The Ten-Day MBA 4th Ed.
Page 4
1. Own a word in the consumer’s mind. If you establish one benefit in the consumer’s mind, the consumer may attribute other positives as well to your product. FedEx means “overnight delivery.” Only one company can own a word, and it is tough to change it once it’s established.
2. Positioning begins with the product’s name. The name should be descriptive, to establish the main benefit in the consumer’s mind. Draino opens clogged drains.
3. If you have a unique new product, use a new name. Instead of using the name Apple Mini Mac, Apple chose the iPod name for their new music player.
4. The easiest way to own a word is to be first. Consumers tend to stick with products that work for them. Kleenex cleans runny noses.
5. Don’t stray from your message; “reinforce the original concept” in all marketing activities. “Coke Classic is the real thing!”
6. The best way to respond to a new competitor is to introduce a new brand, not blurring the original one. When bottled water became popular, Coke didn’t call theirs Coke Water, rather, it chose Dasani.
7. The first option for a follower is to establish a new category. Established brands are tough to beat, but consumers will adopt a new category more easily. Charles Schwab established the discount brokerage category.
8. The second option of a follower is to find an open position in the consumer’s mind. Starbucks became the premium quick-service coffee brand.
9. The third option for a follower is to reposition the competitor to undercut the leader’s concept, product, or spokesperson. Tylenol said, “If your stomach is upset, check with your doctor before your take aspirin.”
10. Stay consistent with the positioning you choose.
4. REVIEW OF THE DISTRIBUTION CHANNELS
Consumer → Market → Competition → Distribution Analysis → Marketing Mix → Economics → Revise
Marketers speak of the avenues to the consumer as the channels of distribution. There are often many ways of reaching your customers, as described with dog food sales. Distribution channel analysis is critical, because the choice of channel influences the price you can charge, and, consequently, the profit margins that you may enjoy. Three questions should be asked to provide you with a basis for your distribution decision:
How can my product reach the consumer?
How much do the players in each distribution channel profit?
Who holds the power in each distribution channel available?
How can my product reach the consumer?
In the case of many mail-order catalogs, there is a direct link between the marketer and the final consumer. A catalog manufacturer of clothing has a direct pulse on sales, returns, pricing, and consumer tastes. As manufacturers of grocery items, brand managers are distanced from the buyer. Cereal, for instance, must go through wholesalers and retailers before reaching the consumer. Those middlemen are called channel intermediaries. As a strategist, the marketing manager must outline all the paths to the consumer to develop a plan.
Commonly used channel intermediaries to the consumer are:
Wholesalers
Distributors
Sales Representatives
Sales Forces
Retailers
How do the players in each distribution channel profit?
As I mentioned, it is helpful to understand all the paths to the consumer in order to know all the possible ways to market your product. Take the time to draw them out on paper. A channel sketch can also give you the insight into the retail price that must be charged to make a profit.
Everyone who touches the merchandise takes a cut, which is called their margin. Participants in the distribution chain are said to “take margin” from the manufacturer. As a manufacturer of a product, you do not “give” the channel margin; there is no charity involved. Channel participants in most industries calculate their cut as a markup on selling price. Canadian and some U.S. drug firms use a markup on cost, but they are the exceptions. The selling price is not the ultimate retail price, but the price at which one intermediary sells goods to the next intermediary in the chain. The retail price is what a consumer pays.
Because of my experience in the coffee industry, I will use coffee retailing to demonstrate the economics of the channels of distribution. At each level of the chain, the intermediary buys the coffee from the previous level and takes a margin based on the sales price to the next level. The margin is not based on cost.
This is how one dollar’s worth of coffee beans, in my example, can reach the consumer at a price of six dollars. At each level, the channel participant adds value and incurs costs by either roasting, grinding, and packaging the coffee beans; promoting the brand; or distributing and shelving the packaged coffee for the consumer. I have outlined below what I estimated were the channel economics for Maxwell House’s gourmet coffee.
At each level in the distribution channel, the participant performs its function, takes its margin, and sells to the next participant closer to the consumer. If a coffee processor, such as Kraft Foods, believes that its gourmet Maxwell House coffee brand must retail at $4.00 per pound rather than $6.00, then the economics of the chain must change. Let’s work backward through the chain to see its effect on the prices charged at each level.
Working backward through the distribution chain:
$4.00 Retail Price to Consumer × (1 − .23 Retail Markup) = $3.08
$3.08 Wholesaler Price to Retailer × (1 − .09 Wholesale Markup) = $2.80
$2.80 would be Kraft Foods’ (the Processor’s) Price to Wholesalers
At the $4.00 price, Kraft Foods’ brand manager must ask if $1.75 ($2.80−$1.05) per pound is a sufficient margin to cover costs and provide an adequate profit. If the answer is no, the brand manager must reexamine the marketing plan’s channel mathematics. Because marketing strategy is a circular process, another price, manufacturing process, or cost may have to be altered. Such changes could affect all the other elements of the plan.
