Tag: Porter

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).

Designing and Delivering Customer Value

I have recently had the time to read the London School of Economics paper which gives a critique of the work of Professor Patrick Minford and the group Economists for Brexit.

Professor Minford’s work is regularly referred to by politicians who advocate a ‘hard’ Brexit where the UK cuts all ties to the European Union and looks to trade on World Trade organisation terms such as the General Agreement on Tariffs and Trade (GATT).

The LSE critique is damning.  It accuses Professor Minford of using out of date methodology and that he has ignored modern evidence based practices.  The LES also accuse Professor Minford of making massive assumptions as to the UK’s trading arrangements post-Brexit.  In particular they point to:

  1. Minford’s assumption that the UK can develop an economy based almost entirely on services with little or no manufacturing.
  2. That Professor Minford incorrectly assumes extensive levels of deregulation which would leave consumers and businesses with little protection other than the concept of caveat emptor.  Minford assumes that all regulation does is create cost for business and he ignores the concept that sensible regulation provides a framework for effective competition.
  3. That Minford assumes the UK can drop all external tariffs unilaterally.  In doing so he ignores the destructive impact such a move would have e.g. the mass importation of cheap New Zealand lamb on UK hill farming or the effect dumping of cheap Chinese steel would have on what is left of the UK steel industry.
  4. That Minford’s Liverpool model of the UK economy ignores the concept of economic gravity.  This is the evidence based concept that, regardless of tariffs and other trade barriers, countries generally do the majority of their export trade to which they are geographically close.  For the UK, this means Europe.

The LSE accuse Professor Minford of placing political bias ahead of data.  That he has decided what outcome he would like to see and structured his models to obtain that outcome.  A position which is contrary to scientific method.

From a marketer’s point of view there is one startling assumption in Professor Minford’s work.  It is that he assumes perfect competition.

Perfect competition assumes that all competing firms in a market sector make identical goods, they have the same cost base, they operate in identical environments and that the only determinant consumers use when deciding what goods to purchase is the price.

Given that price is a crucial element of the marketing mix, and that the concepts of psychological and brand pricing are well understood, to base economic forecasts on perfect competition is a ludicrous position. It is preposterous.

In Minford’s modelling, BMW make identical products to those of Kia and Fiat.  Anyone who drives will tell you such a position is nonsense.  As would anyone who favours Nike trainers or Levi’s jeans.

Minford is clearly ignoring the high elements of Maslow’s hierarchy of needs such as esteem and self actualisation.

Marketers know that consumers buy for a variety of reasons and that, given the correct marketing mix, price premiums can be achieved.

It is extremely worrying that UK government policy is in part being driven by the work of Professor Minford which the vast majority of economists (at least 90%) see as pure bunkum.

Michael Porter of Harvard Business School described three generic marketing strategies, Differentiation, Niche and Cost Focus ( often referred to as price leadership).  Porter says that a firm attempting the compete on more than one of these strategies simultaneously enters a ‘piggy in the middle’ death zone; a position where they cannot effectively compete.

For most small firms, the initial option is that of niche marketing.  They lack the economies of scale to compete directly against larger firms on price and they lack the resources to offer a significant number of diversifications to meet all market segments.  Often SME’s have to choose specific target market segments to serve.

As firms grow, they may expand beyond their initial niche through the use of market expansion strategies or through the riskier strategy of diversification.  Such expansions often involve transferring strategy to one of either differentiation or price leadership.

Many firms operate on the basis of price leadership for example the airline Ryanair or the supermarket chain Lidl.

Some markets are driven by price.  These are often referred to as commodity markets.  These usually contain undifferentiated products on a business to business basis.  for example, the wholesale market for milk or the market for natural gas.  But in consumer markets there are clear examples of firms being able to build price premiums.  For example Starbuck’s can achieve a 20% mark up on its coffee and Evian obtains a 10% price premium on their bottled water.

Under Professor Minford’s model, such price premiums should not be possible as consumers will always go for a cheaper alternative, the base priced product in the market.  IN the mind of Professor Minford, Starbuck’s should not exist or succeed, yet they are the market-leading coffee shop chain.

But professional marketers don’t just sell products, they also sell the product surround.  They are selling value propositions and part of their job is to put the value of a products intangible benefits into the minds of consumers.  Through this process, they augment base products.  The selling of value goes further than the physical and now requires the development of value propositions beyond price alone.

Philip Kotler argues that there are three ways to offer value:

  1.  To charge a lower price than your competitors and to be the discount competitor in the market.  (this fits Minford’s view although he expects all firms to do this)
  2. To help the consumer to lower other costs
  3. To offer the consumer additional tangible and intangible benefits.  This could include a More for More strategy where you are not the lowest priced product in the market but the additional attributes of a product offer additional value.

Aggressive pricing policies can be dangerous as they often mean operating on very low margins.  Carillion, the construction and public service outsourcing firm is an example of a company which operated on a cost focus/low margin basis, collapsed spectacularly when costs rose due to project delays.  The company’s margins disappeared and it developed ever-increasing losses.

H & M, the high street fashion chain, which operates on a high volume, low-cost model, recently suffered significant losses as shop rents rose and the cold spring meant sales were lower than expected.

Toys R Us was a firm described as a category killer.  Its business model was reliant having the largest range of toys but on keeping costs down.  Again this was a low margin, high volume business.  Again, it was unable to compete with internet retailers and the changing focus onto downloadable electronic games.  As the rents of its stores rose and sales volumes of traditional toys fell, Toys R Us went into liquidation.

To be a price leader can also lead to disruptive price wars.  If you price in an overly aggressively, so might your competitors and your market will enter a downward pricing spiral that damages all competitors.

A better cost focus strategy is to help lower your customers other costs.  For example, low energy light bulbs are not as cheap as the traditional filament bulbs but they are sold on the basis that their long lifespan and ability to lower electricity bills gives them a lower lifetime cost.

Caterpillar market their excavators and construction machinery not by being the cheapest on the market but on the basis that customers will enjoy efficiency of operation which lowers the overall costs of construction projects.  These include:

  • Fewer mechanical breakdowns
  • Faster repair cycles
  • Longer equipment lifespans, and
  • Higher second-hand resale prices.

Other B2B suppliers help to lower processing and ordering costs by promising to improve process efficiency, e.g.

  • Helping improve yields
  • Reducing waste and rework costs
  • reducing labour costs
  • reducing accident rates
  • reducing energy costs

Porter’s third price leadership option is to offer increased value by offering more benefits to target customers.  This can be achieved through:

  1. Product customisation (or in digital markets, personalisation)
  2. Increased product convenience
  3. Faster service times
  4. More and better service
  5. Coaching, training or consultancy services in addition to core product
  6. Guarantees
  7. Hardware and software tools
  8. Membership benefit programmes.

Often these form parts of More for More pricing strategies.  With such strategies goods may be more expensive than those of competitors but in the minds of consumers additional value can be seen.  The key to a more for more strategy is to offer additional attributes which are highly valued by your consumers but which can be provided at relatively low-cost to the producer.

As Porter’s generic strategies show, Professor Minford is wrong.  Market competition is not perfect.  Consumers see value beyond price and he most successful and profitable firms develop market offers where consumers see worth in both the product and its surround.