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 5, 2021 | Customers, Marketing, Small business
We usually look at objectives and goals as the things we want to achieve. We then set about figuring out the path towards achievement.
There are always hundreds of ways to achieve a goal. Often we find ourselves bewildered by the options, and procrastinating or picking a fuzzy path as a result.
Try drawing a line through the things you will not do to achieve the goal, rather than struggling to pick what you will do.
This will help focus on a path quickly that removes ambiguity and the many opportunities to be distracted.
Over the years I have worked with a number of SME’s in the food industry. In almost every case, the seductive promise of the volumes delivering profitability to be extracted from the two supermarket gorillas is there somewhere. This always confuses the focus on delivering value and building brands for those who care about quality and differentiation before price. In addition, the resources for mass marketing and promotion that are necessary for success beyond an initial flurry in supermarket chains are usually absent in SME’s.
Failing to Recognise the mechanics of the supermarket business model, and the resultant infrastructure necessary to service this model, is a major source of financial and strategic failure of many SME’s in this space.
In those cases, I encourage people to set their goals, by excluding the option of supermarket distribution. Instead, focus their minds on the many opportunities outside supermarkets that better suit the capabilities and resources available.
Sep 29, 2021 | Communication, Marketing, Social Media
As we all know, a camel is a horse designed by a committee.
So it is with many websites.
Digital camels.
Every page on a website should have only two objectives:
- Provide the catalyst to ‘convert’ to the next step.
- Make the conversion easy.
Not every page is a sales convertor, but each page should play a role in the progressive process towards a transaction, whether it be the first, or the twenty first, only the number matters.
The most common response I get when I make these sorts of observations are: ‘we need to educate‘ and ‘the objective of the site is brand building‘.
Both are valid drivers of the content of a website, but unless they ultimately lead to sales, they are little more than platitudes and good intentions.
Is your website just an elegantly coiffured camel?
Sep 15, 2021 | Analytics, Category, retail
‘Elasticity’ is something most of us did in economics 101. Why have we not used it more than the evidence of my eyes would suggest?
The price elasticity of demand is usually defined as the relationship between changes in price and the resulting changes in volumes sold.
Elasticity = % change in quantity/ % change in price.
For example, assume you raise the price of a widget from $100 to $120, which causes the volumes sold to go from 1,000 in each period to 900. The price increase is 20%, the volume decrease is 10%. Elasticity is therefore 10/20, or 0.5.
It is the absolute value of the metric that is important, the distance from zero, rather than if it is positive or negative. If the number of widgets sold had been 750 after the price increase, the elasticity would have been 1.25. (25/20) a more elastic response to the price increase than the 10% drop in the example.
It is crucial for marketers to understand the elasticity of their products if they are to optimise the price/volume relationship, as price is the most sensitive driver of profitability.
The challenge is that there are a whole bunch of psychological and competitive factors that weigh into the equation in a consumers mind, simply not accommodated by the simplistic price/volume curve we all saw in that economics 101 class.
You can speculate all you like about price elasticity, but the only way you will know is to evaluate it in the marketplace.
We are currently (September) in the season where there is a glut of avocadoes available. My local Coles store seems to be altering the prices daily, anywhere between 1.00 each to 1.69 each. It is probably that they are partly reflecting the deliveries into their distribution centres, but the data collected at the checkouts will give them a detailed view of the volumes at differing prices, and even the time of day. This data is invaluable market intelligence that can be used to optimise their profitability for the product category.
Given that cost is a lousy starting point upon which to base price, it may be that this Coles is leaving money on the table by reducing the prices below $1.49.
How many less avocadoes would be sold at $1.49 than at $1.10?
Someone in their data analysis system, somewhere, has the data to make this call with close to absolute certainty as it applies to this store.
Theoretical price research, outside of the real purchasing decision making, is at best inaccurate, at worst, misleading. A/B testing used to be a challenge, but increasingly we can use digital tools to interrogate the data that digital capture, in this case the checkout, that has become available to us.
Companies like Amazon with vast amounts of data are so good at it that they know the price elasticity of individuals in particular product categories. They display prices accordingly every time you search, in order to maximise the chance you will buy at the highest price they can charge, based on your history. ‘Dynamic pricing’ is the now common term being used to describe this process.
Once you understand the elasticity of the price/volume profile of your product, you are in a better position to maximise profitability, while delivering value to your customers.
Header cartoon credit: Scott Adams. Not sure the analogy is a great one, but the idea was amusing.
Sep 13, 2021 | Branding, Marketing, Strategy
One of the most quoted of quotes is attributed to Ralph Waldo Emerson: ‘Build a better mousetrap, and the world will beat a path to your door’
Unfortunately, Mr Emerson got it almost entirely wrong.
The better product, on its own, never wins. Just being ‘better’ is simply not enough to win that competitive battle with incumbent but technically inferior products. I am sure there are a few exceptions, I just cannot think of any.
