Tag: value

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”.

Understanding Value

Michael Porter defines value as;

“A firm is profitable if the value it commands exceeds the costs involved in creating the product”.

Your customers will understand the concept of value intuitively.  It is therefore difficult to measure value dispassionately.  Every customer will have a different concept of value.  They buy on the basis of value and they spend much of their lives as consumers searching for it.

Value does not mean lowest price and you should not confuse the term value with the cheap and nasty end of the market.  In my former career in local government; where local authorities are legally bound by the concept of best value, I was continually frustrated that managers and councillors confused value with the lowest bid or price for a product or service.  It was part of my job to procure the services of test laboratories.  My managers were keen that I only accepted low bids.  However, I recognised that the expertise of the laboratory and the status of the evidence they could provide was important value criteria.  I would always see more value in a test report signed off by a recognised specialist in say, Toy standards, than a laboratory which could provide a test certificate but who could not provide the Bona Fides of the specialist lab.

What is important in the consumer’s calculation in value is their perception of the utility of your offer i.e. what they believe the product will do for them.

When consumers are considering buying a product or service, they spend a considerable part of the decision process trading off different perceived values of different offers for the goods or service demanded.  The more expensive or complex the goods or services being purchased; the more complex the decision process and the trade-offs.

Value is a critical concept in any market offer but it is still one of the most over-used and least understood terms in business.  All too often, senior management only link value to price.  They ignore other concepts of value.  They forget value means different things to different people.

There is a formula which is often used to represent value:

Value = Benefit – Effort – Risk – Price

The more value you are able to offer, the more likely your ability to create profit.

Value is not about price and it is not about being cheap.  It is about what the customer perceives about a product and that your offer will meet its promises.  It is the value of a job being done in the way your promise demands.

Consumers see benefit as the ability of a good or service to provide the perfect solution to their specific problem.  The closer to the perfect solution you are able to provide, the greater the customer will perceive value in your offer.  The greater the benefit the customer perceives in your offer, the more they will be willing to pay.

 

To understand perceived customer benefit, you need to find out:

  1.  The nature of the consumer’s problem.
  2. What the consumer perceives to be the perfect  solution to their problem
  3. Where your product and service fits on the scale of the consumers perception of ‘a perfect solution’ i.e. does your product fully meet their needs or will it just about do, or is it useless.
  4. If your product won’t provide the perfect solution, where does it fall down.

As every consumer’s perception is unique, these are difficult questions to answer.

Effort is how much work the consumer has to put in to solving their problem when they use your product.  It is the question of ease and convenience.  We live in a convenience society. So the greatest value for consumers is the product or service which is most convenient.

Consumers see risk in many facets of choice and value criteria.  The greater the risk inherent in the decision to purchase a particular product, the lower the perceived value of that product.  Consumers ask themselves, if I buy X brand of a product:

  • What can go wrong?
  • What are the downsides?
  • How long will it take to choose?
  • How long before benefits will begin to flow?
  • How will that product affect my image?
  • What utility will the product offer?
  • If the product doesn’t meet its promise, how will I feel?

Price is a more complex issue than just whether consumers feel they are paying too much or whether goods may be cheaper elsewhere.  If a product or service seems to be too cheap, consumers will wonder if your offer is unfit for purpose or that your goods are of inferior quality.

You also have to consider the opportunity cost of a consumer’s purchase.  This isn’t just the cost incurred in arranging to buy the product.  There is the opportunity cost of the time taken to buy the product; transportation costs, etc.  There is also the thoughts in the minds of consumers of what they could buy if they chose not to purchase your product.

So to maximise customer value:

  1. You can cut prices.  This is the dinosaurs method of maximising value; offering more for less. It is crude and it can be expensive.  It can drag you into expensive price wars out of which no-one can win.
  2. Perhaps it is better to increase the benefit from usage,  You can add more benefits to your products.  But these must be real benefits your customers want.
  3. You can reduce the effort required by consumers to buy your product.  Make it easier for consumers to acquire the benefits of your offer.
  4. You can reduce consumer risk through guarantees and warranties, you can offer free trials and use your brand reputation to build consumer trust.  You need to become a brand that can be believed in.  Your branding effort can reduce risk.

