If Henry Ford asked customers what they wanted, they would have said a faster horse and other myths

Henry Ford supposedly said that if he listened to his customers he would have made faster horses.  There are a few things wrong with this quote.  It doesn’t appear to historically accurate.  OK, perhaps the quote is educational. . . . . well, not so much.  Let’s assume for a minute that one of the things customers said is, “I want a faster horse.”  Fair enough.  A competent market researcher would simplify that comment to, “Faster.”  What else might a pre-automobile customer have said?

“I spent too much time taking car of the horse even when I’m not traveling.”  Which could be said as, “No maintenance when not in use.”

“I don’t like getting wet when riding.” Which could also be, “Covered/enclosed compartment for traveler.”

“It takes too long to get the saddle and gear on the horse when I want to go somewhere.”  Which could be restated as, “No pre-travel time.”

The marketer now has a list of requirements:

“Faster.”; “No maintenance when not in use.”; “Covered/enclosed compartment for traveler.”; “No pre-travel time.”

Steve Jobs is said to not have listened to customers because he said, “It’s really hard to design products by focus groups because sometimes people don’t know what they want until you show it to them.”  Designing by focus groups is incredibly difficult but with a focus group Apple could have understood that before the nano that customers had limited music selection because of carrying all the tapes, it was difficult to carry a big selection and mixing music from different albums was a chore.  That would give the product developers a list of requirements to innovate toward.

Implicit vs. explicit research methods

Implicit methods generally what happened but generally don’t tell you why it happened.  This is good for showing trends or interrelated behaviors.  Explicit methods ask the customer why they acted as they did.  They attempt to understand the customer motivation to understand how the customer would act in a similar situation in the future.

Examples of implicit research methods include analyzing sales and profit numbers, web analytics, customer observations and some types of surveys.  Examples of explicit methods include focus groups, customer service, employees, social media and online communities.

Understanding your customer requires a combination of both methods.  Implicit quantitative analysis tells you exactly what happened.  By comparing different markets, regions, test groups or time periods you will be able to truly understand what outcomes result when changing certain of your inputs.  Unfortunately, you won’t understand why the outcome happened that way.  That limits your ability to transfer that knowledge to slightly dissimilar scenarios.  By laying explicit information over the implicit data, you will have an understanding of why the customer responded the way they did.  That will empower you to better aim your marketing in the a greater variety of scenarios in the future.

Pricing to profit

The simplest way to price is cost plus pricing.  That is, determine how much it costs you to provide your product and add some factor.  A company that supplies to a department store may do a factor of four to the final consumer.  For example, it costs company X to $25 to make a product.  They may sell it to a department store for twice that, $50, and the department store my price it to the final consumer at $100.  Of course little things get in the way of that like promotional strategy.  Department stores are heavily promotional so they may price the product at $200 so that they can sell it to you at 50% off.  Cost plus pricing requires that you have done your market research on which features and functions the consumer requires.  Otherwise you may double the cost of the product and therefore the final retail by adding features the consumer is unwilling to pay for.

Cost plus is simple and it guarantees your products will make a similar margin percentage but it isn’t the most profitable way of pricing your product.  A better method is pricing to what the customer is willing to pay.  For example, working with Swarovski, I priced a foot tall pure crystal bird sculpture (which would have pricing according to Swarovski’s pricing methodology at $650) at $885.  I knew that the consumer would be willing to pay more for such a majestic piece.  What also helped my pricing decision was that I knew the product was supply constrained.  That is, we were likely to not be able to satisfy all of the consumer demand.  Therefore, Swarovski’s profitability was maximized by raising the price where demand would equal supply.

The goal of pricing is to price to the PROFIT maximizing level.  I stress profit because too many people attempt to maximize sales.  Let’s use a simple example.  Through analysis, you feel that you could sell 1000 units of a product at $10, 500 units at $15 or 250 units at $20.  Sales in these examples would be $10,000 at $10, $7500 at $15 and $5000 at $20.  If the product cost you $9 to make at $10 you would only have made $1000 in profit.  At $15, you would have made $3000 and, at $20, you would have made  $2750.  Therefore, pricing to maximize sales would have you at $10 while pricing to maximize profits would have you at $15.

Competitive Analysis

A useful tool in understanding your business is in understanding your competitors.  More importantly, you must understand how your customers perceive you vs. how they perceive you competitors.  This can be done by evaluating which characteristics consumers value in your type of product and service for both you and your competitors.

