This is a blog series that I originally wrote as a book. I’m sharing the full text online for free. Each blog post is a chapter. Please send your feedback: growthmarketingmap@gmail.com. If you’d like, get on the email list.

All chapters:

  1. Intro
  2. Marketing Strategy and Management (we’re here)
  3. Business Growth
  4. Research and Analytics
  5. Campaigns and Tactics

In this chapter:

  1. So What is Marketing?
  2. What Is Marketing Strategy?
  3. Product-Market Fit
  4. Customer Needs vs. Product Features
  5. Value Proposition or Positioning
  6. Strategy to Escape Disruption
  7. Sustainable Competitive Advantage
  8. Innovator’s Dilemma and Disruptive Technology
  9. Network Effects
  10. Marketing Management
  11. Brand Marketing
    1. Brand Architecture and Naming
    2. Other Brand Attributes
  12. Pricing
    1. Equilibrium Price
    2. Willingness to Pay and Price Discrimination
  13. Marketing Strategy Checklist
  14. A Quick Recap
  15. More on Strategy
  16. More on Marketing Management and Careers

So What Is Marketing?

So what exactly is marketing and why should you care? Is it really necessary? Why can’t we just build a product and let customers find you by themselves? Here is what Peter Drucker, Peter F. Drucker, management consultant, educator, author of The Effective Executive, had to say on the subject:

“Business has only two functions — marketing and innovation.”

I’d argue that this is the right way to think about marketing. Fundamentally, most business activities can be grouped into the following categories:

  1. understanding what product to build or how to refine the existing one – marketing
  2. building the product – innovation
  3. communicating the value of the product to the right customers – marketing, again

Rinse and repeat.

But we might need a more specific and workable definition. I suggest we adopt the one crafted by American Marketing Association:

“Marketing is the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.”

Now, let’s take a closer look at certain components of marketing, starting with strategy.

What Is Marketing Strategy?

Marketing strategy is a term that is used very loosely and it might mean a lot of different things. Ultimately, though, marketing strategy should answer the question “Where do we play and how do we win?”

In other words, marketing strategy clarifies what a company or a business unit is going to focus on what it’s not going to focus on.

Here is a simple formula that can help illustrate the concept:

(1) Customer needs + (2) Company goals and capabilities = (3) Strategy => (4) Campaigns

We will describe business goals (2) in detail in the next chapter. And then we will discuss marketing research that can be used to learn about customers (1).  But as it is easier to start with the end result and discuss what a great marketing strategy should consist of.

To answer question “Where do we play and how do we win?” managers and entrepreneurs can ask and find answers to a lot of other question about customers, product, company, and market. Here is a non-exhaustive list:

  1. Customers
    • Which customers are we targeting and why?
    • What do they want or need? Are those needs different by segment?
    • What is a customer’s lifetime value? Does it vary by segment?
    • How will our customers learn about our product? Where? When?
    • How will our customers buy our product? Where? When? How frequently?
    • What do we want customers to do differently and why?
  2.  Product
    • Have we achieved product-market fit?
    • What are product characteristics?
    • What is our value proposition or positioning?
    • How do we differentiate our product from competing products?
    • How much does it cost to produce it?
    • Does the cost per unit decline with increased number of units?
    • What is our pricing strategy? Do we have multiple pricing options?
  3. Company
    • What is our business goal?
    • What marketing goals are we trying to achieve, e.g., acquire users, retain users or generate awareness?
    • How does this strategy align with the company’s business goals, values, and capabilities?
    • What unique strengths we have or can develop, e.g. technology or management best practices?
    • How do we measure marketing success?
    • What resources are available internally? Can we invest in marketing? Can we invest in new product development if our marketing research shows the demand?
  4.  Market
    • Are there alternative products that satisfy a similar need now or are they likely to be developed?
    • What is the competition likely to do in the future?
    • How likely is the market to evolve in the future?
    • If this market regulated, how is regulation likely to change?
    • Do we rely on contractors? How are these relationships structured and how are they likely to change?
    • What companies can we strategically partner with?
    • How can we gain a sustainable competitive advantage?

