Archive for March, 2009

Pricing Demystified, Part I

March 11, 2009

Determining the right price to charge for your product or service is mind-boggling at best and risky at worst. Price too high and your brand is perceived as too expensive; price too low and your product loses money, gets perceived as low quality, or both.

Many businesses first assess what it costs to produce their products and then add on some margin for profit. This is known as cost-driven pricing.  Though this practice is common, it can be dangerous, since a competitor with a lower cost structure will be able to undercut them on price.

It is better for businesses to practice  price-driven costing instead.  In this case, the business first determines the optimal price to charge its customers, and then works to optimize the costs to produce the product in such a way that it can make a satisfactory profit at that price point.

Knowing what you can charge for your product forces you to think strategically about how to make the highest quality product for the least cost possible.  This way, your business has some margin to withstand any price competition that may arise.

How is the optimal price point for a product determined?  There are several pricing research methods available: conjoint analysis and discrete choice modeling are common, but also complicated and expensive.  Gabor Granger and Van Westendorp are also popular, but simpler and more intuitive.

In “Pricing Demysitified, Part II”, I will discuss how to use the Van Westendorp Price Sensitivity Meter to determine the optimal price for a product or service.


10 Costly Marketing Research Mistakes

March 9, 2009

Marketing research provides immense benefits to businesses.  Among these benefits, marketing research helps companies determine whether a viable market exists for their product; assess their competitive position; price their product correctly; measure and improve their customers’ satisfaction; and identify the right message to communicate to customers.

But those benefits accrue if and only if marketing research is done right.  Many times, companies make errors in their market research processes, from beginning to end.  These mistakes cost companies money, time, lost opportunites, and often produce results that are of little or no use.

Throughout my career, I have identified 10 very costly marketing research mistakes companies make.  They include:

  1. Performing unnecessary marketing research;
  2. Failing to establish a clear purpose for performing marketing research;
  3. Performing research for the wrong reasons;
  4. Not designating an owner for the research effort;
  5. Choosing the wrong marketing research vendor;
  6. Scrimping on the research budget;
  7. Using the wrong data collection methods;
  8. Researching the wrong population;
  9. Asking the wrong questions; and
  10. Having no plan to act on the research findings.

These mistakes are among the most common and certainly among the most costly.  To learn about these mistakes in detail and strategies for preventing them, you can download Analysights’ FREE report, 10 Costly Marketing Research Mistakes (and How to Avoid Making Them) from our web site.

While at the Analysights web site, click on the Insight Central tab and register to receive free reports that will help kick your marketing into high gear.

Cutting Your Marketing Investment can be Hazardous to Your Company’s Future

March 6, 2009

In a recent post on an online community for small businesses, the owner of a residential housepainting company wondered whether he should continue with his annual $50,000 direct mail campaign, the economy being what it is.

It is not uncommon for companies to slash or even eliminate marketing expenses during a recession.  But while cutting marketing can have immediate benefits to your bottom line, it can do long-term damage to your future sales, market share, and even your brand.

Companies often mistake marketing for an expense, when, in fact, they should consider it an investment.  After all, they are putting forth dollars into vehicles that are expected to return in the form of future sales, customer loyalty, and brand equity.  Cutting off this investment also cuts off any return they may generate.

Granted, when money is tight, you will need to cut budgets, even possibly marketing.  But the trick is to do so strategically.  Now is the time to take a serious look at all your overall marketing strategy and the tactics that comprise it.

Look at all the marketing tactics (newspaper ads, yellow pages, direct mail, etc.) you’ve employed in the past year as if they were a portfolio of stocks.  How much money did you invest in each during the year?  How much of your sales can you trace back to each?  How much potential sales can you trace back?  In doing this, you determine the current and potential return on investment (ROI) for each marketing tactic.  Cut out the tactics with the lowest ROI and concentrate on or expand those with the highest ROI.

Also, experiment with less costly, high potential ROI marketing tactics – social media marketing, blogging, Twitter, etc.  These vehicles can be helpful in creating buzz about your product.

And most of all, don’t forget your customers – especially not your most loyal and frequent ones.  Send them notes saying you appreciate them (rather than their business).  They’ll understand what you mean.  Also, in your communication with them, don’t try to sell them directly.  Instead, ask them questions about problems and challenges they are facing.  Show them that you care.

