Marketers Love Parents With Daughters

From the Wall Street Journal interview with CEO of Six Flags:

studies show that young girls influence their parents' spending habits more than young boys do

I am one data point for this study.

What Worked For Coke Will Not Work For Dr.Pepper

A product without the messaging does not have a market. But the two are not different and interchangeable. You can't lift a successful messaging that worked for one product and apply to another. For messaging to be successful it has to start at product inception and should evolve with it.

The New York Times talks about Republicans applying the messaging that worked for Bush reelection campaign to McCain 09 campaign. The two products are basically different. A former strategist for McCain perfectly described the move to employ the previous successful team and messaging, in this way:

“It could be the Coca-Cola strategy of marketing that they’re trying to apply to Dr Pepper,”

What happened to all the speculators driving up oil prices?

Speculators were an easy target for the Congress that wanted to show the people that they are doing something about the oil prices.  A simple explanation of demand and supply was not enough, it was too complex for most to comprehend.

Every story needs a villain, a damsel in distress and a knight in shining armor.  Arguably, the speculator are the real knights but they are not up for reelection nor are they good at pitching their side. So the lawmakers took the opportunity to pitch the plausible story of oil speculators driving up prices.

But as the demand fell due to consumers adjusting their behavior, the oil prices fell back 13% from its highs.  The Nightly Business Report's Suzanne Pratt said this nicely:

PRATT: So what happened to all the speculators that were supposedly driving up prices and ignoring fundamentals? Today, futures regulators said an inter-agency task force has found that supply-demand fundamentals are the best explanation for the recent run-up in oil prices, not excessive speculation, as some lawmakers believe. Many economists and analysts agree that fundamentals, mostly strong demand from India and China, have been the primary price driver, as well as stagnant supplies. But those fundamentals may be changing. Economist Carey Leahy says investors are waking up to the idea that slowing U.S. growth and other global factors could result in a big drop in demand.

Of course there is enough room in this for lawmakers to tell a different story, the mere mention of curbing speculation was enough to slay the dragon.

Buy, Beg, Borrow, Today's Wall Street Journal

If you do not subscribe to the WSJ, the print or online version, head over to the newstand near you and buy today's paper.

The cost of $1-$1.50 you pay is a bargain considering the value you will get from the articles on the credit criss, Bernanke's warning, why we use measuring cups and not kitchen scales, the European recession.

Dynamic Pricing Under Scarcity

I came across an online made to order T-Shirt shop, which is a very legitimate and decent site despite its name  200nipples.com. It is different from any other made to order shop, like Cafepress.com.

1. This is not a site for you and I to sell T-shirts
2. They make custom print on T-shirts, graphics done by designers they hire on 10% commission
3. They sell only 1 design at a time 
4. There are only 100 t-shirts to sell for each design and then they say they scrap the design
5. The T-shirts are numbered 1-100
6. The Price?  It is same as the number on the T-shirt. You pay $1 for #1 and #100 for $100

From the 200nipples blog:

What's with "200 Nipples?"

That's how many nipples we assume will be covered by any single run of our high-quality shirts. (We'll have the third-nippled buyer in there occasionally, but we didn't want to count on it when naming the company; this is serious business, after all.)

It is a new model of dynamic pricing under scarcity (however artificial) and betting on customers high willingness to pay based on exclusivity.

I think this is a great experiment, I like the entrepreneurs showing creativity  but ...

As a viable business model I doubt its viability and scalability. Limiting to one design at a time seems unnecessary. It is easy to change however, but may cannibalize the sales as those not willing to buy a T-shirt for $40 or more may choose one that is available for less. While the first few designs and some of them will sell out for a total revenue of $5050 from a design, it is questionable that this would hold for the majority. There isn't a large customer base that would want exclusivity or would want to pay $30-$100 for exclusivity. This is a T-shirt not limited edition collectors item. The macroeconomic conditions are also not conducive to such a pricing model that requires high discretionary income (or even abundance of bubble days).