All stakeholders in your business, both external and internal, from shareholders to prospective customers, need a value proposition. If you cannot easily describe your value proposition to them, you may have trouble convincing them that your offer is something in which they can invest.

Position, Position, Position

Philip Kotler describes four stages in the development of a value proposition:

  1.  Choose the market position for the brand
  2. Choose a specific position for the individual product
  3. Develop a value proposition for the product (e.g. More for More, More for Less, The Same For Less, etc)
  4. Develop a total value proposition for the brand (Answer the question; Why should I buy from you?)

When building a brand, you have to do more than simply choose a brand name.  You have to develop rich associations and promises for the brand.  You have to manage all contacts the consumer has with your organisation and your brand.  These contacts must match; or better; exceed customer expectations.

Managing a brand at a strategic level than managing it at a tactical level.  Managing at a tactical level does not have the requirement of coordinating all areas of your organisation and integrating organisational behaviour to reflect the meaning and values desired of the brand.

Many senior managers only start to take a brand seriously when it appears as an asset on the company’s balance sheet.  Only then do they consider its true potential.  They start to see brand management as a strategic goal which requires long-term investment, commitment and innovation.

Positioning a brand in the marketplace take place at both strategic and tactical levels.  At the strategic, organisational level, it must determine a unique position in the market which differentiates the brand from those of competitors.  this has significant implications for marketing and communications strategies; they must reflect the competitive position and be designed to create, build maintain and improve that position.

This strategic position will direct the tactical position through a positioning statement which defines communications which reflect the actual and/or desired market position.

Once a strategic position is established, every area of the organisation and everything it does should be coordinated to deliver products and services based on that position.  It will determine your marketing choices.  In particular it will inform your marketing mix, the specific benefits and values associated with products and services.

Consumers attach both emotional and rational values to brands.  These can be displayed graphically on positioning maps.  Usually these take two attributes e.g. customer service versus reliability or innovativeness versus modernity.  On these maps, the basis of perceptual mapping, you place consumers views of your products and the products and brands of your competitors.

Treacy and Wiersema stated that there were three basic value disciplines:

  1.  The operationally excellent firm (management efficiency),
  2. Product leadership,
  3. Customer intimacy.

They also stated that customers only notice excellence or below adequate performance.  Adequate or average performance did not catch the eye of consumers.

Treacy and Wiersema suggest that to achieve a strong market position you should:

  1.  Become the best at one of the three value disciplines;
  2. Achieve adequate sector performance of the other two disciplines
  3. Keep improving your superior position so not to lose out to competitors
  4. Retain adequate position in the other two disciplines as consumer’s impression of what is adequate is constantly evolving.

This strategy can be equated with Michael Porter’s generic marketing strategies in that to try to develop excellence in all three value propositions will spread your resources too thinly.  You will end up with, at best, average performance in each discipline and fail to develop a noticeable differentiated market position.  You will enter a value discipline no man’s land.

There are a vast range of options when it comes to developing a specific market position for  product or a brand e.g. Best quality, best performance, most reliable, most durable, safest, fastest, best value for money, least expensive, most prestigious, best designed or styled, easiest to use, most convenient, etc.

Some firms compete on more than one product position.  For example, Volvo lead their marketing on being the safest car on the market; but in some markets they also position themselves as the most durable car brand.  Fairy market their washing up liquid as the best for cleaning crockery but they also state they are the best value for money as you need to use less and a bottle will last longer than other brands.

