How to Understand the Marketing Concept
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The marketing concept of the 1950s was an immediate hit. Academicians seized upon it, talked about it, wrote about it and told the uninitiated how this marvelous concept, with its logical simplicity, could transform a "sleepy" organization into an energetic, market-focused entity.
The original and most useful formulation of the marketing concept, by Peter F. Drucker in 1954, involved the never-before-heard statement: the purpose of a business is to create (and keep) a customer. Other writers extended, amplified and re-explained this statement in a thousand ways.
To be attracted to the marketing concept, you really have to be charged with customer-getting and customer-keeping activities. It further helps if you believe innovation is something more than just a scientific breakthrough.
And you are most vulnerable to this concept if you understand that new scientific technology must be market-focused and made commercially effective through "innovations in marketing."
Two of the fundamental principles upon which Drucker urged the adoption of a market-focused view are particularly important.
Drucker, in Managing for Results, points out that "what the people in the business think they know about customer and market is more likely to be wrong than right." He offers the following remedy:
"Only by asking the customer, by watching him, by trying to understand his behavior can one find out who he is, what he does, how he buys, how he uses what he buys, what he expects, what he values, and so on."
In the classic article "Market Segmentation as a Competitive Strategy," Nelson Foote provided a concrete example of how a company—once it finds out why customers prefer doing business with it—can capitalize on its identified strength:
"Zenith won a preeminent position in the television receiver market…by becoming established in the minds of consumers as the leading exemplar of product reliability,
Its policy of manufacturing products of good workmanship goes back many years, but during the middle ‘50s many consumers became quite concerned to identify the set that would, they hoped, give them the least trouble from breakdown.
That was when Zenith’s market share soared until it surpassed the erstwhile industry leader…As far as known, Zenith’s strategy was not derived through market research although marketing research by competitors soon verified its efficacy."
Zenith did not invent its "quality" appeal in a brainstorming session. Instead, the company listened to customers and discovered that people really did want good workmanship, thought Zenith possessed it and were willing to pay a premium price for it.
Zenith, said Foote, identified its special talents by asking customers why they bought a Zenith and then "pushed" hard in the direction indicated.
Distinguishing Between What The Company "Makes" and the Customer "Buys"
Colossal business blunders and lost opportunities can be attributed to not identifying just what it is that the customer values. In Marketing for Business Growth, Theodore Levitt noted:
"An excellent example of the confusion between what a company ‘makes’ and what a customer ‘buys’ is provided by a producer of private-label ice cream products for supermarket chains.
Since supermarkets need to create low-price impressions in order to attract and hold customers, selling successfully to them means getting down to rock-bottom prices.
The company…became extraordinarily good at producing a wide line of ice cream products at rock bottom costs. It grew rapidly while others went bankrupt.
It covered 10 states with direct deliveries to stores out of its factory and factory warehouse, but continued growth eventually required establishing plant, distribution, and marketing centers elsewhere.
The result was disaster, even though the company manufactured just as efficiently in the new locations as it did in the old."
Levitt detailed how the company had developed an "exceedingly efficient telephone ordering and delivery system" to accommodate the supermarkets’ need for frequent deliveries due to limited storage and display space. When the company opened its new facilities, it could not give the same quick service.
In essence, it did not design its new operation with the "essential values" the customers really wanted and were willing to pay for. It mistakenly thought that "rock-bottom" prices were the only value producing the bulk of its sales.
The company failed in its expansion attempt because the customer was buying an entire "bundle of values."
Levitt’s Augmented Product Concept
Levitt repeatedly pointed out that customers rarely buy just a product. Usually, they buy a total proposition—an entire package of real and perceived values.
Companies do not compete, said Levitt, on the basis of what they make in their factories, but rather between "what they add to their factory output in the form of packaging, services, advertising, customer advice, financing, delivery arrangements, warehousing and other things people value."
Levitt called this surrounding of the core product with a special cluster of values "the augmented product concept."
In an early edition of Marketing Management, Phlip Kotler offered this illustration:
"The augmented product of IBM is not only the computer but a whole set of accompanying services, including instruction, canned software programs, programming services, maintenance and repairs, guarantees and so on.
IBM’s outstanding position in the computer field is due in part to its early recognition that the customer wants all of these things when he buys a computer."