I see the latest version that shows RIAA people going to heaven sold just  42 T-shirts. The number has not changes since Sunday night. True they have not done any marketing, but is not going to be an outlier.

I think those entrepreneurs are not after making it big with this T-shirt shop, they are probably looking for marketing credentials or more, just like more bloggers who spend hours of their unpaid time writing blogs that never get read.

Good luck Wade and Shandra.

Product Placment in News Media

Suppose you read this in the Wall Street Journal or any other newspaper,
"Hank Paulson, stopped to take a sip of the ice cold Coke and replaced it under his lectern as he addressed the reporters on the Freddie and Fannie crisis"

As people use time-shifting and Ad skipping methods like TiVo to watch TV, the advertisers, entertainment content producers and distributors are resorting to product placement as a revenue source. The Amercan Idol judges proudly displayed over-sized Coke cups  during the show.  But should this extend to news stories?

The print version of WSJ had a box story titled "Lunchanomics". You cannot find this in its online version. The primitive search function of WSJ.com does not help.  The story posted two side by side pictures of turkey sandwich lunchs, one home packed and the other deli bought and compared the prices.

Both featured, a bottle of coke and a bag of Lays chips. This is product placement slowly getting into the news stories.  I wonder why they left out putting a brand name on the meat, Sara Lee or Kraft would have perfectly fit here.  I also wonder if the sponsorship did not include online media and hence the photo and the story do not show up on the website.

As I type this on my Apple MacBook Pro, and sip the freshly brewed Floger's coffee from a large red Martha Stewart ceramic cup,   I wonder if this fundamentally changes what is an Ad inventory.

On a serious note, this does require a new Ad selling process for the media if product placement has to become a carefully executed operation rather than a set of isolated opportunities.

You have the option of not standing in line

When I was walking by the Apple Store in Emeryville on the Saturday after the iPhone 3G release, I saw a line about 100 deep. Everyone in the line seemed happy "just to be there". It was surprising to me because, iPhone 3G is not that big a change from the version released an year ago and it was the day after the release.

The people who were standing most probably wanted to and liked standing in line. Quite possibly they stood in line for every Apple product release including Leopard. These are the people who "want to be inspired". After years of experiencing average products, these people are carried away by Apple's design and simplicity. Despite the fact that neither the iPhone 3G nor an Operating system will ever be in short supply, they choose to stand in line.



The problem with wanting to be inspired is that one has to give up the economic decision making or worse, rationalize their actions. A classmate of mine who had bought the original iPhone before the prics dropped, declared in a class on pricing discussion, " I am not at unhappy the prices dropped, I would not mind if they had announced the $100 store credit, because I got to use my pone for 3 months and it was totally worth it". Again there is a choice and if indeed a person want to put an economic value of overpaying for the pride and pleasure of using it before most, then they can.



Seth Godin blogged about the iPhone 3G lines. He said Apple should treat its different customers differently and not make all stand in line. I think the who people who stand in line for Apple release would do that in any case. These are the people who want to be inspired.



On related note, there is another class of people who have been waiting to be inspired and they found their inspiration in Obama. The problem with choosing based on inspiration and not on economical decision making process is that we choose to ignore flaws, however big and choose to be downward counterfactual. We take it to the extreme and start attacking anyone who raises a counter-point.



At the end of the day, choosing a product or president is just that, a choice. You can't blame others for "making you stand in line".

GM Sowed Its Own Seeds Of Failure

(draft version, will be edited continuously)



On Wednesday July 2nd 2008 GM shares hit the levels seen only in the 1950s. Almost six decades of value creation wiped out, serving as a counterexample for the buy and hold thesis of investment. GM is losing money on every vehicle it makes and with current high gas prices there are no takers for its gas guzzlng SUVs. It is an easy answer to blame it a on the oil price shock. Oil price shock is not the root cause of the problem, it only hastened GM's problems.



