Anyone who majored or has worked in marketing can tell you marketing is largely about successfully defining and managing Four P’s: product, price, promotion, and place.
More detailed definitions of the Four P’s can easily be found on the Internet or in any marketing textbook. HBS uses the same framework. The difference: instead of talking about definitions and theories, HBs students learn through applying the Four P’s to a large number of case studies. In the following sections, I will discuss the case insights that have been most useful in helping me think about each of the Four P’s.
In the United States, some brands are so successfully marketed that their name has become the generic name of a whole category. People will ask “may I have a Kleenex” instead of “may I have a tissue,” and people will say “this is your Xerox copy” instead of “this is your photocopy.” Other examples are Band-Aid, Jello, Q-tips, Velcro, and FedEx. In fact, I still do not know the real category name for Velcro.
While this kind of achievement (officially termed becoming a “genericized trademark”) can pose significant legal issues in trademark protection, from the purely marketing product-launch perspective, these companies are often discussed at HBS as examples of great success. Analyzing the key success factors of these examples, it seems that while brands that become household words provide good products, they are not necessarily the best in their category. It is unclear and unproven that Kleenex is better than Scott, or that Xerox is better than Canon.
However, while they may or may not be the best, these successful brands were the first product in their category. That is, they were not necessarily the very first available in their market, but they were first to establish themselves in buyers’ minds and are thus perceived as being first. In marketing, perception is often more important than reality. For example, the very first mainframe computer sold was Remington Rand but IBM became the first in the popular mind because of its massive marketing.
Being first is important because, psychologically, some people perceive the first as superior and the rest as copycats. Also, people have inertia as change usually comes with a switching cost. The time, resources, and risk of trying a new product may deter people from switching unless it offers a very compelling advantage.
The most direct way to achieve first-in-category status, of course, is to be truly the first to reach the market. For example, Xerox was indeed the first to introduce office photocopying in the 1960s.
The second way is to usurp the position through marketing. An example is IBM’s victory over Remington Rand, as mentioned earlier. It must be noted that this is only possible if the market has not “made up its mind” about the category or the company. For example, once the market has made up its mind that “Kleenex” is first, it will be very difficult, if at all possible, for any company to try to take that position away from Kleenex, even with billions of marketing dollars. With the strong perception that Xerox makes copying machines, Xerox wasted decades and billions of marketing dollars and still failed to have any share in the computer market.
The third way is to try to make some variation so the category can be perceived as a new category. For example, Charles Schwab in the United states was not marketed as a new and better player in the brokerage business. It made its success by marketing itself as the first “discount” brokerage firm. The key is to identify the competitive advantage versus leading players in an established category and then try to create a new category based on this advantage. Of course, this is not always possible and is easier said than done—but it is very powerful if you can manage it.
If business is like war, then price must be one of the most common, most critical, and most challenging battlefields. It is common because it is much easier to reduce price and get immediate results than to change product features, advertising, or distribution. This is true both offensively and defensively. It is critical because the stakes are high. Companies and even industries can be destroyed by price wars. An example everyone knows is the 1992 U.S. airline price war. As a result of aggressive price cuts by all major competitors, the combined losses of the industry for that year exceeded the total profits of the industry since its very beginning. Price wars are challenging because even the winner often suffers significant losses.
For these reasons, I have always paid extra attention to case discussions related to price wars. Here are the cases I have found most fascinating and valuable. They illustrate four key strategies when faced with prospects of a price war: preemption, segmentation, disguise, and retreat.
NutraSweet was a patented sweetener used in Diet Pepsi and Diet Coca-Cola. When the patent was about to expire a number of years ago, NutraSweet faced a significant threat of price pressure and possibly price war from generic sweeteners.
What would you do if you were NutraSweet? Slash price to drive competitors out of business? Advertise like crazy to build a brand? Instead of a lose-lose price war and millions of dollars of brand advertising, Nutra-Sweet cleverly preempted the price war by preparing and sharing a contingency plan with its major customers Pepsi and Coca-Cola, assuring both that it would be executed if either switched to the generic sweetener.
