Dale Renner:
Wander through the downtown of any Australian city, and the
signs are everywhere: '50% off everything in store', '2 for 1',
'Closing down sale'... In tight financial times, marketers thoughts
naturally turn to the question of value and pricing.
The assumption is that when times are tough, people are looking for
more 'value'. But how do you define this? Traditional competitive
theory suggests a firm should either take a differentiation (more
features, premium price) or a low cost (value) strategy to market.
But this either/or view may be a false dichotomy: a marketer's
choice is not as simple as low price or premium price. It may well
be possible to provide both low price and differentiated value by
designing the offer around specific customer purchase occasions and
needs.
Is there a 'value segment'?
At first glance, it is easy to assume there are 'budget' buyers
(lower income) and 'premium' buyers (higher income). Yet the
evidence suggests people of all income levels move in an out of
value markets depending on the solution they are looking for.
Sometimes consumers will feel they are getting good value by paying
extra for an additional benefit (say, more features, or more
convenience such as at a 7-11 store), and sometimes the value will
be delivered through lower prices.
In Australia, the Franklins discount supermarket parking lot was
frequently filled with Mercedes and BMWs. In Germany, they call
this the 'Audi and Aldi' phenomenon. When it comes to grocery
staples, even higher income people may decide lower price is the
value they want.
Another good example of different use defining value is the USD
$2,500 Nano car from India's Tata Motors' (pictured). In developing
countries it might be a first car for a new market that can't
afford more expensive cars. In developed countries the brand is
more likely to play the role of a cheap second or even third car
which is not expected to be driven very often, but provides the
convenience of another car when needed. The need is different, and
the definition of value is therefore different between these two
markets.
Is value only about price?
In lean times, the temptation is to play with price, discounts and
specials to drive sales. Premium brands may start to eye the value
brands with envy. But a value offer that disrupts the market is not
just a matter of setting a low price.
Value markets often require significant innovation to develop.
Leading value marketers tend to come from the operation side of
business (rather than the traditional marketing side) where the
focus is on the supply chain and design of features around a
tightly-controlled cost base. Creating the significant price
difference could involve an entire reinvention of the value chain,
and removal of features that the market orthodoxy says are
critical.
When low cost airline pioneers like Ryanair removed free in-flight
meals and pre-booked seating, the prevailing wisdom was that the
customer included these features in their definition of value.
Ryanair is now testing the limits of cost-feature tradeoffs by
entering discussions with Boeing to remove seats from the value
proposition (although the passenger would be given some device or
stool to lean against during the flight). Even if the proposal does
not get accepted, the drive to reinvent the offer and remove costs
is relentless. Source: The Straits Times, July 2009.
The lesson is that value markets require a fundamental re-think of
the cost base in order to drive rock-bottom prices - and this takes
time and investment. If a brand hasn't invested in the value
strategy prior to an economic downturn, it is unlikely to
successfully execute it during the downturn.
ACTION
Ask yourself the following questions:
- Do you understand how customers define value in your
industry?
- Are you providing too much value for the customer need?
- Are there elements of the proposition that you can remove to
provide lower cost options?
- Are there markets that could benefit from your offer that are
not currently served, such as those on lower incomes?
- How can you gain a better understanding of value for your
market?
Recent GSG client work has involved helping clients define their
market more precisely, leading to insights about what customers
really value and how this varies across different segments. This
allows value propositions to be defined around precise needs -
providing just enough value for the need, not too much or too
little.
Dale Renner is a Senior Consultant at Growth Solutions
Group.