How Much Money Would It Take to Open a Streetside Market

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The author of this article says he would be the last one to argue that the approach described here is a complete view of marketing. Then again, he is convinced that the approach enables marketers to achieve three important objectives. First, it enables them to identify the markets in which their companies have the best opportunities to reap large profits. Second, it enables marketing executives to identify the tasks that must be done to seize the opportunities mentioned. Third, it makes it easier for management to see how to fit together the basic pieces of the company's marketing approach so that the activities are consistent with and reinforce each other.

Some companies make a great deal more money than others. While there are many reasons for this, three stand out from a marketing point of view. First, the companies are active in the right markets—those in which it is easiest to make substantial profits. Second, the companies concentrate on doing a few important tasks very well. In a phrase, they do the right things. And third, they do those right things consistently in the right way—that is, with consistency.

The purpose of this article is to clarify these three basic causes of success. This article is not a primer. It concentrates on basics because the basics are important, not because they are easy. Nor is this article a revelation of "the three secrets of marketing success." Rather, what I shall try to do is:

• Identify in generic terms markets that are right for a company—those markets that enable it to make substantial profits.

• Discuss the right tasks for a company's marketers—those tasks that, if done well, will lead to success.

• Describe the right way to do those tasks.

In this article, I shall use the word company broadly. In actuality, a large company has operating units in many different businesses. Accordingly, the term operating unit might be more precise. In some cases, however, even an operating unit is in different businesses. For the sake of a simple shorthand, therefore, let us use company as if only one business were involved.

The ideas presented here are somewhat exploratory in that several of the concepts being discussed have not been completely defined, and others remain difficult to measure. Operating managers and analysts, however, have already found the basic conceptual framework to be useful in understanding the nature and profitability of their businesses. The precise applicator of these ideas to service, as opposed to manufacturing, businesses is the least well-developed aspect of the article and therefore offers the most opportunity for further investigation.

The Right Markets

Companies operating in some markets seem to be more profitable than those operating in others. For some time the differences seemed to analysts to be more dependent on the type of market than on the activities of the individual companies. For example, one important criterion was the commodity nature of the market. Managers who marketed products such as rock salt and sulfuric acid would lament that "this is a price business—customers buy our commodities only on the basis of price." A colleague of mine, Martin V. Marshall, used to illustrate the criterion as follows on the blackboard:

This conceptualization helped students and marketers to visualize how an undifferentiated commodity is the opposite of a highly differentiated one—often called a specialty or proprietary item. (Of course, his example of a specialty product is not as good as it used to be, since Kodak has introduced its own instant cameras, but the point will be clear enough if the reader thinks back a few years.)

Actually, as marketers are increasingly coming to realize, differentiation is possible even in so-called undifferentiated commodities. I refer to what has been called the augmented product.¹ This concept refers to the total bundle of benefits that the customer receives from a product, including both its physical and service attributes. While the product, say, sulfuric acid, might not differ among competitors, the service provided by competing companies—for instance, technical support and delivery reliability—can be used to differentiate suppliers and, accordingly, the total bundle of benefits each supplier offers. The company's services are thus differentiated even if its physical products are not.

Dimensions of Differentiability

We should focus on the potential for differentiation, which I shall call differentiability, rather than on the actual amount of differentiation present. This is because we now are interested more in the nature of the market than in how companies operate in that market.

The two dimensions of differentiability—physical and service characteristics—lead to a matrix or grid like that shown in Exhibit I. Clearly, the two dimensions are actually continuums. However, it is easier to think about the general concept if we artificially separate the continuum into the high and low ends.

Exhibit I Dimensions of Differentiability

Taking the physical characteristics first, let us consider two examples:

• Some products offer little opportunity for differentiating the physical attributes of one brand from another. Thus a simple product like rock salt might be described by only two physical attributes—purity and particle size. The relevant range of variation in these attributes, as well as the practical impact of the variations, seems small. Therefore, it is difficult to differentiate the product, at least in terms of its physical properties.

• In contrast, large main-frame computers offer a great deal of opportunity to differentiate a product physically. The number of physical attributes, their relevant range of variation, and the practical impact of the variations all are large.

The same type of analysis can be made for the service dimension. The differentiation, furthermore, can be physical, or, as in the case of some consumer goods, it can be the result of promotion. In general, the less opportunity there is for differentiation along the physical dimension, the more emphasis there is on differentiation along the service dimension.

Companies selling hard-to-differentiate products emphasize the "soft" service attributes of the augmented product, such as the quality of company salespeople, reliability of delivery, or personal benefits. Thus cigarette and liquor advertisements often focus on the psychological and social benefits of the product (e.g., prestige and peer group enjoyment) rather than on such physical aspects as filter, length, and tobacco.

