I was once working a conference and had a chance to have lunch with Tom Kelley, the General Manager of IDEO, the nation’s premier design firm that developed the first Palm device, Apple mouse and hundreds of leading consumer products.  Tom was working with Disneyland at the time I met him, and he told me that his engagement centered on improving customer experiences because Disney had concluded that their customers were already spending all they could afford in the park.  Now that is brand power!

Kelley and his cohorts at IDEO are leaders within the field of ethnography, which could also be described as reverse engineering a product based on latent needs. Every company should have a methodology for probing deeply to gain insight on wants, needs and preferences. As Tom’s brother David puts it, “Fish don’t know when they are wet.”

 IDEO’s “Deep Dive” methodology has five steps:

On one project, IDEO researchers observed kids using toothbrushes, and came to realize that young children held their brushes in a fist, because their hands were too small to grasp the toothbrushes that were made for them.  They then created a fatter design for Oral B to meet this consumer need, one that wouldn’t have been communicated through any survey or focus group.

What Kelley refers to as “design thinking” has deep implications for marketers who are looking for features and benefits that create differentiation for their brand.  Even in smaller companies with limited budgets, scientific approaches can be applied to understanding customer’s latent needs.

Marketers should invest heavily in dissecting how clients use products and services and should be hungry for feedback. One excellent tool for gathering customer feedback is Customer Advisory Boards.

One way to convene a Customer Advisory Board is to have a panel at an offsite meeting. Usually a facilitator is used to ask probing questions of the panel. Such panels seem to generate some type of synergistic energy, where the ideas that are developed are greater than those that can be extracted from one to one conversation. Customer Advisory Boards are also self-fulfilling; by taking part in such conversations, customers are more likely to be early adopters of a program or product.

Part 2 of a two-part post on pricing strategy

Our last post spoke to the difficulty of sustaining competitive advantage as the low cost leader, a temptation for many in this sluggish economy.   Globalization has opened the market to big box retailers and up starts that can create a virtual offer overnight. Discounting is rampant in almost every industry, and the sluggish economy has reinforced  the  trend towards consumer thrift and a “treasuring hunting” mentality.

Consumers are trading down on some goods so that they can trade up on the luxury goods that they desire. Go into any suburban Walmart, and you will see a representation of Mercedes Benz in the parking lot. Upon boarding a Southwest Airlines flight, the business man in the next seat is apt to be sporting a Rolex watch.  The consumer (as well as the professional buyer) will vary their purchase triggers (quality, service and price), based on the use of the product they are acquiring. Customers find middle priced offers confusing because they are not sure if the product or service stands for quality and service (which they perceive as higher priced) or for value.

Now that the bar has been lowered on many goods and services, it will be hard to raise it again. Consider the plight of U.S restaurant chains.  Earlier this year, Bennigan’s and Steak and Ale skipped Chapter 7 and went straight to liquidation, (because their business was so bad). At around that time, operating margins by  segment were as follows:

• White Table Cloth (Ruth Chris 6%, Morton’s 4%)
• Casual Specialty (Cheesecake Factory 6%, Olive Garden/Red Lobster 9%)
• Casual (Bennigans, Steak and Ale–Chapter 7, Ruby Tuesday’s 5%)
• Fast Casual (Panera 9%, Corner Bakery/Chili’s 6%)
• Fast (McDonald’s 27%,  KFC/Taco Bell/Pizza Hut 12%)

White table cloth restaurants, operating on high margins were able to introduce an occasional special and remain solvent during the downturn.  Themed restaurants such as Olive Garden and Cheesecake Factory eked out a small profit. McDonald’s with its massive scale and zeal for consistency was able to capitalize on its dollar menu and build market share (McDonald’s and Walmart were the only Dow components to increase in value in 2008). The companies in the middle such as TGIF, and Ruby Tuesday struggle because they lack any differentiation and only create marginal economies of scale.

If restaurants are not proof positive that the middle had eroded, consider the department store industry. While Nordstrom’s and Walmart continue to thrive, Montgomery Ward’s and Mervyn’s shuttered their stores. The merger of Sears and Kmart was like two guys who didn’t know how to swim, grabbing for each other in the deep end.  Only differentiated Target is able to price in the middle (Target is priced 5-10% higher than Walmart).

Clearly, the highly differentiated brand that commands higher price points supports higher margins and less risk.  Many are asking, how can a company preserve premium pricing in this economy? Any company can discount, but to cut prices on more lucrative goods only commoditizes a brand.

