What makes a company successful?...

... delivering products and services that are relevant and create impact among consumers.

I combine my expertise as a Marketing executive in a Fortune 500 company and my passion as an investor to find the Companies that I think have "cracked the code" with consumers. Advertising does work. When I see a new product that fits relevant consumer trends, and that is supported with a campaign that I find particularly shrewd and innovative, I know that Company is potentially a great investment.

One of the great investors of all times, Peter Lynch, recommends to "buy what you know". You watch TV, go to the supermarket and walk around everyday. Observe... look around: what you see can make you money in the stock market. Now, let's be clear: a Company is not good just because it advertises. What we have to look for is great products supported with -and enhanced by- great advertising. The principle is simple: if something is good enough to draw your interest, it will be of interest to millions of persons just like you.

It is my goal to share with the reader my findings in the world of marketing which I think will turn into great returns for investors. Profit from it!

Sunday, January 9, 2011

Leveraging the desire for ‘more’

No different than in other aspects of life, as consumers we are anything but rational. As a general rule, rationality kicks in just after we are emotionally committed to a decision. That applies to almost anything: from the impulsive decision of buying a pack of chewing gum at the convenience store’s counter to choosing the person we will share the rest of our lives with. We emotionally decide we need that new flat-screen TV. Then rationality engages to a) validate and justify the decision, and b) sift through features and alternatives to select the specific product and model to buy. Even this is not a sequential process: there is a constant feedback loop between our emotional and our rational beings before we arrive to a concrete purchase decision and act on it.

Based on this precept, the implications for any marketer are obvious: engage the emotional side of the customer first. Get him to emotionally commit to your product first and just then provide him with the rational arguments for him to justify and validate his decision. If a marketer tries to win the competitive war based on the assumption of consumer rationality, he’d be choosing the harder, riskier path to success.

One of the most powerful emotional drivers ruling our consumer behavior is, simply, our desire for ‘more’. More what? Anything: better, faster, cheaper. We are helplessly compelled to want whatever we perceive is an improvement to what we already have. We want it (emotional): we can’t always justify it… or afford it (rational). Yet, this is the drive that makes us ditch perfectly fine, working cell phones, TV sets, jeans, sofas, cars to go and get the shiny new one. If emotionally we perceive there is more to be gotten, and rationally we can justify it, then we have a purchase.

While the principle might seem obvious, its execution is not that simple. The challenge for a marketer is not only creating a tangible “better” that consumers can understand and ultimately, desire, but also creating the codes to communicate it. And this is key: consumers must be able to ‘emotionally’ understand the improvement that is offered. Emotionally understand? Isn’t “understanding” an eminently rational trait? Well, not really.

Here is where I want to introduce the concept of category “dimensions” or “coordinates”. For any given product category, consumers create a sort of a mental map or space, not unlike the physical space we live in. In each of these categories, though, there are just a limited number of ‘dimensions’ that consumers use to make up their mind about what is desirable and relevant in a product. Usually there are maximum three or four of these “dimensions” that are relevant. More than that and the decisions become too complicated. Our brains abhor complexity, and when the decisions become too complicated, our tendency is to just avoid them. If the “better” is not immediately obvious, then I’d rather avoid the risk –and the associated pain- of not making the right decision. Dan Ariely covers this topic in its book Predictably Irrational. When you think about it, this is not that different than the way we perceive the physical world: everything is in three dimensions. We can even entertain the thought of a fourth dimension: but if we are pressured to consider a fifth, sixth or more dimensions, we enter into a mental short circuit. We simply discard the thought.

One of the best examples of how product ‘dimensions’ work and are able to drive consumer behavior is the PC market of the late 80’s, early 90’s. It is also a great example of how departing from a simple model consumers can easily “emotionally” understand creates a short circuit, and ultimately, lack of consumer interest. It is an example where a drive for rationality took over, paralyzing consumers and ultimately, hindering the growth of a Company that still today is looking for its north.

Many claim that Intel’s (INTC) stroke of genius was its “Intel Inside” campaign. That campaign turned a highly technical computer’s component into a desirable consumer brand. Intel was able to have consumers demanding PCs built with its processor, and that generated the dramatic growth that ultimately turned Intel into the uncontested leader of the processor industry it still is today. But Intel inside is just half of the story. The other half is how Intel was able to simplify for the consumers what otherwise could have been a very technical and almost ethereal category. What Intel did was to simplify the processor category for the consumers in terms of just two, simple to get, and very desirable dimensions: a) capacity and b) speed. That’s it. Along with that, it created communication codes that where easy for the consumers to follow. When PCs started making inroads into the consumer market, Intel very quickly changed the branding conventions from its processors from a technically driven nomenclature (286, 386, 486) to a cool, awe-inspiring brand name: Pentium. And for speed, Intel made sure to make news with the easy to follow clock rate in terms of Mghz. And this is exactly the point: consumer didn’t need to know what made a Pentium 2 better than a Pentium 1. They didn’t need to know what the clock rate exactly meant. These where just easy indicators for the two dimensions consumers cared about; an increase in the indicators signaled the consumers that there was something ‘better’ out there. That’s all they needed to know. And the race to upgrade started. I vividly remember the buzz among consumer when Pentium 3 was launched; or when the first 1 Ghz processor was introduced.

And then, everything just got more complicated. Suddenly, Intel launches the new Celeron processor. Consumers scratched their head: what is the difference? Should I buy Celeron or Pentium? How do I know? Pentium reached the 4 version as the last significant launch, and that was it. The race for speed stopped at 3.6 Ghz. More dimensions where introduced: the category turned complicated, technical. Decisions became difficult, and with that, consumer interest faded. The PC turned into a commodity. Yes, of course other factors came into play. But the single most important one is that, as I like to say, engineers took over.

This analysis process can be applied to any category. Then you’ll notice that those brands and companies that are able to disrupt a category are the ones that a) create one or more new dimensions in such a category that are more relevant for the consumer; and/or b) create more meaningful, easy to understand codes to communicate “better” to consumers.

Which companies are mastering this need for “more”? Just to mention a few examples:

Apple (AAPL) of course comes to mind. The lines in front of stores when a new iPhone is launched are a clear indicator of that. Apple is a master in planned obsolescence. Yet, watch out for Google (GOOG), who is threatening the iPhone supremacy by leveraging a key dimension in the smartphone arena: accessibility.

Netflix (NFLX) continues driving the key dimension that made them a disruptive force on the entertainment delivery category: ubiquity. Let me see a movie when I want it.

Microsoft (MSFT) does a good job with Office and with Internet Explorer. They also finally adopted a more meaningful code for Windows. The use of numbers will allow them to do more frequent updates to its OS that need not be tremendously onerous in terms of time and resources.

In the luxury car category, I think BMW (BMW.DE) has one of the smartest and more consistent product branding strategies. Just two numbers: size and engine power. It’s very easy to understand and shop their line-up. Lexus, Infinity, Accura and Cadillac use a series of meaningless, hard to understand combinations of letters and numbers that are impossible to commit to memory.

I will continue referring to this concept in future publications.

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