Those Who are Slaves to Fat Profits, Never Master Consumer Needs

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Peter Drucker was not only a management guru, he was also a marketing sage.

Mr. Drucker presaged the now almost taken-for-granted phrase, "the consumer is boss." In one of his many books, he declared: "true marketing starts out with the customer, his demographics, his realities, his needs, his values. It does not ask, what do we want to sell? It asks, what does the consumer want to buy?"

Yet Mr. Drucker, in a Wall Street Journal article, also pinpointed why many companies persist in selling consumers what they want them to buy. In an article headlined, "The Five Deadly Business Sins," he stated: "The first and easily the most common sin is the worship of high profit margins and of premium pricing.

"The worship of premium pricing always creates a market for the competitor. And high profit margins do not equal maximum profits. Total profit is profit margin multiplied by turnover. Maximum profit is thus obtained by the profit margin that yields the largest total profit flow, and that is usually the profit mar-gin that produces optimum market standing."

Mr. Drucker, writing in 1993, ascribed GM's troubles-and those of the U.S. auto industry-to "the fixation" on profit margins. This over-zealousness led U.S. automakers to ignore the small-car market (Volkswagen gained almost 10% of U.S. sales). "A few years later, after the first oil crisis, that market had become very large and was growing fast. Yet the U.S. automakers were quite content for many years to leave it to the Japanese, as small-car profit margins appeared to be so much lower than those for big cars" like SUVs.

Today that same worship of fat profit margins is causing GM to bet the ranch that full-size SUVs will revive. As Automotive News reported: "The multi-billion dollar question: Has the recent run-up in gasoline prices rattled consumers permanently? In the past month or so, gasoline prices have fallen. Will consumers flock back to big trucks (SUVs)? Watch those sales numbers closely. They'll tell you a lot about GM's fortunes."

I've noticed over the years that car guys normally don't say anything of a negative nature about other car guys, even the competition. That's why I was startled when the head creative guy at TBWA/Chiat/Day on Nissan lit into the GM pricing strategy.

Listen to what Rob Schwartz told Automotive News: "What kills me as an American is to see GM not live up to its promise. You have a magic brand in Chevrolet. It should be as iconic as Jack Daniel's, Coca-Cola and Levi's. Yet GM is forcing everybody to think about employee pricing. It's a waste of agency and client resources."

He contended employee pricing was "a real good tactic that should have had a very short, one-time effort. They should have said: `We've done that, and now we are moving on. Now we want to talk about the magic of the Silverado.'

"This is endemic to GM. GM's marketing machine has almost become like a cellular phone company. How many different ways can I tell you about a new offer?"

Apparently an unlimited number. Its message morphed from a short-lived and muddled "value pricing" approach-which it forgot to explain-to a "red tag" sale where it inexplicably picks up some of the lingo from value pricing and proclaims you won't pay "a penny more" than the tag says-as if anyone would be dumb enough to offer more.

I like what Peter Drucker said about corporate profits. Profitability "is not the explanation, cause, or rationale of business behavior and business decisions, but rather the test of their validity."

That rather neatly sums up why GM will be mired in red ink for the foreseeable future. It continues to flunk the validity test.

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