The 30 Day MBA (20 page)

Why branding matters

This is considered the holy grail of the product/service aspect of the marketing mix. A brand encompasses not just what a product is or does but all the elements such as logo, symbols, image, reputation and associations. The McDonald's arches represent its brand as a welcoming beacon drawing customers in. Branding is an intangible way of differentiating a product in a way that captures and retains markets through loyalty to that brand. Coca-Cola tastes little different from a supermarket brand, but the promotion that supports the brand confers on the consumer the chance to share the attractive lifestyle of those ‘cool' people in the adverts. Apple's iPod is differentiated from just any old MP3 player in much the same way. Intel and Audi are examples of branding designed to reassure consumers in unfamiliar territory that a product will deliver. Body Shop International exudes ethics
and concern for the environment, where other cosmetics concentrate on how they will make the wearer look beautiful.

Building a brand takes time and a considerable advertising budget to build. But by creating brand value, that is the price premium commanded by that product over its unbranded or less appealing competitors, a business can end up with a valuable asset. Superbrands (
www.superbrands.com
) has a listing of the top brands by country, often with a case study supporting the top brands in any country.

Alongside this dramatic position jostling the global meltdown has revealed some important facts about the economic resilience of established brands. Warren Buffet's statement ‘it's not until the tide goes out that you can see who is swimming naked' could be aptly applied here. The share prices of the top 100 brands as identified in the BrandZ study have outperformed the S&P 500 by over 30 per cent over the period 2005–10. In fact whilst companies in the S&P 500 lost 11.5 per cent in value, those of the top 100 brands gained 18.5 per cent. The reasons for this outperformance in hard times seem to be:

• A brand generates trust, a fact that appears to transcend business sectors. Consumers are as loyal to Coca-Cola, Procter & Gamble and WalMart as business users are to Cisco, HSBC and Goldman Sachs for a company, for its products, and for its services. According to BrandZ consideration of brand in the purchase decision has risen by 20 percentage points since 2005 so in uncertain economic conditions people turn to something they can trust – an established brand.
  
• Brands are established in almost every corner of the globe. In China, India and Russia brands are as prevalent as in France, the United Kingdom or in the United States. Today over a dozen emerging market economies now have world class brands, where there were none at all in 2000. This global dimension allows businesses with top brands to keep growing across economic cycles. So while the Western economies shrank between 2008 and 2010, China, India, Brazil and much of South America were powering ahead.
  
• The population of top brands is relatively stable, and that in turn allows them the luxury of formulating and implementing long-term strategy, rather than being buffeted by turbulence. Seven of the same brands are present in both the 2006 and the 2010 BrandZ rankings. True, some positions have changed with Google now number 1 brand up from 7th in 2006 and IBM in the second slot up from 8th. This resilience means that firms such as Starbucks, Samsung, Toyota and Exxon had the ability to recover from difficulties relatively quickly. Exxon, for example, a virtual pariah after the Valdez oil spill disaster in 1989, was back in the top rankings in under a decade, coming in at 39th in the world, ahead of Disney, Orange and Colgate in 2010. It remains to be seen if BP is as fortunate.
  

CASE STUDY
  
Tata Nano, India – the People's brand

On 17 July 2010 Mr Ashok Raghunath Vichare of Mumbai became the first customer in India to take delivery of the Tata Nano LX (Lunar Silver) from the Chairman of Tata Sons and Tata Motors, Mr Ratan N Tata, at the company's dealership, Concorde Motors. Tata, the Indian conglomerate that took over Jaguar and Land Rover, launched its Nano, the ‘People's Car' in concept form in 2008, with a basic model aimed at the local and Chinese markets. Models with air-conditioning and a range of extras that will double its price were scheduled for its launch on the European market at an unspecified later date. The Nano mission began back in 2003, when Tata Motors set itself the challenge to build a ‘people's car'. Tata gave an engineering team, led by 32-year-old star engineer Girish Wagh, three goals for the new vehicle; it should be low-cost, adhere to regulatory requirements, and achieve performance targets such as fuel efficiency and acceleration capacity. The Nano is a four-door car with a 623-cc engine that gets 50 miles to the gallon and seats up to five. It's nearly a tenth smaller in outer length than its closest rival, Suzuki's Maruti 800, but has a fifth more useful interior space. Costing around $2,800 (£1,800/€2,154) it is the most inexpensive car in the world.

