Strategic Planning Analogy #556: Position Vs. Proof

THE STORY
Imagine this conversation with an entertainment promoter. We’ll call him Bob.

Bob: I’m so excited! I just booked a night to use the stage at Carnegie Hall. This is such a great venue to perform in. Some of the greatest performers in the world have had some of their greatest performances at Carnegie Hall. This is the place where winners perform. Success is mine.

Me: So who will you have performing at Carnegie Hall? What will they perform?

Bob: I have no idea. That’s just a minor detail. The important thing is that whatever it is, it will be on that successful stage.

Me: If you don’t know what the act is, how do you plan to sell tickets?

Bob: I’ll just say that great stuff happens at Carnegie Hall. Come see the greatness.

Somehow, I don’t think Bob has this thing fully figured out.

 

THE ANALOGY
In my long line of strategy blogs, one of my favorite topics to talk about is positioning. Dozens of times, I have talked about the necessity for businesses to choose a position if they want to succeed. They need to find a place where they can win.

Perhaps I have focused so much on the importance of positioning that people think that strategy is little more than choosing a position. But strategy is far more than just finding a position in the marketplace. In fact, if all you have is a position, you are likely to fail.

Consider the story above. Bob the promoter found the ideal position—a place where he could win. That place was Carnegie Hall. A lot of performers have won at that position.

But just because Bob had found the ideal place to play does not mean he would automatically succeed. To succeed, he needs to sell tickets. And to do that, Bob needs to figure out what to perform and how to convince people to pay to see it. Owning an empty stage will not draw crowds. Just saying “come see the greatness” won’t work.

In the same way, businesses only succeed if they convert their positioning into preference—a proposition that causes consumers to actually give their money to you (rather than someone else). Being on the right stage only matters if people pay to see it. Therefore, strategy needs to not only find they place where you can win, but a reason for customers to choose to support it.

  

THE PRINCIPLE
The principle here is that positioning is mostly an internal strategy. It tells a company where to play. It talks about the solution it will own and how to structure the company to achieve it. A second strategy, which we will call “the compelling reason”, is needed to get customers as excited about the position as the company is—enough to spend their money with the company. That is the external strategy. Both are needed to win, just as Bob needed both the stage (the position of Carnegie Hall) and the compelling performance for that stage (a reason to come to Carnegie Hall).
   

It is easy to get confused and think that the position and the compelling reason are the same. After all, a position must be desirable to a consumer if it is to be successful, right? Yes, but in reality, what it takes to win internally is not the same as what it takes to win externally.

Trust Issue

Positions tend to rest on owning some idealized superiority, such as highest quality, most luxurious, easiest to use, coolest, cheapest, “ultimate driving machine”, and so on. This type of positioning is what Les Wexner of LBrands refers to as answering the question “What are you Best At?”

Yes, customers like things that are the best. The problem is that customers are jaded. They’ve been hearing claims of superiority their whole lives. After all, how many brands try to claim a position of mediocrity? No, everyone shouts about their superiority. They can’t all be best. Hence, there is a trust issue. You cannot just claim a position of superiority. Nobody will believe it merely because you claim it. No, you have to prove it in order to overcome their lack of trust.

There’s a reason why user and expert opinions/ratings are so sought after on the internet. It’s because consumers don’t blindly trust claims made by the brand. They want them verified by others. They want proof.

So “positioning” determines the claim to be made (what am I best at) and “the compelling reason” determines how to prove to the customer that the claim is true. The two are not the same.

Two Components of Proof

There are two components to the compelling reason. Without them, there is not enough proof to make the claim of the position believable.

The first component is difference. You have to prove that you are different from the alternatives. The logic is simple: If are seen as doing the same thing as others, then you cannot be seen as superior…only the same. You must do something different in order to be perceive as different from the others.

And to make the difference believable, it needs to be easily understood and verifiable.

The second component to the compelling reason is linkage. You need a way to link the difference to the position of superiority. Just saying we’re different because we wear green shirts won’t work, because there is no linkage between wearing green shirts and producing a superior product. The difference needs a direct link to the superiority—proof that the difference causes the superiority.

