Oct 18, 2021 | Branding, Marketing, Sales
In competitive markets, price is a bit like a game, typified by the ‘prisoners dilemma’ of game theory, where two players acting in their own self-interest will result in a suboptimal outcome for both.
In the classic scenario, you have two people, suspects of a crime held in separate rooms with no means to communicate.
The copper tells each of them that if they confess and testify and the other does not, you will go free.
If you do not confess and the other does, you will get the maximum sentence of 3 years.
If both confess you will both be sentenced to 2 years.
If neither confesses, there is enough evidence to have you both serve 1 year.
The result is that if the prisoners act out of self-interest, the result is worse than if they had cooperated.
When you consider this in a competitive duopoly market, to keep it simple: what happens if one party cuts its price?
The other has the choice of cutting theirs to match, which inevitably results in less profit for both if competitor two cuts their price in response. However, if the reaction of the second mover is to keep their prices up, they might sell less, but very probably make more profit. The price cutter will be relying on selling more at the lesser price to increase profit, or grabbing market share which is usually the driver, because of the added volumes.
Given most organisations have KPI’s around sales volumes, the temptation to cut prices in the face of competitive activity is almost irresistible, despite the profit impact which is often ignored.
The Fountain Tomato sauce story: I joined Cerebos back in 1981. Fountain Tomato sauce had a share in NSW of about 40% of volume and 50% of value. Fountain sold for .72 cents for the 600ml bottle, I remember the numbers well. A short time after I joined, discounter Franklins brought out No Frills tomato sauce, on shelf for .69 cents,
The sales force was in a panic, as Fountain was a big part of their sales and they insisted that we had to drop the price to match No Frills or lose huge volumes.
I did the numbers, and convinced the marketing manager, and MD to overrule the sales manager, and we put the price of Fountain up, so it was on shelf at .81 cents, and we started advertising: ‘Rich Red Fountain Tomato Sauce’
The logic was that Fountain at .72 and No Frills at .69, were very close, so the consumer found it sensible and easy to save a few cents, as after all, they must be pretty much the same if the price was so similar.
However, at a price difference of .12 cents, very substantial in percentage terms, but not particularly significant in the mix of a weekly shop, consumers figured that they had to be very different. Fountain had to be the far better product, and the advertising we did confirmed that view. More tomatoes, no filler, ‘Rich Red Fountain tomato sauce’. Our volumes did drop marginally, and our profits went up.
This outcome was not just instinct, it was based on research and experience.
‘No Frills’ margarine was the very first cheap housebrand on the Australian market. It was proposed and supplied by the business that at the time owned Meadow Lea margarine, my employer. I had done quite a bit of research after the launch of No Frills margarine to understand the consequences, and so was lucky to be in a position where I had some understanding of the dynamics that were at play, without at that time having any solid idea of the psychology that drove them.
Later, both Fountain and Meadow Lea allowed the retailers to dictate their strategies, so redirected advertising funds into price promotions, boosting the retailers margins and destroying their brands. Both Fountain and Meadow Lea are now just ‘also-rans’ in their markets, (judging by shelf presence) and neither would be anywhere near as profitable as they were in their heyday.
The lesson is that the intense pressure to reduce price as a competitive reaction is almost always a very bad choice. Resist the pressure and protect profit, without which you will be out of business.
Oct 11, 2021 | Analytics, Change, Governance
The starting point of any review process is to define the current situation.
In every case, the trends are as important, and often more important than the immediate position, as they are often leading indicators of what might happen into the future that will impact your planning.
The trends give a picture over time of the success or otherwise of the organisation, which leads us to examine some areas in more detail than others, asking ourselves the ever-harder questions.
The four parameters are also cumulative and absolutely interdependent.
Under the ‘Strategic’ heading there is a wide range of areas for examination. The most obvious are:
Regulation.
No enterprise can survive, legally, if it is outside the regulations that control it.
Looking not only at the regulations that are in place now, but what might come down the pipe at you is important, in some cases critical.
For example: if you are exporting manufactured products into the E.U. it is likely that in the near future, there will be a tariff added to any that already exist to accommodate the imbalance between there being no carbon tax in this country, while there is one in the EU. In addition, the recent submarines decision will likely disrupt any movement towards increased access to the EU.
Competitive environment and your relative place.
What is the reality of your competitive position?
Being tough on yourself, ensuring conformation bias plays no role is important.
Strengths and Weaknesses are internal to the enterprise, while opportunities and threats are external.
Strengths and Weaknesses are always relative to those of your opposition, and/or what customers are demanding.
Just because you think you do a great job, and you may, it is not a strength unless it is a better job, in customers eyes than the opposition can deliver.
Similarly with weaknesses, if customers do not care, then why does it matter? Only consider weaknesses that impact on your competitive performance relative to the opposition, and to what the market is looking for.
Customers.
As Peter Drucker noted, ‘The purpose of a business is to create and keep a customer’
Your business relies on them, they should be the centre of everything you do, think and say.
