Archive for the ‘Pricing’ Category

Was Marketing Research Absent from Liz Claiborne’s Strategy to Target Younger Consumers?

August 17, 2010

Yesterday’s Wall Street Journal reported that Liz Claiborne’s efforts to appeal to younger female consumers may have been the company’s downfall. This month, J. C. Penney will launch an exclusive line of Liz Claiborne clothing, home and accessories. As part of the agreement, Claiborne cedes control of production and marketing and converts the label into a mass market line in exchange for royalties, the article reported. In five years, Penney also has the option to buy U.S. rights to the Liz Claiborne name.

This may well be the concluding chapter in what appears to have been a failed attempt by Liz Claiborne to broaden its appeal to younger women. Apparently, Claiborne realized correctly it would need to move to a younger consumer, as most of its customers had been working age Baby Boomers, who have begun to retire. However, the Wall Street Journal indicates that its efforts to target the younger female consumer actually did more to harm the brand.

In trying to appeal to the younger crowd, Liz Claiborne nixed, sold off, or licensed out tried and true lines; it changed designs so much that it confused its existing customer base; it introduced lower priced items, eroding its appeal as a high-end brand; and it alienated its long-term relationship with Macy’s.

As I read the article, I couldn’t help asking myself whether Liz Claiborne did its homework. I don’t know whether Claiborne did or didn’t do marketing research, but deciding to pursue a new target market requires extensive marketing research, because so many mistakes can be made because of unaided judgment. Among other things, it is important to have surveyed the younger female shoppers to understand what they needed for workplace casual attire; and to have looked for common ground between existing product lines and the new, emerging fashions that the younger crowd was embracing. Most likely, the research would have led Claiborne to develop lines that were new enough to appeal to the younger working woman, but traditional enough to maintain loyalty with its existing boomer customer. If the research showed that the younger women wanted something drastically different in the way of style, then Claiborne could have used that information to develop a completely different line (likely by launching a whole different brand) aimed at those preferences.

When appealing to a new target market, it is also important to do pricing research. Surely younger consumers don’t have the discretionary income that older ones do. But that doesn’t necessarily mean a company should introduce lower-priced apparel. As Van Westendorp pricing theory suggests, a price can communicate one of four things to consumers: a good buy, a luxury item, an overpriced item, or a cheap, low-quality item. I could only wonder whether the introduction of lower priced merchandise might have led consumers to believe the newer lines of Liz Claiborne were of lower quality.

Companies that don’t conduct marketing research – or conduct it inadequately – increase their risk of failure, declining sales, customer defections, and increased competition.

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Research Findings are Like Manure: They Work Better When You Spread Them Around

August 10, 2010

One of the biggest mistakes companies do when conducting marketing research is conducting it in a vacuum. At many companies, the marketing department will often execute a marketing research study for either its own information, or upon request from another department. The findings of the research may also be beneficial to other parts of the company, but rarely do departments share the information. This concentration of information often leads to silos and exacerbates organizational politics. Marketing research expert Larry Kilbourne considers this data myopia – the failure to share survey findings – one of “Seven Survey Sins,” referring to it as the “Mr. Magoo Syndrome.”

Repurposing research and sharing it within the organization produces immense benefits. The sharing of the information facilitates better planning, creates buy-in from and fosters consensus among cross-functional groups, creates accountability, avoids duplication, fosters a shared purpose, and enhances the company’s agility in responding to problems and opportunities. Imagine that an insurance company with a captive sales force wanted to conduct a survey of its sales office managers. Specifically, the insurance company’s marketing department wants to know how the company stacks up against the competition in various territories.

Specifically, the marketing department would like to know who each branch sales manager considers to be the three main competitors in his/her agency’s territory, the policy features that are most important to customers and prospects in that territory, an estimate of how many potential policy sales are lost to the competition in those territories, and where they feel their main competition is beating them in terms of product features and benefits. The marketing department conducts the survey and uncovers a wealth of information. Who can benefit from it besides the top executives who commissioned the research?

Each branch agency

The marketing department should start with each branch sales manager. The sales manager might want to know whether his/her problem with a specific competitor is unique to his/her office or common to several others. Moreover, the manager might want to know where his/her office stands with respect to the rest of his region or the entire company. The findings can also help the manager plan for improvement.