The relative power of the channel participants can dictate pricing decisions based on the economics of the channel chosen. In Kraft Foods’ case, the brand manager could have opted for the lower $4.00 retail price in the grocery store. However, he chose $6.00 to yield his desired profits.
Kraft Foods decided to use an alternative channel in addition to grocery stores. Kraft “bypassed” the grocery trade’s middlemen and sold its Gevalia coffee brand directly to coffee lovers by mail order at a price over $8.00 per pound. With most products there are usually a variety of ways to reach the consumer. Each channel has its own channel margin mathematics. By understanding the math you are better able to make a choice of channel.
CHANNEL OF DISTRIBUTION FOR MAXWELL HOUSE’S PRIVATE COLLECTION COFFEE WITH CHANNEL MARGINS AND PRICES
Who has the power in the channels?
The question of channel power is crucial in selecting where to sell. If your product is unique and in demand, then the manufacturer generally has the power to outline the terms of the relationship. If not, the channel’s intermediaries will be able to dictate the terms to take as much margin as possible.
In the grocery trade, the power of the channel has shifted from the manufacturers to the supermarket chains. As smaller grocery chains consolidated into larger superchains in the 1980s, the larger chains’ management realized that they held the prized real estate, “shelf space.” Each stock keeping unit (SKU) on the shelf takes space. Each product must be tracked, shelved, and inventoried. When Mazola cooking oil produces three sizes, it takes up three SKUs. With a finite amount of store and warehouse space, the shelf real estate has become valuable, and retailers want to be paid for carrying each SKU. Marketers even diagram their shelves like architects in drawings called planograms and fight over best placement.
Packaged-goods companies, large and small, must often pay slotting fees to the chains to reserve “slots” on their shelves for both new and existing products. In the 1970s the packaged-goods giants could force their products on the trade. W
hen there were many smaller grocery chains, Procter & Gamble and Kraft Foods could play one chain against another by threatening to withhold their popular products. That is no longer the case.
Unfortunately, slotting fees can run into millions of dollars for a new product introduction. Therefore, in practice, slotting fees bar smaller competitors from selling in the supermarket. A maker of an excellent pizza in the Midwest that I knew failed to get off the ground because it could not afford the bribes necessary for space. Slotting fees are a “hot topic” in retailing. Feel free to interject this topic into MBA conversation as often as you like.
What is the Internet’s role as a channel of distribution?
The Internet can be a great way to sell product. The Internet has four functions as a channel of customer communication, called the Four C’s of Internet marketing. The “commerce” function of a Web site allows for sales, but more importantly it provides a 24/7 storefront to fit the customer’s schedule to shop, browse, and compare product offerings. The “content” of your Web site is an extension of the product. It can provide additional support and value, and if it is compelling, it can attract new prospects. iTunes.com provides music for the Apple’s iPod player; it sold over 10 billion songs by 2010. Your site can provide “customer care” by allowing customers to access their accounts, check on deliveries, and get answers to frequently asked questions (FAQs). This pleases customers and also reduces a manufacturer’s cost of live customer service. And lastly, Web sites also “convert leads” from your Internet and other marketing efforts, such as television, radio, sales promotions, and public relations.
5. DEVELOPMENT OF THE MARKETING MIX
Consumer → Market → Competition → Distribution → Plan the Marketing Mix → Economics → Revise
Based on judgments developed in the analysis of the consumer, the market, the competition, and the distribution channels, the marketing manager must make a set of tangible decisions. MBAs call it the action plan. Marketing managers choose what mix of marketing efforts should be made. The mix is commonly referred to as the Four P’s of marketing.
The development of the marketing mix is an evolutionary process whose goal is an internally consistent and mutually supportive plan. That cannot be overemphasized. Tinkering with one P in the mix generally means the marketing strategist must alter all the other P’s in some way, because one P affects the others.
THE MARKETING MIX
Product Place Promotion Price
PRODUCT DECISIONS
How does my product fit with my other products?
How will I differentiate my product?
How does the product life cycle affect my plans?
How does the product fit with my existing product line?
This question tries to identify areas of synergy among your products, or uncover a constraint on your activities. For example, if “The Dependability People” at Maytag added dishwashers to their line of clothes washers and dryers, the product, the customers, and the retailers for the dishwashers would be shared with their existing line. There would be a fit with this line extension. But if Maytag wanted to sell personal hair dryers, the fit would be questionable.
How will I differentiate my product?
Differentiation is a broad issue that includes any way that a marketer can distinguish his product from the field. Consequently there are many ways to do it.
Features—Capabilities
Fit—Tailoring
Styling—Functional, visual
Reliability—Warranties, return policies
Packaging—Color, size, shape, protection
Sizes—Clothing, appliance, computer, and luggage sizes
Service—Timeliness, courtesy, accuracy
Brand Naming—Labeling
If Ralph Lauren had used his real name, Ralph Lifshitz, he would have forgone the psychological benefits derived from his Ralph Lauren’s Polo label on $5 billion in clothing, cologne, and bedding in 2011. Lifshitz somehow fails to convey the image of English aristocracy.