The plan involved a major advertising blitz that would “educate” the consumers that “the other cola” was the only one that contained NutraSweet. This was a real threat to Pepsi and Coca-Cola, given the large market at stake and the risk that consumers could be made to perceive a change in quality or taste under the influence of the advertisements. This threat was enough to deter Pepsi and Coca-Cola from considering switching, and hence the price war was preempted.
I once worked on a strategy study for a major multinational consumer electronics producer. As part of the project, I arranged an interview with the CEO of a competitor in Asia. To my surprise, the CEO himself agreed to the interview. I was even more surprised when the CEO started revealing some relatively sensitive manufacturing and cost data. Usually, for competitive interviews, we would only discuss some non-confidential market or supplier information. At the end of the interview, he said, “Do you know why I agreed to your interview and shared so much information with you? I need you to do me a favor. Bring a message to your client. Tell them we have a low cost structure. If they cut price, we will retaliate.” When I passed this to my client, one of the senior executives joked, “Here is the answer to our pricing strategy!” The client was very appreciative of the information I brought back, though I never expected to be paid such high consulting fees simply to be a messenger.
Imagine you are FedEx. Your key competitor, the U.S. Postal Service’s Express Mail, just offered a guaranteed U.S. domestic overnight delivery by either noon or 3 Pm the next day. How would you compete? Instead of competing on price, FedEx decided to offer two services: Premium and Standard. Premium would deliver by 10 Am the next day and standard by 3 Pm the next day. This way, FedEx could compete with USPS on two fronts: faster service at a higher price and comparable service at a competitive price. FedEx was able to keep the higher margins from the price-insensitive customer segment and at the same time compete effectively in the lower-end market.
The FedEx case demonstrated an important concept in marketing: segmentation and target segment selection. Segmentation is the division of a market into groups of customers. These groups, called customer segments, have sufficiently different needs and characteristics that they can be served differently. one or more segments will then be selected as targets based on their fit with the company’s strategy and its competence with the unfulfilled needs, as well as on segment profitability.
The two segments in the FedEx example are relatively easy to understand. Both groups fit FedEx’s strategy of providing express service and are profitable. There were likely other segments that could have been identified—say, those that required even faster service or were willing to accept even slower service. These probably were operationally difficult to serve, strategically did not fit with FedEx, or simply were not financially attractive due to investment needs or competition.
However, many markets are much more complex than FedEx’s, especially when consumers are involved. For example, I was involved in market segmentation for a tobacco company in Vietnam many years ago. The market had a proliferation of brands, and consumers made their choices based on a whole range of psychological and physical needs, including brand image, aspiration, packaging, peer pressure, tobacco content, taste, and price.
Four fundamental principles need to be understood in order to conduct more complex segmentation and target selection successfully:
There are two related types of segmentation:
The best practice is to first segment the customers based on benefits they seek. Then define key distinguishing customer characteristics for each segment so that advertising and promotions can be targeted and segment sizing can be calculated or checked. In the FedEx example, customers were segmented based on their service needs. Then, if necessary, characteristics could be defined for each segment. For example, companies in banking, legal, and consulting, of revenue size and number of employees above a certain threshold, or with an international business would probably be more likely customers for the premium service. With these characteristics defined, advertising and other efforts like direct marketing could be targeted. These characteristics would also allow FedEx to estimate the size of each segment using government, trade association, and industry statistics.
Another example of the key to first focus on need and then on characteristics is the disguised fast food restaurant example given by Professor Clayton M. Christensen and his co-authors in the Harvard Business Review article “Marketing Malpractice.”1 A fast-food restaurant was trying to improve sales of its milkshakes. So it segmented the frequent customers of milkshakes based on characteristics including demographics and personality. It then invited people who fit the profile to focus groups to understand their needs for the taste, texture, and price. The milkshakes were fine-tuned accordingly. However, sales did not improve.
