Differentiation that matters

Differentiation that matters
Market Leader Summer 2009

Marketing is about two things. First, the marketing concept: 'Marketing is not a specialised business activity. It is the whole enterprise seen from the customer's point of view.'2 Firms make money by profitably meeting customers' needs better than the competition. Second, differentiation: marketing's role is to increase the brand's distinctiveness in customers' minds, countering the commoditising pressure of competition. Firms make money by being seen to be different.

Many marketers have lost sight of the first and misunderstood the second. Obsessed with being different from the competition, they focus on trivial unique features and gimmicks, leading to widespread customer dissatisfaction.

In contrast, the big rewards go to firms that really embrace the marketing concept by focusing on differentiation that matters to customers.

TWO MARKETING MYTHS

Far too much so-called differentiation is about things that do not matter to customers, sometimes coupled with a naïve faith in the power of advertising to turn a sow's ear into a silk purse. This reflects two widely held myths, as outlined below.

1. The uniqueness myth – that customers will buy your product or service only if it offers them something unique (or the same benefits at a uniquely low price).

2. The 'table stakes' myth – that in today's competitive markets, you can no longer differentiate the basics – the generic category benefits that all the main competitors provide. On this view, customers take them as given and they become mere 'table stakes' rather than a source of competitive advantage.

In reality, customers rarely buy a product or service because it offers something unique. Usually, they buy the brand they expect to meet their basic needs a bit better or more conveniently than the competition. What customers usually want is simply better – not more differentiated – products and services. Most unique features or benefits are irrelevant or only marginally relevant to most customers.

In contrast, differentiation in the sense of brand equity – that is, customers' belief that products or services sold under a particular brand name will meet their needs – can be hugely valuable. This type of perceived differentiation is completely consistent with the marketing concept.

Sometimes a brand does develop a unique feature or benefit that turns out to be valued by large numbers of customers. Usually, competitors will quickly copy it. This does not validate the 'table stakes' myth, however: keeping the basics relevant and reliably delivering them (including features and benefits that were once unique to one brand) is so difficult that it forms the main basis of sustainable competitive advantage in most markets.

An example: Volvo, Toyota and Chevrolet

Volvo is a textbook well-differentiated brand. Ask a convention of dentists in Sydney about their associations with it: most will say 'safety', followed by a unique combination of other associations such as Swedish and large, slightly boxy estate cars. Ask the same question in Wolverhampton or San Francisco and the responses will be remarkably similar.

Volvo has strong, clear, unique, consistent, highly differentiated global brand equity and is indeed a valuable brand – but Toyota is a much more valuable brand despite being far less clearly differentiated. Dentists in Sydney will certainly know Toyota and associate it with quality and reliability. But if you ask them how, as a brand, it differs from Honda they'll struggle. Yet all three published brand value rankings (Interbrand, Millward Brown and Brand Finance) have Toyota as the most valuable car brand on the planet – more valuable than Mercedes and BMW, and much more valuable than Volvo – or any of the big US car brands.

Toyota's brand value was illustrated by a McKinsey study comparing the prices of the Toyota Corolla and the Chevrolet Prizm – identical cars produced on the same assembly line at a jointly owned plant.3 At the time of the study (2002), GM/Chevrolet was already spending US$750 per car more than Toyota on dealer and consumer incentives, but the Toyota was outselling the Chevrolet by four to one – and keeping its price premium in the second-hand market. The brand was the only difference between the two products.

Why was (and is) Toyota a stronger brand than Chevrolet in the US, GM's home market? We believe that it is because, over many years, US consumers have found that Toyota makes reliable, economical, easy-to-drive cars that get you from A to B in comfort, at reasonable cost and with generally good after-sales service. Their experience with Chevrolet has been more mixed.

In other words, Toyota has been simply better at providing what most car buyers want, which is the basics. Customers remember this and tell each other – that's brand equity. The fact that they are willing to pay more for the physically identical Toyota-badged product shows that Toyota has indeed created a valuable differentiated brand – but based largely on superior delivery of the generic category benefits that matter most to customers, not on unique features or benefits, nor, in general, on outstanding brand communications.

EVEN MORE IMPORTANT IN SERVICES

The evidence from companies like Toyota, Tesco and P&G is that, through relentless customer focus and continuous improvement, you can differentiate the basics – they aren't just 'table stakes' – but it's very hard work. This is precisely why many companies fail. The challenge (and opportunity) is significant for manufactured products such as cars, but even bigger for service companies, where quality depends on millions of interactions between individual customers and the company's systems and employees.

There are countless examples of service businesses messing up. One was reflected in a letter from a John Roberts to DIY retailer B&Q after Ellen MacArthur completed her record-breaking solo voyage round the world in a B&Q-branded trimaran. It started, 'My congratulations to you on getting a yacht to leave the UK on 28th November 2004, sail 27,354 miles around the world and arrive back 72 days later.' It then went on, 'Could you please let me know when the kitchen I ordered 96 days ago will be arriving from your warehouse 13 miles away?'