To look at the root cause we need to go all the way back to start of its growth phase, the 1950s, (the levels to which GM's stock has now fallen). By then GM had successfully eliminated the cheap substitution to its automobiles, Electric Trolleys, and started selling more autombiles to Americans. Historian Stephen Goddard describes in his book, Getting There: The Epic Struggle Between Road and Rail in American Century, how GM teamed up with Firestone the tire maker and, ironically, the Oil companies (Philips Petroleum and Standard Oil), systematically elimiated trolleys in towns across the USA.



Goddard writes,

Trolleys considered artifacts today pervaded all aspects of american life at the turn of the century.

...

There were trolley cars for commuting, trolley cars to carry the mail and trolley car to hire for parties.

This posed two kinds of problems to GM, Firestone and the Oil companies. First they acted as the substitution for automobiles, a cheap and comfortable one indeed. Second the trolleys ran on tracks and the tracks in the middle of the road did not serve well for driving automobiles. Goddard describes how the foursome formed a shell company to systematically buy the local trolley franchises, just to shut them down, blaming it on incompetency.



GM's growth took off. It was a successful strategy, illegal but successful atleast over the next 50 years. But the problem is the strategy was based on the assumption that Oil will remain cheap and ignored the secondary costs like pollution. In any other case, a strategy that delivers 50 years of growth would be considered extremely effective. But the strategy is flawed on two fronts. First, the macroeconomic factors take longer than 50 years, GM's strategy failed to look ahead that long. Second, and arguably the core reason, GM's Marketing Myopia.





Ted Levitt wrote in his seminal work, how companies sow their own seeds failure by narrowly defining their strategy. For example, Kodak look at itself in the business of photo films and missed on the digital photography growth. Instead Kodak should have looked at itself in the business of "memory capture". Then it would not have mattered whether it was selling films or digital cameras.



GM's Marketing Myopia is obvious in the hinsight. While it executed the strategy that correctly identified trolleys as its "true competition", it failed to define correctly the business GM is in. GM looked at itself in the business of selling automobiles and not in the transportation business. GM continued to commit to a strategy that made bigger, faster, powerful and luxurious automobiles, forgetting to look at the "purpose these automobiles served".



People did not want muscle cars, they wanted thrill. People did not want automobiles, they wanted a safe, easy and comfortable way to go to places. People did not want SUVs, they wanted to make a statement and chose big SUVs as the medium.



The other big US car maker, Ford, isn't doing better than GM. Ford suffers from the same two factors that GM suffers from. When Ford started, it was not suffering from Marketing Myopia. Henry Ford purportedly said, "if I listened to people I would have made faster horses". Whether those were the exact words or not, it was a proof point that he realized that what people really wanted was a way to travel from Point-A to Point-B.



As we stand now, at the beginning of the third quarter of 2008, facing increasing Oil prices and the effects on the environment, GM is facing what appears to be a certain failure. It is not easy now for GM to lose its myopia. It has committed all its resources towards automobiles and cannot rally recast itself to make the new transportation means. GM is doing more of the same, with its plan to make more mini-cars than SUVs. Again, the strategy is myopic, reactive to Oil price crisis than solving the real needs of people.



If GM survives for another fifty years, it will be because it recast itself to be in "the business of connecting people to their economic, physical and emotional needs" and not because it made smaller fuel-efficient cars.



In fifty years, we may not even travel from point A to point B, but this topic requires its own article.

Data Wags The Long Tail Theory

Harvard Business School Professor looks at the data and finds that  The Long Tail theory does not hold good.  Read the article before HBR yanks the link.

Lee Gomes of WSJ has this to say on the Long Tail theory.

"The Long Tail" seems to have followed the template of many Wired articles: take a partly true, modestly interesting, tech-friendly idea and puff it up to Second Coming proportions.