The company then engaged in new research focused on first understanding customer needs. A new researcher spent time observing customers’ purchase and consumption of the milkshakes. This researcher soon noticed a distinct segment of customers who purchased milkshakes in the morning. Interviews with these customers revealed that they purchased the shake as a light breakfast and a way to reduce boredom while driving to work. At other times of the day, the major segment was parents buying to placate their children’s plea for sweets. Understanding such segmentation based on needs, the restaurant was able to fine-tune its products better. For the morning segment, it added more fruit to make the milkshakes more filling and interesting, and it instituted an express purchase process including swipe cards and dispensing machines, both of which helped to drive up sales. This segment was well-defined by the need to drive to work every day. Other characteristics such as length of drive, home location, sex, age, and so on could then be identified in order to help with promotions and advertising.
one can argue that the restaurant could have done its research in reverse. It could have first identified a segment with demographics of a certain age group living close to the restaurant but owning a car that they used to drive to work every day. This would certainly have worked too. But with so many demographic variables, it would be difficult to identify this as a distinct segment—and the original attempt to start with demographics did fail to identify this segment.
It is important to segment according to the company’s strategy. In the FedEx example, the overall strategy is to provide speedy delivery at an affordable price. Therefore, it is appropriate to segment based on need for different shipment speeds. By contrast, the Miller Lite “Catfight” advertising campaign provides a vivid example of segmentation not anchored by strategy. The strategy of the company was to increase sales, including switching drinkers of light beer from competitor Bud Lite. Market research identified the segment of young males and it was decided this segment would enjoy advertising featuring mud-wrestling supermodels. The company launched such a campaign, which attracted major viewership and market attention, including from the target segment. But sales did not increase. It was later discovered that while the target enjoyed the “Catfight” type advertising, the pleasure didn’t induce many of them to switch brands.
It’s necessary to understand segment attractiveness; that is, segmentation is a means to an end. For most companies, the ultimate goal is to select a segment or segments that can maximize the company’s profit. The key factors to consider in this selection are the firm’s ability to serve each segment, along with the competitive landscape and the profitability of each segment.
For a firm’s ability to serve various segments and assess the competitive landscape, the HBS Module Note “Market Segmentation, Target Market Selection, and Positioning” suggests using the framework shown in Exhibit 8.1 to analyze each segment of the market.2
Each blank cell in the matrix will be a rating (either a moon chart pictogram like the ones described in Chapter 3 or a number on a five- or 10-point rating scale). The rating should be based on detailed analysis.
The five rows are the five general areas that should be considered for target selection. Each of five general areas can be eliminated or further broken down into subareas depending on the market. For example, for FedEx, ability to conceive and design may not be an important factor. Ability to produce may be broken down into different parts of the production process, including order taking, package pickup, and customs clearance. Then FedEx and key competitors will be rated for each of the general areas or subareas. It should be noted that too many subareas will lead to loss of focus and difficulty in making decisions. Hence this matrix should focus on the most critical success factors relevant to target segment selection. The other less critical factors can be put on another matrix for subsequent consideration.
Exhibit 8.1 Market Segmentation Grid
Profitability of each segment must also be estimated. Without a good understanding of the segment profitability, companies may end up targeting and serving a low-profit or even unprofitable segment. For example, I once consulted for a bank in Indonesia whose strategy was to grow non-interest income from selling more sophisticated products and from transaction fees. The bank had a sizable wealth management business. Traditionally, it segmented the wealth management customers into platinum, gold, and silver status based on the total assets (savings, stocks and bonds, and so on) entrusted to the bank. Most of the bank’s resources for product development, service, and promotions were devoted to the platinum segment, which had the most assets at the bank. However, subsequent detailed analyses showed that many platinum customers were not particularly profitable for the bank, as they were retired individuals with stable holdings in cash and stocks and did not buy new products from the bank. On the other hand, some of the silver customers were young professionals with sophisticated and significant product needs, leading to higher non-interest income for the bank. This sub-segment was highly profitable, had long-term growth potential, and fitted well with the bank’s strategy. But lack of understanding of segment profitability had led to misallocation of bank’s resources and under-servicing of this sub-segment.