Understanding the nature, shape, and trends in your customer base, what needs you are meeting, what needs may be there that you are not meeting, why they are customers of yours, and not someone else’s, what they think about the service you deliver.
Customers must see the value you deliver, or they will walk.
Similarly, it is reasonable to ask yourself ’are they the customers we want?
Measuring customer ‘stickiness’ is the key to a successful business, so much so that if you did nothing else, it would serve you well.
Three measures I use:
Share of wallet. (SOW)
How much of the money a customer spends on products you could provide, do they spend with you? What is your share of their ‘wallet’?
This always opens very interesting thinking and discussions about the scope of the wallet. E.g., Imagine you are an insurance company with a big share of the car insurance market.
Should your wallet also include home, life, professional indemnity? Or do you niche even further to vintage and collectable cars?
These are the strategic decisions that need to be made before a marketing plan can evolve.
This analysis does not have to be confined to individual customers, it may be applicable to a cohort of very similar customers, to give you a SOW of a market segment.
There are some tough choices here, you have limited resources, and need to apply them where you will generate the greatest leverage.
Leverage is a word I use a lot. We all know what it means: doing more with less.
Customer retention, churn, and lifetime value.
How long do customers stay with you, how much do they spend?
Both measures are useful when applied to differing groups of customers, geographic, demographic, or any other parameter that defines the behaviour of a group.
You cannot do enough work in this space, the better you know your customers, the better able you will be to serve them, increase your share of their wallets, keep them as custumers, and have them refer you to their friends and networks, still the most powerful form of marketing there is.
Lifetime Value is a good measure, simply the sales to a customer X the average life of a customer.
Customer Pareto.
The 80/20 rule is immensely valuable. Measuring the profitability, revenue, or margin, perhaps the three of them, offers insights to performance and highlights areas for improvement.
A catch with this approach: it will tend to focus attention on the currently most valuable customers. However, most of your best customers started out as small first timers. Some will be more strategically valuable for one reason or another, so do not let the Pareto discard them prematurely.
Market competitiveness.
Michael Porters competitive analysis tool has passed the test of time.
It is a little outdated now as the complication of all the new digital channels adds complexity, but the tool remains extremely useful.
There is no business where there is not some value in thinking through the competitive forces driving your industry.
Product & market lifecycle.
All products go through a lifecycle, of some sort.
Launch, growth, maturity, decline.
Even a failed product has a life, albeit a short one.
Businesses go through a similar lifecycle, it always holds, in one way or another.
It is a useful tool to consider at which point individual products, product groups, markets, and businesses are situated, and the pattern of their growth and decline.
Where would you put EV cars on this graph? Mobile phones? Cigarettes?
Occasionally a product, or business bucks the trend, and comes back, the product changes in some way, and finds a new lease of life.
The BCG tool is well known. It is a tool through which to consider your product portfolio.
A dog, to be euthanised. A cow, to be milked, A star, to be nurtured and protected
Who knows, it will become a dog, or a superstar, you must decide what to do with it in terms of marketing investment.
Business model.
Your business model, is the means by which you turn your value proposition into revenue.
Clarity about your business model, and how to optimise the mechanics is a key component of considering your current situation, and how best to leverage it.
The strategies that will work for one model may not work for another.
E.g., The wholesale model is becoming redundant, as the net has opened the communication channels and opportunities for buyers and sellers to collaborate, and manage ordering and logistics, a role wholesalers used to fill.
Two sided and subscription models are the ones that have flourished with the net. eBay, Airbnb, Netflix, Amazon prime, all the SaaS software you use.
You must be clear about your business model, as experience suggests that two different Business models sitting under the one roof is very uncomfortable and creates friction.
Every business requires money to operate, the ‘Working capital’ of the business.
Every business also has some fixed costs, even home businesses. Insurance, power, communications, and so on.
Every business that has any sort of manufacturing, from a simple transformation to complex manufacturing has the cost of goods sold, plus the equipment and labour necessary to do the transformation, as well as the fixed costs of factories. The processes to forecast and manage your money need to be robust and subject to continuous improvement.
Budgets.
Given we are talking about the future, we know it will not be as we expect, so the budgets flowing from your forecasts will be wrong, question is by how much, how well do we adjust, and how much did we learn on the way through.
I strongly favour rolling budgets, usually 3 months, which parallel rolling marketing review, and forward planning.
You have in effect two reporting dimensions.
Financial accounts.
The financial accounts are the ones we see in every annual report. There are statutory formats, lists of required information, and the definition of how varying situations will be treated. They are for public consumption, analysis and comparison, and come in three standard sections: Cash flow, Profit and Loss from trading, and the Balance sheet.
Management accounts
These are the reports used internally to manage the business.
They use the same raw data, and the same 3 core reports as the financial accounts, but go much deeper, and have an entirely different purpose.
The management reports are what you use to allocate resources, track their application, monitor the financial outcomes of the decisions you take, and manage the assets, tangible, and intangible, of the business.