Actuarial and Underwriting

The insurance company’s actuaries can also benefit from the findings. If branch sales managers in the company’s Pacific Northwest territory complain of losing too many long-term care insurance policy sales to Insurer X on the basis of price or ease of acceptance, the actuaries can review the underwriting criteria and assess whether the company is being too risk averse in that territory, or whether Insurer X is being too aggressive.

Advertising

If the insurance company faces aggressive competition in certain areas, the Advertising department can benefit from changing its strategy in those areas. It might try advertising in different newspapers, utilize direct mail or email marketing, etc.

Human Resources, Training, and Recruitment

Sharing the findings of research can also shape a dialogue between branch managers and the home office to understand what is needed to increase sales. This can often result in a refinement in training and recruiting needs for various territories. For example, if the company is losing to Insurer X in the Seattle market, it may well be due to the experience of Insurer X’s agent force, which could be experienced insurance sales professionals, professionals with a successful track record in sales careers in any industry, or naturally extroverted people with a knack for selling. If this is the case, the insurance company’s HR department could start recruiting agents with similar characteristics. It may also identify ways to change performance requirements so that the company can get rid of underperforming agents. The company can also devise new training programs to increase agent performance, and create new incentive plans.

The list of groups within the organization with whom the marketing department could share the findings is far from comprehensive. Marketing research should never be conducted in isolation, but should be used for the greater good of the organization. Whenever a company conducts marketing research, it should always have a predetermined plan for what to do with the information, the departments that could benefit from it, and ideas on how to act on the findings, whether good or bad.

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New York Life: How Traditional Approach Made for Great Marketing

May 19, 2010

This week, I got the May 24 issue of Fortune Magazine and skipped to this issue’s profile of one of the “World’s Most Admired Companies.” This time it was New York Life, the nation’s largest mutual life insurer. As I read the article, I was pretty intrigued by the company’s operation: very conservative. While New York Life is owned by policyholders, it didn’t follow the lead of other major insurers to invest aggressively for the sake of paying generous dividends. And the insurer chose to remain neutral in a price war on some lines of insurance, even though that meant losing some business in 2008. New York Life also invests in its own captive sales force – 12,000 agents strong – a practice so cost prohibitive to many publicly-traded insurers that they’re forced to rely on a network of banks, independent agents, and broker-dealers to push their insurance.

Fewer and fewer of us want to be viewed as traditional or passé, so one would think that New York Life’s conservative approach would have cost it a great deal of business. And in the go-go years, that seemed to be the case. But now, two years after a near meltdown in financial services, New York Life appears to have been vindicated: it had a record $15 billion surplus of cash in 2009; it has continued to pay policyholders dividends for the 156th year, and had an increase of 40,000 policies sold in 2009. Even better, it didn’t have to raise premium rates like many of its price war competitors.

Just look at the effective marketing system New York Life has built for itself. Recall the components of the marketing mix: product, price, position, promotion, and distribution. It’s easy to discern from the article that New York Life got all of these components right. While New York Life also sells mutual funds, long-term care insurance, and annuities, it has neither forgotten nor abandoned its core product: life insurance. In fact, the company still emphasizes it as an important part of a family’s protection. Because of its traditional investment style, New York Life’s pricing is competitive. In terms of promotion, New York Life turned its traditional operation into a distinct advantage, boosting ad spending by 24% and trumpeting how its conservative style was appropriate for these economic times. Distribution is handled through by New York Life’s own captive agent force – the only agents for New York Life, all New York Life, and nothing but New York Life. Every New York Life agent I’ve met knows its products backward and forward, and knows quickly which ones are most ideal for prospective and existing customers. Now positioning… New York Life apparently could market itself as the kind of insurance company that gives its policyholders great peace of mind. Policyholders can sleep at night knowing dividends will be paid consistently, premiums will remain stable, that they have the right insurance, and that the company will be around to pay out when they need to make a claim.

I am not a New York Life policyholder. I came very close a couple of years ago, but another company had a policy that was better suited to my needs. And I found it hard to reject the New York Life agent who had been working with me to find the right policy for me. But when my insurance needs change, New York Life is on my short list, a further testament of its marketing success: make a great impression on a prospective customer so that if he/she doesn’t buy now, there’s a good chance he/she will do so in the future.

Your Marketing Should Stress Time, Not Money

March 24, 2009

In her blog today, Kelly Spors, entrepreneurship columnist for the Wall Street Journal discussed a study by Stanford Business School which suggests that marketers who emphasize time as opposed to money when promoting their products and services tend to have better sales.

