by Emily Chan
14. Harvard Business Essentials, Power, Influence, and Persuasion, (Boston: Harvard Business School Press, 2005), 20.
15. Robert Greene and Joost Elffers, The 48 Laws of Power (London: Profile Books, 1998), 15.
8
MARKETING
THE FANTASTIC FOUR P’S
Anyone who majored or has worked in marketing can tell you marketing is largely about successfully defining and managing Four P’s: product, price, promotion, and place.
Product includes tangible products and intangible services. It includes functionality, brand name, warranty, services, and accessories. in short, it is what the company is trying to charge money for.
Price is what the company gets in exchange for the product. It includes pricing strategy, list price, discounts, and rebates.
Promotion is communication about the product with the goal of generating positive customer response. It includes advertising, direct mail, lucky draw, public relations, and promotion budgeting.
Place is distribution, that is, how to get the products to the customers. It includes wholesale and retail channel selection, order processing, warehousing, and logistics.
More detailed definitions of the Four P’s can easily be found on the Internet or in any marketing textbook. HBS uses the same framework. The difference: instead of talking about definitions and theories, HBs students learn through applying the Four P’s to a large number of case studies. In the following sections, I will discuss the case insights that have been most useful in helping me think about each of the Four P’s.
PRODUCT: BETTER FIRST BEST?
In the United States, some brands are so successfully marketed that their name has become the generic name of a whole category. People will ask “may I have a Kleenex” instead of “may I have a tissue,” and people will say “this is your Xerox copy” instead of “this is your photocopy.” Other examples are Band-Aid, Jello, Q-tips, Velcro, and FedEx. In fact, I still do not know the real category name for Velcro.
While this kind of achievement (officially termed becoming a “genericized trademark”) can pose significant legal issues in trademark protection, from the purely marketing product-launch perspective, these companies are often discussed at HBS as examples of great success. Analyzing the key success factors of these examples, it seems that while brands that become household words provide good products, they are not necessarily the best in their category. It is unclear and unproven that Kleenex is better than Scott, or that Xerox is better than Canon.
However, while they may or may not be the best, these successful brands were the first product in their category. That is, they were not necessarily the very first available in their market, but they were first to establish themselves in buyers’ minds and are thus perceived as being first. In marketing, perception is often more important than reality. For example, the very first mainframe computer sold was Remington Rand but IBM became the first in the popular mind because of its massive marketing.
Being first is important because, psychologically, some people perceive the first as superior and the rest as copycats. Also, people have inertia as change usually comes with a switching cost. The time, resources, and risk of trying a new product may deter people from switching unless it offers a very compelling advantage.
The most direct way to achieve first-in-category status, of course, is to be truly the first to reach the market. For example, Xerox was indeed the first to introduce office photocopying in the 1960s.
The second way is to usurp the position through marketing. An example is IBM’s victory over Remington Rand, as mentioned earlier. It must be noted that this is only possible if the market has not “made up its mind” about the category or the company. For example, once the market has made up its mind that “Kleenex” is first, it will be very difficult, if at all possible, for any company to try to take that position away from Kleenex, even with billions of marketing dollars. With the strong perception that Xerox makes copying machines, Xerox wasted decades and billions of marketing dollars and still failed to have any share in the computer market.
The third way is to try to make some variation so the category can be perceived as a new category. For example, Charles Schwab in the United states was not marketed as a new and better player in the brokerage business. It made its success by marketing itself as the first “discount” brokerage firm. The key is to identify the competitive advantage versus leading players in an established category and then try to create a new category based on this advantage. Of course, this is not always possible and is easier said than done—but it is very powerful if you can manage it.
PRICE: TO FIGHT OR NOT TO FIGHT
If business is like war, then price must be one of the most common, most critical, and most challenging battlefields. It is common because it is much easier to reduce price and get immediate results than to change product features, advertising, or distribution. This is true both offensively and defensively. It is critical because the stakes are high. Companies and even industries can be destroyed by price wars. An example everyone knows is the 1992 U.S. airline price war. As a result of aggressive price cuts by all major competitors, the combined losses of the industry for that year exceeded the total profits of the industry since its very beginning. Price wars are challenging because even the winner often suffers significant losses.
For these reasons, I have always paid extra attention to case discussions related to price wars. Here are the cases I have found most fascinating and valuable. They illustrate four key strategies when faced with prospects of a price war: preemption, segmentation, disguise, and retreat.
NutraSweet: Preemption
NutraSweet was a patented sweetener used in Diet Pepsi and Diet Coca-Cola. When the patent was about to expire a number of years ago, NutraSweet faced a significant threat of price pressure and possibly price war from generic sweeteners.