Tata Motors is India's largest automobile company, with consolidated revenues of Rs 92,519 crores (£10 million/$20 billion) in 2009–10. It is the leader in commercial vehicles, among the top three in passenger vehicles, the world's fourth largest truck manufacturer, and the world's second largest bus manufacturer.

The car has three powerful strengths as a brand. Tata Nano's safety performance exceeds current regulatory requirements – it passes the roll-over test and offset impact, which are not regulated in India. It's affordable in the local market. Tata Motors has entered into agreements with 15 banks for a financing deal that enables a car to be reserved by paying just Rs 2,999 (£41/$64/€50). Internationally the car is a steal. For the price of a new Range Rover, the top brand in the Tata Motors stable, you could buy 60 Nano's, one for every week of the year with a few left over. The brand is generating attention by winning awards. In 2010 the Tata Nano won the prestigious Indian Car of the Year (ICOTY) award ahead of the Chevrolet Cruze, Honda Jazz, Fiat Linea, Fiat Grande Punto, Maruti Suzuki Ritz, Mahindra Xylo, Skoda Superb and Toyota Fortuner.

Branding pitfalls

Brands have global visibility and as a consequence problems can appear to be on some distant horizon yet suddenly become amplified and virtually omnipresent with unfortunate consequences. Nowhere has this capacity to suffer global reputation for local or narrow specific problems been more in evidence than the fall from grace in 2010 of two of the world's most successful brands, BP ranked 34th and Toyota ranked 26th in the top 100 brands of 2009/10. Both brands suffered catastrophic, though perhaps not
terminal, blows to their reputations for quality, integrity and honesty. Whilst BP tussled with leaking oil in the Gulf of Mexico it received four times as many mentions in the world press as it did two years earlier on 29 July 2008 when it announced record profits of £3.5 billion ($5.53 billion) for a single quarter. Though the brand may survive on the international arena – a survey running on a local Gulf website puts 48 per cent in favour of adopting Amoco for US gas stations, a brand it abandoned when that company was acquired by BP. Toyota and its near invisible chairman Akio Toyoda also found themselves the centre of a storm of unwelcome public visibility when the company had to recall a few million cars for a variety of reasons – ranging from sticking accelerator peddles to steering lock defects.

Price

Seemingly the simplest of the marketing choices, it is often the most agonizing decision that MBAs are faced with. The subject transcends almost every area of a business. The economists get the ball rolling with ideas around the elasticity of demand. Set too high a price and no one comes to the dance; too low and your budget for bouncers will go off the Richter scale. The accounts and production teams are concerned that sales will at least be sufficient to reach break-even in reasonable time. The strategists are worried about the signals in terms of corporate positioning that prices can send. However profitable a certain price may be for the business, it may just be so low that it devalues other products in your range. Apple, for example, has a position fairly and squarely at the innovator end of the product adoption cycle. Their customers expect to pay high prices for the privilege of being the first users of a new product. The iPod was positioned above the Walkman in price terms, though as the market for pocket sound devices was already mature there was scope to come into the market lower down the price spectrum.

Skim vs penetrate

You need to decide between two generic pricing strategies before you can fine-tune your plans. Skimming involves setting a price at the high end of what you believe the market will bear. This would be a strategy to pursue if you have a very limited amount of product available for sale and would rather ‘ration' than disappoint customers. It is also a way to target the ‘innovators' in your market who are happy to pay a premium to be among the first to have a new product. To be successful with this strategy you would need to be sure that competitors can't just step in and soak up the demand that you have created.

Penetration pricing is the mirror image; prices are set at the low end, while being above your costs. Prices are competitive, with the deliberate intention of eliminating your customers' need to shop around. Slogans such as ‘everyday low prices' are used to emphasize this policy. The aim here is to grab as much of the market as you can before competitors arrive
on the scene and hopefully lock them out. The danger here is that you need a lot of volume either of product or hours sold before you can make a decent profit. This in turn means tying up more money for longer before you break even.

