accurate knowledge is power.

The business which owns the most accurate information about its market, customers and environment, tends to be the most successful business in that market.

Information and its assessment is therefore a critical stage in the marketing planning process and the development of sustainable marketing strategies.

It is really important that you know you are operating on correct information. Your business must know it is operating within the truth and not relying on fallacy.

In the realm of intellectual property protection generating false information is a common tactic.  It is not unknown for sportswear manufacturers to leak false football strip designs in the far east, so as to put counterfeiters off the right track.  In entertainment, film-makers deliberately leak rumours of false character arcs and storylines to divert the attention of showbiz journalists keen to publicise ‘spoilers’.

Some definitions:

  • Data:  Facts and statistics used for reference and analysis.
  • Information:  Facts or knowledge provided or learned.
  • Knowledge:  Information and skills acquired through experience and education.

Alternatively:

  • Data:  The plural of datum. A statement accepted at face value: a given.
  • Information:  A collection of facts (data) which, when analysed, can be used to draw conclusions.
  • Knowledge:  Information of which a person or organisation is aware.

Increasingly in organisations, the management of knowledge is seen as a critical factor in the development of sustainable competitive advantage.

The information to be managed is that which is focused on the organisations identity and focus. it is what the organisation needs to know about itself, its customers and the environment in which it is to operate.

Remember, knowledge is different to information in that it is used as an essential ingredient in your customer offer and business purpose.

So what is knowledge management?

  • Knowledge:  “A fluid mix of framed experience, values, contextualised information and expert insight that provides a framework for evaluating and encorporating new experiences and information.  It originates and is applied in the minds of knowers.  In organisations it is often embedded in documents, processes, policies and norms.
  • Knowledge Management:  “The explicit and systematic management if vital knowledge and its associated processes for creating, gathering, organising and exploitation.  Knowledge management is turning personal knowledgeinto corporate knowledge that can be widely shared throughout an organisation and thus appropriately applied.”

Increasingly organisations will differentiate themselves through the way they retain and manage knowledge.

Knowledge management is a concept simple in definition but desperately difficult in implementation. However, it provides real marketing advantages which offset the cost of developing knowledge management processes.

Competitive advantage is created through knowledge management by:

  1. Collecting relevant data
  2. Analysing that data – turning data into information and information into knowledge
  3. Distributing that knowledge to staff so that it can be applied in the market.
  4. Using that knowledge to enhance the customer experience.

This knowledge management process is central to the balanced scorecard method developed by Kaplan and Norton.  In that process organisational learning and knowledge management is applied to create better and more efficient corporate processes.  These new processes lead to better customer results, e.g. new customer acquisition and customer retention. These better customer results lead to better financial returns which can be re-invested in further organisational learning.

Knowledge is power and managing knowledge is increasingly seen as a key factor in any organisation’s future. It is closely linked to new technology, new market channels, market disruption and the creation of new organisational networks.  It allows the development of new ways to grab the attention of prospective customers.