For Roberts and customers like him, B&Q's sponsorship of MacArthur was irrelevant. But if B&Q had kept its basic product and service promise to its customers, it would probably have enjoyed a big return on its investment in MacArthur, which generated huge, positive and well-branded publicity. The moral? Get the basics right.

WHY THE OBSESSION WITH UNIQUENESS?

The obsession with uniqueness reflects, we think, confusion between marketing in the company-wide Drucker sense and marketing in the narrower functional sense of advertising and promotion – that is, the activities directly controlled by the CMO and funded by the marketing budget. In the latter case, uniqueness really does matter: brand communications do need to be sufficiently distinctive to cut through the cacophony of other messages competing for customers' attention. But this does not mean that the product or service itself needs to be unique.

Marketers' focus on brand communications and, therefore, distinctiveness partly reflects the fact that this is what they directly control but also the continuing assumption that fmcg represents the norm. In fact, fmcg is the exception in today's economy.

Vodka consists of ethyl alcohol, water, trade marketing and branding/communications. The first two of these are commodities. Trade marketing is a B2B service activity where all the 'simply better' issues apply. But, as examples such as Absolut and Grey Goose illustrate, great branding and communications can create enormous shareholder value in this market. This is fairly typical of fmcg, but fmcg accounts for only about 5% of GDP. Around 70% is accounted for by services. In service markets – and for most B2B and high-ticket B2C products – brand communications have an important but supporting role: brand equity is mainly created by customer experience, reinforced by communications.

The big challenge for marketers in most businesses today is that brand value is mainly created – or destroyed – by large numbers of operations people who do not report to the CMO. The role is increasingly about trying to influence and engage these people to ensure reliable delivery of the brand promise.

RELEVANCE AND EXECUTION

Related to this, marketers also need to be the voice of the customer throughout the organisation. This is important to ensure both relevance and execution – that is that the current brand promise is being consistently delivered, and that changes to that promise through product, service and process innovations continue to be focused on what matters to customers.

There are many sources of customer insight. Formal qualitative and quantitative market research – increasingly online – is essential, but needs to be supplemented by direct contact with customers and frontline staff, learning from operations (e.g. complaints), database analysis, market intelligence, and awareness of potential longer-term threats and opportunities at or beyond the edge of the current market.

Equally important is to create systems and – above all – a culture in which the voice of the customer reaches those with the power to act and is acted on, even when this means reversing an earlier decision. Few companies do this well: in most, everyone spins to their boss – more than the boss realises. GM has always been good at market research but weak at hearing and acting on the results – unlike Toyota, whose culture has always encouraged continuous, customer-focused improvement. Ultimately, that is why Toyota is a stronger brand than Chevrolet.

Being 'simply better' is not just about operational excellence and great execution. It is also about customer relevance and, therefore, about understanding and acting on what matters to customers. Increasingly, marketers need to complement their technical skills (in branding, communications and formal market research) with softer organisational and influencing skills in order to make this happen.

WHERE TO START?

For an existing business, we suggest you first focus on reducing the drivers of customer dissatisfaction with your brand versus the competition. These issues are relatively easy to measure using generic satisfaction/dissatisfaction scores, supplemented by more specific diagnostic data. The main challenge is to follow up vigorously and persistently until your brand is best in class.

Next, explore ways of improving the offer in ways that go beyond the current brand promise but remain customer-relevant. Options here include new features, benefits, and product or service improvements, as well as value-adding brand communications, better design, and so on – all tested through flexible customer insight activities and, where possible, pilots or fast prototyping, rather than by researching them to death. In this way, you will be driving the market by always promising a bit more than the competition – while still ensuring high relevance and reliable execution. Ideally, you will be relentlessly raising customers' expectations above what the competitors can deliver, while still ensuring that you continue to meet these ever-increasing expectations.

Finally, you should address the most difficult challenge, which is to uncover and meet the drivers of customer dissatisfaction within the whole category. The reason this is difficult is that these drivers represent customers' latent (not explicit) needs: since none of the brands meets these needs well, customers just assume 'that's the way things are' and base their purchase decisions on what is currently available. For instance, in the car market, most consumers dislike many aspects of the sales and service experience at car dealers, which is why (after 100 years) so much effort is now going into improving that experience.

THE BOTTOM LINE

Drucker was right. The marketing concept is easy to understand but hard to put into practice. The best way of doing so is to focus obsessively on what matters to customers. This is still about differentiation, but differentiation that matters, not differentiation as an end in itself.

REFERENCES

1. Simply Better: Winning and Keeping Customers by Delivering What Matters Most, Harvard Business School Press, and follow-up to be published by HBSP in 2010.

2. Drucker, P. (1954) The Practice of Management, New York, NY: Harper Collins.

3. Chatterjett, A. et al (2002) 'Revving Up Auto Branding', McKinsey Quarterly, 1, p134.


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