I’m going to take a quick tangent and remind you about customer segmentation.  Different segments of customers will value different things.  For example, my commuter car is comfortable and safe but all I care is that it gets me where I’m going as inexpensively as possible since I put on a significant number of miles each week.  While reliability is important, I am more concerned about price and mileage.  I have at least 140,000 miles on it and will probably double that before I think about replacing it.  A friend of mine was driving back from a later event with her three small children in her car.  The car broke down completely unexpectedly.  This was back before everyone had a smartphone.  She was stuck in the middle of nowhere with her kids for a long time before someone pulled over and offered to call AAA for her.  Even then, she was nervous about the stranger in the middle of no where.  She values reliability over everything else.  There was no way that she was going to be in that situation again….. ever.  She has purchased a new car every three years, regardless of how well she may love her current one.  She also won’t consider an entry price point car because she perceives them as less reliable.  Two different segments.  Me, ok I’m cheap.  My friend, Ms. Reliable.

Back to competitive analysis.  Start by compiling a list of different functions, features and attributes about your product and your competitors’ products.  Keep in mind that you want to understand the consumer perception of the products.  For example, if product quality is a key differentiator and you could put your product up against a dozen competitors in a third party lab and prove without a hesitation that your product’s quality is superior but the consumers have a perception that the competitors are of higher quality than you, you lose that comparison.  Common attributes include performance, price, quality, convenience, reliability, etc.  Don’t forget that even if you are providing a product, the delivery process is part of the consumers’ perception.  Therefore, you may need to include things like knowledge sales associates, return policy, hours of operation, etc.

A survey works well for creating what some call an importance-performance analysis.  For each attribute for each product you want to test, you need to have the respondent provide two points of data.  First, how does this specific product deliver against the attribute.  For example, on a 7 point scale rate how product A satisfies each of the following attributes: price, delivery, reliability, quality, etc.  Additionally, you need to know how important each of those attributes are to the customer.  Back to the car’s, I would rank price as more important than reliability while my friend would be the reverse.  In this case, I suggest force ranking the attributes.  That is, if you have six attributes you are measuring, have the respondent rank them in importance.  Importance of feature can be an excellent method for segmenting your customers.

Once you graph the result, you can see which areas you are superior and inferior to your competitors AND you can tell how important each of those areas are.  Good rule of thumb, the more important the attribute, the more you want to be better than your competitor.  The less important the attribute, the less it matters.

Customer (Market) Segmentation

Customer segmentation, also called Market segmentation, is classifying your customers into different segments based on similarities or differences in their need.  To segment, you need to collect as much data as possible about how your customers are using your product, which features they value and where are they in relevant point in life statistics.

Relevant point in life statistics means understanding where customers of your product generally are in their life.  For example, if you are selling products to new mothers, the relevant point in life you are most interested in is that they just had a baby.  Additionally, you may consider segments as pregnant women, couples seeking adoption and new grandparents.

A simple example is a service that provides roofing to home owners.  In a town with 100,000 residents, there may only be 20,000 owner occupied residences.  That is one rather large segment.  Depending on the business, this segment can also be divided by neighborhood, considering that most homes within a neighborhood are not only of similar age but the owners are generally in similar income brackets.  Another large segment could be owners of rental homes.

Market Research and the role of the Marketing Manager

The Marketing Manager focuses the business on getting the right goods and services to the right people at the right place and time with the right price through the right combination of promotional activities.

In other words, the four P’s of marketing: Product, place, price and promotion.  If the Marketing Manager has absolute knowledge, aligning the company’s P’s with the customer’s needs is a very easy task.  Unfortunately, the four P’s are filled with uncertainty.  Uncertainty is why companies fail.

This is where marketing research comes in.  Through marketing research the Marketing Manager gains insights on the customer’s unsatisfied needs, when and where the customer will need the product or service, what the customer is willing to pay and the how the customer should be contacted.

Marketing research is all about understanding the customer.  Even researching competitors is about understanding how they are relating to their customers . . . . . and perhaps how you can steal their customers away.

Marketing research simply reduces the uncertainty inherent in the Marketing Manager’s role.  While it is impossible to completely remove uncertainty even improving decisions by as little as 10% can have a significant impact on the company’s profitability.  Imagine pricing your product at $60 instead of $50 with minimal loss in unit sales because you were able to better understand what your consumer was willing to pay.

The market is constantly changing.  Customers gain and lose interest.  Competitors move into and out the market.  Technology requires adjusts the customers needs.  This means the marketing research is a necessity at all times.  The Marketing Manager must continually gather new information and test old knowledge.