You are charging too much

Why is it that marketing theorists tend to blame a brand’s demise on “loss of differentiation” or some such thing when they shoud be saying “it’s too expensive, it’s no longer competitive” ?  (which incidentally means the brand is becoming more not less differentiated).

Why is charging too much seen as a indicator of marketing strength, not weakness or stupidity ?

It annoys me how people keep citing Apple as a company that charges price premiums.  They don’t.  Anyone really familiar with the industry knows of the comparison feature-by-feature breakdowns that show macs are priced competitively they just don’t compete in bargain basement minimal feature area.  Notice how iPad competitors are struggling to even match the iPads pricing.

Back in 2008 Steve Jobs said this during an interview with financial analysts:

Toni Sacconaghi – Sanford Bernstein:

“And then you had also mentioned the price umbrella statement and you said look, certainly to be successful on iPhone, we don’t want to create a price umbrella. I think in response to another question, you also talked about extraordinary feature functionality in terms of your Mac products. Do you have the same philosophy around Mac as you do with iPhone, that you have to be careful not to create an umbrella in each? So I guess the simple question is should we continue to see more affordable price points across the Mac product family and across iPhone going forward?”

Steven P. Jobs:

“Well, I think what we want to do is deliver a lot, an increasing level of value to these customers. There are some customers which we choose not to serve. We don’t know how to make a $500 computer that’s not a piece of junk, and our DNA will not let us ship that. But we can continue to deliver greater and greater value to those customers that we choose to serve and there’s a lot of them. And we’ve seen great success by focusing on certain segments of the market and not trying to be everything to everybody. So I think you can expect us to stick with that winning strategy and continuing to try to add more and more value to those products in those customer bases we choose to serve. Does that make sense to you?”

Share of wallet isn’t enough

In a recent Harvard Business Review article TIm Keiningham et al (Oct 2011) argue that managers should pay attention to “share of wallet”. To grow brands should aim to improve their share of wallet rank.

To do this you obviously have to get customers who currently give you a very small share of their purchasing to give you a greater share – it’s logically impossible to get much more share out of customers who already give you near 100%.

So Tim Keiningham et al have discovered the importance of light customers. Great.

Unfortunately, in their article they then make an unsupported assertion that the way to improve a brand’s share of wallet metric (and hence market share) is to survey customers on their motivations for buying each brand and then whatever it is that they like about a competitor should be improved in your brand. This ignores the very weak link between claimed motivations and behaviour. But is an unsurprising recommendation from someone who works for a market research agency.

Like Reichheld and Sasser (see retention profit myth) they also imply that improving loyalty metrics is easy – just ask people what they are looking for, provide it, and then your share of wallet metric will jump.

They provide (only) a hypothetical example of a supermarket. So let’s look at real data on supermarket loyalty. This is Kantar Worldpanel data (2006) on UK supermarkets (a very vibrant and competitive grocery market), market share is in the left column, penetration next, and share of purchases in the right:

 

 

Like all loyalty metrics, share of purchases rises with penetration and market share, in accordance with the Double Jeopardy law. As expected, there is much greater variation in penetration than in the loyalty metric.

In the HBR article’s fictional example the supermarket achieves a 7 percentage point gain in share of wallet (at some unknown cost), the implication is that this is an easy task. But this would be equivalent of Sainsbury’s doubling its market share – that’s a Herculean task!  And, very importantly, Double Jeopardy shows us that Sainsbury can’t do this without also increasing its penetration from an annual 64% to something nearer 80% – in other words it has to gain more customers.

That means the supermarket has to increase its reach (in space or time), e.g. more stores, longer hours.  This vital message is missing from the HBR article.

Professor Byron Sharp

Oct 2011

Correlations are a poor way of assessing predictive ability

Firstly, I’d like to blow away the myth that correlations above 0.5 are spectacular in the social sciences. On pages 32 and 33 of my book “How Brands Grow” I present some car repeat loyalty metrics and market shares for the USA, UK and France. A quick calculation shows a higher than 0.6 correlation between repeat rates and market share. These sorts of correlations between brand performance metrics are the norm.

