By Mark Overbye
In the olden days of business, a manufacturer drove the product cycle, internally deciding how products got developed and presented in a controlled manner. Developed in the 1960’s, the "4 P's" representing Product, Price, Place, Promotion comprised a business strategy that helped define success in that bygone era. It’s a supplier-sided mindset that defines how products get made, priced and promoted.
In today’s world, which is all about the customer experience, if you’re doing it right, the only P's that matter are Paint and Price. Paint refers to the appeal of an item and Price references a perceived value, both determined by the buyer.
Product is still king as it was in the old model. But instead of concentrating on how to make it, then selling its virtues, today’s product development must evolve to how it solves customers’ problems first. It’s a total 180-degree view change from a manufacturing perspective of making, then selling, to solving a problem, then supplying. It’s a mindset shift, when supported by thoughtful marketing that makes all the difference.
Regarding price, arriving at a selling price is frequently the sum total of all costs, including such line items as cost of goods, sales, marketing, warranty, G&A plus a reasonable margin.
In today’s market that calculation still works, but in some cases competitive segments require price adjustments to be viable. Costco is a $153 billion behemoth with a gross margin of just 11.4%. Accordingly to Gurufocus.com, 81% of Costco’s competitors have a higher margin.
Medtronic, a $31 billion supplier of innovative medical devices has a gross margin of 69%. This is 77% higher than Medtronic’s competitors according to Gurufocus.com. How to determine your pricing/ margin strategy? Success with a pricing/ margin strategy is a function of how well a particular product or service uniquely satisfies a need. Through that lens the number of competitors is a non factor.
Unless there’s a strong reason compelling limited distribution, the old model of “exclusive market areas” is over. Ralph Lauren to use one example is a popular clothing brand sold globally across many distribution channels. Check out these stats on how “selective” their distribution strategy is:
In addition to selling on line and through thousands of retailers like Macy’s, the company has 493 Ralph Lauren directly operated stores: 144 Ralph Lauren stores, 77 Club Monaco stores and 272 Polo factory stores. The company also operates 583 concession shop locations. In addition to company-operated locations, international licensing partners operate 93 Ralph Lauren stores and 42 dedicated shops, as well as 133 Club Monaco stores and shops. There doesn’t appear to be a selective distribution plan here; they’re everywhere human beings shop.
Like Ralph Lauren, Starbuck's distribution plan may be defined as “be everywhere." Perhaps their key distribution considerations are, “Where are people and how do we make it easy for them to buy from us?” In a recent walk in downtown Chicago I encountered a Starbucks in a hotel lobby, then three more locations within the next 10 minutes. Obviously, it’s a safe bet to contemplate making your products as widely available as possible for your new-age distribution strategy.
As for promotion, consider this. I have a friend who owns a boat company with a promotional budget of $0. His product is excellent, he relies solely on word of mouth advertising and his production consistently sells out. His product is his branding with messaging formed in the wild, purely defined by what his customers say to each other. Quite a contrast to the old model of multi media campaigns and controlled messaging.
If you want to win, you’ve got to replace the old model of developing a product, defining its virtues then advertising it thorough traditional channels with today’s more effective process of positioning solutions in the path of customers, ranging from traditional media to social media to experiential. Such a broad thinking approach considers every possible channel to demonstrate how a product wins at meeting a need.
The 2 P approach
How many times have you seen something and immediately said, “I want that?" It could be a Lamborghini or a tube of tooth paste. In our daily life we pick from an array of choices then justify an acceptable price. It’s over in seconds. When we consider that all decision making is intuitive, backed by logic as a secondary confirmation process, our go-to-market business strategies should mimic human behaviors.
Paint is presenting your product in a way that immediately stirs an emotion and connects with a buyer in solving a problem. It’s a marketing euphemism, understanding that consumers make instant decisions, so the presentation must be right. Paint refers to how a Ferrari is universally appealing, its presentation being a composition of beautiful styling, brilliant marketing touch points and a conjuring of feelings that make you want it immediately upon seeing one.
In short, if your Paint does not evoke some form of action, whether opinion guiding or purchase, rethink it. As a side note, most data driven campaigns lacking emotion will fall short of their desired impact. Emotion and feeling should be your measure since that is to what humans respond.
As for the second P, Price, it’s simply an implied value, and is always a moving target, defined by the buyer. If the Paint component is done right, commanding a higher price is easier. If the Paint component does not create a message of how uniquely the product or service satisfies a need, then the price must be lower.
Warren Buffet is spot on when he says, “Price is what you pay, value is what you get." If you zero in on your value proposition instead of wrestling with pricing, you’ll quickly grasp whether you’re really satisfying your customer’s problems while also feeding your business the margin it deserves to serve your customers faithfully.
On a personal level, we’ve recently had lots of internal discussion about the pricing strategy for a new boat brand launch. The pricing considerations are important because we’re taking about water sports toys that retail for over $100,000. But the consensus is clea; if we concentrate on the consumer experience, working to create a, “I want that” feeling, the pricing pressure is reduced.
Further, a higher margin creates an opportunity for better quality content, it bolsters premium product support and elevates the passion in touch points thus reinforcing the brand experience.
Wayne Dyer is totally right with the quote, “When you change the way you see things, the things you look at change."
Maybe it’s time to reconsider your go-to-market campaigns to see the benefits of the new 2 P strategy.
Mark Overbye is the CEO of Anthem Marine, as well as the chairman of USA Waterski and Wake Sports Foundation. He is also the founder of Montara Boats, Gekko Sports and co-founder of Moomba.