Depending on the company type, some questions might be more important than others. For example, a strategy conversation at an early-stage startup hi-tech startup might center around company’s unique strengths in regards to technology but not so much around the market as there might be no market yet. This type of company might also pick a very short timeframe of a few months when it will test whether the strategy  is working. On the other hand, a company in a highly regulated industry might focus much more on legal environment.

On the other hand, a mature pharmaceutical company that employs thousands of people will have a very different strategy discussion. As the industry depends on government regulations, the legal environment will get more attention. The time horizon will also be different: instead of planning for a few months, the strategy can be developed for three, five or even more years and then revised annually or semi-annually.

But ultimately all companies will try to find the answer to “Where do we play and how do we win?” question.

Once this answer or at least a plausible hypothesis is found, company strategy should be put in writing and clearly communicated to everyone in the organization.

It’s true that some of the things described here are sometimes assigned to other teams at some companies. For example, at some companies, pricing might be a responsibility of the corporate strategy team. Or tracking business metrics, such as customer lifetime value, might be the responsibility of product management.

But all these pieces are also integral pieces of marketing strategy. And regardless of the organizational structure your company might have, having a broader and deeper perspective on the customer, company, and market will only improve the marketing you can do.

Finally, here is how not to approach development of marketing strategy:

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Product-Market Fit

The first two big topics on the list from the previous section are customers and product. This is because they are highly related. There are many ways to study customers, and the “Research & Analytics” chapter is fully devoted to these methods. The reason we study customers is to create a product that they want or, in other words, to achieve product-market fit.

Paul Graham, Y-Combinator Co-Founder, venture capitalist and essayist is famous for giving very simple advice:

“Make something people want.”

Product-market fit is a prerequisite for business success, and until it is achieved, it should remain the primary strategic focus.

Trying to market a product that nobody wants or needs is not only a huge ordeal and a waste of resources, but it is also not fair to customers – why would they buy what they really don’t need or want? Once we have a product that customers want, it’s much easier to align our marketing efforts with their needs.

There are different ways to achieve this magical product-market fit. Successful, established companies usually rely on comprehensive and in-depth marketing research studies to understand what their customers’ needs really are, and then they build on this knowledge.

Smaller startups, which are often limited in resources, are usually better off simply creating a low-cost working prototype (also known as the minimum viable product), showing it to customers, getting early feedback from them, and constantly iterating the process to eventually build what customers want.

Both are credible strategies. To call one traditional, slow or outdated, or to call the other chaotic, random or unstructured, would mean completely losing sight of the big picture. The choice depends on the business context, and both can be successfully utilized at different stages of a company maturity.

If we have enough resources and time, and if it’s cheaper to conduct a market research study than to develop a minimum viable product, then, by all means, we should do it. If on the other hand, developing a minimum viable product is cheap and quick enough, we might skip the marketing research stage altogether.

In reality, though, we would often do something in between. For example, we can create a mockup or a prototype of a product to avoid wasting time and money creating a fully functional product. Then we can test this prototype with customers to get as much feedback as possible; this can be accomplished via focus groups or even using display advertising and social media to check if our offering resonates with customers. More on this later.

Customer Needs vs. Product Features

Here is how Theodore Levitt, professor at Harvard Business School, explained the difference between customer needs and product features:

“People don’t want to buy a quarter-inch drill. They want a quarter-inch hole.”

As this quote beautifully illustrates, we should always strive to get to the underlying customer’s need instead of settling on superficial assumptions. Customers are not looking for products; they are looking to solve their problems. When we understand those problems or needs, we can develop products that better address those needs and talk about our products in a relevant and appealing way.

A modern day example of addressing the actual need instead of bragging about product features is Apple iPod. When Steve Jobs introduced it in 2001, he did not talk about a 5 GB hard drive. Instead, he led with a powerful message: “1,000 songs in your pocket.” Customers don’t want 5 GB players. They want to carry 1,000 songs with them wherever they go. Look around and see how often companies do exactly the opposite: advertising product features instead of what customers can do with those features.

To get to the underlying need, we can use a technique called “5 Whys” that was pioneered by Toyota Motor Corporation. It is very simple: keep asking “why?” (at least five times). Start with a basic assumption. For example, customers want to buy a drill. Ask why. They want to make a hole in a wall. But why? Because they want to hang a picture. You get the idea. Now that we know that the actual need is hanging a picture, we can make sure that our drills solve this need gracefully and that it’s clear communicated to customers.