Stick to the Narratives

Yet another example of the use of narratives in marketing, "Gas Tax Holiday". The hard numbers take time to explain and most people do not have the patience to understand. By repeating the story and by creating a strong, albeit non-existent, relation to the prices we pay at the pump, the two presidential candidates managed to grab attention.

The problem is that the Government needs to fund the infrastructure through other means and taxing oil companies, whose margin is 25 cent from a $3.50 retail price, will only result in them passing on this tax to the customers. Multiple other reasons like a weakening dollar, supply disruptions, or increased demand may push the gas price much more than current levels.

The reality is this will save utmost $30 for more than 95% of the people. But by framing it as "Holiday" and as a plan to "provide relief to people", by funding it by, "taxing the oil companies", the numbers get lost in the narratives.

It is surprising that narratives never fail.

Web2.0 does not obviate Strategy

I attended a two day class on Web2.0 marketing taught by Andreas Weigand. There is nothing new that came about. I do see generalizations of certain concepts, like free is the next business model. One important impact of Web2.0 that gets lost in the hyperboles is the ease, speed and scale of the customer conversations. Customers were always talking to each other, tinkering with the product, and exchanging experiences and their product adaptations. Now all these happens at a much faster rate and across a large audience.

In my conversation with Professor Rashi Glazer, he described Web2.0 world as Marketing Communication, he added "today your customers are having conversations about your product and your decision is whether you want to be part of it or ignore it". In other words, Web2.0 is not a substitution for bad strategy or lack of one, but a tool that companies cannot avoid but use to communicate with their customers. It is an effective marketing communication tool. Having a blog, user participation, social network, a tag cloud etc does not help your firm if it lacks strategy. If the firm ignores these tools in its marketing mix, it stands to be excluded from the conversation.

When a firm decides to enter a market it still has the fundamental questions to answer:

1. Who are the customers and how do they make purchasing decisions?
2. How is the market segmented?
3. What are the holes that we can fill? Why haven't someone else filled it?
4. Who are the current players in the market?
5. What is their strategy? Will they accommodate us or fight on price?
6. What should be our firm's strategy? Go for Profit or Market share?
7. Do we want to stay small and capture one segment or grow to fill other niches?
8. How defensible is our strategy? What is unique about our offering or the activities we perform to deliver these?

Web2.0 is part of the marketing mix tactics, letting you choose your price, channels and communication. It does not obviate strategy!

Branding and Pricing effects on Consumer Behavior

I regret not doing the Consumer Behavior course this semester. I see a whole bunch of experiments being conducted by my classmates for their final projects. I served as a willing subject for many such experiments, from tasting organic vs. non-organic vegetables and wines to deciding whether or not I will bet on an outcome with same expected payout but different entry costs. There was one study that promised a gift card raffle for participants deciding on Tulley's pricing market entry strategy, now I wonder if the study was really about consumer behavior with respect to raffles.

The New York Times talks about recession diets, people cutting down on brand name goods for cheaper alternatives.

Holly Levitsky, a 56-year-old supermarket cashier in Cleveland, buys a brand of steak sauce called Briargate for 85 cents and surreptitiously pours it into an A1 steak sauce bottle she keeps at home.

“My husband can’t even tell the difference,” she said.

The packaging and the marketing has obviously trained her husband to associate the taste and the experience to the brand name A1 even if there is no clear link (as Ms. Levitsky's experiment demonstrates).

On a more scientific level, Business Week reports a study done by Stanford and CalTech researchers on the same consumer behavior on wine pricing.

"The marketing industry has done a good job convincing people about their free will and that they are making logical, well-thought-out decisions about the things that they buy," Linn said. "Studies like this suggest that, in fact, there are lots of things that influence our responses to marketing and our choices of products that are completely irrational that we might not be aware of."

Is Ruby Tuesday solving the right problem?