Why is differentiability important in strategy? High differentiability provides an opportunity for high profits. It provides room for a company to adjust the physical attributes and service content of the product so that it gets closer to consumer needs and stands apart from competitive offerings. At the same time, differentiability represents risk. It forces the marketing manager to cope with a more complex product. Also, it allows competitors to use greater flexibility in their own marketing.

In short, companies in the upper right-hand corner of the grid in Exhibit I face both greater return and greater risk than do companies in the lower left-hand corner.

Price Sensitivity

Many products are parts of larger systems in use. A lathe, for example, might be part of a total factory or production system. A bearing is a component of a motor. Floor cleaning compound is part of the floor cleaning process. And many services are parts of systems operated by buyers—for instance, engine service and maintenance of a customer's car or car fleet and security services offered to banks and stores.

Any single product has two distinct impacts on the system of which it is a part. It has an impact on total system cost and on total system performance. These two types of impact determine the price sensitivity of the customer. The customer will be sensitive to the price of a product that has a high impact on the cost of the system. If, let us say, the motor is 50% of the cost of the fan, the fan producer is going to pay careful attention to what he is paying for the motor. But if the motor has a crucial effect on the performance of the system, as well as a smaller impact on the cost of the system, then that consideration dominates, and the producer is less sensitive to the price he pays. Exhibit II brings these points together.

Exhibit II Price Sensitivity of Customer

To illustrate price sensitivity further, here are two more examples:

• A low-price gasket (e.g., $5) determines whether a $30 million chemical plant operates as it should. This is a prime example of high performance impact, low cost impact, and low price sensitivity.

• The choice of a medicine is very important to a patient's chances for recovery. Although the medicine is expensive, its impact on the total cost of life support for the patient is small. The result again is low price sensitivity. This could explain some of the traditionally high margins in the health care industries.

Effect on Margin

The two dimensions described, differentiability and price sensitivity, can be combined as in Exhibit III. We see that, not surprisingly, high margins occur in businesses of low price sensitivity and high differentiability. The obverse is also true. The lesson: go into an industry with high differentiability and low customer sensitivity to price.

Exhibit III Margin as a Function of Differentiability and Sensitivity

Thomas V. Bonoma of the University of Pittsburgh has identified an important interaction between price sensitivity and differentiability. Those products that are differentiable, he suggests, are differentiable because they have a substantial impact on the performance of the system of which they are a part. (They are not differentiable, in the customer's thinking, because of variations in composition, operating speed, and durability per se.) If this is so, it would make the argument for being in the low price sensitivity/high differentiability quadrant even more powerful.

To this point, I have attempted to identify industry situations in which there exists the potential to make large profits. But that is not the whole story. Companies that operate in the same industry often differ in profitability. The winners do some things better than the losers.

What are those tasks that the winners must do better? This question brings us to the second point—the right things for marketing people to do.

The Right Things to Do Well

Marketing and management folklore are full of statements that stress the generally held belief that an organization or individual cannot do all things well. "You can't be all things to all people," we say, and "Analyze your strengths and weaknesses."

Marketing is an incredibly complex task of relating a company's abilities, which vary over time, to customers' needs, which also change. It is made more complicated by competitors who get involved in trying to meet customers' needs and by the necessity of managing nonquantifiable (or at least unquantified) costs and customer relationships. To do the task well requires concentration on those aspects of the task that are most important, paying relatively little attention to the less important aspects.

This, in turn, means that it is first necessary to identify the important things. By definition, the important things are those aspects of the task in which a little effort generates a lot of return. Activities that reward management in this way are said to have leverage.

How can management identify the points of leverage in different types of markets? The answer to this question involves the relationships among some seemingly insignificant yet profoundly important variables. These variables are shown as the two dimensions of Exhibit IV.

Exhibit IV Analyzing What Things Must Be Done Well

These two dimensions—degree of customization and run length—are seldom viewed with any strategic significance. Yet they are of overwhelming importance. Indeed, the degree of customization in a product line or line of services marketed is beginning to appear to be the most important product policy variable for industrial goods producers and many other types of companies.²

The other dimension, run length, refers to the size of each line entry on an order. This is run length in a manufacturing sense—the number of exactly identical products, services, or materials ordered at one time.

The two variables, run length and degree of customization, loom large because the marketer plays a "bridge role" in relating customer needs and company manufacturing capability. To explain, let me describe each quadrant in Exhibit IV.

Long Product-Service Runs

Long runs of identical products with low customization lead to what I call manufacturing-oriented marketing, as shown in the upper left-hand quadrant. The necessary competitive element here is cost leadership—that is, being able to produce the product at a low cost, preferably lower than competition. If the technology is stable enough to allow it, automated equipment will be used to decrease variable cost. Many standard industrial components and raw materials fit this model. Simple consumer products such as children's underwear and socks also fit here.