Amazon.com, the company that was launched in 1994 and achieved a market cap of 309 billion dollars in 2015, is famous for its “working backward” approach. Product managers are encouraged to write a press release before even starting to work on a new product. These press releases should be customer-centric and revolve around real problems that the potential product can solve. This practice forces managers to focus on customer needs, and not on product features. And this, in turn, creates better products that customers want.

One way to capture how a product solves real customer needs is to write a so-called value proposition, also sometimes called positioning.

Value Proposition or Positioning

Value proposition or positioning is simply a way to capture customer needs and product offering in a clear way.

It is important to have one for multiple reasons:

  1. It informs all marketing research studies and marketing campaigns by identifying the target audience and benefits of our product. Once we have the value proposition written down, it’s much easier to create copies for all marketing channels, from email to social media, and to check if these copies are consistent with what we are saying elsewhere.
  2. It forces the company to focus. It’s impossible to write down the value proposition without having difficult conversations about priorities: what our product delivers and what it does not.
  3. It unites and aligns everyone in the company by clearly showing what we are offering the world.

There are different ways to put a value proposition in writing. Here is a simple and useful template that we can use:

To <our customers/prospects>, <name of the brand> is the brand of <frame of reference> that promises <relevant, superior benefits> based on <compelling rational or emotional proof points>.

And here is an example of an actual value proposition or positioning:

To savvy business and leisure air travelers (average age: 44), Virgin America is the brand of contemporary air travel that is making flying fun again by disrupting the domestic airline industry with distinctly designed aircraft, technologically advanced amenities, and world class service.

Notice how this format forces company to focus. To include “technologically advanced amenities, and world class service” in its value proposition, Virgin America also needs to make a decision not to compete on price. By defining its target audience as savvy business and leisure travelers and by choosing to focus on the domestic market, Virgin America also decides not to cater to long-distance, cross-border travelers. Of course, the value proposition is not kept the same forever. It is meant to reflect current company priorities and evolve over time.

We can also subdivide various customer needs into even smaller needs with user stories, following this format:

As a <role>, I want <goal/desire> so that <benefit>

For example:

  • As a savvy business and leisure air traveler, I want Wi-Fi onboard so that I can have fun flying.
  • As a savvy business and leisure air traveler, I want safety videos to be engaging so that I can have fun flying.

Ideally, these should be based on marketing research insights. In other words, we should know that our customers do indeed want these things. If we don’t have any insights yet, we can start with a hypothesis of what people need, put this hypothesis in words, and later check it in the real world.

This is why both creative and analytical skills are so important in marketing. Someone who tends to be analytical often won’t know where to start. And getting started is sometimes the most important thing because it allows you to generate data and learn. Someone who tends to be creative, on the other hand, might have a difficult time developing a proper framework to methodologically evaluate his or her ideas and systematically learn from real world performance.

Strategy to Escape Disruption

It might seem that achieving product-market fit is sufficient for business success: we identified a profitable niche, developed a product that the customer want to buy, and we are making money selling it. What else can we wish for?

However, companies fail all the time despite being leaders at a certain moment. The DVD rental industry used to have a perfect product-market fit – before it was completely disrupted by online video streaming. Then companies like Blockbuster went bankrupt. Typewriter producers became extinct once personal computers and word processing applications became widely available. The list goes on and on.

One of my favorite examples of how companies rise and fall comes from the tech industry. Contrast these two lists of biggest public Internet companies market capitalizations from 2015 Internet Trends — Kleiner Perkins Caufield Byers report:

image01

How many of the most successful companies of 1995 can you recognize? How many of those to the right will still be around in 2035?

Some of the best minds of the 20th century tried to the understand reasons why some highly successful companies remain leaders, while others fall. Even though there is no one simple answer that would be universally applicable, some patterns have been identified. We will review ideas, conclusions and recommendations of some of the best thinkers in this chapter. Some of these ideas are not ready-to-use, step-by-step instructions, but conceptual frameworks which can be employed to derive a business strategy that will be successful in your particular situation.

So what do companies that thrived for a longer time have that others don’t? We will start with a concept called “sustainable competitive advantage.”

