Marketing Creates Value, Wine and Music Provide the Evidence

Author: Kingsford Consulting

Author: Kingsford Consulting

In their bones sales-oriented entrepreneurs believe that marketing is a cost centre. Some might quote Peter Drucker in support, Nothing happens in a business until somebody sells something. Financially-oriented entrepreneurs know that marketing is a cost centre best placed on a starvation diet along the way to zero overhead growth. Technically-oriented entrepreneurs are often not even sure of the value of the sales function. After all, sales people are coin operated, the antithesis of devotees of product beauty and elegance. Build it and they will come is the techies belief and sometimes that does happen, for a while. In most techies eyes, marketing is management stuff: sales is also redolent of management. Technically-oriented entrepreneurs might also quote Drucker in support, (M)ost of what we call management consists of making it difficult for people to work. Aside from alleviating entrepreneurs angst about marketing and sales by the consumption of wine and enjoyment of music, how else can wine and music help entrepreneurs succeed, particularly new entrants? Wine Useful and usable empirical evidence comes from an experiment on wine tasting undertaken by scientists at CalTech and Stanford. People were given the same wine but some were told that it cost $5.00 a bottle and others up to $90.00. The value the subjects placed on the wine, measured as tasting good, was recorded in conjunction with a scan of their brain waves. When expectations were not set, the cheapest wine got the highest ratings. When expectations were set, the higher the price, the better the taste. The research supports the view that, people experience reality not the way it is physically (objectively), but as they expect it to be. The subjects brains made the wine taste better, not their taste buds. A financially-oriented person might assert that, the brain cooks the books in line with expectations. In another experiment Frederic Brochet at the Universite of Bordeaux gave 54 experienced wine tasters red and white wine. They described each with the standard set of descriptions for the colour. The red was jammy and full of crushed fruit. The white tasted of lemon, peaches and honey. Next day the experts were given two red wines. In fact, one was the white with red colouring added. The peaches and honey became black current. Brochets experiment provides evidence that the customer experience is, the end result of an elaborate interpretive process, in which our brain parses our sensations based upon our expectations. If we think a certain brand is better than we will interpret our senses to preserve that belief. Such distortions are a fundamental feature of the human brain. It is a fact based upon hard evidence. Music The musician, a nondescript man wearing a baseball cap removed his violin from its case, seeded it with a few bucks and started to play classical music in the subway entrance. A thousand and seventy people passed by. Twenty seven pitched in a total of $32 plus change with one person giving $5.00 not quite 20% of the total. An expert who had known what was to transpire had forecast that 75 to 100 people of a 1,000 would stop and give a total of $150. The expert knew that three days before this same musician playing the same instrument, a $3.5 million dollar Stradivarius, had commanded $100 a seat for so-so seats in Bostons Symphony Hall. Two weeks after his appearance in the subway, out of respect for the quality of the musicianship, an audience stifled their coughs until pauses occurred in Joshua Bells playing. The audience was in Bethesda MD., just a few miles north of the subway station. The person in the subway who threw in $5.00 was a trained classical musician and only he plus another musician knew that what they heard was something special. Yet, though one of them is a fan of Joshua Bell, even he did not recognize the violinist during the entire six minutes he stopped to listen on his way to work that morning. Our Take The music story shows that product beauty in itself can get a sale or two. Product alone does not get recognized or appreciated by enough people to create a large enough customer base to generate enough money to support a fast growing business. Both the wine and music stories confirm that people dont pay based upon the products technical merits. This is a fundamental fact of customer behaviour with which a new entrant has to cope. It is not just a pitch by a marketer raiding your scarce cash. Odd that the connection is not made with the well known phrase, nobody gets fired, etc. The stories also make clear that a common engineering approach to pricing, mark up costs by a factor large enough to make a profit provides only a hit or miss basis for a pricing policy. It has no anchor in reality. People pay relative to the value they perceive as customers, not what it costs the producer. The wine story shows that by setting price expectations independent of technical product quality, marketing works with a fundamental fact of human behaviour to establish individual expectations about value and hence selling prices and margins. The music story shows that creating physical context also sets expectations about the products value to the customer, in this case by more than 20 to 1. Think about what might have happened had the subway context not been no name. What would have happened had Bell been wearing a tux? If advertising had been used to tell people it was Joshua Bell? How many people would have stopped if there had also been a video showing the world famous Joshua Bell playing his multimillion dollar Strad in Boston? What sum would the 1,070 passersby have thrown into the violin case? Replay the scene but assume there had been a TV ad or a news story the day before the event and then answer the questions again. We suggest an extension to Druckers first comment so it becomes, Nothing happens in a business until someone sells something but nothing good happens unless the sales function is led by marketing. Great marketing works by setting favourable expectations about your product and business amongst prospects and customers. A great sales machine captures the targeted portion of the additional value created by marketing. In sum, your business gets higher gross margins. Marketing clearly and directly contributes to the overarching objective of a business, wealth creation generated from a growing positive cash flow. Failure to understand the distinct but complementary roles of marketing and sales is rife amongst entrepreneurs. They often have sales and marketing as a single expense category on their income statement! This intellectual failure is akin to failing to distinguish between labour and materials. Simply put, the coin-operated salespeople are responsible for getting the best price possible at the clients premises within the limits set by marketing and competition. Because marketing creates value by creating a favourable context for prices, for example, positioning the product in prospects minds as a unique category and thus worthy of a higher selling price or shutting out competition, there is no link to the cost of production and sales. Because there is no automatic rule that says costs are less than the selling price, marking up costs to establish a selling price amounts to the equivalent of looking in the mirror. It is a special form of business lunacy to say you must pay this so I can make a profit. Governments and monopolies successfully get away with a cost-based approach to securing their revenues. Entrepreneurs do not. Only marketing-led firms generate enough wealth to be able to afford to credibly offer competitive returns to early stage investors and to generate wealth for entrepreneurs. This is why Acorn describes its equity product for high growth rate businesses as Marketing-Led Sales-Driven Equity. Wine and music do indeed provide the necessary evidence that while pleasure awaits those who orchestrate marketing and sales, the duo provide only solace for those who do not. (Quoted with permission from www.acornpartners.com) http://kingsfordconsulting.ca/?p=232 About the Author:

Kingsford Consulting Ltd. is a Strategy and Business Development firm that provides business planning, market research and strategy development services.

www.kingsfordconsulting.ca

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