As the slowing economy eats into restaurant sales, Ruby Tuesday is trying to improve sales with a $50 million investment to spruce up stores. The Wall Street Journal reports:

To boost sales and set the company apart from its casual-dining competitors, Ruby Tuesday is spending at least $50 million on remodeling, with 668 of its 721 company-owned locations getting a new look. It is replacing its decor of Tiffany lamps and roller skates with custom artwork and leatherlike upholstered furniture. Servers are wearing black pants instead of jeans.

The company has changed some of its food suppliers to trim costs. It saved $800,000 on broccoli by using a different supplier, and an additional $500,000 by switching mashed-potato suppliers. Ruby Tuesday is installing a new frying-oil filtration system to reduce the amount of cooking oil the company uses, a move Mr. Beall estimates will save $2 million a year.

Even if we work with their premise that improving the ambiance will steer customers to their restaurants, the numbers do not work well. Suppose, they capitalized the $50 million and depreciated it over 10 years and they are able to keep up with the $3.3 million cost savings. Their 2007 10-K says their current free cash flow is $59 million and one of their goal is to reach a 3% year over year same restaurant sales growth. If we assume that they achieve this and this increase flows to a 3% increase in free cash flow. Let us assume their discount rate (WACC) is 12% and discount the increase in cash flow over the 10 year period. This investment turns out to be a NPV negative one.

Why is Ruby Tuesday and all other places seeing slowing sales? As the restaurants proliferated at a rate faster than population growth, they generated sales by selling more per customer. As people cut their spending, eating out is one of the first to go. Even though the economic slowdown may be short lived the increasing oil prices and grain prices are here to stay. This calls into question their profit growth.

More important than these finance issues, there is a bigger positioning issue here. The customers are not walking away from Ruby Tuesday to their competitors. Hidden in the data is that customers are buying more prepared meals from supermarkets. The market demographics is also shifting with more women staying at home. This indicates that the value proposition to these customers is convenience and not ambiance. Ruby Tuesday is seeing itself in the business of providing a better dining environment than their competitors, the casual dining places.

An alternative to restaurant redesign project would be to aggressively enter prepared meal segment and reach their customers through supermarkets. This requires Ruby Tuesday to see itself in the food service or even convenience business and not in the restaurant business.

Since they are committed to the $50 million spending, I expect their stock to fall further from its current level of $7.35.

Narratives in Marketing

What is narrative in marketing?
According to David Aaker, retired marketing professor from Haas School of Business and now a partner at Prophet, this can be best answered by showing a perfect example of masters of narratives, The Republican Party. Narrative is about having a coherent theme in every communication, repeating the same message over and over. Narrative starts with correctly framing the message and choosing words that reinforce this framing. Take the case of some of the republican causes:

1. Death Tax, Not estate tax!
2. Pro Life
   
3. Tax Relief
   

David Aaker, spent an engaging hour with a small group of students. His favorite answer for a question is, "you know I have written a book on that, have you read it". Which is true, he has written several books which are arguably seminal works on Branding and Marketing strategy.

Changing Consumer Behavior: Heinz in India

Indians are used to ketchup that flows easily from the bottle. No tapping on the sides or the bottom of the bottle. The well known Indian ketchup brand is Maggi (owned by Nestle). Its viscosity is very low and it almost pours out. Heinz ketchup is much thicker viscous than anything Indians are used to. Heinz could have changed their product to match the expectations, instead they decided to train the consumer, change their behavior to accept Heinz for what it is. Instead of masking the difference they showcase it, trying to get the consumer accept it. See the following Ads. (You may want to lower the volume)




The punch line is, "takes a while to come out".

I wonder how they decided that reducing product variability in different markets is more important than meeting the consumer taste.

Attending a Course on Web2.0 Marketing

For two Sundays in April, (one of which is tomorrow) I will be attending a Web2.0 Marketing class at Haas School of Business, UC Berkeley. This course is taught by Andreas S. Wegend, who had worked for Amazon and as a Assistant Professor at NYU Stern School of Business.

I hope to learn more about the analytics and do some nice cases.

I will write more on these topics in the coming days.