One approach is to create a separate offering. Ultra luxury brand Coach has developed the “Poppy” line of handbags sold at a lower price point. By marketing a secondary line, Coach can maintain its leadership as a premium brand, while providing the consumer a lower price alternative.  Others are creating Internet offers which different products, case packs and terms (cash).

Marketers must make short term profit decisions within the context of long term brand positioning.  Customers equate higher prices to higher quality and lower prices to…well, lower quality.  A strategic view of pricing dictates that the value of the brand be preserved so that companies can take advantage of the real profit, to be made during the upturn.  While one may feel compelled to cut prices to fend off competition, consider the attributes of the customer you are acquiring…..a price buyer who does not value brands or quality. If you are unable to play on any field but price, it is an indication that more investment is required in creating a differentiated offer and unique bundle of services. 

Part 1 of a two-part post

One of my fondest memories of the 90’s was my weekly trek to the local independent book store to sip espresso while previewing the latest business books (I had no life back then either).  With the emergence of Internet booksellers, independent book stores are on the verge of extinction.   

The book business is braced for another watershed moment.  Last week, Walmart announced their intent to be the low cost leader for books online, and sent the first salvo with the announcement of a cut on the top 10 hardcover titles to the bare bones price of $10.  Not to be outdone, Amazon matched the price within hours.  Later that day, Walmart cut the price again to $9, only to be matched by Amazon, as an entire industry gasped, “holy commoditization”!

Walmart is not only sending a shot over the bow for the book business, but for the future of Internet retailing. Amazon, already positioning the Kindle as the next killer app, will need to redefine how books are sold and downloaded to maintain competitive advantage.

Welcome to the slippery slope of competing on price.  Walmart is the “category killer” on everything from baby formula to tires. Walmart and Amazon are built from the ground up to support the business discipline of low cost leadership. One salesman tells of a time he called on a Vice President of Purchasing at WalMart who had lawn chairs set up as his office furniture.  A scarcity mindset is part of WalMart’s DNA and its daily decision making.

Walmart can afford to cut prices, every time a competitor enters the fray.  The annoying Walmart smiley face has become a caricature of low pricing and a message that Walmart will not be undersold. The problem with being a low cost leader is that there is a low cost of entry as upstarts attempt to buy business with lower margins.  Lower margin businesses also have more risk, as one or two bad quarters can put the low cost operator out of business.

 The only way that low cost leadership can be sustained is through scale, or technological advantage (often a function of scale).  When scale can be achieved, the bottom end can make money on purchasing power and operating efficiencies. Only a few companies in any space can create enough volume to remain competitive.  The complex combination of attributes that combine into a unique selling proposition must continuously be shaped and prodded to create more value.

Part II of this post will focus more on how to price in the competitive marketplace.

We have all fallen victim to bad service in auto repair shops, retail stores, and restaurants. And then there are doctor’s offices, the land of inaccurate billing, mis-information, apathy and indifference. We consumers may end up with the last laugh, even before the particulars of healthcare reform unfold.

On the website, healthgrade.com, consumers have the opportunity to rate their physicians and the service provided by their offices.  As Zagat is for restaurants, and TripAdvisor to Travel, Yelp is becoming a go to destination for ratings on everything from bicycle shops to CPA’s.

It is not that I am fascinated by Yelp as much as the concept of Yelp. Businesses from construction contractors to service businesses should be both excited and petrified of the repercussions of being rated online. Customer satisfaction ratings on the Internet can be the impetus to competitive advantage or become an onerous wave of customer discontent that is difficult to reverse.

Feedback directly collected by the provider can be a source for innovation, and marketing fodder.  It is critical that every company be proactive about formally gathering customer feedback. If you fail to control the message about your company on the Internet, someone else will control it for you. Organizations should gather customer feedback regularly in order to:

- Gauge the quality of their service level, in the eyes of the customer

- Understand how customers perceive them relative to competitors

- Monitor changes in the marketplace that may lead to continuous improvement/innovation

- Understand customers’ changing wants and needs

 Companies are well advised to assign a marketing professional (internal or outsourced) to monitor postings on the Internet, from both institutional sources and customers. To preserve the optimum positioning, they should actively combat irresponsible or inaccurate postings.  

 As blogs and various Internet sources replace traditional media, perceptions about a product and services can be formed in a matter of hours. It is incumbent upon the marketer to seek positive relationships with customers and shape their online messaging to their strategic advantage.