For example, Dove soap has the position of being “the best beauty soap.” Their point of difference is in saying that their soap is one-fourth moisturizing lotion (and the others aren’t). The linkage is that moisturizing lotion is associated with beauty, so soap with moisturizing lotion can be the superior beauty soap.

Back when Oxydol was the #1 laundry detergent, the position claimed was superiority in cleaning. The difference was putting little green crystals inside the detergent (which others didn’t do). The linkage was that the little green crystals supposedly added bleach to the detergent. And customers could believe that combining bleach to detergent would cause superior cleaning.   

Linkedin’s position is to be the best place for professionals to connect. The difference is that they have far more active professional people in their network than anyone else. The linkage is that you are more likely to make the professional connections you need in the place where the most connections with professionals are possible.

Uber’s position is to provide transportation as reliable as running water, everywhere for everyone. Their point of difference is that their business model abandons all of the conventions of taxis and public transportation. All the rules have been reinvented, including the mobile interface. The linkage is that these changes have dramatically increased the numbers of people providing transportation and improved the interaction with them, making transportation more reliable and more everywhere.

Two Messages

So, as you can see, the positioning message and the compelling reason messages are not the same. In fact, they move in different directions. The positioning message moves towards the broader, more generalized, more universal concepts and solutions. The compelling reason is more specific to a particular company and the “unique ingredients” in its offering.

The position lets you know if the company is relevant to your needs. The compelling reason lets you know if this particular brand is the best alternative in that space (compared to others claiming the same relevancy).

Positioning is about ideals. The compelling reason is about proof.

Both messages are essential. Both need to be a part of the strategy process.

SUMMARY
Although positioning is a key component of strategy, it is not the only key component of strategy. Another key component is the compelling reason. A position is merely a claim that is made concerning where you have chosen to play to win. A compelling reason is the proof as to why customers should believe your claim. Although they are similar concepts, they are not identical. Therefore, if you have only created the position, you are not yet finished with the strategy process.

FINAL THOUGHTS
The problem with claiming a stage like Carnegie Hall is that it is not the only stage. Consumers have other alternatives. So even if Carnegie Hall is the best stage, consumers will go to another stage it they think they will enjoy a better performance. Therefore, you need to work on two fronts: finding your platform/stage AND making sure you are perceived as having the preferred performance.

Strategic Planning Analogy #533: Planning the Periphery

THE STORY
Last week I got bumped off an airplane in exchange for a ticket voucher discount for a future trip. I thought that was a pretty good deal until I tried to redeem it.

The airlines said I had to redeem it on their online site. Unfortunately, there was a flaw in the website making it impossible for me to redeem the voucher online. As a result, I had to call the airline on the phone.

After a terrible phone experience, I finally got an email notification of my transaction. There were two parts of the email that irritated me. First, they still had not corrected the problem. Second, they charged me a $25 service fee for using the phone to do my booking.

So I had to call the airlines a second time. It struck me that this was a pretty good deal for the airlines. By creating incompetency on their website and on the phone, they were able to create numerous $25 services fees they would not otherwise receive.

They were getting rewarded for incompetence as my travel voucher was becoming less of a deal.

THE ANALOGY
Airlines have an interesting pricing strategy. They sell the seat ticket at unsustainably low prices and then make up the difference by charging all sorts of associated fees, like the $25 I had to pay for calling them on a telephone. They have other extra fees for things like luggage, earlier pre-boarding, seats with slightly more legroom, pillows, blankets, meals and a host of other things.

How did it get to this point? Well, the core business of selling a seat to get you from one airport to another became commoditized. Let’s face it. There is very little difference between the standard seat experience in one airline over another. If you closed your eyes, you’d never be able to determine which airline you were flying.

I remember one time flying from London to Germany. I was about to go up the boarding steps to the airplane door when I noticed that the steps had the wrong airline logo on them. At first I thought that I might be boarding the wrong plane. But then an airline employee came along with a magnetic sign with the right airline logo. He put in on top of the other logo. Voila! Suddenly I was going up the proper airline set of stairs.