Companies who continue to market – and market smartly – during these economic times can gain loyalty from customers, promote awareness of their brand, and gain market share from their competitors.  Let one of those companies be yours!

Starbucks Serves Up Great Marketing as Well As Great Coffee

March 4, 2009

Yesterday, March 3, I had the privilege and honor to meet Starbucks CEO Howard Schultz.  Schultz was visiting various downtown Chicago Starbucks stores, and the one I frequent – 600 N. State – was one of them.

The store staff quickly pointed me out to Mr. Schultz as one of their most loyal, and he asked me a couple of questions about my experiences with that Starbucks store.  I told him how I couldn’t have been more pleased with the customer service bestowed upon me by the partners at this Starbucks.  (Note: Starbucks refers to its store employees as partners – GREAT MARKETING!!).

Mr. Schultz impressed me much, but not by anything he said.  In fact, Mr. Schultz didn’t do much talking.  He did a lot of listening.   Schultz asked many questions, both to partners and to customers.  I was there to see it.  And I was never prouder to be a Starbucks regular.  Especially at the 600 N. State Street store.

Now, to set the record straight, I frequent several Starbucks stores, and I’m highly pleased with the service I get from all of them.  But at 600 N. State, the partners really know how to make their customers feel welcome and appreciated.

Under the stewardship of store manager Tiffany and assistant store manager Danielle, the partners consistently greet customers and get to know them by name.  They know us by our regular drinks and are quick to start preparing them.  They ask us about our lives, and share information about theirs when we reciprocate.  At 600 N. State, you feel more like a party guest than a paying customer.

The partners at 600 N. State all seem happy to be working there and come from all walks of life: white, black, Hispanic; young, middle-aged; straight, gay.  This store is all-inclusive, both in terms of staff and customers. 

Howard Schultz and the Starbucks chain exemplify great marketing principles, particularly:

  • That the most effective, least expensive marketing research is listening to your customers;
  • If you’re providing a service (and Starbucks delivers as much a service as it does a product), make sure your service providers – your partners – are happy.  Happy employees beget happy customers; and
  • That a happy customer becomes a regular customer and a happy regular customer becomes a referring customer.

Rock on Starbucks!

How large should a survey sample be? Not as large as you think!

March 3, 2009

When conducting a survey, one of the key challenges a company faces is determining the appropriate sample size.  How many people should they survey?  Quite often, clients resort to subjective judgments, based on budget, past business processes, or corporate politics.

Some clients find safety in large sample sizes, and request 1,000 completed surveys.  But is a sample of 1,000 really necessary?  It depends on the level and sophistication of analysis the client needs to do.  If, for example, the client wants to compare market sizes for its product in five or six geographic regions within the country, a sample of 1,000 might be ideal for that level of analysis.  But what if the client is comparing at most two or three groups?  A sample size of 1,000 would be both overkill and a waste of money.

A scientific way to determine the ideal sample is to use a confidence interval approach.  This approach requires the client to know just three things: the desired level of confidence (a 95% confidence level means that if a sample was randomly drawn 100 times, we can be confident that 95 of them will contain the true population parameters); the variability (the degree to which respondents’ likelihood to answer your survey are similar or dissimilar to one another); and the desired level of error.

In most business cases, confidence intervals of 95% and 99% are common.  Insofar as variability is concerned, if you have no idea of the variability, you should assume maximum variability (50-50 chances).  And a 5% margin of error is pretty standard.

So, for a 95% confidence level, with maximum variability, and a 5% margin of error, a client would need only a sample size of 384.  At a 99% confidence level, the required sample size would only be 663.  Both are well below 1,000, and provide high levels of accuracy.  And a lot cheaper!    

But notice one thing: when the client increased its confidence by just 4% points, it needed to survey 279 more people!  The sample size had to be increased dramatically for just small increases in accuracy!  Simply put, the accuracy gained diminishes for each one-unit increase in sample.  In this case, the client needs to decide whether the benefit of the additional confidence justifies the cost of surveying an additional 279 people.  If millions of dollars are at stake, then the additional cost is justified.  If relatively few dollars or resources are at stake, probably not.

Your ideal sample size is that which provides you with the level of accuracy you need for the value you expect to receive.  If each addition to your accuracy increases the value of the research benefit, by all means, increase the sample size until the benefit of that accuracy is maximized.  But in many cases, even that point will be reached somewhere below 1,000.