What would you do if you were NutraSweet? Slash price to drive competitors out of business? Advertise like crazy to build a brand? Instead of a lose-lose price war and millions of dollars of brand advertising, Nutra-Sweet cleverly preempted the price war by preparing and sharing a contingency plan with its major customers Pepsi and Coca-Cola, assuring both that it would be executed if either switched to the generic sweetener.
The plan involved a major advertising blitz that would “educate” the consumers that “the other cola” was the only one that contained NutraSweet. This was a real threat to Pepsi and Coca-Cola, given the large market at stake and the risk that consumers could be made to perceive a change in quality or taste under the influence of the advertisements. This threat was enough to deter Pepsi and Coca-Cola from considering switching, and hence the price war was preempted.
I once worked on a strategy study for a major multinational consumer electronics producer. As part of the project, I arranged an interview with the CEO of a competitor in Asia. To my surprise, the CEO himself agreed to the interview. I was even more surprised when the CEO started revealing some relatively sensitive manufacturing and cost data. Usually, for competitive interviews, we would only discuss some non-confidential market or supplier information. At the end of the interview, he said, “Do you know why I agreed to your interview and shared so much information with you? I need you to do me a favor. Bring a message to your client. Tell them we have a low cost structure. If they cut price, we will retaliate.” When I passed this to my client, one of the senior executives joked, “Here is the answer to our pricing strategy!” The client was very appreciative of the information I brought back, though I never expected to be paid such high consulting fees simply to be a messenger.
FedEx: Segmentation
Imagine you are FedEx. Your key competitor, the U.S. Postal Service’s Express Mail, just offered a guaranteed U.S. domestic overnight delivery by either noon or 3 Pm the next day. How would you compete? Instead of competing on price, FedEx decided to offer two services: Premium and Standard. Premium would deliver by 10 Am the next day and standard by 3 Pm the next
day. This way, FedEx could compete with USPS on two fronts: faster service at a higher price and comparable service at a competitive price. FedEx was able to keep the higher margins from the price-insensitive customer segment and at the same time compete effectively in the lower-end market.
The FedEx case demonstrated an important concept in marketing: segmentation and target segment selection. Segmentation is the division of a market into groups of customers. These groups, called customer segments, have sufficiently different needs and characteristics that they can be served differently. one or more segments will then be selected as targets based on their fit with the company’s strategy and its competence with the unfulfilled needs, as well as on segment profitability.
The two segments in the FedEx example are relatively easy to understand. Both groups fit FedEx’s strategy of providing express service and are profitable. There were likely other segments that could have been identified—say, those that required even faster service or were willing to accept even slower service. These probably were operationally difficult to serve, strategically did not fit with FedEx, or simply were not financially attractive due to investment needs or competition.
However, many markets are much more complex than FedEx’s, especially when consumers are involved. For example, I was involved in market segmentation for a tobacco company in Vietnam many years ago. The market had a proliferation of brands, and consumers made their choices based on a whole range of psychological and physical needs, including brand image, aspiration, packaging, peer pressure, tobacco content, taste, and price.
Four fundamental principles need to be understood in order to conduct more complex segmentation and target selection successfully:
Type
Strategy
Selection
Data
Type
There are two related types of segmentation:
Based on benefits sought by customers, needs of customers, or the job they want to get done using the product or service.
Based on observable characteristics of customers. For consumers, characteristics most often used for segmentation are demographics (such as age, sex, or income level) and psychographics (this is people’s lifestyles and behaviors such the kinds of interests they have, the values they believe in, and the things they spend money or time on). For business customers, characteristics most often used are revenue size, number of employees, industry, and geography.
The best practice is to first segment the customers based on benefits they seek. Then define key distinguishing customer characteristics for each segment so that advertising and promotions can be targeted and segment sizing can be calculated or checked. In the FedEx example, customers were segmented based on their service needs. Then, if necessary, characteristics could be defined for each segment. For example, companies in banking, legal, and consulting, of revenue size and number of employees above a certain threshold, or with an international business would probably be more likely customers for the premium service. With these characteristics defined, advertising and other efforts like direct marketing could be targeted. These characteristics would also allow FedEx to estimate the size of each segment using government, trade association, and industry statistics.
Another example of the key to first focus on need and then on characteristics is the disguised fast food restaurant example given by Professor Clayton M. Christensen and his co-authors in the Harvard Business Review article “Marketing Malpractice.”1 A fast-food restaurant was trying to improve sales of its milkshakes. So it segmented the frequent customers of milkshakes based on characteristics including demographics and personality. It then invited people who fit the profile to focus groups to understand their needs for the taste, texture, and price. The milkshakes were fine-tuned accordingly. However, sales did not improve.