But that’s how it is. The standard airline service is so commoditized that you could slap any logo on it and it wouldn’t make a difference.

And we all know what happens when a core service becomes commoditized. The only way to create a preference is by lowing the price. So all the airlines lowered ticket prices to unsustainably low levels.

Since the airlines could no longer make a profit on the seats, they had to get the money somewhere else. That’s why I had to pay $25 to make a phone call to complain about a defective website.

And the point of this blog is that nearly every industry is moving in a direction towards this airline pricing model. Core businesses in numerous sectors are becoming commoditized. If you cannot come up with ways to make money on the periphery of your business (like charging for phone calls), you will have an unsustainable business model.

THE PRINCIPLE
The principle here is that in industry after industry, the core business is becoming commoditized. The commoditization is causing core businesses to be priced as a “loss leader.” To remain viable, one has to get nearly all of the profit from non-core elements on the periphery. So, ironically, one’s strategy may need to be more focused on the periphery than the core if one wants to succeed.  So much for all that literature on “sticking to one’s core.”

Fast Food Example

This is not just an airline problem. Look at the fast food industry. The basic hamburger is commoditized. All the major fast food restaurants sell the core hamburger at a loss.

With the core product priced at a loss, the only way to make money is by focusing on the periphery. So McDonald’s adds fancy coffees and fruit smoothies. They all start putting a slice or two of bacon on everything so that they can charge a premium price. They push the higher margin fries and beverages. They try to get you to upsize to a larger combo meal and to add a dessert.

This is their version of what the airlines do. They come up with all sorts of peripheral things to charge you for, because the core item on the menu (the hamburger) can no longer make it on its own.

Others

Or how about the cable TV industry?  Cable TV in the US is commoditized. They all give you essentially the same channels in the same way. When watching your favorite show on TV, the viewing experience is identical, regardless of the cable company piping it to your screen.

As a result, US cable TV companies can no longer price their core TV business at a profit. The only way to earn a profit is by focusing on the periphery—phone service and internet service. Cable TV service has become a loss leader in order to sell the periphery.

In a similar fashion, phone companies sell talking over the phone at a loss and have to make it up on peripheral services like data transfer.

In social media, it is quite common for companies to give away the core business for free and then try to recoup their losses in sales of peripheral features to peripheral customers (think of LinkedIn). It’s called the “Freemium” model. It is very common in gaming, where the core game is free and you pay for periphery features which help in the game experience.

It’s common for digital companies to use the word “monetization.” It is their way of saying that they have to give away the core for free in order to build out network to a critical mass. So, to make a profit, you have to create a secondary strategy for collecting cash—the “monetization.”

When you try to buy something at the store, they try to get you to pick up impulse items at the checkout, get the extended warranty, add on the optional extras, get a matching belt for the pants, and so on. Why? Because the core products are not profitable. The money is made on the peripheral goods. Even big ticket items like cars are sold this way.

I could go on and on, but you get the idea.

Implications

So what should a strategist do? Well, first one can try to fight the commoditization by creating uniqueness at the core. It can be difficult, but some can succeed. I’ve talked about this in a prior blog. The problem is that if everyone starts adding the same “uniqueness”, then that becomes a commodity as well.

Therefore, one should seriously consider the periphery while developing the core strategy. The periphery strategy may be even more important than the core strategy. After all, if the core truly is commoditized, all you need to do is copy industry best practices and build scale to get credibility at the core.

It is in the periphery where you not only get a chance to make extra margin. It is also the place where you have the best shot at creating differential advantages. The periphery is where you have a shot at creating a sustainable reason to be preferred over the competition.

For example, Comcast has a reputation for absolutely horrible customer service. A cable TV competitor can take the peripheral element of customer service and create a meaningful advantage over Comcast. Southwest Airlines has created an advantage by treating the peripheral business of baggage differently from its competitors.

Apple tries to get around commoditization in smartphones through the unique peripheral features in the closed system it attaches to its phones. All along, it has been the closed systems circling on the periphery (like iTunes) which have made all the Apple innovations truly successful.

So the periphery may not be at the core of the industry, but it is probably at the core of what helps you to win and make a profit. So treat it accordingly when doing your planning.