It’s the Differences that Make the Difference
A company must endow its product with a real or psychological difference that is of value to its customers. Stated differently, a company’s product offering should occupy a distinct potion in the marketplace. Each product offering should be an expression of an organization’s unique capabilities.
Again, Foote’s television illustration explains why it’s important to offer a distinguishable product. While Zenith was stressing quality, a major competitor continued to stress its own particular excellence—producing quality television sets "within a major piece of furniture."
Another competitor stressed "portability and personalization." Still another (Sears’ Silvertone) stressed shopping convenience, easy credit and speedy repair service.
In other words, Zenith’s major rivals did not attempt to imitate Zenith. They continued to emphasize their own individual strengths. According to Foote, the television companies that did not survive were "undistinguishable in their capabilities and offerings, hence undistinguishable by consumers."
Always Ask: What Is Value to the Customer?
Tremendous competitive insights can be gained by just asking and systematically answering the question "What is value to the customer?" Peter F. Drucker provided a superb illustration of the beauty and benefits of an organization asking itself this question:
"An American company making lubricating compounds for heavy earth-moving equipment such as is used by highway builders has long had a reputation for the quality of its products.
Yet, it could not gain more than a very small share of the market, as it competed against every major petroleum company. It then asked the question, ‘What is value to the customer?’
The answer is ‘to keep very expensive machinery operating without breakdowns.’ One hour of downtime may cost a construction company more money than it could possibly spend on lubricating compounds in the course of an entire year.
The company usually works against a deadline and risks penalty payments if it misses it. As a result of this seemingly obvious insight, the lubricating compound manufacturer no longer sells lubricating compounds.
Instead, the seller offers to pay the owner of heavy earth-moving equipment the full cost of any hour of downtime caused by lubricating failure.
The only condition attached to this offer is that the construction company adopt and follow a maintenance program—designed by the manufacturer’s service representatives—which, of course, prescribes the company’s lubricating compounds.
The company formerly had to price its products below those of the major petroleum companies. No customer now even asks, ‘What do you charge for your lubricating compounds?"
This company became a maintenance company after it realized what its customers really valued. Similarly, travel agencies have become meeting planners. Several fertilizer companies have become agricultural productivity consultants.
It should be noted that most organizations have two distinct customer groups: distributive channels and end-users. Each of these groups must be provided a unique set of values or benefits. Successful companies harmoniously mesh the needs of both customer groups.
Innovations in Marketing Must Accompany Innovations in Technology
We have described the marketing concept as a conscious effort to identify and supply customers with what they consider value. What is the role of technology in this effort?
Most marketing professionals agree with the assertion that technology creates the possibility of a new market or new industry. But only a sound marketing concept can convert a technology into a customer-getting reality.
In other words, "Technology is usually unproductive unless accompanied by an innovative marketing concept."
Drucker provided many examples of this basic principle. In his book, Innovation And Entrepreneurship, Drucker explains how King Gillette and Cyrus McCormick surrounded technological innovations with marketing innovations.
"King Gillette did not invent the safety razor, dozens of them were patented in the closing decades of the 19th century…Gillette’s Safety razor was no better than many others, and it was a good deal more expensive to produce…but he did not ‘sell’ the razor. He practically gave them away by pricing it 55 cents retail or 20 cents wholesale…
…But it was designed so it could be used only with his patented blades… these cost him less than 1 cent apiece to make: he sold them for 5 cents…and since the blades could be used six or seven times, they delivered the shave at less than 1 cent apiece… or at less than one tenth of the cost of a visit to a barber…"
Gillette’s innovative marketing strategy was a pricing strategy. What Gillette did was to price at what the customer buys, namely, the shave rather than what the manufacturer sells. In short, people paid for what they bought. A shave.
"Cyrus McCormick in the 1840s was one of many Americans who built a harvesting machine—the need was obvious… and he found, as had the other inventors of similar machines, that he could not sell the product…the farmer did not have the purchasing power…
…That the machine would earn back what it cost within two or three seasons, everybody knew and accepted, but there was no bank then that would have lent the American farmer the money to buy a machine…
Mccormick offered installments, to be paid out of the savings the harvester produced over the ensuing three years… the farmer could now afford to buy the machine—and he did so…"
McCormick’s innovative marketing strategy was also a pricing strategy. He invented installment buying.