Why is it so?
Several common reasons pop up as I survey the field of my experience.
Customers must care.
What is the value of being different, technically superior in some way if customers do not recognise the value of that differentiation to them? If customers do not care then you will fail, despite the supposed superiority of the alternate. Customer indifference is often the reality, uncoloured as they are by the marketers enthusiasm for the new, improved features.
Peer pressure
We are social animals, and while we do like being one up on the next person, being a long way up puts us outside the herd, and therefore vulnerable to all sorts of attack.
Risk aversion
Doing what you have always done is safe, you know it works, so there is no risk. A change of any type invites risk, which we are shaped by evolution to avoid. While risk aversion varies enormously between individuals, it takes a significant effort to change from the riskless to the riskier, even if the change is slight. In addition, often we simply do not see the alternatives. Consider your own behaviour in a supermarket in commonly purchased categories. There might be something new, perhaps better, but you simply do not see it in the process of pushing the trolley down the aisle trying to get out as quickly as possible.
Habit.
Doing simple things without thought frees up cognitive space to spend in more productive ways. We develop habits, repeated relatively mindless actions as the tool to enable this more productive use of our cognitive capacity. As with risk aversion, it is an outcome of evolutionary psychology that we leave as much capacity as possible free to react quickly and decisively in a tough situation.
Incumbents leverage entrenched distribution channels.
Combined with the four above, incumbents have a huge advantage in that they have access to distribution channels that newcomers must buy their way into somehow. While it is a standard barrier to entry, it costs money to overcome, which leaves less cash available for other activities designed to counter the four above. Again, consider supermarkets. In this country (Australia) two supermarket chains have around 70% of FMCG sales. For a newcomer, no matter how superior to existing alternatives they may be, they must ‘buy’ distribution. This leaves less money available for advertising, and other demand generating activities. It is also easier for incumbents to ‘channel-stuff’ in the lead up to a competitive launch. I have both used this tactic, and been on the receiving end many times, and it works.
If you want to win the war on mice, do not just build a better trap, figure out a way to stop the buggars breeding in numbers in the first place. That way, the solution to the problem is both sufficiently different to be noticed, and it overcomes the value of incumbency given to the existing trap makers.
Sep 8, 2021 | Change, Marketing, Strategy
There is a massive but unrecognised marketing and branding war going on right on front of our eyes, unseen by most, but substantially funded by taxpayers.
It is the Covid vaccine marketing war.
Which brand will you choose?
The development of these vaccines has happened at unprecedented speed, driven by the commercial opportunities delivered to the pharmaceutical industry’s doorstep by Covid.
There are a number of agreements entered into by the Federal Government for the supply of vaccines, as well as the evolving commitment to creating manufacturing capability for mRNA vaccines. This would be additional to the rDNA capability we already have as a result of the brilliant strategic and financial management of CSL over an extended period.
Astra Zeneca? Pfizer? Both of which are TGA approved, and in distribution. Moderna is now TGA approved, on order, and about to arrive on our shores.
Which do you choose?
By moving the availability goalposts around by press release, and completely muddying the waters around the facts in the attempt to cover the total lack of planning in 2020, the federal government has created a minefield of questions and mistrust. Into this uncertainty have stepped the pharmaceutical marketers, often ignored genuine expert scientists, the ‘Looney-fringe’ with a barrow to push (a space inhabited also by some politicians with a vague grasp on the truth) purveyors of snake-oil, ‘no vaccers’, and a horde of self-appointed experts sprouting nonsense that just further confuses.
Who really knows the facts amongst the triumphant press releases and soothing words acting as prophylactics against the truth of the failure of (most) politicians to listen to, understand and communicate scientific advice.
‘Modelling’ varying covid outcomes has become a game of who can give me the answer I want. The Doherty institute modelling is widely and selectively quoted, misquoted, and ignored, as is the modelling from the Kirby Institute, and various other scientific and research organisations.
On top of the existing AZ, Pfizer and about to arrive Moderna vaccines, you have a range of other brand contenders. A Johnson & Johnson rDNA vaccine is being widely used in the US, amongst a number of not yet approved in this country options, like the creatively named ‘Sputnik’ and the Chinese ‘Sinovac’ version.
Then you have the schism between the rDNA and mRNA vaccines. This is science way beyond my understanding, but to a layman it seems that the ‘old’ vaccines, typified by Astra Zeneca are rDNA, and the newer technology, Moderna and Pfizer are mRNA
Which will you choose?
What an expensive and truly monumental mess for us, and a profit pool of unprecedented depth for those Pharma companies smart enough to put themselves in a position to dip the snout.
If I was a betting man, I would be betting on Pfizer as the winning brand. They have used one of the oldest and most effective selling techniques with great skill: scarcity. It has ramped up unfulfilled demand and this has increased perceived value enormously. In addition, they are the leaders in the newest technology, and in this space, the first mover advantage is huge.