SUMMARY
There is a tendency for the core business of all industries to become commoditized and/or become a loss leader in price. As a result, if your strategy only focuses on the core, you will most likely never achieve sufficient profitability to make your business a financial success. Real profit tends to come from the periphery, where there are more opportunities to enhance your margins. As an added bonus, the periphery also often is the best place to create meaningful differentiation. With all those potential benefits coming from the periphery, one should not leave the periphery to chance. It needs strategic planning emphasis as much as the core, if not more.

FINAL THOUGHTS
I know a lot of social media companies have a singular focus on building out the core. They say they will get around to figuring out how to monetize it later. That’s like saying I have a great strategy, except that it does not provide me with a differentiating position or a way to make a profit. You’d never settle for a strategy like that. Why would you settle for a business like that?

Strategic Planning Analogy #481: Law of Extremes

 

THE STORY
Back about 40 years ago, Wal-Mart had not yet fully cemented its image as a low cost leader.  Other retailers were still challenging Wal-Mart on price supremacy.  One of those chains was TG&Y variety stores.

TG&Y decided to get into a price war with Wal-Mart.  The item chosen to go to war over was a pair of jeans.  TG&Y would lower the price on jeans and Wal-Mart would retaliate with an even lower price.  This pattern continued for many rounds.

Eventually, Wal-Mart dropped the price of jeans to 9 cents a pair.  At that point, TG&Y gave up and stopped the price war.  Wal-Mart had won supremacy on price, and not too long thereafter, TG&Y ceased to exist.

 

THE ANALOGY
Yes, 40 years ago, you could buy a lot more for 9 cents than you can today.  But even 40 years ago, 9 cents was an unrealistically low price for a pair of blue jeans.  Every jean sold at 9 cents would be a huge loss for Wal-Mart.  But that was the sacrifice Wal-Mart had to make in order to win the image of price against TG&Y.

Times may have changed in the last 40 years, but this type of activity still goes on.  Business leaders understand the value of owning an image and will go to extremes in order to win that image.  This seems especially true on the internet. 

In order to create a large network, internet firms will go to great lengths to get people hooked into their system.  Most end up giving away their product for free.  Other go even further by “paying” people to get on-board, either with badges, coupons or some other form of promotion.  It’s hard to make a living if you have to pay people to use your product.

And it’s not just price where companies go to extremes.  Luxury automobile brands are fighting against each other to own the word “luxury.”  They keep upping the ante by adding ever more exotic features to their automobiles.  At some point, even many luxury auto buyers will balk at paying the premium so that auto makers can get an adequate return on investment for these exotic features.

For most auto dealers, the maintenance area is among its most profitable areas, even more profitable than selling cars.  But, to increase the luxury treatment experience, many luxury dealers are throwing in maintenance for free.  Now, they’ve cut off a key source of profits.

The world is very competitive.  It takes a lot to dramatically own a position in that competitive market.  Every winner has to go to extremes to own their position, be it in price, luxury, service, convenience, technological innovation or whatever.  It’s as if the whole world is becoming the equivalent of 9 cent jeans—a world where the only way you can win is to create a costly, unsustainable extreme.

How do you create a profit if the entry level cost to achieve a winning position is unsustainably high?  That requires a sophisticated strategy.

 

THE PRINCIPLE
The principle here has to do with what I call the Law of Extremes.  It is one of my 23 laws of strategy.  (I know I said in an earlier blog that it was 22 laws, but I’ve since added another law.)  The law of extremes goes like this:  “Creating performance levels needed for ownership requires trade-offs and subsidies.”

Another way of saying this is that when the core business can no longer sustain the extremes, you have to:

1)      Add secondary businesses (called subsidies) to provide cash to cover the extremes; and/or

2)      Subtract secondary activities which take away cash from the building the extreme position (a process called trade-offs).

We will look at each of these separately.

Subsidies

Subsidies are non-core activities or businesses which are principally done only to fund the core.  An example of this practice is the “Freemium” model used by many internet businesses.  The idea is that the core business is free.  Yet in order to afford to give away the business for free, a small subset (often under 3%) pay a price in order to get premium extras.  In other words, around 3% of the users of the internet site subsidize the activity of the other 97% so that the site can make money.  Many internet sites use a freemium model like this, including Linkedin and Pandora.