Understanding profitability includes estimating the segment size, profit margins, and growth potential. Key sources of information will be internal company data, government and other industry statistics, and estimation. For example, for FedEx, the margins of premium service could be estimated through internal accounting data. The current and future number of companies that would require such service could be estimated based on characteristics and statistics available from other sources. The average number of packages, their destination, and growth potential for this segment could be estimated based on historical customer data and customer interviews. The estimation technique would be similar to the quantification techniques described in Chapter 12.
Expect significant data collection, analysis, and iteration. To determine needs, characteristics, competitive landscape, and profitability, you will need large volumes of data and substantial analysis. Some of the tools are similar to the ones described in Part III. Others are more specific to marketing, such as customer questionnaires, focus groups, and conjoint analysis.3 HBS does not go into technical details of these mechanisms. In my experience, it is usually more time- and cost-effective to hire market research companies to apply these tools, as they have access to teams of part-time questionnaire conductors, large databases of potential focus group participants, experienced focus group leaders and data analysis experts, and so on. But market research companies should be seen as the arms and legs, not the brains of the project. The choice of data to gather and possible segmentation of the customers should be led by company personnel or by consultants who know the company, its business, its strategy, and its operations well.
To conclude, segmentation may be easy in theory but it tends to be tough in practice. There are many ways to segment a market. Significant resources and experience are often needed to identify an effective segmentation. It takes strategic and creative thinking. It also takes a lot of patience as iteration and rework (such as another round of questionnaires or focus groups) may be necessary.
In FedEx’s case, both premium and standard services fit well with the FedEx brand. But sometimes a company may need to introduce a new brand to fight the war. This is especially true if the original brand has a premium image. An example is 3M. Back in the early 1990s, competitor Kao Corporation introduced a low-priced diskette. Despite the need to answer, 3M was reluctant to drop the prices on the 3M brand as it knew very well that a customer segment was perfectly willing to pay the higher price for the quality that 3M represented. As a result, 3M introduced a new brand called Highland to fight Kao.
The Harvard Business Review article “How to Fight a Price War” describes a very impressive episode.4 The authors did not name the company, and though I have heard of the same case from various business school friends, no one has been able to tell me the real identity of the company or the product.
As the story goes, a major consumer products company was faced with an aggressive price-cutting competitor. The company defended itself by dropping the price of its economy-size product with a “buy one, get one free” offer. Because each unit of the economy-size product would last six months, the high-volume, price-sensitive customers that stocked up with the offer were off the market for almost a year. The competitor was put in a very difficult situation. It was not possible for the competitor to respond quickly given the stock levels, logistics, and so on. Even if it managed to respond with a similar offer, its margins would be severely affected. It also would not change the fact that the high-volume, price-sensitive customers would stock up and be off the market for a long time, hence severely affecting sales in the following months. This aggressive counter convinced the competitor to withdraw from the price-cutting adventure. In some similar situations for other markets, smaller competitors could be totally driven out of business.
The four cases discussed thus far describe some of the ways to fight a price war. However, just as in real war, sometimes there is just no way to win a price war. It is lose-lose no matter how the war is fought. This is especially true when a product becomes generic with very limited differentiation. In such cases, some companies will choose to withdraw from the market altogether. Naturally, this is only possible if the company has other product lines or is able to constantly innovate. A key example is Intel. Intel stopped making DRAM chips and focused on other products when price pressure from Asian manufacturers on DRAM intensified. Another example is 3M, which exited from the videotape business when videotapes became a generic product offered by many low-priced manufacturers.
Promotion includes above-the-line and below-the-line marketing. Above-the-line marketing uses mass media such as television, radio, newspapers, Internet banners, and the like. Below-the-line usually focuses on more direct means, such as direct paper mail or e-mail, flyers, coupons, gift with purchase, and lucky draws.