In service businesses, an example of manufacturing-oriented marketing might be the industrial linen supply business, where companies rent linens to hotels, restaurants, and so on.

Long runs and high customization, the upper right-hand quadrant, are typical of businesses such as defense and the manufacture of components for original equipment manufacturers. I call this section account-oriented marketing to reflect the emphasis on a few large accounts with very definite needs. Here, a company will be engaged, say, by the government to make a missile in fairly large quantities. Over time, the missile will go through some change, but essentially it is a product customized for one customer need.

This type of selling requires strong account management and applications engineering functions. The applications engineering is needed to manage the customization process, including the fitting of the product into the system of which it is a part. In the service sector, the construction of large, unique items such as nuclear power plants, telephone systems, and the Alaska pipeline also seem to go in the upper right-hand quadrant. Here, run length should be viewed in terms of dollar size, not number of items.

Before going further, let me clarify several terms. A distinction should be made among the terms sale, order, and order line or run length:

A sale is a commitment by a prospect or customer to purchase something. Sometimes it leads to an immediate order. This is typically the case with capital equipment. The customer says, "I'll take a green one with a 20-foot bed and a 7-horsepower motor and…"

In other businesses, the order does not accompany the sale. In the paper business, for instance, the salesperson of a merchant or wholesaler may get a statement from a printer such as, "Yes, the next time I need a heavy glossy cover stock, I will order that grade from you." Or a lubricant salesperson from the factory might hear, "Yes, when I'm down to my last drum of the product I am using, I will order ten drums of your grade 70 from your distributor."

A sale might imply many orders. A corporate purchase agreement might cover the annual needs of a variety of items. Each order is the request for some merchandise to be delivered at a certain time and place.

A single order, which becomes an invoice when shipped, may have many line items, each for a different precise item of merchandise. A distributor might, for example, receive an order for 20 or more different items with the quantity and precise description of each item on a different line. Hence the term order line. As can be seen from the foregoing discussion, it is not sufficient to talk of sales or even of orders. To fully understand the marketplace, one must go down to the level of an order line—the ordered amount of a specific item.

Order-based Marketing

Short orders of proprietary items bring us to the lower left-hand quadrant, which I call order-based marketing. Because of the short runs and standard nature of the uncustomized product, the orders are often shipped from inventories held in the field and/or factory. Because the profit per order (and perhaps per sale) is low, the distribution system must be very efficient. The product line needs to be carefully managed because inventory exposure is high. The large number of items often masks the activity, or inactivity, of the individual items, and this situation leads to frequent imbalance in the inventory.

This type of situation requires careful distribution management (often using dealers' distributors) and careful product-line management. Consumer packaged goods such as toothpaste and powdered detergents fit into this quadrant. In each case, distribution is critical. For example, a good deal of Procter & Gamble's highly respected advertising effort, while apparently directed at the consumer, is actually used to obtain strong retailer support. In the industrial sphere, maintenance, repair, and operating supplies such as tool room grinding wheels (but not production grinding wheels) and miscellaneous nuts and bolts fit this category.

In service businesses, an example of order-based marketing is photo finishing—that is, the production of photographs from the consumer's exposed film.

Flexible Marketing

Finally, we have the lower right-hand quadrant which, for lack of a better name, I call flexible marketing. Products include custom-designed clothing and custom-built houses in the consumer market and custom-built machinery in the industrial marketplace. Such products require short runs but high customization. Because of the customization, orders cannot be shipped from inventory; they must be produced to customer specifications.

Operations in this quadrant tend to be job-shop oriented, and often they are performed by small companies, which have the advantage of flexibility. When the work is performed by large companies, the sales and manufacturing units tend to be decentralized and in some way organizationally linked. In general, capacity exceeds demand because some part of the manufacturing operations is almost always out of balance. Not all departments and/or machines need to be used for any given order.

The only way to support this type of operation is to have a high gross margin. The ratio of labor cost to capital investment usually is high because of the short runs. Automated equipment, unless made flexible by computer control, is of limited usefulness because of the high setup time needed, which cannot be justified for short runs.

As I just mentioned, industries like this tend to be populated by small companies. A good example is custom store fixtures made especially for one department store unit. The companies that compete successfully here have highly trained manufacturing people who work from fairly complete sketches, not blueprints. The plant manager is also the sales manager—and often the owner, too. He or she bids for jobs on the basis of available capacity, carefully adjusting the price and sales effort to the product mix already in the shop.

A good portion of the industrial spring business and some segments of the paper box and envelope industries fit this quadrant. Large companies generally have organized their operations with local autonomy. Local general managers have plant managers and sales managers reporting to them. The local team is usually evaluated jointly on the basis of some measure of profitability.