Philip Kotler advocates that when designing a specific market position for a product of brand you should consider:

  • Attribute positioning – e.g. first established firm in the market or the tallest skyscraper in the city.  However Kotler warns that such positioning strategies are weak as they often do not involve easily explained benefits to consumers.
  • Benefit Positioning – e.g. Cillit Bang is marketed as being a strong cleaning fluid that cuts through grime.  Most marketing communications are based on benefits positioning.
  • Use/Application Positioning – For example Apple Computers are advertised as the best machines for graphic designers.  Sun Microsystems advertised their computers as the best for engineers.
  • Competitor Positioning – Position your products in the context of your competitor’s products.  Suggest superiority or difference.  Avis described itself as the car hire company which ‘tries hardest’, implying they had better customer service than Hertz.
  • Category Positioning – Kodak means photographic film, Xerox means photocopiers, Hoover means vacuum cleaners, Jacuzzi means jet baths.
  • Quality/Price Positioning – Chanel No. 5 positions itself as high quality/high price. Fairy liquid is best value for the money and better quality cleaning.

Kotler also advises that you avoid:

  1.  Under-positioning- Failing to present a strong central benefit or reason to buy the brand.
  2. Over-positioning – Adopting such a narrow position that some potential customers will overlook the brand.
  3. Confused Positioning – Offering two or more benefits that are contradictory.
  4. Irrelevant Positioning – Offer a benefit few consumers will care about.
  5. Doubtful Positioning – Claiming things consumers doubt you can deliver.

Positioning your product or brand is a critical stage in the development of your marketing strategy.  Your position should reflect your organisational goals and values but it should also differentiate your business from your competitors and attract your target customers.  Doubtful positioning will often mean that your product or brand will fail to meet its potential.

Blue or Red Ocean

An important element in the management of a brand is innovation.  Successful brands are constantly innovating; developing new products and services, developing how those goods and services are delivered and developing new promotional channels.

As products move through their life cycle, they are continually innovated, packaging is redesigned, new features and functionality are added.  Take Listerine: It is currently sold as a mouthwash for bad breath but it started life as a household cleaning detergent.  Take Canon cameras: they launch a new model every six to twelve months and each time there is product adaption such as GPS, internet connectivity and ever higher pixel counts on the cameras sensor.

When looking for new products there are three possibilities:

  1.  An existing product class to meet an existing consumer need.
  2.  A new product class to meet an existing consumer need
  3. A new product class to meet a new consumer need (possibly a need the consumer is yet to realise they have).

An example is Apple.  When Apple launch a new iPhone, it is launching an existing product class to meet an existing product need, the mobile phone.  When it launched the iPod, it was launching a new product class, the digital music player for an existing consumer need, a portable music device.  Apple’s original product, the desk top computer was a new product class, the home computer, for a new consumer need, having a computer in the home instead of in the office or laboratory.

When computers were developed after the World War Two, they were seen as tools for science and mass computation.  In the mid-1970s following the invention of the silicon microchip, computers could be put on a desk but no one considered them a product for the home, they were business tools for accountancy and word processing.  It was innovators such as Sir Clive Sinclair and Steve Jobs who saw the possibility of a computer for the home and with the ZX 80, Sinclair was the first to put his to into that, Blue Ocean.

A word which is in common parlance currently is ‘Disruptor’.  Many business leaders, such as Sir Richard Branson, have disruptor programmes.  Disruptors sit neatly in the second of the three categories.  They are individuals who aim to create new product or service classes to meet disrupt existing market expectations.  These are businesses looking to do things differently and to present a radical marketing mix.  This is was is often termed as Blue Ocean Marketing.

In recent years, many researchers have focused on Blue Ocean Marketing and they have highlighted prominent successes such as Ryan Air, Amazon and Ocado.  Another example of blue ocean marketing is the estate agency business where companies such as Sarah Beeney and HouseSimple are breaking down the value expectations of the traditional estate agency market.

It is generally accepted that markets grow by the reduction of unit prices.  The home computer market is one such example where the cost of a PC has fallen dramatically in real terms.  Unit price falls and sales volumes increase.