Dragon Lock (the executive puzzle makers), who were Cranfield enterprise programme participants, adopted a penetrating strategy when they launched their new product. Their product was easy to copy and impossible to patent, so they chose a low price as a strategy to discourage competitors and to swallow up the market quickly.

Danger of low pricing

Aside from the obvious possible problems of the cash-flow implications of stretching out the break-even horizon and quality/image issues, it is an immutable law that raising prices is a whole lot more difficult than lowering them. It is less of a problem if the market as a whole is moving up, but raising a price because you set it too low in the first place is a challenge to say the least.

Value pricing

Another consideration when setting your prices is the value of the product or service in the customer's mind. His or her opinion of price may have little or no relation to the cost, and he or she may be ignorant of the price charged by the competition, especially if the product or service is a new one. In fact, many consumers perceive price as a reliable guide to the value they can expect to receive. The more you pay, the more you get. With this in mind, had Dyson launched its revolutionary vacuum cleaner, with its claims of superior performance, at a price below that of its peers, then some potential customers might have questioned those claims. In its literature Dyson cites as the inspiration for the new vacuum cleaner the inferior performance of existing products in the same price band. A product at six times the Dyson price is the one whose performance Dyson seeks to emulate. The image created is that, although the price is at the high end of general run-of-the-mill products, the performance is disproportionately greater. The runaway success of Dyson's vacuum cleaner would tend to endorse this argument.

Real-time pricing

The stock market works by gathering information on supply and demand. If more people want to buy a share than sell it, the price goes up until supply and demand are matched. If the information is perfect (that is, every buyer and seller knows what is going on), the price is optimized. For most businesses this is not a practical proposition. Their customers expect the same price every time for the same product or service – they have no accurate idea what the demand is at any given moment.

However, for businesses selling on the internet, computer networks have made it possible to see how much consumer demand exists for a given
product at any time. Anyone with a point-of-sale till could do the same, but the reports might come in weeks later. This means that online companies could change their prices hundreds of times each day, tailoring them to certain circumstances or certain markets, and so improve profits dramatically. easyJet.com, a budget airline, does just this. It prices to fill its planes, and you could pay anything from £30 ($47/€34) to £200 ($313/€223) (including airport taxes) for the same trip, depending on the demand for that flight. Ryanair and Eurotunnel have similar price ranges based on the basic rule – discounted low fares for early reservations and full fares for desperate late callers!

Internet auction pricing

Once the prerogative of the fine art and antiques markets, auctioning is a fast-growing pricing strategy for a whole host of very different types of business. The theory of auctioning is simple. Have as many interested potential buyers as possible see an item, set a time limit for the transaction to be completed and let them fight it out. The highest bidder wins and, in general, you can get higher prices than by selling through traditional pricing strategies. eBay was a pioneer in the new auction house sector and is still perhaps the best known. But there are dozens of others covering this area and other auction houses you can plug into:

• eBay (
  http://ebay.com/sellerinformation/
  ) has its own training resource helping 160,000 or so people in the UK, PowerSellers as they are known, in the art of successful auctioning.
  
• IBidFree.com (
  www.ibidfree.com
  ), set up by Shane McCormack, a former eBay seller, with the proposition that you can have all the features of eBay but for free. IBidFree.com was created as a perfect opportunity for the person working from home trying to market their products without all of their profits being swallowed up by charges and fees. The rules are few and, unlike eBay, sellers are encouraged to place a link in their auctions back to their own websites. They are also allowed to e-mail each other directly to allow for better communication.
  
• UBid.com (
  www.ubid.com
  ), founded in 1997, went public in 2005. Its online marketplace provides merchants with an efficient and economical channel for selling on their surplus merchandise. UBid currently carries over 200,000 items for auction/sale each day. You have to become a certified merchant to sell on the site, which cuts down on fraud. The fees are no sale, no fee, and then from 12.5 per cent down to 2.5 per cent on sales of over $1,000.