There is a common perception that all marketers are liars! I am not going to comment on this. Instead, I will focus on the two biggest lies that I have observed in marketing using an example that was elaborated in my book Value Merchants (co-authored with James Anderson and Jim Narus) targeted to business marketing professionals.
Dow Corning, in 2000, despite a 40% worldwide market share in silicones, was facing many low cost competitors that were undercutting the firm’s prices. Rather than try to match their prices and lose the price premium across its entire volume, Dow Corning decided to research what customers truly value.
They uncovered the following four customer segments:
- Customers Seeking to Innovate – Customers inventing state-of-the-art products, creating advanced technologies, or developing new markets. Innovation-focused customers were committed to being first-to-market with new applications and revolutionary products.
- Customers Seeking Productivity Increase – Customers seeking off-the-shelf products with proven performance. They needed help with improving the acquisition, use, and disposal of products.
- Customers Seeking to Reduce Total Cost – Customers seeking supply chain optimization for cost reduction or customer service improvement. Other areas of support included vendor-managed inventory, custom packaging, cost-in-use studies, and supply-chain analysis.
- Customers Seeking Better Prices – Customers in mature industries wanted materials and services at the best price they could get. They bought mature products in large quantities and did not require service but instead sought quality, reliability, and low prices to make them more cost-effective.
This customer research led to the insight that the last segment did not value the supplementary services that Dow Corning offered. However, since the supplementary services were bundled with the product and provided “free” to all customers and their costs had to be recovered, it made the naked solution too expensive for the last segment. Understandably, this segment refused to pay for the services they did not value and put pressure for lower prices. But lowering prices for this segment without changing the fundamental market offer was problematic because then the customers from the other three segments, which truly valued the supplementary services, would also demand the same lower prices.
The Xiameter Value Proposition
In 2002, to serve this low price-seeking segment, Dow Corning launched a wholly-owned subsidiary called Xiameter. Xiameter realized they needed to cut their prices by 15-20 percent, which was very significant in the business markets they were serving. This could only be done profitably, though, if the costs to serve the customer were also reduced by a proportionate amount. Furthermore, it had to be launched in such a manner that it did not just cannibalize existing sales in the other three segments. The result: Xiameter was targeted to “price-driven convenience buyers of mature silicone-based products that spend over $50,000/p.a. on silicone materials.” To be both cost efficient and attractive only to price buyers, the market offering and value proposition were tightly defined in the following manner:
- Instead of Dow Corning’s fast delivery promise, Xiameter promised a shipping date 7-20 days from date of order. This allowed Xiameter to slot orders when there was spare capacity at Dow Corning.
- No technical service. This meant Xiameter did not have to invest in an expensive service capability.
- No order size flexibility for the customer. Depending on the product, customers must order full truck, tank, or pallet loads. This enabled Xiameter to run efficient logistics.
- Customers could enter their own orders on the website, but if they wished to send the order by email or phone, there was a $250 charge per order. This reduced customer interface costs.
- The shipping date, once set, could not be changed unless the customer was willing to pay a 5% surcharge. A rush order incurred a 10% surcharge penalty, while the order cancellation fee was 5%. All of this made production planning more predictable.
- The credit terms were very tight – 30 day net, 18%. This reduced required working capital.
- Product variety available was limited to 350 mature products in contrast to the 7000 products available through Dow Corning. This limited cannibalization as only mature products were offered, where Dow Corning faced price competition from low cost players.
- Product returns were accepted only if the goods were damaged.
- The worldwide pricing was only in six major currencies so that the currency risk and exchange was limited.
The Two Biggest Marketing Lies
To emphasize what was identical, Xiameter provided certificates of chemical equivalency for customers to demonstrate that its newly branded products were equivalent to the Dow Corning products. But when this was proposed, the sales people said all Dow would do is cannibalize sales for the full-service option. By arguing this, salespeople revealed the two biggest lies that marketers are often trapped into:
- First, despite all the power point presentations on segmentation, when pushed, the salespeople did not believe that four segments existed. If cannibalization was going to be such a large problem, then clearly there is only one segment – and all it cares about is price.
- Second, that despite spending millions on providing so many supplementary services to customers that marketers call “value-added” services, if push comes to shove, the customer would trade them all off for cheaper prices. If companies themselves do not believe in the value-added nature of the services they provide for free to customers, then customers can hardly be blamed for seeing them as simply additional costs loaded on by suppliers into the price.
What is fascinating about the Xiameter example is that the core product is an exact commodity. It is in the supplementary services that the variation in tailoring the market offering is being delivered. The results for Xiameter were excellent. The cannibalization in the first year after launch was half of what they had projected. While the prices were 15-20% lower, by having a web only model, they had eliminated several cost factors like technical service, sales force and inventory costs, and optimized other costs like logistics and production. In addition, the working capital requirements were low as the accounts receivable are lower and inventory is minimal. Taken together, these cost savings yielded an attractive return on assets. Furthermore, by using the spare capacity of the Dow Corning production lines, Xiameter also made Dow Corning operations more efficient.
Are you trapped into the the two biggest marketing lies: not believing in your segmentation and in the value added nature of your services?