I am a naturally cost-conscious person. Hence, though I believe promotion is an essential part of marketing, I want to be sure that the money is spent wisely. When examining effectiveness of promotional spending, my education and experience tell me to adhere to three fundamental principles:
Advertising is important. It is the fastest way to reach a large audience. But advertising is not omnipotent. It is expensive and risky to rely on advertising alone to build a brand. As Professor Clayton M. Christensen of HBS and his coauthors clearly stated in the Harvard Business Review article “Marketing Malpractice”: “advertising alone cannot build a brand, but it can tell people about an existing branded product’s ability to do a job well (fulfill a need).”5 Here are two examples to help illustrate this point:
The Soupy Snax campaign was a major success resulting in high sales. The “Catfight” got a lot of attention from media and consumers but failed to increase sales. One key difference: in the first one, advertising was used to highlight an unsatisfied need and how the product could fulfill that need. The second one was creative and entertaining but did nothing to convince consumers to switch.
I do not have the research data to say that no brand can succeed on advertising alone, and it’s hard to prove a negative anyway. Probably some have. But being of a cost-conscious turn of mind, I would prefer to maximize the chance of success by ensuring that advertising is used in a supporting role, not the lead role.
The U.S. motor industry has always been highly competitive, with a handful of major players. The industry provides a lot of interesting case examples in many areas, including below-the-line promotions. Two well-known ones:
The results of the two promotions were vastly different. For the employee-discount offer, competitors retaliated with major price cuts. The resulting bloodbath cost GM and its competitors billions of dollars. Meanwhile, the TV show was a major success. The target was to sell 1,000 cars in 10 days. All 1,000 were sold in less than an hour.
The key differences between these two efforts highlight a number of best practices in designing promotions:
In other words, the period between the time customers start to respond to the promotion and competitors can react will be the window where the company’s promotion can “monopolize” the market with the offer available to the customers. The bigger the monopoly window, the greater the chance of the promotion being a success. The window can be maximized by speeding up customer response or delaying competitors’ response. In the case of the Pontiac Solstice, customer response was sped up by leveraging a popular TV program, immediate Internet access for information, and the “ticking clock” of a limited edition. Competitors simply could not respond—it would take a new product ready to launch and a lot of time to figure out a countermove.
Figure 8.1 The Monopoly Window
Source: Betsy Gelb, Demetra Andrews, and Son K. Lam, “A Strategic Perspective on Sales Promotions,” MIT Sloan Management Review 48, no. 4 (Summer 2007): 3.
A long monopoly window does not happen by chance. It takes ingenuity, creativity, competitive savvy, marketing expertise, discipline, stealth negotiations, and well-coordinated execution.
It is surprising how many companies do not rigorously analyze the profitability of their promotions. I once had a liquor client that measured promotion profitability by the total number of cases sold during the promotion. The fact that each case was sold at a discount price and that a lot of the sales reflected forward buying (customers stocking up for future use rather than really increasing consumption) was ignored. And I worked for a property investment firm that owned a high-end shopping mall. The mall had a very active promotion calendar with promotions such as free parking, gift with purchase, and other maneuvers. But the profitability of all these promotions was never measured because it was, according to the head of sales and marketing, “too difficult to quantify.”
It is critical to measure profitability and to measure it correctly. Between 1982 and 1990, Professor Leonard M. Lodish and Magid M. Abraham studied promotions of all brands in 65 product categories in the United States and found that only 16 percent were profitable!8 I helped my liquor and shopping mall clients make some rough assessments of their promotion profitability. The analysis found that the former was losing money from many of its promotions and more than half of the promotions done by the latter were unprofitable.
The key in measuring promotion profitability is to focus on incremental profit. Incremental profit is what the company makes above and beyond what would have been made without the promotion. There are two categories of profit that would have been made without promotion:
The reduction from what that would have been made if baseline and forward buying purchases had been at full price must be taken into account when assessing promotion profitability.