Another subsidy common on the internet is to use advertising.  If you cannot get the users to pay for your extreme pricing position of free, then you have to get advertisers to pay for the site.  Another subsidy example is when internet sites sell information about you to other business that would pay for that information (watch out when companies put cookies on your device—it can be their door to a subsidy business selling your behavior).   

This subsidy phenomenon also occurs in the retail space.  In consumer electronics, the pricing policies are very extreme, often selling the main items near or below cost.  To subsidize these prices, the retailers need to bundle profitable subsidy purchases to the transaction.  A familiar one is the extended warranty, which is often more profitable to the retailer than selling the item being insured.  Other examples are selling ad space on the screens of the computers being sold, selling extra ink with the printer, selling smartphone accessories, and so on.

This is also seen in fast food restaurants where the core hamburger is sold at a loss and is subsidized by the sales of more profitable french fries and beverages.  (I’ve gotten in the habit of buying a second burger instead of the fries in order to get a better extreme value for myself). 

The irony here is that in a world of extremes, the core business becomes almost like a loss-leader for the subsidy add-on businesses.  At some point, it’s hard to tell what is the real core business anymore.  IF the subsidies are where all the profits come from, does that become the new core?  The extreme image won with the traditional core could now be seen as a loss leader positioning to mask the real positioning, which is to be best at selling the subsidies.

It goes to show that business strategies are getting more complex.  If subsidies are not integral to your business model, the model may no longer work in a 9 cent jeans world.

Trade-Offs

If subsidies are about adding income to the business, then trade-offs are about subtracting costs from the business model.  The principle behind trade-offs is as follows.  If you try to be all things to all people, you will probably never obtain an extreme position on anything.  For example, if you try to be the highest quality, lowest priced and fastest in innovation, you will have to make compromises which will prevent you from being the most extreme in any of these attributes.   There will be specialists focusing on only price or only quality or only innovation which will be the most extreme and win the battle for these positions. 

Therefore, to win in one space, you may need to stop pouring money into other spaces, so that more money can be funneled to the space where you want to win.

An example would be extreme low price “hard discount” grocers, like Aldi, Save-A-Lot, and Lidl. They have prices substantially below conventional grocers—extreme enough to win the low price image.  Yet those low prices are sustainable because these firms make trade-offs.  They stop doing many things the conventional operators do which add costs.  Examples include:

1)      Smaller, Less Costly Assortments (only one brand in one size per category)

2)      Eliminating Lower Margin Branded Goods by Going Direct to the source to create their own brand.

3)      Large reductions in labor by not having service departments, not stacking products individually on shelves, etc.

4)      Lower rent by building smaller stores in less prime real estate.

By trading away variety, ambiance, convenience, selection and other such factors, they can divert cash flow from those activities into sustainable extreme prices.

Southwest Airlines is another example.  They make money when other airlines don’t because they do more trade-offs than traditional airlines.  Activities like only selling point to point tickets, refusing to sell tickets on third party travel websites, focusing on only one-sized plane, and other non-conventional approaches, they have eliminated a lot of costs borne by their competitors.  This allows them to focus on the things important to their image and still make a profit.

The idea with trade-offs is that your successes is defined as much by what you don’t do as by what you do.  Your strategy needs to delineate what activities go onto each list (the do’s and the don’ts).

SUMMARY
In a highly competitive world, it takes extreme levels of performance in order to win a position.  Gaining extreme positions is costly.  In order to afford the cost and still make a profit, firms need strategies about subsidies and trade-offs.  Subsidies are the add-on activities which provide extra cash flow beyond the core.  Trade-offs take away activities which to not reinforce the extreme position in order to provide extra cash flow to invest in the extreme.

 

FINAL THOUGHTS
The things which “delight” the customer tend to “deplete” the cash of the company.  To remedy the situation, the company needs to “destroy” unnecessary costs and “deploy” subsidy businesses. And that is “de-truth.”