Marketplaces used to be static places. Citizens would flock to a central square and purchase goods, choosing amongst the assorted vendors, who knew their customers and preferences. But Niraj Dawar, a marketing professor at the Ivey School of Business, points out that these days products, brands and marketplaces have become more ethereal.
"Marketplaces exist in the customer's mind, where he is comparing brands, making tradeoffs and choosing what to buy. To understand competition you need to understand what goes on in the mind," he says in an interview.
As companies probe customer mindset, they usually turn to two tools, both of which he says are flawed and should be replaced by an approach he has developed.
One common effort is perceptual mapping: The brand chooses some dimensions of its appeal considered decisive, and compares itself to competitors. So colas might check out sweetness and fizz. But usually those are arbitrary factors, based on the brand manager's intuition of what's important and may miss what actually motivates customers.
To counter that, companies may try multidimensional scaling or cluster analysis, using surveys and sophisticated data techniques. But the manager's mindset still dominates when it comes to analysis, and usually little is said about pricing and sales volume, two key elements of business success.
Prof. Dawar, with Charan Bagga – a PhD student he supervised who is now a visiting professor at Tulane University – developed Centrality-Distinctiveness Maps, which they revealed in Harvard Business Review and some clever online videos. It brings the marketplace of the mind closer to key business factors: How typical a brand is of the category it's in – how central it is – and also how distinctive it is. That leads to a matrix with four quadrants in which your offering might fall:
· Aspirational: This quadrant houses brands that are highly distinctive but also hold wide appeal. In their research on cars and beers, it included brands like BMW and Mercedes, and Heineken and Sam Adams. In cars, the quadrant accounted for 30 per cent of sales and in beer 62 per cent, showing how companies in that latter industry fare better in combining both elements.
· Mainstream: Customers have little trouble identifying brands that are typical of an industry and this quadrant represents those quite typical but lacking much distinctiveness from competitors. Since distinctiveness can allow higher prices, they suffer on that score, but are usually quite popular, which can compensate. For cars, think Ford and Chevrolet; for beer, Miller and Busch. Overall, mainstream brands account for 44 per cent of car and 19 per cent of beer sales.
· Unconventional: These brands score high on distinctiveness but are viewed as atypical of the category. The Smart Car and the Mini don't seem like a standard car and Dos Equis and Stella, for North Americans, are also viewed as quite distinct. The brands in this quadrant tend to have low sales volume as a result of their unconventional appeal, two to four per cent in the industries studied. But this niche appeal can be rewarded with higher prices.
· Peripheral: These brands lack centrality or distinctiveness. They are me-too brands, such as Kia and Mitsubishi for cars and Old Milwaukee and Pabst for beer. But don't assume they are completely unattractive. They account for 24 per cent of car sales and about 15 per cent of beer sales.
"Not all brands need to be central and distinctive to be successful. What matters is that their business model fits their place on the map," Prof. Dawar says in an interview. "Mainstream brands have to invest in marketing to hold that positioning. Unconventional brands need to invest in innovation. Peripheral brands aren't distinctive or central, so [they] need to keep costs down by keeping innovation low and replicating existing products."
In both the car and beer markets, the higher a brand scores on centrality, the greater its sales volume. In the Harvard Business Review article, they report that a regression analysis suggests that a one-point increase (on a 0 to 10 scale) corresponds to greater sales of about 200,000 cars per year, on average, for a given brand and a sales volume boost for a beer brand by an average of 10.3 million barrels per year.
But you can also gain by being distinctive. Porsche and Guinness, the most distinctive brands studied, had the highest retail price. For cars, a one-point increase in distinctiveness is associated with a retail price increase of $12,900, on average, per unit. For beer, it leads to a retail price increase of about $2.59 for a 12-pack.
After you map where you are, you can decide to change your positioning. Companies can also choose to have brands in all categories. Toyota has its mainstream Toyota brand, aspirational Lexus, unconventional Prius and peripheral Scion. Positioning – and brand strategy – can change by region. He notes that the Canadian banking picture changes in B.C, with Van City's highly aspirational presence, and the powerful Desjardins Group in Quebec.
But overall, centrality-distinctive mapping presents a way to look at any market you compete in, rising above fizzy and sweet as it links to all-important volume and pricing.
Harvey Schachter is a Kingston, Ont.-based writer specializing in management issues. He writes Monday Morning Manager and management book reviews for the print edition of Report on Business and an online work-life column, Balance. E-mail Harvey Schachter