Sustainable Competitive Advantage

Michael Porter wrote his revolutionary book Competitive Strategy in 1980, and followed that up with Competitive Advantage in 1985. Both books were hugely influential in academic and business circles. Porter posits that companies should strive to achieve a sustainable competitive advantage over rivals:

“Strategy explains how an organization, faced with competition, will achieve superior performance.”

According to Porter, sustainable competitive advantage can come from multiple sources and can be challenged in multiple ways. To describe the five main forces, he developed a framework and called it exactly that – “Five Forces”:

image04

Even though this framework was developed a while ago, it is still relevant in today’s fast-paced age of disruptive technologies.

Let’s consider “threat of new entrants” and take Facebook as an example. It can be challenged by new entrants – “disruptive startups” in Silicon Valley lingo. Its position can also be threatened by substitute products and services. After all, it happened so many times before – for example, with Myspace, Livejournal, and Friendster. A company that thinks and acts strategically and proactively can prevent it from happening. How? For example, by acquiring Instagram for $1B and Whatsapp for $19B.

Now, let’s look into “bargaining power of suppliers.” Do you think suppliers are less important for tech companies? How about Amazon’s Web Services cloud service that so many tech companies rely on these days? Do you think they can be hurt by Amazon’s decision to significantly raise the prices? Will the founders of these startups benefit from thinking through these hypothetical scenarios and hedging their risks by not putting all their eggs in one basket?

How about the “bargaining power of customers?” Consider fierce competition between Uber and Lyft. Each time customers check prices in both apps before ordering a taxi, they collectively put a significant pressure on these companies. There is even an app called “What’s the Fare” that allows users to compare prices between Uber, Lyft, and other services.

Thinking through these forces might impact decisions about product launches as well as decisions concerning the marketing of existing products. For example, if our strategic analysis shows that customers and suppliers in a given field will have a strong bargaining power and that the threat of new entrants will be high in 10 years, we might re-consider launching a product in this field even if we can achieve product-market fit today. Instead, we can focus on a field where we have higher odds of building a strong competitive advantage.

Peter Thiel, venture capitalist, hedge fund manager, writer, as well as co-founder of PayPal and Palantir, echoes the same idea when talking about the competition:

“All failed companies are the same: they failed to escape competition.”

In his book, Zero to One: Notes on Startups, or How to Build the Future, he talks about building a creative monopoly – a company that solves customer problems in such a superior way that its dominant market position cannot be challenged. In this situation, the company can substantially invest in innovation, attract and develop the best talent, as well as serve the world better by building great products.

Innovator’s Dilemma and Disruptive Innovation

Mediocre companies die for all kinds of reasons: incompetent leadership, bureaucracy, flawed decision making, poor execution, and many others. But great companies that were once on top of the world can die as well.

Clayton Christensen, writer and professor at Harvard Business School, sheds some light on reasons why great companies may eventually fail in his books Innovator’s Dilemma and Innovator’s Solution. According to Christensen, there are two types of innovation: sustaining innovation and disruptive innovation. Successful companies typically focus on sustaining innovation – marginally improving existing products and focusing on customer feedback.

Disruptive innovation, on the other hand, means creating new products and markets. Wikipedia displaced encyclopedias. Airbnb displaced hotels. Netflix displaced video rental stores. Google Maps displaced printed maps. Uber displaced taxi companies. This is the threat of new entrants and substitute products, as described above.

How can successful companies overlook such threats? The reason is that pursuing disruptive innovation early might seem unpromising in the short-term and it goes against management incentives. In their nascency, markets can appear too small to be valuable for big established companies. Customers might also suggest that it is more important to focus on improving current products. So this is a strategy that works well in the short-term but might lead to extinction in the long-term.

image03

This is good news for startups: you can find a small niche and target it with a superior product. More often than not, established companies will be slow to react since the niche is too small and risky to be worth going after. A startup might use this valuable head start to capture the market.

Clayton also warns successful companies that want to disrupt themselves. According to him, companies rarely succeed at both: sustaining innovation and launching a separate, disruptive product. Part of the problem is that the organizational structure and business processes that make the company so successful at sustaining innovation are roadblocks for disruptive innovation.

What are the implications for marketing strategy? Those will largely depend on what side of the table you find yourself at – if you are a small startup or an established company.