The company then engaged in new research focused on first understanding customer needs. A new researcher spent time observing customers’ purchase and consumption of the milkshakes. This researcher soon noticed a distinct segment of customers who purchased milkshakes in the morning. Interviews with these customers revealed that they purchased the shake as a light breakfast and a way to reduce boredom while driving to work. At other times of the day, the major segment was parents buying to placate their children’s plea for sweets. Understanding such segmentation based on needs, the restaurant was able to fine-tune its products better. For the morning segment, it added more fruit to make the milkshakes more filling and interesting, and it instituted an express purchase process including swipe cards and dispensing machines, both of which helped to drive up sales. This segment was well-defined by the need to drive to work every day. Other characteristics such as length of drive, home location, sex, age, and so on could then be identified in order to help with promotions and advertising.
one can argue that the restaurant could have done its research in reverse. It could have first identified a segment with demographics of a certain age group living close to the restaurant but owning a car that they used to drive to work every day. This would certainly have worked too. But with so many demographic variables, it would be difficult to identify this as a distinct segment—and the original attempt to start with demographics did fail to identify this segment.
Strategy
It is important to segment according to the company’s strategy. In the FedEx example, the overall strategy is to provide speedy delivery at an affordable price. Therefore, it is appropriate to segment based on need for different shipment speeds. By contrast, the Miller Lite “Catfight” advertising campaign provides a vivid example of segmentation not anchored by strategy. The strategy of the company was to increase sales, including switching drinkers of light beer from competitor Bud Lite. Market research identified the segment of young males and it was decided this segment would enjoy advertising featuring mud-wrestling supermodels. The company launched such a campaign, which attracted major viewership and market attention, including from the target segment. But sales did not increase. It was later discovered that while the target enjoyed the “Catfight” type advertising, the pleasure didn’t induce many of them to switch brands.
Selection
It’s necessary to understand segment attractiveness; that is, segmentation is a means to an end. For most companies, the ultimate goal is to select a segment or segments that can maximize the company’s profit. The key factors to consider in this selection are the firm’s ability to serve each segment, along with the competitive landscape and the profitability of each segment.
For a firm’s ability to serve various segments and assess the competitive landscape, the HBS Module Note “Market Segmentation, Target Market Selection, and Positioning” suggests using the framework shown in Exhibit 8.1 to analyze each segment of the market.2
Each blank cell in the matrix will be a rating (either a moon chart pictogram like the ones described in Chapter 3 or a number on a five- or 10-point rating scale). The rating should be based on detailed analysis.
The five rows are the five general areas that should be considered for target selection. Each of five general areas can be eliminated or further broken down into subareas depending on the market. For example, for FedEx, ability to conceive and design may not be an important factor. Ability to produce may be broken down into different parts of the production process, including order taking, package pickup, and customs clearance. Then FedEx and key competitors will be rated for each of the general areas or subareas. It should be noted that too many subareas will lead to loss of focus and difficulty in making decisions. Hence this matrix should focus on the most critical success factors relevant to target segment selection. The other less critical factors can be put on another matrix for subsequent consideration.
Exhibit 8.1 Market Segmentation Grid
Profitability of each segment must also be estimated. Without a good understanding of the segment profitability, companies may end up targeting and serving a low-profit or even unprofitable segment. For example, I once consulted for a b
ank in Indonesia whose strategy was to grow non-interest income from selling more sophisticated products and from transaction fees. The bank had a sizable wealth management business. Traditionally, it segmented the wealth management customers into platinum, gold, and silver status based on the total assets (savings, stocks and bonds, and so on) entrusted to the bank. Most of the bank’s resources for product development, service, and promotions were devoted to the platinum segment, which had the most assets at the bank. However, subsequent detailed analyses showed that many platinum customers were not particularly profitable for the bank, as they were retired individuals with stable holdings in cash and stocks and did not buy new products from the bank. On the other hand, some of the silver customers were young professionals with sophisticated and significant product needs, leading to higher non-interest income for the bank. This sub-segment was highly profitable, had long-term growth potential, and fitted well with the bank’s strategy. But lack of understanding of segment profitability had led to misallocation of bank’s resources and under-servicing of this sub-segment.
Understanding profitability includes estimating the segment size, profit margins, and growth potential. Key sources of information will be internal company data, government and other industry statistics, and estimation. For example, for FedEx, the margins of premium service could be estimated through internal accounting data. The current and future number of companies that would require such service could be estimated based on characteristics and statistics available from other sources. The average number of packages, their destination, and growth potential for this segment could be estimated based on historical customer data and customer interviews. The estimation technique would be similar to the quantification techniques described in Chapter 12.