Feb 24, 2025 | Analytics, Strategy
The ‘Power law of Distribution’ or ‘Zipf’ distribution, can be used as an adjunct to the much better understood Pareto principle.
There is a consistency to the structure of mature markets. There is a dominating leader, followed by a long tail of smaller competitors. The size rank of an enterprise inversely correlates with its market share.
This is the Zipf distribution at work.
Zipf comes from the study of linguistics, where the probabilities of the frequency of words occurring in a written piece was identified by American Linguist George Zipf in 1935. In summary, the characteristic of a Zipf distribution is that the most common item appears approximately twice as often as the second most common, and three times more often than the third most common, and so on.
For example, the most common word appearing in an English text is ‘the’ which appears twice as often as the second most common word ‘of’, and three times as often as the subsequent word. This relationship has been validated across languages and the sophistication of language use via the free Gutenberg Project, a free database of 30,000 works. The obvious use is in the statistical probability calculations used to generate the tokens that deliver us output from AI platforms. It also powers the language translation capabilities of digital tools.
Zipf distributions occur across many domains beyond language. Income distribution, population sizes, numbers tuning in to TV shows, and followers of so called ‘influencers’.
So, how do you use this when thinking strategically about how to break into a market where you are somewhere in the long tail of a Pareto chart?
It is a problem faced by most businesses in competitive markets. The big players get all the attention, leaving little for the small players to fight over.
The answer: Identify an existing niche and own it, or better still, create your own niche, and be the dominating player in a Zipf distribution for that market segment.
Fragmented markets with a wide range of competitive offers tend to consolidate over time into a small number of players that dominate. Typically, the number one competitor evolves to be double the market share of the next.
This occurred when ‘Meadow Lea’ emerged from the crowd of margarine brands in the late seventies. It became the dominant brand with a market share over 20% (at a premium price) with the next brand in line, ‘Flora’, having a share from memory that never climbed over 8%. Then came ‘Miracle’ margarine maxing out at about 5% before going down the gurgler.
‘Apple’ created the smartphone niche, which then became the whole mobile phone market. They led the emerging market in volume until Google released Android, and allowed anyone to use it. Apple no longer holds market volume leadership, currently they are around 15% volume share, but still hold profitability leadership at about 80% of mobile phone profit share, a clear example of a Zipf distribution.
Which would you rather have?
These ‘Zipf dominators’ do not happen by accident.
They are created by a combination of the identification of unmet demand, creation and/or leveraging of a market niche, and an emotional connection compounded by long term brand building.
When you are the second brand, chasing a Zipf dominator, life is tough. It will take strategic insight, investment, time, and perseverance to prevail. Critically, it also requires a deeply strategic analysis of customer behavior and needs to be able to see the ‘white space’ than becomes ‘Zipfable’
Header George Zipf courtesy Wikipedia
Feb 6, 2025 | Analytics
The Rule of 72 is a ‘rule of thumb’ calculation used to quickly estimate how long it will take for an investment to double in value, given a fixed annual rate of return.
It was first introduced by Italian mathematician Luca Pacioli in 1494, a collaborator of Leonardo Da Vinci. Pacioli is best known as the codification of double entry book-keeping, and the reporting of transactions via journals and ledgers, and outcomes via profit and loss and balance sheet.
His Rule of 72 is widely used in the initial ‘back of the envelope’ assessment of investment options.
The formula is: Years to double = 72/Annual rate of return.
For example, if an investment has an annual rate of return of 8%, it will take around 9 years to double. (72/8 = 9)
The rule can be used to make reasonable estimates of a range of outcomes, such as how long it will take for money to lose value due to inflation, the impact of compounding interest on debt, and evaluating the impact of service fees.
Be careful however, at best the calculations will be estimates, reasonably accurate at rates between 5% and 10%. Outside this range, the accuracy will suffer due to the non-linear nature of compounding growth.
Jan 17, 2025 | Analytics, Branding, Marketing, Strategy
Small improvements in average price drive large improvements in profitability.
Do the numbers.
The normal expectation in consumer markets is that volumes will increase when you promote. Usually they do, but that period is usually followed by a period of lower volume, as what you have done is pull volume forward. This gives those who would have bought at the full price a discount, and rewards those who only buy on price, but who will move on next time to the cheapest on the day.
Brand equity flattens the peaks and troughs of price driven demand, reducing the volatility of price driven volume.
A reduction in the volumes driven by price alone, and an upward to the right movement in average prices paid, act together to drive profitability.