However, when a market becomes mature the goal is not to increase sales volumes through expansive growth but to obtain the market share of your competitors.  Often it is not a case of increasing sales volumes but increasing sales value.

No one considers brushing their teeth six times a day.  Most people stick to brushing twice a day, or three times at most.  Our usage of toothpaste doesn’t change so we are unlikely to buy more toothpaste.  However, we may be persuaded to change to a different brand or to buy a more expensive version of toothpaste because it promises to whiten our teeth, kill bacteria or cure bad breath.

Businesses in mature markets aim not to sell more but to get consumers to pay more.  It is not an accident that Dyson vacuum cleaners are amongst the most expensive on the market.

To allow premium pricing, many brands aim to find value innovations, a more for more strategy.  This involves building an unprecedented bundle of marketing mix attributes.

Blue Ocean disruptors often aim to break this model.  They suppress certain value innovations and promote themselves on a single value attribute.

Take as an example Premier Inns.  They broke the accepted rules of the hotel.  They realised that there were huge numbers of consumers who didn’t use hotels.  Hotels were for the wealthy or paid for by your employer.  Students, OAPs and Other demographic groups tended to use B&Bs or to stay with friends rather than the premium prices of hotel chains.

So Premier Inns and the likes of Travelodge removed some of the value innovations of traditional hotels.  There is no room service.  Room decor is basic.  There is no mini bar of satellite TV service.  Breakfast is either from a vending machine or it is a self-service buffet.  These companies offer a value innovation of a hotel bed at a discount price but to enable that price they removed many of the traditional attributes of a hotel stay.

A critical element in blue ocean marketing is ‘identifying your oilfield’; the bundle off value attributes which are not offered by other providers.  Often this can be through identifying an area of market growth not utilised by others.  This can even be areas which others in the market see as unprofitable.

Blue ocean marketing is often a high risk strategy.  For every blue ocean success, there are thousands of failures.  Take Bic as an example.  Bic was an early blue ocean pioneer.  It applied blue ocean strategies to the pen market.  Until Bic invented the disposable ballpoint pen, writing implements were seen as premium products.  People would buy expensive fountain pens which would last a lifetime.

Bic then applied the disposable pen model to the cigarette lighter market.  Again smokers would buy a refillable lighter which would last many years.  Bic soon became the market leader in the lighter market.  Bic applied blue ocean marketing principles again, taking on the likes of Gillette in the razor market.  Again success.

However, Bic then tried to enter the mobile phone market competing with the likes of Ericsson and Nokia.  Bic produced a phone which was able of making calls but which didn’t have the accessories offered by their competitors such as games, internet access and a camera.  The Bic mobile phone was an utter disaster.

Other blue ocean firms, such as the Easy group, best known for the value airline EasyJet, have also had mixed fortunes in applying blue ocean strategies outside their original markets.

Blue Ocean innovations are risky.  The television programme Dragon’s Den is replete with failed blue ocean pitches.  Only a small minority of blue ocean innovations succeed.  So is it worth considering only blue ocean marketing?  Is it always advisable to ditch traditional incremental product innovation and to offer a radical alternative offer.  Is the concept of making a superior product to your competitors dead and is  modern marketing solely the strategy off meeting consumer needs in a different way?

Traditionally product innovation was all about creating a superior offer.  However, some marketing academics dismiss this approach as ‘Red Ocean’.  A blood filled sea of cutthroat competition where sharks fight to consume a shoal of tuna.

These academics argue that market disruption is the concept of our times.  To succeed you must think in a  radically different way and blue ocean marketing is the methodology.  To succeed you must think differently and offer distinct value propositions.  You must look at existing market beliefs and challenge them.  You must suppress some traditional product or service attributes and enhance those which promote difference.

However, these studies often concentrate solely on blue ocean success stories ignoring the many failures such as the Bic mobile phone.