Smaller startups should think hard about the probability of bigger companies competing with them in a given field and make their product decisions accordingly. Larger companies should be realistic about potential threats and pick the best strategy: to compete, to acquire, or simply to simply ignore the threat if it’s is not substantial.

Either way, the bigger takeaway is that market dynamics and priorities of main competitors should always be discussed in the context of marketing strategy because they can drastically alter the playing field.

In other words, developing a product that customers want is critical to success. Without it we have nothing. But this is not necessarily enough for success. Thinking broadly about market forces and trends can allow us to actually capture the value that you are creating for customers.

What are some other ways a company can position itself strategically so that it can shield itself from new entrants, substitutes, and the bargaining power of suppliers and buyers? Even though the answer is highly contextual, there are some ideas to consider. One of them, network effects, has gained some popularity in recent years and is worth discussing.

Network Effects

Network effects, also called demand-side economies of scale, have become hugely important for many tech companies in recent years. The idea is very simple and quite old: for some products and services, the value that the customer gets is in direct proportion to the number of customers. If you are the only person who owns a phone, the phone is useless to you, no matter how perfect the product is. But if almost everyone owns a phone, the value you derive from your phone skyrockets.

What is interesting about the network effect is that it can be a source of sustainable competitive advantage, often even more so than a brand or technology. Let’s stop for a second. A sustainable competitive advantage that is more powerful than brand or technology? How is this possible?

Take Facebook, valued at more than $313B as of March 2016. One interesting way to think about company valuations is to ask yourself a question: “Can this company be replicated if the same amount of money is invested?” At first glance, it seems that a $313B valuation is outrageous. It’s six times the valuation of General Motors. It’s almost equal to the gross domestic product of Malaysia. Even if you hire 10,000 stellar managers, engineers and designers and pay each one $500,000 a year for the next 10 years, you will only need $50B. Would you be able to build a better tech platform and superior user experience? Quite likely.

But here is the tricky part. Would you be able to capture as many users as Facebook has, starting from zero when everyone and everyone’s friends and relatives are already connected on Facebook? Quite unlikely.

This is why network effects are so powerful. Google tried with Google Plus. It had all the resources. The product was also good. But how many times did you use it last week?

$313B reflects Facebook’s future earning potential. In other words, investors understand that it’s unlikely that Facebook’s dominant position will be significantly challenged in the foreseeable future. They also understand that this unique position will allow Facebook to effectively monetize the platform and invest in future growth.

We can repeat the same experiment for Uber, Instagram, and many other companies, but the result will be the same. A comparable or superior product often can be developed with a smaller investment. But the community of users is an integral part of these products, so it is very hard to compete with these companies. They have a sustainable competitive advantage.

Does it mean they will be around forever? Of course not; on the long-term horizon, all companies disappear. But having a sustainable advantage substantially improves the odds.

Marketing Management

Ben Horowitz, businessman, investor at $4B VC fund Andreessen Horowitz, blogger, and author wrote in his book The Hard Thing About Hard Things:

“The hard thing isn’t setting up an organizational chart. The hard thing is getting people to communicate within the organization that you just designed.”

We will talk about the importance of data-driven management throughout the book. But there is another highly important topic in marketing management: cross-functional collaboration.

It’s easy to understand the importance of product-market fit. After all, this is common sense. But what is hard, as Ben Horowitz might say, is getting people to follow these principles and work together.

If engineering and marketing work in their silos, the company is likely to develop mediocre products. Marketing then will be tasked with advertising them. This model fails each time. Engineering talent and effort are wasted on useless products. Marketing budgets are wasted on advertising of these products. And customers are betrayed.

Instead, as a founders, CEOs, managers, or individual contributors, we should try to bring those teams together. Marketing teams can be a voice of the customer when brainstorming potential solutions with engineering. This is when the magic happens and truly innovative products are born. There is no simple recipe for creating a collaborative culture, but understanding its importance is the first step.

Brand Marketing

Now, let’s turn to things that are more closely associated with marketing and talk about brands. Even though having a strong brand does not guarantee a sustainable competitive advantage, it might still help to differentiate your product and solidify the advantage you have.

So what is a brand? Let’s use the American Marketing Association definition again:

“A name, term, design, symbol, or any other feature that identifies one seller’s good or service as distinct from those of other sellers. The legal term for brand is trademark. A brand may identify one item, a family of items, or all items of that seller. If used for the firm as a whole, the preferred term is trade name.”

