Sometime ago an experienced marketer and former colleague recounted a discussion she had had with a senior board director of the financial services company where she once worked. The director said that if he had his druthers he would stop the advertising campaign and use the ad budget to invest in higher commissions. Higher commissions he reasoned would incentivize independent sales representatives to promote the company’s branded products over other brands in a highly competitive market. Realizing that many financial products had become commoditized, he insisted that aggressive pricing and attractive sales commissions would create purchase preference among customers and build loyalty among independent sales representatives. The expected result, the director predicted, would be an increase in sales volume and a higher ROI than the advertising campaign.
Although it is difficult to prove the correlation between advertising budgets and sales revenues, I could not imagine how the senior director could expect that sales representatives, no matter how richly compensated, would be able to increase sales volumes when their clients had no awareness of the brand of products being sold in an already crowded, competitive market. Without a clear understanding of the brand’s value proposition, it would be difficult to create purchase preference among potential customers, even if the price was comparatively lower than competing brands.
Advertising campaigns and marketing programmes play a critical role in building brand awareness and publicizing value propositions. This is particularly true when the creative execution effectively cuts through the noise of competing brands’ advertisements.
Business leaders tend to advocate engaging in price wars in the absence of a clearly defined value proposition for their brand. This is a short-sighted view, which cannot sustain business success.
The BIG picture
The truth is, price wars are not sustainable. Value is.
Price is where supply and demand meet. Demand is influenced by value. Value is the set of benefits that customers perceive that they gain beyond the price they pay for a product or service. Value is generally where quality of service, convenience and emotional benefits such as peace of mind, safety and financial security come into play. To be meaningful, value must fulfill a critical customer need. Value creates demand and nurtures customer loyalty. Customer loyalty is the basis on which sustainable business success is built. To me, this is the BIG picture.
Customers, whose purchase decision is based solely on price, are not loyal to brands. These customers shop around and patronize whichever brand is winning the price war at any given time.
It is true that commodity retailers are by default, very often engaged in price wars. However, successful commodity retailers understand that sustainable business success is built on customer loyalty and value propositions that are not based solely on low prices. Gasoline retailers are a good example. Their value propositions are generally based on the quality of their products and on safety and convenience. To build loyalty, most of them offer rewards programmes that include the purchase of non-gasoline products. Most gasoline retailers invest significantly in advertising campaigns that promote the loyalty programmes and value-added services.
Focus on what’s important
Business leaders who understand the difference between price and value direct resources to invest in the things that customers value. They invest time to clearly define the value proposition of their brand. They invest in advertising to promote awareness of the value proposition that differentiates their brand and products from the competition. These business leaders also realize that investing in value requires providing training programmes and resources to ensure that all employees are equipped to bring the company’s value proposition to life in the way they serve and interact with customers at every customer touch point.
See the BIG picture. Focus on what’s important.