For those who may be interested, following is some of what I have learned sifting through the mounds of material relating to the brands of vaccination medications. Apologies in advance for the simplicity, and for any errors of fact.
mRNA vs rDNA. A layman’s explanation.
DNA is the double helix design we are all familiar with, that carry the genetic instructions for the development, growth, and reproduction of life. It is the long-term storage device that drives the development and evolution of a species.
RNA is in effect the messenger that converts the instructions contained in the DNA into the proteins that take action to produce the individual cells that make up the individual organism within a species.
To date, vaccines have all been based on delivering a mechanism that results in variations that give protection from specific conditions when the cells reproduce, by altering the instructions carried when the strands of DNA split to create new cells. These variations offer protection from the condition for which the vaccine was developed. It is a game of trial and error in the lab. This is typified by the existing influenza vaccines that have been around for years. Each year, the pharmaceutical companies predict the ‘next wave’ of mutation of existing strains of the flu and produce vaccines in anticipation of next winters flu. The technology is well understood, and the processes repeatable. Many members of ‘big Pharma’ produce their versions of DNA vaccines, including CSL in Australia.
RNA has offered the holy grail of being able to translate the instructions from DNA into instructions for the cells of an individual to produce proteins that protect from the targeted infection.
The Corona pandemic put a rocket under the scientific work being done on RNA for several decades, compressing the scientific development time from decades into a year. They are based on new genetic technology called ‘synthetic messenger RNA’, a manufactured version of the substance that directs protein production in our body cells. The idea has been around for several decades, based on the recognition of the role RNA (Ribonucleic Acid) plays in the transmission of genetic codes necessary for our body to produce proteins. Understanding the mechanics of RNA is like opening a recipe book for bespoke medications for individuals to address a wide range of conditions, but the technical hurdles have been significant to date.
The result is ‘new boy on the block’ mRNA vaccines represented so far by Pfizer and Moderna.
Pfizer is 150 years old, founded by an immigrant German chemist in New York in 1849. It produced and sold medications for then common ailments such as intestinal worms, until a ‘bet the company’ investment in using fermentation technology to mass produce penicillin in 1942. Since that time Pfizer has taken over a number of significant competitors and adjacent companies, becoming a huge pharma conglomerate, producing ‘hit’ wonder drugs such as Xanax and significantly by accident, Viagra. The investment in mRNA has continued for some time, as a response to the waning sales of their other drugs as the lapsing of patents enabled competition.
Moderna by contrast is a new company formed in 2010 to commercialise the science emerging from labs around compounds that supress the immune reaction to the injection of synthetic RNA into an individual’s body. For them, the emergence of Covid was a ‘gift’ that offered an injection of capital and marketability of ballistic proportions.
Where to from here?
mRNA offers the potential, indeed, probability of developing more potent and targeted vaccines almost in real time, and there is a huge research effort quietly being applied, by both incumbent pharmaceutical companies like Pfizer, J&J, and now Moderna, as well as newcomers. For example, Alphafold is an AI breakthrough of a Google subsidiary ‘Deep Mind’ that can predict the structure of proteins, an essential piece in the mRNA jigsaw . It is a combination of Neuro and Computer science. Again, this is way beyond my understanding, but those ‘in the know’ seem to be jubilant. It seems it is an advance, using similar processes to the AlphaGo program that stunned everyone by beating the best Go player in the world. Go is a game of Chinese origin many times more complex than chess, and it had been assumed that algorithms could not replicate the billions of options open in the game. AlphaGo learns as it goes, just as humans do, and that learning can be applied to the development of the immuno-proteins that make up mRNA vaccines.
Then, we have the promise of geometrically increasing data analytical capacity with the development of quantum computing.
A couple of further places I would like to go.
- We stop talking about ‘70%’ vaccination rates as the point at which we might open up. Let’s be honest, and acknowledge that it is 70% of the ‘eligible’ population, which excludes those under 18, coincidentally the voting age. The reality is that it is more like 50%, and no epidemiologist I have heard speak believes that number is even in the ballpark of a reasonable place to consider opening safely.
- Let’s have an intelligent conversation about what happens when ‘son of Delta’ arrives, as it inevitably will, and let’s not be caught again without pants around our ankles, bending over trying to tie our shoelaces so we can run from it.
- Let’s also acknowledge that 50% vaccination rate, while grossly inadequate, is way better than much of the world’s population, whose governments do not have the funds to buy the jabs, or their ‘leaders’ have their resources tied in hidden accounts in Switzerland. I wonder where Son of Delta might emerge? Yes, probably amongst those unvaccinated populations in the third world.
Hopefully, if you have read this far, it is a bit clearer. It is to me. What started out as a simple post on the observation of an essentially publicly funded branding war became a monster, as I tried to answer for myself the ever present marketing question: what has to be true to give us this outcome?
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