One more time: Innovations in technology must, in the majority of situations, be accompanied by innovations in marketing. It’s a valuable Drucker insight.
The original and most useful formulation of the marketing concept, by Peter F. Drucker in 1954, involved the never-before-heard statement: the purpose of a business is to create (and keep) a customer. Other writers extended, amplified and re-explained this statement in a thousand ways.
To be attracted to the marketing concept, you really have to be charged with customer-getting and customer-keeping activities. It further helps if you believe innovation is something more than just a scientific breakthrough.
And you are most vulnerable to this concept if you understand that new scientific technology must be market-focused and made commercially effective through "innovations in marketing."
Two of the fundamental principles upon which Drucker urged the adoption of a market-focused view are particularly important.
- The customer is the business.
- Technology is usually unproductive unless accompanied by an innovative marketing concept.
Drucker, in Managing for Results, points out that "what the people in the business think they know about customer and market is more likely to be wrong than right." He offers the following remedy:
"Only by asking the customer, by watching him, by trying to understand his behavior can one find out who he is, what he does, how he buys, how he uses what he buys, what he expects, what he values, and so on."
In the classic article "Market Segmentation as a Competitive Strategy," Nelson Foote provided a concrete example of how a company—once it finds out why customers prefer doing business with it—can capitalize on its identified strength:
"Zenith won a preeminent position in the television receiver market…by becoming established in the minds of consumers as the leading exemplar of product reliability,
Its policy of manufacturing products of good workmanship goes back many years, but during the middle ‘50s many consumers became quite concerned to identify the set that would, they hoped, give them the least trouble from breakdown.
That was when Zenith’s market share soared until it surpassed the erstwhile industry leader…As far as known, Zenith’s strategy was not derived through market research although marketing research by competitors soon verified its efficacy."
Zenith did not invent its "quality" appeal in a brainstorming session. Instead, the company listened to customers and discovered that people really did want good workmanship, thought Zenith possessed it and were willing to pay a premium price for it.
Zenith, said Foote, identified its special talents by asking customers why they bought a Zenith and then "pushed" hard in the direction indicated.
Distinguishing Between What The Company "Makes" and the Customer "Buys"
Colossal business blunders and lost opportunities can be attributed to not identifying just what it is that the customer values. In Marketing for Business Growth, Theodore Levitt noted:
"An excellent example of the confusion between what a company ‘makes’ and what a customer ‘buys’ is provided by a producer of private-label ice cream products for supermarket chains.
Since supermarkets need to create low-price impressions in order to attract and hold customers, selling successfully to them means getting down to rock-bottom prices.
The company…became extraordinarily good at producing a wide line of ice cream products at rock bottom costs. It grew rapidly while others went bankrupt.
It covered 10 states with direct deliveries to stores out of its factory and factory warehouse, but continued growth eventually required establishing plant, distribution, and marketing centers elsewhere.
The result was disaster, even though the company manufactured just as efficiently in the new locations as it did in the old."
Levitt detailed how the company had developed an "exceedingly efficient telephone ordering and delivery system" to accommodate the supermarkets’ need for frequent deliveries due to limited storage and display space. When the company opened its new facilities, it could not give the same quick service.
In essence, it did not design its new operation with the "essential values" the customers really wanted and were willing to pay for. It mistakenly thought that "rock-bottom" prices were the only value producing the bulk of its sales.
The company failed in its expansion attempt because the customer was buying an entire "bundle of values."
Levitt’s Augmented Product Concept
Levitt repeatedly pointed out that customers rarely buy just a product. Usually, they buy a total proposition—an entire package of real and perceived values.
Companies do not compete, said Levitt, on the basis of what they make in their factories, but rather between "what they add to their factory output in the form of packaging, services, advertising, customer advice, financing, delivery arrangements, warehousing and other things people value."
Levitt called this surrounding of the core product with a special cluster of values "the augmented product concept."
In an early edition of Marketing Management, Phlip Kotler offered this illustration:
"The augmented product of IBM is not only the computer but a whole set of accompanying services, including instruction, canned software programs, programming services, maintenance and repairs, guarantees and so on.
IBM’s outstanding position in the computer field is due in part to its early recognition that the customer wants all of these things when he buys a computer."
It’s the Differences that Make the Difference
A company must endow its product with a real or psychological difference that is of value to its customers. Stated differently, a company’s product offering should occupy a distinct potion in the marketplace. Each product offering should be an expression of an organization’s unique capabilities.