Table 8.1 is an example of a framework to estimate incremental profit using disguised data from my liquor client, which sells to retailers. Assume the liquor costs $40 a case to produce (cost of goods), sells at $100 a case without promotion, and is promoted at a 10 percent discount for a month. Assume $5,000 for the cost of planning and execution of the promotion, including advertising and printing of promotion materials, human resources, allocated overhead, and other details.
This framework can be used to assess a promotion after it is finished, and it can be applied in the planning stage with “target volume to be sold” replacing actual “volume sold” during the promotion period. But whether it is for post-promotion assessment or for planning, the challenge is in estimating baseline sales and forward buying. There are two main ways to estimate these figures: you can build a systematic approach for it, or you can take your best estimate based on the data you have.
Table 8.1 Estimating Incremental Profit
| 1. Total volume sold during promotion period | 2,000 cases |
| 2. Estimated baseline volume | 900 cases |
| 3. Estimated forward buying volume | 300 cases |
| 4. Estimated incremental volume | 2,000 – 900–300 = 800 cases |
| 5. Revenues from incremental volume | 800 cases × $90 = $72,000 |
| 6. Manufacturing cost (cost of goods sold) of incremental volume | 800 cases × $40 = $32,000 |
| 7. Loss of revenues due to discount | (900 + 300) cases × $10 = $12,000 |
| 8. Other costs of promotion | $5,000 |
| 9. Total cost of the promotion | $32,000 + $12,000 + $5,000 = $49,000 |
| 10. Profit from the promotion | $72,000 – $49,000 = $23,000 |
The most accurate way of course is to develop and apply statistical analytical algorithms. This is possible if you have accurate and timely sales data such as supermarket scanning data for consumer goods. In the study mentioned earlier, Lodish and Abraham estimated baseline sales of the 65 product categories using scanning data from supermarkets that showed purchases by consumers before, during, and after the promotion period. A detailed algorithm was developed to project baseline sales for the promotion period itself. However, even with this amount of data and analytical power, the system could not estimate the consumers’ forward buying.
As discussed earlier, hard data is often unavailable. Also, systems take a lot of time and resources to build and are often imperfect even if built. In such cases, best-effort estimates should be made based on historical data, market trends, sales force field input, and management judgment. In the liquor client example, we identified some smaller trade customers who were not forward buying (because they had policies against it or couldn’t afford it). Trends of orders from these clients helped to estimate the baseline. For those that were forward buying, salespeople held discussions with their management to understand volume and pattern of forward buying. Sales to these clients before and after the promotion were also studied to estimate the volume of forward buying. In the end, the team of marketing and sales personnel agreed on a best estimate based on information collected. This process was difficult at first, but it became more structured and easier once people got familiar with the process. Since the numbers produced by such a process are estimates, they should be used with caution.
To help provide estimates, some mechanisms can also be implemented, either permanently or as part of each promotion. While most of these mechanisms do not provide enough accurate and detailed data for systemtype analysis, they do provide invaluable data to help with getting the best estimates.
If data is simply not sufficient to project baseline or forward buying figures, you can calculate them by a shortcut. The formula I use is:
G´ = Gross margin $ per unit after discount (in other words, discounted price minus cost of goods sold)
V´ = Total volume sold during promotion (including incremental, baseline and, forward buying)
E = Other expenses like printing and direct mail related to this promotion
G = Gross margin $ per unit without promotion discount
V = Total volume that would have been sold without discount (including baseline and forward buying)
For a promotion to be profitable:
G,´ G, and E are all known variables. V´ is either the target or actual total volume, which is also a known variable. This means the right side of the equation can be turned into a number. V must be smaller than this number for the promotion to have a positive impact on company’s financials. The question to ask is whether the company believes it would only be able to sell V or less without the promotion.
Before a decision can be made on where to distribute, a thorough understanding of the market is necessary. I have found two tools particularly useful as a first step to understanding distribution of any market: a channel map and a cost structure calculation.
A channel map displays how products are distributed and the importance of each channel. Figure 8.2 is an example from my liquor client (data is disguised).