There are also lessons to be learnt from Blue ocean failures:

  1.  Value innovations are not the only way to create new brands
  2. Value innovation – suppressing an attribute seen as necessary by existing market players – is no guarantee of success if there is insufficient demand for that innovation.
  3. Value innovation can lead to no innovation at all.

Some of the most successful products and brands in today’s market rely on traditional ‘red ocean’ innovation.  The iPhone is one such example.  It’s success is through the constant innovation of an existing product by adding better or additional functionality.

So if you are considering a new product or entering a mature market, do not only think of blue ocean innovation or a radical marketing mix.  Sometimes the answer is just to provide a superior product to your competitors.

 

 

What is the value of marketing?

Marketing professionals are always under pressure to add value to an organisation’s brand or identity.  But what does adding value look like?  The answer is that the definition of value depends on the type of organisation and the developmental stage of that organisation.  If you are going to measure the success of your marketing activity on the addition of value, you need to define the measures of value to be used from the outset.

For many businesses the sole measure of marketing success is financial return on investment.  Such a measure is important but you should consider the wider aspects of value in measuring marketing success.  That could mean a wide range of results including increasing consumer advocacy, the expansion of your product or service range, increasing the number and types of distribution channel used by your organisation or even by changing your organisational structure.

In the latest edition of Catalyst, the Chartered Institute of Marketing’s quarterly magazine, several different organisations give examples of the value of marketing to their business:

  1. The first example is a small family business which makes curry sauces.  For years the owners of the company were wholly focused on getting their products into shops.  The focus was on the place and product elements of the marketing mix and other mix factors such as promotion, price, process and physical evidence were all but excluded.  In 2016, the firm’s proprietors decided to take a wider view of their marketing activities.  They wanted to develop a brand identity and grow beyond their existing distribution chain.  To develop the brand, they found they needed to tell their brand story more effectively and they needed to develop a consumer focus.  By analysing the response from their customers they found that their business was seen as a fun, family brand with a tasty product.  To engage with their consumers, the firm developed a range of promotional materials focused on their fun image.  They were also able to use the responses from their customer survey as evidence in achieving a distribution deal with a major supermarket chain.  For this business marketing success wasn’t just improved financial returns, it was a closer link to their customer base, increased distribution and the creation of a brand identity.
  2. The second example was a major arts and entertainment venue.  This venue contained museums, a theatre, retail units, bars and coffee shops.  Each of these activities were used by different customer segments. Each group of customers had different value expectations.  Using strategic marketing plans, the venue was able to develop distinct strategies for different groups of target customers.  The management of the venue had the perception that customers came to their venue to see a particular piece of art or a particular show.  Market research showed that there was a commonality between different customer segments, that they wanted to go out to the venue and have a good time.  Marketing value to this organisation was the development of closer ties to its varied customer base and the development of feedback systems to ensure that what was offered by the venue met the expectations of visitors.
  3. The third example given in Catalyst was a publisher of academic textbooks.  Marketing told this business that their client base differed from its consumer base.  The firm marketed its books to academics and saw itself as part of the academic community.  However, it was undergraduate students who were the consumers of its products and services.  The firm therefore had to produce texts which academics would refer as standard texts for their students but which also met the educational expectations of those students.  The organisation found that different marketing channels were appropriate for different academic sectors.  Marketing value to this business was the ability to widen their communications strategy and to match the communication expectations of different recipient segments.
  4. The final example is a firm which produces virtual reality software for industry.  for many years, this organisation saw its success as the success of its customers.  However, management realised that they were good at telling other people’s story and not their own.  By applying strategic marketing, the firm was able to redefine itself in the market.  It was able to focus on the critical parts of its business and to discount areas which were no longer relevant.  This led to a complete reorganisation of the business’s structure to better match its new priorities.

The above examples clearly show that marketing value and success are not simply a matter of financial return.  There are a wide range of non-financial measures which define marketing success.