Sponsor Content Above the Clutter with Pete Krainik
Episode Four: St. Louis Cardinals
Brought to you by: IBM
Many marketing managers overlook a simple principle: In the long run, every category coalesces around two major brands.
Cola: Coca-Cola and Pepsi-Cola.
Toothpaste: Crest and Colgate.
Mass merchandisers: Walmart and Target.
Energy drinks: Red Bull and Monster.
Home improvement warehouses: Home Depot and Lowe's.
Videogame players: PlayStation and Xbox.
Ride-hailing services: Uber and Lyft.
If your brand is not one of the two major brands in your category, then you have a problem.
Take a mythical battle between four brands. The assumption is that the brand with the better product, the better pricing, the better marketing program and the better advertising agency will win in the marketplace. That's not reality.
AT&T, Verizon, Sprint and T-Mobile
Here are last year's revenues for the four leading telecommunications companies.
AT&T: $146.8 billion
Verizon: $131.6 billion
Sprint: $34.5 billion
T-Mobile: $32.1 billion
Two are very successful and two are not. Can you guess which are which?
Last year, AT&T made $13.3 billion in net profits, a profit margin of 9.1%. Verizon made $17.9 billion, a profit margin of 13.6%.
But Sprint lost $3.4 billion and T-Mobile had a profit margin of just 2.3%.
Now which company has the better service, the better pricing, the better marketing program and the better advertising agency?
Does it really matter?
What really matters is which two brands dominate the category. And once you dominate your category, your brand becomes almost invulnerable to competition.
GE, Westinghouse and Allis-Chalmers
After college, my first job was in the industrial advertising department of General Electric. Our two major competitors were Westinghouse and Allis-Chalmers. Here are sales of the three companies in the year 1954.
General Electric: $2,960 million
Westinghouse: $1,630 million
Allis-Chalmers: $492 million
Looking at these numbers could you predict what might happen in the decades to come?
Allis-Chalmers went bankrupt in 1987. Westinghouse is now a nuclear-power company owned by Toshiba. And General Electric is the world's 13th most-valuable company worth $291 billion on the stock market.
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Allis-Chalmers was a weak No. 3, so it's not surprising the company is no longer with us, but what happened to Westinghouse?
Business goes global. That's what happened to Westinghouse. Today, many categories have become global, not just national. So now we still have three giant industrial electrical companies. One in America, one in Germany and one in France. Here are sales of these three companies in the last ten years:
General Electric: $1,565 billion
Siemens: $1,019 billion
Alstom: $342 billion
But sales alone are not the only measure of a company's strength. Even more important is a company's net profit margin. And as you might expect, the more dominant the company is in its category, the higher its net profit margin.
General Electric: 9.9%
So will history repeat itself? Of course, and the process has already started. Alstom is facing financial problems. It lost money its last fiscal year and late in 2015, the company sold its power and transmission business to General Electric.
Duality is not equality
Almost never are the two market leaders equal. The leading brand almost always has a clear-cut lead over the No.2 brand. In the global market, Coca-Cola has a substantial lead over Pepsi-Cola. Why is this so?
Because one of the two brands is always perceived as the "leader" and the other brand is perceived as a No.2 brand. And guess which brand most consumers want to buy?
The leading brand.
That's why many No.2 brands have to cut their prices to maintain decent market shares. And cutting prices cuts a company's net profit margins. Over the past ten years, PepsiCo's net profit margin was 11.4 percent and Coca-Cola's was 20.4 percent.
For a No.2 brand, competing on price is a two-edge sword. It might increase sales, but it also reinforces the "leadership" of the No.1 brand. When consumers see two brands side by side and one brand, the leader, has a higher price, they assume the leading brand is "better quality."
Over the year, the higher prices of brands like Hellmann's mayonnaise, Land O'Lakes butter, Kleenex tissue, Scotch tape and many other brands have hammered this quality idea into consumers' minds.
In many categories with established leaders, it's almost impossible for a No.2 brand to compete except by lowering its price. And that makes the leader even stronger.
Wait a second. What if the No.2 brand has the better product, the better marketing program and the better advertising agency?
It doesn't matter. Look at the Energizer bunny, according to Advertising Age, the 34th best advertising campaign of the 20th century. Did the bunny make Energizer the leader in appliance batteries? No, it did not.
Coping with duality
If you believe in duality, there are principles you need to follow.
Get in the game early. Toyota entered the American market in the year 1957, closely followed by Datsun (now Nissan) and Honda.
Uber was founded in March 2009, but Lyft was not founded until June 2012, three years and three months later.
Will Lyft ever overtake Uber? Not a chance. You can't give a competitor a head start of more than three years and hope to win the battle. Currently, Uber takes in 12 times the revenue of Lyft.
Avoid multiple brands when competing with a leader. Long term, there is only going to be room for two brands, the leader and hopefully one of your brands.
So why waste resources on two brands when there's only room in the mind for one additional brand besides the leader?
In competing with Bud Light, why does MillerCoors spread its marketing resources over both its Miller Lite and its Coors Light brands?
In competing with Nike, why does Adidas spread its marketing resources over both its Adidas and its Reebok brands? That just leaves room for Under Armour.
Focus on launching new categories. Sooner or later, every category will contain two dominant brands. And market share gains are going to difficult to achieve for either brand.
If you own one of these brands, you need to defend your position with marketing resources. But don't overspend.
Consider using most of your resources to launch a new brand that will define a new category for decades to come.