One large spring company uses a different method to tie manufacturing and sales. The salespeople report to one centralized sales management office. When a salesperson receives a request for a quote from a prospective customer, he or she transmits it to three plants, each of which autonomously develops a quotation including price, quality, and delivery date. The salesperson then chooses which quote to pass on to the customer. In essence, this company creates an internal auction marketplace to perform the coordinating function normally handled by a local manager.

Some large, one-of-a-kind sales may fall more appropriately in this quadrant than in the upper right-hand quadrant. Service businesses in this quadrant include custom engineering and design, management consulting, and legal services.

The Right Way

Having identified the right tasks that a marketer must do especially well, let us turn to the other aspect of successful marketing—doing the right things in the right way. How does a company get all of its marketing horses to pull together in the same direction?

As managers know, marketing is an exceedingly complex task. Part of the reason is that it is hard to develop general knowledge given the wide range of marketing situations and the many approaches available to marketers. This situation makes it particularly important to reduce marketing to generalizations that seem applicable in many situations. The simpler the generalizations in such a situation, the more powerful they can be.

The base generalization is that successful companies not only know what functions to do well but also manage to make all of their activities consistent with one another. All functions in marketing amplify each other, and nonmarketing functions meld with marketing functions, further amplifying the total effect.

If consistency is absent, the resources of the company are dissipated in useless internal struggles. If it is present, the company has enormous power. In its simplest form, marketing is involved with four things: product, price, communications mechanisms, and customers and prospective customers. The primary task of the marketer is to bring these four elements into congruence so that each amplifies and is amplified by the others.

All marketing strategies are made up of combinations of one to four basic strategies, each corresponding with one of the elements just mentioned. The strategies and their action implications are:

• Product modification—Change the product so that it meets existing customer needs at the existing price and can be communicated by the existing mechanisms.

• Price change—Change the price (usually down) so that customers will purchase the product as communicated by the existing mechanisms.

• Communications improvement—Change or develop advertising, promotion, and sales presentations so that customers will buy the product at the current price.

• Market development—Find prospects who can be convinced by the communications mechanisms to buy the existing product at the current price.

This list differs from the standard so-called marketing mix in that distribution channels are omitted. I see them functionally as a part of the product, price, and communications mechanisms. The distributor, for example, might inventory the product and customize it in some way (first strategy mentioned). This makes for a broad definition of the product, but it is consistent with the augmented product idea mentioned earlier. Thinking of strategies in this way calls attention to the implicit tradeoff between (a) having the product and communications functions performed by a distribution channel and (b) having the company do these things itself.

Consistency is the exact congruence of the four elements mentioned; it occurs when all four elements of the approach fit together. Effective marketing programs continually stress the importance of congruence. When one or more of the elements are not synchronized with the others, marketing falters. Clearly, a task as complex and subtle as marketing cannot afford to lose any of the scarce resources that are directed to it.

Trying Out the Concepts

The conceptual frameworks presented here are quite incomplete. My purpose has been to enable marketing managers and analysts to perform their role more easily and better by:

1. Identifying those markets in which a company has the greatest inherent opportunity to reap large profits.

2. Identifying those tasks that must be done well in order to realize the opportunity.

3. Stressing the importance of having all of the basic pieces of the company's marketing approach consistent with one another.

Analysts will have several tasks. The first, clearly, is to assess objectively the usefulness of these frameworks, particularly the first two because they are novel, whereas the third one is just a restatement of things people have said before. If the first two frameworks seem to have some validity, then analysts will have to develop meaningful ways of measuring the factors discussed in them. How, for example, do we measure the impact of a single product on the performance of a customer's usage system? What is a reasonable way to distinguish between products where the potential for differentiating the service component is high versus those where it is low?

Managers, too, will have to assess the validity of the ideas presented here. They will also have to determine how useful the constructs are in practice. It will be their task, with some help from scholars and analysts, to determine the strategic and tactical implications of the schemes presented here. Referring back to Exhibit II, for example, what does a manager do with a business that is in the lower left-hand corner?

In the meantime, perhaps these frameworks will prove useful to marketing analysts and managers, contributing both to their marketing success and the further development of the concepts themselves.

1. Theodore Levitt, "The Augmented Product Concept" in The Marketing Mode: Pathways to Corporate Growth (New York: McGraw-Hill, 1969).

2. Research on this subject is going on at the Harvard Business School as part of an investigation of product policy being conducted by Barbara B. Jackson, Thomas V. Bonoma, and myself.

A version of this article appeared in the July 1979 issue of Harvard Business Review.

How Much Money Would It Take to Open a Streetside Market

Source: https://hbr.org/1979/07/making-money-through-marketing

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