Brands are important because they magnify market forces. Companies that produce great products become known as such by customers. And customers buy more of their products, recognizing them by brands. The opposite happens for companies producing inferior products.

Here is the Interbrand 2015 list of the top 10 best global brands:

  1. Apple
  2. Google
  3. Coca-Cola
  4. Microsoft
  5. IBM
  6. Toyota
  7. Samsung
  8. GE
  9. McDonald’s
  10. Amazon

There is also the BrandZ 2015 list of the top 10 best global brands:

  1. Apple
  2. Google
  3. Microsoft
  4. IBM
  5. Visa
  6. AT&T
  7. Verizon
  8. Coca-Cola
  9. McDonald’s
  10. Marlboro

Brand Architecture and Naming

Name is an important component of a brand and value proposition. Just as we develop value propositions from a customer’ perspective, we should name products from a customer’s perspective. For you as a customer, is it easier to make a choice between Apple MacBook and MacBook Pro or between Sony Vaio VPC SA26GG/T and VPCCB48FN/B? Names also depend on brand architecture choice.

For early stage startups or single-product companies, usually company = product = brand. For example: Evernote company = Evernote product = Evernote brand in customer’s mind. This works as long as the company only sells one product to a homogenous group of customers.

For larger and for more diversified companies, company name, brand name, and product name can be distinct concepts. And the way those concepts are differentiated largely defines success. This is because a company might have multiple products that serve different customer segments. By building distinct brand names or brand lines, companies can have a flexibility that they otherwise would not have. Brand architecture is the way companies structure their brands.  Following are major types of brand architecture and their respective pros and cons.

  1. Individual brand family architecture (P&G as stealth brand)

image06

Notice how a company brand (Procter & Gamble) is distinct from its product brands (e.g., Tide or Pringles). The major advantage is that there is no confusion in the customer’s mind. People will not think, “I will not buy potato chips from a detergent company!” because they are largely oblivious to the fact those brands are produced by the same company.

  1. Sub-brand architecture (Virgin)

image05

This is the opposite set-up. Virgin America, Virgin Hotels, and its other brands are all under one umbrella. It is easier to launch new brands with this type of architecture because each new brand gets support from previous successes. But it is also risky. If a new brand fails, it might harm the umbrella brand too.

  1. Hybrid Architecture (Johnson & Johnson)

image08

Many companies choose to use hybrid architecture, utilizing Individual Brand or Sub-brand, depending on the situation. For example, Johnson & Johnson might launch a separate product line, such as Listerine, and then create separate product offerings within this product line. Notice that it’s not called Johnson & Johnson Listerine. But other brands can be kept under “Johnson & Johnson” umbrella. Marketing research can help making brand architecture decisions. Focus groups can be used to see how people react to different versions and how their brand perception changes.

Here is a map, showing brand architectures of multiple consumer goods companies:

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Other Brand Attributes

There are other brand attributes that can create a distinctive memory in the customer’s mind. Here is the incomplete list: logo, fonts, colors, packaging design, music, and even personalities that the brand is associated with. Even such things as interior design (think IKEA!) or smells (think Starbucks!) can be considered brand attributes. The best way to choose these attributes is to know your customer and make those reflect your value proposition.

Once you have something to show, you can conduct a customer study to check if what you want customers to conclude about your brand is what they actually conclude when they are exposed to it.

You can find examples of some great brand guidelines online:

Pricing

Equilibrium Price

Price is a critical component of the value proposition and the brand. If you ever took an Economics  class you probably learned that demand for your product is usually in inverse relation to price. So the chart looks something like this:

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Equilibrium price is a sweet spot where a company earns healthy profits and customers are happy. This theory is not necessarily super helpful, though. First, it doesn’t offer much insight into ways to find this equilibrium. Second, for some companies, supply is not an issue at all because each additional user does not increase costs by much – most software companies fall into that category. Third, there are exceptions. Paradoxically sometimes sales can increase after prices are raised. This is particularly likely for high-end premium products. Price serves as a signal and if it’s too low and it can sometimes send a false signal that quality is not good enough, even if in reality it is top-notch.