The challenge is to be in sufficient control of your distribution to be able to manage the balance of price based promotional activity often demanded by distribution channels, and investment in brand equity held by the end consumer.
In Australia, the power of the supermarket duopoly together with poor management of that balance by weak minded and brand equity unaware management has resulted in the brand equity of most consumer brands being trashed by supermarkets. It has been replaced by cyclic price promotions, with mandatory participation if distribution is to be maintained.
One of the great missed opportunities to build and leverage brand equity (in my opinion anyway) is the use years ago of Al Pacino by Vittoria coffee.
I have no idea how long the campaign went, or how much they spent, but I clearly remember seeing the ad on TV, and on posters in coffee shops around Sydney. I still buy Vittoria coffee as my preferred coffee, but have been ‘trained’ and rarely need to buy it at the full price of close to $40/kilo, when it is ‘on promotion’ regularly at between $20 and $25. I drink a lot of coffee, so the low price is a pantry stock opportunity.
Unless I am highly unusual, Vittoria has missed out on many millions of dollars of profit over the decade. Heavens, they miss out on several hundred a year just from me!
The potential power of human emotion on the purchase choices they make is huge.
Most fail to leverage it to its fullest extent.
The campaign for Meadow Lea margarine that ran from about 1977 to the mid-eighties is another example. ‘You ought to be congratulated’ not only drove the brand to massive market share leadership at an average price that was a premium to its natural competitors, but it also drove the size of the whole market.
When the dopes who took over the brand failed to recognise the dynamics, and cut advertising, while bowing to retailer pressure, the brand shrunk like a balloon with a slow leak.
Nearly 40 years on, the ‘you ought to be congratulated’ positioning may retain enough equity to be revived. Similarly, I am sure Al Pacino still drinks coffee every day, but may now be a very expensive spokesman.
Maybe not. Worth a try?
Nov 7, 2024 | Analytics, Management, Marketing, Strategy
How do you anticipate the reactions of competitors to your initiatives?
First you must understand them holistically and well. The better you understand them, specifically the strategic and tactical frameworks they work with, the better able you will be to anticipate and respond. You should also reflect on the leadership of your competitors, as their behaviour drives their decision making.
11 questions to ask yourself and your team:
- Will they react at all?
- Will they see and understand the strategic and tactical drivers of your actions?
- Will they feel threatened?
- Will mounting a response be a priority?
- What options will they actively consider?
- Do they have the right mix of resources to respond meaningfully?
- Which option are they most likely to choose?
- How many moves ahead do they look: do they play draughts or chess?
- What metrics do they use that will influence their decision making?
- What are the lead times required to respond effectively?
A final and key question in this volatile environment that is often missed:
- Who might emerge to be a competitor, who could change the dynamics of your market that currently would not be classed as a genuine competitor?
Commercial history is littered with failures to see the possibility of a disruptive new competitor emerging from left field.
Anticipating competitor reactions to your initiatives is a competitive superpower.
It enables you to strike at their weak points, and repel their advances at minimum cost to you, while having them consume resources for no result.
The downside of focusing on competition is that your customers do not see the world as you do. They are looking for the supplier who best addresses their need, solves their problem, or scratches their itch.
Those who spend their time looking over at their competition are risking taking their eyes away from their current and future customers. Lose sight of your customers, and one way or another, you will be eaten!
Oct 14, 2024 | Analytics, Marketing
Against my better judgment, I recently engaged in a conversation about the ‘Law of Purchase Duplication’ with a young marketer. He seemed quite convinced that he was delivering a groundbreaking insight to a marketing dinosaur.
In essence, the law argues that the larger a brand’s market penetration, the more likely a consumer is to purchase alternative brands within the same category. Smaller brands, on the other hand, struggle with loyalty, relying primarily on occasional or incidental purchases when they fall within a larger brand’s ecosystem.
This concept, while not new, remains fundamental to understanding brand dynamics in the marketplace.
Back in the day, we referred to it as the purchaser’s ‘acceptable pool of brands.’
This young hot shot expanded on the advantages of being the dominant brand, and how it becomes self-sustaining through positioning, weight and quality of advertising, brand salience, product accessibility, and consumer perception. While this may all be true, the notion of it being ‘self-fulfilling’ is a step too far.
The reality is that maintaining market dominance requires constant effort and adaptation to changing consumer preferences and market conditions.
