Thursday, 18 December 2008

Marketers identify consumer needs. Markets satisfy them.

On a recent visit to the grocer’s, we observed the following. A number of companies have branded rice, salt and wheat flour, but none of these companies sold branded sugar.

Given the concern today on healthy diets, low cholesterol and sugar diets have become much talked about. But while companies have worked to reduce the harmful effects of edible oils, not much work has been done on sugar. We are expected to take to sugar substitutes and the aim is to develop substitutes that taste as well, without the harmful effects.

(Not the same thing. Anyway, this reflection requires some more research.)

However the thought raised another question. That in the commodities business (wheat/ salt/ rice/ sugar etc), there is a trend towards “de-commoditisation”. In something as basic as these elements, companies in India are trying to find “value add” opportunities to create a differentiation. (We have not observed this in more advanced markets; and perhaps that’s why this stood out).

The role of the marketer is to define “segments” on which relevant ( to the consumer) and profitable/ sustainable differentiation can be built. Create markets.

Not all markets start as commodities, but a large number of industries based on processing naturally available raw materials start there.

Then the markets follow four stages.

Stage 1: Commodity: Sugar/ iron ore/ cooking oil/ petrol/ salt etc. These are extracted and then sold. While the market volume indeed is large, the number of consumers who would pay for a brand that adds no value to the commodity is likely to be very low. Companies should not be spending money in mass consumer communication here. The “above normal” profits would not be available.

Stage 2:
Companies identify the possibility to add value on these materials to satisfy an apparent or non obvious need. For example, in India the health benefits of adding iodine to salt developed the salt market in an entirely new way.

The role of marketing media here is to connect to the end consumer to explain the benefit of the new innovation. Education is the key. Above the line drives the speed of this education.(in the consumer goods space).

A late entrant in this stage usually plays the role of “spoiler” and will drive down prices to gain market share. In essence, over time this category will step down to stage 1 commodity level.

Late entrants usually have to invest in their brand, as they category has been well established already. A good research question would be what is the maximum number of players that can profitably battle for the stage 2 market? (Our guess is that starting from the arrival of the 4th player, returns in this business start decreasing)

Hence innovating companies move to stage 3. Brands that establish themselves in stage 2, have the advantage in stage 3.

Stage 3: Segmentation, where higher order benefits are discussed. In this we look at the market for mobile phones. Where once the basic idea has been established, companies are defining phones for different users (business/ consumer), different geographies etc. again to create markets.

Media and the marketing message are continuing to educate consumers, however they are equally concerned about reaching specific segments. Market research becomes critical so as to identify large segments of consumers. Again, wider media options would be ideal here, optimized to the size of each segment being targeted.

For the early innovators, high brand salience requires less communication on the brand level but more on demonstrating the relevance of the new segment.

For late comers, that have not played in stage 2, developing the brand is critical in stage 3. At the same time they must also do one of the two:
1. Define a new sub-segment, build its relevance and hence the brands salience to the consumer.
2. Or demonstrate objective performance superiority in a new sub-segment.

Hence marketing investments have to be on two fronts.

Nokia would be an example of a brand that defined a category (stage 2) and then has continued to differentiate it in stage 3.

Another example, a brand like Tata salt that has established itself in the “iodized salt” category should have found it easier to then define “vitamin enriched salt” for the next stage. (It has not done so).

Stage 4: Super niche categories evolve with inherent high entry barriers as well as high profits. Technology and consumer expectations are very high. Here, we enter super-niches. Mass market communication tools are sub-optimal as the size (volume) of the segment decreases.

New entrants in the market must understand where their offerings would fall in the stage-wise evolution of markets. Without this understanding defining of the marketing mix is risky and inefficient.

Ritu and Venkat.

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