Willingness to Pay and Price Discrimination

What matters from a practical viewpoint is that we need to find a price point that is in line with the value we actually provide and also allows the company to achieve its financial goals. In other words, the price should be very close to the customer’s willingness to pay for our product. In this situation, we don’t charge too much (and lose customers), but we also don’t charge too little and undercut ourselves. It might seem simple, but there are different types of customers. And they have a different willingness to pay. What is highly valuable for Jane is not very valuable for Claire. Welcome to the world of price discrimination.

According to Wikipedia, price discrimination, or price differentiation, is a pricing strategy where identical or largely similar goods or services are transacted at different prices by the same provider in different markets.

This is a highly controversial topic that is famous for causing customer backlash. When Amazon displayed higher prices to Apple users than to PC users, some people got really upset. Uber’s price increases in a period of high demand also caused some controversy. So did the San Francisco initiative to dynamically adjust parking prices based on demand.

According to David Rock, Director of the NeuroLeadership Institute and author of the bestselling book Your Brain at Work, fairness is one most important needs we have as human beings. It is easy to see how price discrimination can feel really unfair.

It makes perfect sense from an economic perspective, though. What is worth $50 to me might be worth just $5 to 10 of my neighbors. If a company charges everyone $5, it loses $45 because I would happily pay $50. If it charges everyone $50, it loses $50 because nobody else (except me) buys the product. So assuming that customers actually want our product and that the price is fair, it usually helps to differentiate.

There are different levels of price differentiation. From company’s perspective, being able to offer an individual price to each customer would be ideal. This is rarely possible, though. However, enterprise sales contracts are often unique and are very close to this ideal, because the needs of corporations are very different and because contracts are not public.

On the consumer side, airlines are very good at adjusting ticket prices based on hundreds of factors, from the number of days till a flight to previous buying history of a given customer. It is possible because most sales happen online and can be priced by algorithms.

When charging individual prices is not possible, tiered pricing might be the best strategy to employ. It is preferable to one fixed price and it does not feel as discriminatory, either. For instance, Uber offers different products: Pool, Uber X, and Uber Black. Customers self-select based on their willingness to pay – how much they are willing to spend for extra comfort or prestige.

Bear in mind that customer willingness to pay or perceived value of your product does not only depend on product characteristics. It depends on the overall value proposition which includes what your brand stands for. This why there are H&M t-shirts that cost under $10 and Armani t-shirts that cost over $100. The customer’s perceived value is higher for Armani t-shirts because Armani’s elite status is part of brand’s value proposition.

So companies should strive to expand the customer’s perceived value and willingness to pay by developing product-market fit and value propositions that appeal to their customers and go beyond mere product characteristics. Prices should then be aligned with the customer’s willingness to pay across different products and across different customer segments.

Marketing Strategy Checklist

Atul Gawande, a surgeon, author, and public health researcher, explained the importance of checklists in his excellent book, Checklist Manifesto. Simply having a checklist can dramatically cut mistakes made by surgeons and pilots. Marketing managers can benefit from a checklist too.

This is why we will end this chapter with this marketing strategy checklist:

  • Understand the “Why” behind customer needs
  • Find an overlap between customer needs and company goals and capabilities
  • Develop marketing strategy by answering “Where do we play and how do we win?”
  • Position your product in a way that customers will find appealing
  • Create a sustainable competitive advantage
  • Foster a collaborative culture between engineering and marketing
  • Build a brand to differentiate your product from the competition
  • Align prices with the customer’s willingness to pay

A Quick Recap

  • Rule #1: understand “why” behind customer needs
  • Rule #2: identify company goals and capabilities
  • Rule #3: achieve product-market fit
  • Rule #4: think strategically to create a sustainable competitive advantage
  • Rule #5: foster a collaborative culture between engineering and marketing

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  • Book: Effective Executive by Peter Drucker
  • HBR’s 10 Must Reads on Change Management
  • HBR’s 10 Must Reads on Leadership
  • HBR’s 10 Must Reads on Managing People
  • HBR’s 10 Must Reads on Managing Yourself
  • Book: Growing Up Fast: How New Agile Practices Can Move Marketing And Innovation Past The Old Business Stalemates by Kevin Fann and Jascha Kaykas-Wolff
  • Book: Conscious Capitalism by John Mackey

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