Secondly I want to highight the misleading claims of consultants peddling special brand health metrics who often claim correlations of say 0.7 between their special score for brands in a category and their sales – they say how amazing this is, and how it is proof of predictive ability.  Well here are my attempts to predict tomorrow’s temperature in Adelaide Australia, each prediction and reading is taken about a month apart starting in Summer and ending in Winter. I get it right that the temperatures go down as Winter arrives (big deal, it’s a bit like predicting that growing brands will increase sales a bit next period) but otherwise my predictions are miserable, they are always wrong, sometimes too high, mostly too low. The correlation however is very near perfect, 0.99 to be precise.

Actual temperature (Celsius) is in the left column, and my hopeless predictions in the right column:

39   43
32   36
24   22
21   18
17   15

r = 0.99

The moral of the story is that correlation is not a good indicator of predictive ability.

 

Professor Byron Sharp

Some people shouldn’t work in sales

I’m looking to buy a home espresso machine, and while there are good online retailers I thought it would be good to support local retailers – plus it’s nice to have local advice and after sales service.  So I found online a nearby coffee place that stocked the models I was interested in, I was sure they would match any online price because as a student I worked in a coffee shop and the margins are high (to recover overheads) so any extra sale is welcome.

So I drove my daughter to Simply Coffee  in Kent Town which describes itself as a “cellardoor” for coffee – how could I resist!  I wasn’t expecting to buy a machine today, I just wanted get some advice and I’d also picked out 2 coffees from their website I’d like to try (500g of each for $50).  I ordered an espresso, a hot chocolate and a small packet of italian biscuits to entertain my daughter while I looked at their coffee machines.

A sales person asked if she could help and I said yes I was considering a manual machine but also looking at the semi-automatics like Rancilio Silvia.  “All our machines are manual” she said “the Rancilio Silva is manual”.  I replied “I meant the difference between the lever ones where you pull the shot compared to the ones where you push a button and it determines the pressure”.  “Oh it’s all the same” she said “but if you want to make up your own terminology”.  Whoa, I was only using the terms used on serious coffeesites like coffeegeek.com, but who was I to argue.

So she hardly endeared herself but she went on to recommend a cheaper machine than the Rancilio which looked like it would suit my needs since I didn’t really care about milk frothing.  So I sat down, drank my espresso, and checked out reviews of this machine I’d not heard of and found they were generally positive, also (no surprise) thanks to Google search advertising that it was cheaper at online retailers, although not much just $50 (10%).

Emotionally I didn’t really want to buy from this dogmatic woman but she had been good enough to point out a machine I’d not considered, and it was convenient, so I caught this salesperson’s attention and said she had convinced me but that it was $50 cheaper at coffeeitalia.com.au, before I finished speaking she said “I can’t lower that price”.  “That’s all right” I said “could you throw in $50 of coffee” knowing this would cost her far less than $50.  “No” was the unambiguous reply.  I was really really surprised, it seemed such a strange unbusinesslike thing to do.  “I’ll have to buy it online then” I said and that was that.  When I got to the car I remembered that I’d forgotten to buy the coffee beans I’d intended, oh well, they lost that sale too.

Some people work really hard and long hours in jobs they are entirely unsuited to.

 

PS It turned out very well I bought it for $100 cheaper from AchieveKafe who delivered (at no charge) in 2 days – great service.

Should Apple have called the iPhone 4S a 5?

Apple’s iPhone 4S announcement was a bit of a PR flop. No I exaggerate, it achieved front page coverage around the world, so flop is too strong a word. But people were disappointed, they hoped for an iPhone 5.

Realistically though, Apple can barely supply demand for the iPhone 4, why should it take a big hit to its margins by releasing a radical new model? Because it would hurt its competitors – but that sort of thinking has been shown to hurt company performance and increase the chances of going company failure.

An iPhone 5 would have a different shape and larger screen, and then all the enhancements of the 4S. Not perhaps a huge difference, so should Apple have just called its 4S a 5? Perhaps, but that would devalue the 3GS and 4 models that it is still selling and these models are much more important than people realise.

Apple has quietly expanded its reach even further with sales on the Sprint network but perhaps even more importantly they now have their first ‘free’ model (a 3GS with 2 year contract) that’s a very important place in the market to be. And they have a $99 iPhone 4 (with contract).