One experiment the researchers did was to have two six-year old girls set up a lemonade stand, and tested three signs: “Spend a little time and enjoy C&D’s lemonade.”; “Spend a little money and enjoy C&D’s lemonade.”; and simply “Enjoy C&D’s lemonade.”  According to Spors’ post, the researchers were asked to pay between $1 and $3 for a glass of lemonade and were then asked questions about their impressions about the lemonade. 

The experiment found that the “Spend a little time…” sign attracted twice as many passersby than the sign emphasizing money, and those who were attracted by the “time” sign paid almost twice as much for the lemonade and said they were more likely to enjoy it than those who saw the “money” sign.  

Despite the recession, time still seems to be more precious than money to most people.  And it also seems that people are more judicious with their time and will pay more for something that either makes the best use of their time, or – as suggested in the blog post – helps them achieve a great experience with a product or brand.

Marketers might be better advised to try building engagement with their brands rather than promote it as a money saver. 

Kelly Spors’ blog post can be seen here.

Pricing Demystified, Part II: The Van Westendorp Price Sensitivity Meter

March 12, 2009

Several different analytical approaches are available to help marketers determine the optimal price to charge for their product or service.  Here, I will discuss the Van Westendorp Price Sensitivity Meter, which is simple to employ, yet gives some very useful information.

Start with Four Questions

Van Westendorp starts with a survey asking respondents just four simple questions about price:

  1. At what price would you consider this product so expensive that you would not consider buying it? (Too expensive)
  2. At what price would you consider the price of this product so low that you’d question its quality? (Too cheap)
  3. At what price would you consider the product starting to get expensive – not out of the question, but you’d need to give some thought to buying it? (Expensive)
  4. At what price would you consider the product to be a bargain – a great buy for the money? (Inexpensive).

Graph the Responses

Once you have compiled this information, group the answers to each question into frequency distributions and plot the cumulative frequencies on a graph.  Each question above will have its own line on the graph.  The percentage of respondents should comprise the vertical axis; the price points, the horizontal axis.  Since the lines need to intersect, invert the cumulative frequencies for the “Inexpensive” and “Too cheap” on the graph.

Determining the Acceptable Price Range

The price at which the “Too cheap” and “Expensive” lines intersect is described as the “Point of Marginal Cheapness,” or PMC.  PMC represents the lower limit of the acceptable price range.  Similarly, where the “Too expensive” and “Inexpensive” lines cross is the “Point of Marginal Expensiveness,” or PME.  This is the upper limit of the acceptable price range.

Determining the Indifference and Optimal Price Ranges

Next, the point where the “Inexpensive” line and the “Expensive” line cross marks the “Indifference Price Point,” or IPP, the point at which the same percentage of respondents think the product is either cheap or expensive. 

Finally, the point at which the “Too cheap” and “Too expensive” lines intersect is known as the “Optimal Price Point,” or OPP.  It is at this point where the percentage of respondents who say the price is too cheap equals that who say it is too expensive.  OPP is optimal in the sense that the price senstivity to the product for being cheap is equal to that of being too expensive, and is often the recommended price.

Using the Results

  1. The OPP is the recommended price for your product or service.
  2. Competitive products will rarely be priced outside the acceptable range (between PMC and PME).
  3. If your goal is a healthy balance of revenue and market share, price as closely to OPP as possible.
  4. If your goal is to maximize market share or penetration, price somewhere between PMC and OPP.
  5. If your goal is to maximize revenue, or “skim the cream,” price somewhere between OPP and PME.

Warnings

Finally, be aware of four limitations or dangers of Van Westendorp:

  1. Your data is derived from surveys, so questions must be worded properly to avoid biased responses, and sample size must be large enough for statistical accuracy;
  2. Different customer segments have different price sensitivities.  Hence, if you serve multiple customer segments, the OPP and acceptable range may be different for each;
  3. Even if you price within the acceptable range, you can still price too low such that you lose money and/or get regarded as low quality; and
  4. Even with a skim the cream strategy – pricing within the acceptable range –  you can price your product too high that your competition wins your customers.

All this said, continue to know your customers intimately and, using Van Westendorp’s points for a guide, experiment with different price points until you find the one that brings you the closest to achieving your marketing objective.