In many cases the so-called brand equity of one product can be transferred to new products using a brand or line extension strategy that differentiates it from the pack. Kraft Foods has chosen to place the Jell-O brand name on its new pudding and ice cream treats. The Jell-O brand bestows upon the new products all the goodwill and brand recognition (brand equity) that Jell-O has earned over decades. It would take many years of expensive advertising to establish the brand equity of the Jell-O brand. Accordingly, almost 90 percent of the thousands of new product introductions since 1987 were line and brand extensions. If stretched too far, a brand’s equity can be diluted and its effectiveness with consumers devalued.
The choice of any one of these product differentiation techniques affects the entire marketing process, as it lays the groundwork for your promotional efforts. A product can be differentiated from the competition by creative advertising and promotion, even if competing products are physically identical.
Perceptual maps and positioning can help to differentiate the product. All the product attributes mentioned affect the positioning of a product in the marketplace. The marketer can always call upon his company’s product engineers to develop a product’s physical characteristics if the profits justify it. As my perceptual map of paper towels indicated, consumers have specific needs within a product class, and they perceive each product differently. The marketer’s job is to uniquely position the product (using a perceptual map as a guide if desired) to earn its place in the market. That place is often called a product’s niche in the market. As pictured in the perceptual mapping of paper towels, Georgia Pacific’s Brawny brand is positioned as the tough, durable towel for really dirty cleanups. Hopefully the brand manager will choose a niche that will yield the most sales and profits by targeting a market segment his product serves best. Positioning is inexorably tied to the market segment selected through your consumer and market analysis.
How does the product life cycle affect my plans?
Based on the point in the product life cycle (PLC), different aspects of the product become more important in the competitive battles. The previous discussion of the PLC noted that product features are extremely important to differentiate products in the growth phase, while branding is increasingly more important in the maturity phase. The emphasis on multiplay features on compact disc players, for example, currently indicates the growth phase of the PLC. In the mature cassette deck market, the battles over auto reverse and Dolby noise reduction have already been played out. Whatever the choices for the product, product decisions will have a definite effect on the other P’s of the mix.
Product Place Promotion Price
PLACE OF SALE DECISIONS: WHERE TO SELL?
In your review of the distribution channels, the goal was to determine what avenues exist and what margins are available. At this stage, having made product decisions and a choice of target market, the marketer has to choose an appropriate channel to fit with the product and the intended buyers.
What distribution strategy should I use?
On what basis should I choose a channel of distribution?
What type of distribution strategy should I select?
Exclusive—Sell in only one outlet in each market
Selective—Sell in only a few outlets in each market
Mass or Intensive—Sell in as many outlets as possible
The place of sale affects the perception of your product. The choice of distribution is an evolving process that matches the product’s intended diffusion along the product life cycle, as described in the market analysis passage. A distribution strategy can differentiate your product from the crowd. For example, if a new designer chooses to sell exclusively at Neiman Marcus, it gives a certain cachet to the product. Consumers tend to perceive certain attributes in a product, such as style, quality, and price, based on the point of sale. The same designer may choose to selectively sell in only better department stores to provide greater initial sales volume. The C
alifornia marketer of car-window sun shields had no such concern, and selected a mass distribution strategy. The company wanted to distribute the cardboard shade as widely and quickly as possible. That choice made sense since the shades, unlike designer clothing, did not have any status appeal and could easily be copied and manufactured.
Each of these distribution methods places certain responsibilities upon the manufacturer and the retailer. By choosing to be selective, the manufacturer may be “obligated” to provide high quality, good service, and possibly cooperative payments (co-ops) for promotional support. When manufacturers share the costs of advertising with retailers, that is called cooperative advertising.
In distribution relationships involving manufacturers’ incentives, the retailer is also obligated. Retailers may be “obliged” to pay special attention to the product by giving it preferential placement, special promotion, display, and sales attention. If those obligations are not met, the contract is breached and the relationship can be severed. In Ralph Lauren’s case he believed that his Polo clothing line was so unique that he became the first designer to demand separate boutique space in department stores. Ralph provided the image and the margins sought by retailers. The retailers were in turn obliged to provide Ralph Lauren with special placement and selling efforts.
Which channels of distribution to choose?
It depends . . . on a variety of factors. There is usually more than one choice. However, if a channel is integrated into a mutually supportive and internally consistent strategy, many choices can potentially be successful. Three factors should serve as a guide to make a selection.
Product Specifics. Another factor to consider is the level of attention needed for the sale. This is related to the level of complexity of the product, the newness, or the price. The product may indicate a need for your own sales force despite the costs. On the other hand, products such as candy and soft drinks are sold through a series of wholesalers and distributors before reaching the store shelves. These products are simple and do not require direct control by the manufacturer over the presentation and sale.