A few points are worth noting on channel maps. The percentages on the maps can be drawn based on volume or value of goods depending on market characteristics and data availability. The idea is to show the relative importance of the channels. Make sure that the percentages add up to 100 percent, so you’re looking at the whole picture.
Draw a few channel maps to help you brainstorm and to highlight any issues. This includes a map for the whole market, for key competitors, and for the company itself. These maps should then be compared and the similarities and differences should be identified and assessed.
For markets where channels have been changing or are changing, it may also be valuable to project the future channel map. For example, for the liquor client, imagine that Internet sales are expected to grow much faster than the other channels. Then by estimating the growth rate of each channel and then applying the growth rate on the current map, the future map can be drawn to assess the importance of the new channel and to stimulate discussions on channel strategy.
Figure 8.2 An Example of a Channel Map
* All percentages are based on volume, not value.
Figure 8.2 is just an example of the format of a map. The format can be adapted based on the situation. For example, sometimes it may be possible to draw the different boxes of the distribution map proportional to the importance of the channel. Alternatively, if you’re working with a manufacturer who sells directly to retailers with no middleman, you may want to display the information in a format like the one shown in Figure 8.3, so you can also see the margins from each channel.
The key is to creatively design a map that displays the data in a format useful for analysis, discussion, and decision making.
Data for these maps can come from similar sources to the ones used for quantitative data for strategy study: government statistics, trade journals, internal experts, and supplier and customer interviews.
In addition to channel maps, understanding distribution cost is also critical in any distribution plans. This includes two aspects of distribution cost: the impact of total distribution cost on total company cost and the relative cost of serving different channels. As an example, Figure 8.4 is the distribution cost breakdown for the music industry, where distribution cost represents a major cost of the product.
Figure 8.3 A Channel Map with Margins
In Figure 8.4, the retailer margin is not unusually high. It is important to understand distributors’ (wholesalers, agents, retailers) margins. The margins should be studied together with the value-added by the distributor. High margins but replaceable value-added means there may be an opportunity for a more cost-effective distribution strategy, or even disintermediation (going direct and by-passing the distributor).
If the cost of different channels is very different, it is worth doing a cost breakdown for each channel. For example, if selling music CDs through major department stores has a different cost structure (different manufacturer margins due to different price points, different amount of sales staff time, and so on) than selling through specialty stores, then it will be worth doing the cost breakdown shown above for each of the channels.
Figure 8.4 Cost Breakdown for a Compact Disc
Source: Nirmalya Kumar, “From Declining to Growing Distribution Channels,” Harvard Business Review, March 2005, Figure 4.3.
When used together, the channel map and the cost structure can provide some basic information as the first step to identifying the key channels that best fit with the company’s strategy and target end users.
Notes
1. Clayton M. Christensen, Scott Cook, and Taddy Hall, “Marketing Malpractice: The Cause and the Cure,” Harvard Business Review (December 2005).
2. Miklos Sarvary and Anita Elberse, “Market Segmentation, Target Market Selection and Positioning,” Harvard Business School Module Note (Boston: Harvard Business School Press, April 2006). Module notes are written to provide HBS students with basic knowledge in selected areas.
3. Conjoint analysis is a rather widely used statistical technique used in market research to determine how consumers value different features of a product or service.
4. Akshay R. Rao, Mark E. Berge, and Scott Davis, “How to Fight a Price War,” Harvard Business Review, (March–April 2000).
5. Clayton M. Christensen, Scott Cook, and Taddy Hall, “Marketing Malpractice: The Cause and the Cure,” Harvard Business Review (December 2005).
6. Ibid.
7. Betsy Gelb, Demetra Andrews, and Son K. Lam, “A Strategic Perspective on Sales Promotions,” MIT Sloan Management Review, Summer 2007.
8. Magid M. Abraham and Leonard M. Lodish, “Getting the Most Out of Advertising and Promotion,” Harvard Business Review (May–June 1990).