For SME’s, the most important measure is your cash flow. Without cash, you are dead, so a detailed understanding of your cash position is essential.
Hidden within the management accounts are the seven financial levers that should be measured and managed. Price, Volume, COGS, Overheads, A/c Receivable, A/c payable, and inventory.
Businesses are usually structured vertically. However, customers interact with businesses horizontally.
A customer has no interest in how you are organised, and how you work, their only interest is in having the product they paid for perform up to or beyond expectations, in relieving the itch they feel, solving the problem they have.
Putting the customer at the centre of your efforts, which is where they need to be in order to be successful, means that you focus on the horizontal, external customer experience, not the internal, vertical organisational experience.
Forget this basic fact at your peril.
Businesses are made up of a series of processes. Order to delivery, Cash to cash, Raw material to finished product, Acquisition of and retention of customers, and others.
Every one of these processes is critical.
Culture is most often defined by repeating Michael Porters assertion that: “culture is the way we do things round here.” However, this leaves the question of what drives the way things are done.
Performance management.
The manner in which KPI’s are allocated, and usually they are financial KPI’s that dominate, is a critical consideration, as they are often in conflict, driven by functional considerations of no interest to customers.
For example. If your factory manager’s KPI’s are all about the efficient running of the factory, with no allowances for the downtime, experimentation, and pilot runs, that are necessary during the product development stage, you will have trouble getting a new product that is OK on the development bench validated through the factory.
This always leads to problems in the market.
A similar scenario comes from many salespeople, they often do not report to marketing, but are crucial in the marketing plan implementation.
Overlooking ‘Culture’ in the preparation and execution of a plan often sounds the death nell at execution time.
Flow.
Imagine a river, running unimpeded by rapids, narrow bits, waterfalls, and varying depth along its path.
It looks leisurely, smooth, but more water passes through than a similar river with all the impediments.
The latter just looks busier, more activity, turbulence, conflicting paths around the impediments.
Processes in a business are similar.
Smooth processes that hand a task over, one person to the next, one part of the process to the next at the critical time, with the minimum of disruption, the better.
More gets done.
Flow is a state that comes from a place of communication, collaboration, and continuous improvement.
All are enhanced by tools, but in the end, you need people to work together, communicate and continually improve to achieve that state.
Flow is an outcome of a positive egalitarian culture.
One of the most common problems I see in businesses as I wander around is constant never-ending firefighting.
That happens because adequate, repeatable processes are not in place,
Next time you walk into a new office, or factory, look for Flow.
You will know it when you see it and know further that this is a place with whom you want to do business.
Flow can be seen and felt, and it can also be measured by cycle time and throughput.
Culture is an outcome of all the interactions, big and small people have with each other.
‘The way we do things around here’
It is therefore critical that you hire the right people.
You can measure engagement, and how happy and fulfilled people are. A useful rule is to
Hire slowly, fire fast, and with great care. When you must terminate someone, it will have a profound impact on them. It is vital that you do it with empathy and make the landing for them as soft as possible. This will aid them immensely, but as important, is the impact on those who are left.
If they see the departed as a valuable member, they will be wondering if they are next. ’Why not me’ survivor syndrome, is a powerful psychological force. If they see the departed as a good riddance, the fact that you did it with empathy will also be noted and bind the remainers closer to the business.
Besides, when you feel you have to fire someone, it is usually your mistake in hiring them in the first place.
A further good measure is how time is spent. Keeping timesheets is not what this is about, it is a cultural behaviour that you leave time, block it out in your diaries if that works for you, to give your self-time to see what is around you. Most in modern businesses are so busy they do not allow the time to look up, observe, and see the opportunities that may pop up. We are so busy we miss them, confirmation bias dictates what we do see, so act deliberately to remove that inherent bias from time to time and look up.
For many SME’s, the opportunity to go to industry trade shows, forums, and formal networks of peers is a great way of doing this. Chance then can catch up with you.
Keep the bias to action without which you will get nothing done, but make the time to look around with clear eyes, meet new people, as opportunities are always attached to people, they do not float around looking for a place to land.
Bias for action, must be part of the culture.
Ask yourself the question ‘Do I really need more information, or do I need to simply act on what I have’
Most decisions are reversable so long as you have good feedback loops and are prepared to recognise early that a course of action is not going to deliver expected results.
Marketing is always about making choices with incomplete information, do not allow yourself to be paralysed by the missing pieces, act and be prepared to back away, having learnt something new. Bias for action is a cultural thing, demonstrated by the leadership.
The secret sauce of a successful business is to have a successful culture, one that ensures that everyone knows that what they are doing today is correlated and contributing to the long-term achievement of the mission, strategic objectives, whatever you choose to call it. Every person understands the contribution they are making today, for that long term achievement of the goals.
Defining your current situation is like having a detailed map of the block of land you intent to build on before you start designing the house. The better the map, the more functional and useful the house design will be.
Take the time, and make the effort to do it well. An independent set of eyes always helps.