Again, Foote’s television illustration explains why it’s important to offer a distinguishable product. While Zenith was stressing quality, a major competitor continued to stress its own particular excellence—producing quality television sets "within a major piece of furniture."
Another competitor stressed "portability and personalization." Still another (Sears’ Silvertone) stressed shopping convenience, easy credit and speedy repair service.
In other words, Zenith’s major rivals did not attempt to imitate Zenith. They continued to emphasize their own individual strengths. According to Foote, the television companies that did not survive were "undistinguishable in their capabilities and offerings, hence undistinguishable by consumers."
Always Ask: What Is Value to the Customer?
Tremendous competitive insights can be gained by just asking and systematically answering the question "What is value to the customer?" Peter F. Drucker provided a superb illustration of the beauty and benefits of an organization asking itself this question:
"An American company making lubricating compounds for heavy earth-moving equipment such as is used by highway builders has long had a reputation for the quality of its products.
Yet, it could not gain more than a very small share of the market, as it competed against every major petroleum company. It then asked the question, ‘What is value to the customer?’
The answer is ‘to keep very expensive machinery operating without breakdowns.’ One hour of downtime may cost a construction company more money than it could possibly spend on lubricating compounds in the course of an entire year.
The company usually works against a deadline and risks penalty payments if it misses it. As a result of this seemingly obvious insight, the lubricating compound manufacturer no longer sells lubricating compounds.
Instead, the seller offers to pay the owner of heavy earth-moving equipment the full cost of any hour of downtime caused by lubricating failure.
The only condition attached to this offer is that the construction company adopt and follow a maintenance program—designed by the manufacturer’s service representatives—which, of course, prescribes the company’s lubricating compounds.
The company formerly had to price its products below those of the major petroleum companies. No customer now even asks, ‘What do you charge for your lubricating compounds?"
This company became a maintenance company after it realized what its customers really valued. Similarly, travel agencies have become meeting planners. Several fertilizer companies have become agricultural productivity consultants.
It should be noted that most organizations have two distinct customer groups: distributive channels and end-users. Each of these groups must be provided a unique set of values or benefits. Successful companies harmoniously mesh the needs of both customer groups.
Innovations in Marketing Must Accompany Innovations in Technology
We have described the marketing concept as a conscious effort to identify and supply customers with what they consider value. What is the role of technology in this effort?
Most marketing professionals agree with the assertion that technology creates the possibility of a new market or new industry. But only a sound marketing concept can convert a technology into a customer-getting reality.
In other words, "Technology is usually unproductive unless accompanied by an innovative marketing concept."
Drucker provided many examples of this basic principle. In his book, Innovation And Entrepreneurship, Drucker explains how King Gillette and Cyrus McCormick surrounded technological innovations with marketing innovations.
"King Gillette did not invent the safety razor, dozens of them were patented in the closing decades of the 19th century…Gillette’s Safety razor was no better than many others, and it was a good deal more expensive to produce…but he did not ‘sell’ the razor. He practically gave them away by pricing it 55 cents retail or 20 cents wholesale…
…But it was designed so it could be used only with his patented blades… these cost him less than 1 cent apiece to make: he sold them for 5 cents…and since the blades could be used six or seven times, they delivered the shave at less than 1 cent apiece… or at less than one tenth of the cost of a visit to a barber…"
Gillette’s innovative marketing strategy was a pricing strategy. What Gillette did was to price at what the customer buys, namely, the shave rather than what the manufacturer sells. In short, people paid for what they bought. A shave.
"Cyrus McCormick in the 1840s was one of many Americans who built a harvesting machine—the need was obvious… and he found, as had the other inventors of similar machines, that he could not sell the product…the farmer did not have the purchasing power…
…That the machine would earn back what it cost within two or three seasons, everybody knew and accepted, but there was no bank then that would have lent the American farmer the money to buy a machine…
Mccormick offered installments, to be paid out of the savings the harvester produced over the ensuing three years… the farmer could now afford to buy the machine—and he did so…"
McCormick’s innovative marketing strategy was also a pricing strategy. He invented installment buying.
One more time: Innovations in technology must, in the majority of situations, be accompanied by innovations in marketing. It’s a valuable Drucker insight.
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