|Illustration: Keith Negley|
Smart CMOs will carefully consider key variables before implementing major shifts in marketing strategy -- so that they avoid the risks associated with drastic change.
But successful implementation of major marketing change is possible. How? By carefully answering three critical questions: What marketing metrics are in play? How will your channel and your competition react to the change? And how asymmetric is reaction to "up" vs. "down" changes?
In analyzing multiple interrelated metrics, anticipating rational and sophisticated reactions by competitors and channel partners, and recognizing that markets react differently to increases in marketing efforts vs. decreases in such efforts, CMOs can get a handle on one of the job's biggest challenges: implementing major changes to their companies' marketing strategies.
Question 1: What marketing metrics are in play?
Marginal changes usually focus on one metric, often sales. Major changes require consideration of multiple, interrelated metrics. For instance, you might plan a major increase in advertising or a significant price cut. The prime objective may be to grow market share. But go the next step. Market share consists of three components: penetration (PEN), the percentage of category users who buy your brand at least once; share of requirements (SOR), the percentage of total category requirements among these users that your brand accounts for; and category usage (USE), total category usage by these users relative to the average. In fact, market share = PEN x SOR x USE, so there are many different ways a major policy change aimed at increasing market share can work. Small, niche brands may focus on SOR and USE, while new brands may want to build PEN. PEN may be all-important in the early stage of introduction to a new segment or to sustain growth through brand extensions, but SOR is key for a product in a steady state that wants to focus on profitable customer retention.
Understanding what you want to change is critical, because marketing mix variables affect these three components of market share differently. Our analysis of Procter & Gamble's value pricing move during the 1990s showed that, at least in mature markets, large increases in advertising improve PEN significantly only for new and small brands, and, despite conventional wisdom about advertising and loyalty, such increases hardly move SOR. In contrast, big cuts in consumer promotion really hurt PEN and don't do much to improve SOR among the smaller group of customers that remain. As a result, value pricing led to some pretty severe losses in market share for P&G.
The interplay among various metrics can be subtle, producing second-order effects on the metrics you were not intending to change. For example, increasing penetration 20% by cutting price won't translate to a 20% increase in market share if the new users you are bringing in are light users or cherry pickers who bring down USE or SOR. Value pricing reduced P&G's costs in the short term, but the substantial cuts in market share it brought were too serious to ignore. A brand that loses significant market share in the very mature and competitive package-goods industry starts to lose distribution, which speeds up further market-share losses, and ultimately the revenue losses outpace the cost reductions. So identify the metric you want to move -- but keep a keen eye on the others that may also be affected either immediately or shortly.
Question 2: How will your channel and your competition react?
When you make major policy changes, competitors and channel partners will react. And the conduit through which your marketing mix reaches the end consumer is far from passive.
The balance of power between the company making the policy change and its retailers is crucial, and leading brands clearly have more leverage to induce retailers to toe the line. But those who ignore retailer reaction do so at their own peril, even if they are market leaders.
So before you make major changes in marketing policy, evaluate how those changes will affect your retailers and, in turn, how they are likely to react. Then you can put in place incentives to align their goals with your own or, at the very least, prepare yourself so that you're not blindsided by their reactions later. In today's environment, the retailer is not just a passive price-taker but a strategic, forward-thinking player with the ability to influence both its suppliers and its customers.
Wal-Mart is the obvious example. Its long-term marketing and information strategies give them the power not just to react to policy moves but also to dictate them. Wal-Mart is not the only one. After years of simply selling scanner data to market-research companies and having suppliers put it to use before they ever did themselves, retailers have smartened up. CVS and the U.K.'s Tesco are just two examples of retailers that are fully leveraging their sophisticated data-warehousing and customer-information capabilities. Indeed, when we developed a model based on game theory that would predict market response to P&G's policy change, we found that actual retailer response was predicted best when we allowed for strategic, forward-looking retail decision making.
Simple models in which retailers continued to set their prices and promotions in much the same fashion as they had before value pricing were rather poor predictors of actual retailer response.
Meanwhile, let's consider the effect of marketing change on competitors. Marginal changes in marketing-mix variables may go unnoticed by competitors, and even if they are noticed, they may not elicit much reaction. But big policy changes are a different matter. The business press notices, the retailer notices, the consumer notices, so competitors would be foolish not to take note.
Of course, predicting competitive reaction is notoriously difficult. But it is possible. In our analysis of P&G's value-pricing move, we found competitors' reactions were directly related to how much the policy change affected them. Indeed, competitors whose market share benefited from P&G's price and promotion changes more aggressively cut price and increased promotions to strengthen their position further.
In contrast, they cut back on advertising. One might argue that they were smarter than P&G in recognizing the impact of promotions vs. advertising on market share and decided to compete with the weapon that was more effective. We also found that smaller competitors react differently than large competitors because large competitors typically compete in multiple markets, with the firm making the policy change. In general, small competitors tend to be more aggressive than larger, multi-market competitors.
Question 3: How asymmetric is reaction to 'up' vs. 'down' changes?
Marketing-mix analysis has gained popularity, especially in the package-goods industry, for simulating the impact of marketing-policy changes. These analyses use statistical methods such as regression to determine the impact of a change in price, advertising or promotion on sales. However, most of these models neglect a simple but crucial issue: the impact of an increase may be different than the impact of a decrease. In fact, market response is asymmetric. For example, our research has found that brands with high equity enjoy a significant advantage because consumers react minimally to their price increases but react strongly to their price decreases. Previous research has found "heavy-up" advertising tests often have little impact. That may mean that, at the current level of advertising, further increases are not needed -- how many times does the customer have to hear that Tide gets clothes clean? However, this doesn't mean that significant decreases in advertising are necessarily warranted. Statistically, it is feasible to differentiate between the impacts of increases and decreases. But this issue is usually ignored. Managers need to be aware of it and guide their marketing-analytics group to consider it.
Retailers and competitors are also likely to react asymmetrically to increases vs. decreases. Aggressive competitors are more likely to follow you down in price than up, and retailers with some power are likely to pass along price increases while pocketing part of any price decreases. Similarly, retailers may not react much when you increase advertising beyond already high levels, but if you make significant cuts in advertising, they are more likely to cut merchandising support or even drop a few SKUs.
Marketers don't, and shouldn't, make major changes in marketing policy all the time. But with the radical shifts in technology, consumers, channels and global competitors, such inherently risky changes are becoming necessary more often. CMOs can't afford to shy away from change, nor can they afford to make costly mistakes as they experiment with change. Careful analysis of these three questions should help CMOs embrace and lead change when needed, while anticipating and controlling the sources of risk.