During our discussion, the topic of brand loyalty surfaced, leading to several useful questions about what brand loyalty truly means in today’s fast moving consumer markets:
- Does it mean that no other brand will ever be purchased under any circumstances?
- Does it only matter when a preferred brand is unavailable?
- Is there a sliding scale of brand loyalty that correlates to price differences?
- How does this law of duplication apply to sub-categories within the same brand?
- What are the varying impacts of demographics and psychographics of consumers?
- Could brand loyalty simply be a combination of awareness and preference, disconnected from actual purchasing behaviour in-store?
These questions highlight the complexity of consumer brand loyalty and the need for an understanding of the nuanced drivers of consumer behaviour in every market.
Over the years, I’ve been intimately involved with several instances where this so-called ‘Duplication of Purchase Law’ played out in real-world brand battles:
Meadow Lea Vs all comers. The rapid ascent of Meadow Lea margarine in the late 70s and early 80s was astonishing. The brand evolved from one of many competitors to a market leader, at its peak dominating with three times the market share of its nearest rival. Although it was driven by exceptional advertising, there were several alternative brands consumers could have turned to. However, consistent availability, competitive pricing, and in-store sampling helped cement its position. These instore marketing activities supported the brand advertising that built long term brand salience and loyalty.
Yoplait Vs Ski. The yogurt wars between Yoplait and Ski during the 80s and 90s are another example. Yoplait initiated huge market growth by making yogurt mainstream when it launched. This left Ski, the previous leader, floundering and scrambling to recover. Both brands became largely interchangeable despite product differentiation. Yoplait strawberry was an acceptable alternative to Ski strawberry, and vice versa. However, this dynamic didn’t extend evenly across other flavour categories or packaging formats. If Ski strawberry was unavailable, Yoplait strawberry was more likely to be purchased than an alternative ski flavour. These inconsistencies across the product categories and pack sizes, highlighted how nuanced and context-specific the Duplication of Purchase Law can be.
Having reliable data from the likes of Ehrenberg-Bass provides the statistical credibility necessary to sell what to date have been qualitatively understood wisdom, to the boardroom. However, it’s crucial to remember that this qualitative wisdom, built over time, should never be discarded or obscured by academic multi-syllable descriptions or management jargon. One-dimensional data cannot replace the wisdom accumulated by thoughtful marketers over time.
Oct 11, 2024 | Analytics, Operations
Real-Time Feedback is the objective of any effective performance management system. We instinctively knew how to generate and leverage feedback as kids. Remember that cricket scoresheet a parent kept during a Saturday morning game? It could just as easily have been netball, hockey, soccer, or footie.
Every ball bowled was accounted for in real-time: a run, a wicket, who bowled the ball, and who was the batsman. This real-time recording enabled tactical choices at every ball. This is a ‘box score.’
By contrast, typical accounting systems look at what’s happened up to a point in time, often monthly, in arrears.
Translating real-time game results to a commercial context makes perfect sense. It enables decisions on a short-term basis that maximises outcomes.
Adapting to this change isn’t easy, as our accounting training, established processes, and regulatory systems are geared to historical data, not real-time. They use ‘standards’ and reporting templates that obscure real-time detail.
Successful businesses find ways to translate the outcomes of their actions into visible measures of real-time performance from which they can learn, iterate, and improve.
Following are six tactics you might consider implementing to improve your performance.
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- Break down your processes into their component parts, as far down as you can.
- Identify the bottlenecks in those processes. These usually become obvious the further you break the processes down.
- Choose the two or three key metrics that track performance of that part of the process, make them transparent via dashboards, and give the operators the power to adjust and improve.
- Leverage technology to both do the measuring, and providing the real time feedback. This can be a simple as a digital display of unit movement down a production line, or sales orders received.
- Start small, and build as the ‘performance bug’ bites those involved. Achieving this sense that there is a ‘performance bug’ around is a function of the leadership and resulting culture that is built.
- Integrate the dashboards in a process I call ‘Nesting,’ so that each board builds on the ones that contribute to it. For example, a dashboard that reflects the units going past a specific point in a manufacturing process, build to one that reflects the output of that specific production line, which builds to a factory wide dashboard.
This is all easy to say, but very hard to do. However, if it was easy, everyone would be doing it
Header credit: Wikipedia. The scoresheet in the header is the scoresheet of Australia’s first innings in the Ashes test against England at the Gabba in 1994. Michael slater scored 176, mark Waugh 140, and Glenn McGrath did not disturb the scorers, shooting another duck. A perfect example of a ‘Box Score’.
