Tag: product, distribution, marketing

formerly product, placement, promotion – a business model framework

A Monster JTBD

MIKE2 Comments

One of the best-performing stocks of the last twenty years – a famed 100-bagger – is Monster Energy.

Why didn’t we see this?

If you want to succeed at investing, Howard Marks wrote, you have to be different and you have to be right. Embedded in that is the notion that being different is hard.

If different was without social, financial, political, emotional, or mental costs then everyone would do it.

😕

Monster Energy faced at least two of our common business headwinds. First is the TiVo problem. Can an innovator (like Monster) gain distribution before market leaders with distribution (Coke, Pepsi, Anheuser Busch) gain innovation?

It’s remarkable that Monster succeeded. Their competitors already made sweetened caffeinated beverages. They already managed brands and distributed millions of liters of fluid to every gas station, bodega, and grocery store across the country.

The second is category creation. If you can’t be first, notes the second Immutable Law of Marketing, create a category where you can be. Buy-now-pay-later, fast-casual, on-demand-storage, and hard seltzer are all examples.

But the ‘energy drink’ category had a market leader: Red Bull. Not only that, the market leader had existed for nearly twenty years before Monster Energy began.

So what happened?

🍸 🆚 🥤

Sometimes the category isn’t the competition. Snickers and Milky Way don’t really compete. Honey Baked Ham, Chinese restaurants, and ordering pizza are all holiday meals but not many consumers debate between those three. It’s homemade or Honey Baked.

“Red Bull and Monster consumers are unique. Red Bull went after the extreme consumer but early on focused on on-premise service: bars and restaurants. As a result, it morphed into what I would consider a white-collar beverage. Partly because of the premium price, partly because the smaller can…Monster decided on a 16oz can – the same price for twice the volume and marketed it towards more blue-collar workers. They also focused on palatability, especially from a sweet standpoint.”

Mark Astrachan, Odd Lots podcast

That ‘Monster’ can was a focus group suggestion.

A canonical Job-to-be-done example is the McDonald’s milkshake. The five-minute clip of Clayton Christensen is worth watching and the explanation probably mimics hiring Monster. It’s sweet and caffeinated. It’s large, so it lasts. It also means something to the consumers. Here’s a Google Trends map from January 2023.

There’s something about Pennsylvania through West Virginia, Ohio, Kentucky, Tennesse, Arkansas up through Missouri, Iowa, and Wisconsin consumers. Monster Energy tapped ‘that thing’.

📚

Related: Bitter Brew tells the story of Anheuser-Busch’s history. For God, Country, and Coca-Cola tells the story of Coke and highlights the importance of distribution advantages as Coke employees were the rear guard of the Allied forces marching across Europe in 1945.

Why is this so cheap?

MIKELeave a comment

Our simple business model is a product, distribution, and marketing. 

  • Sex toys (product) sell better thanks to Amazon’s anonymity (distribution). 
  • RX BARS (product) sold better with a packaging redesign (marketing).
  • Catalogs, department stores, big box, and online (distribution) seeded DTC (products). 

Why is this so cheap?

One thing low-cost airlines got right, says Rory Sutherland, is they “magnify the things you didn’t get like a meal, pre-allocated seating, free checked luggage, and so on. And they had to do that to explain where the savings were taking place. Otherwise, you assumed it was worse trained pilots.” 

Yes! “People don’t just believe, here’s the price but you can get it for this,” agrees Marcia Kilgore, “you have to tell them how and you have to tell them why.”

According to Kilgore, beauty product is no longer differentiated. Everyone sells the same thing – and anyone can sell it. This is a problem for people like Kilgore. 

Hers is the ‘explain where‘ approach – we cut out the middleman. But with so many new entrants (thanks to easy products) it’s hard to communicate that message. 

“Instagram and Facebook have become the new landlords. We’re trying to get away from having to ‘pay retail’ and now you have to pay that same cut to Instagram.”

If the product is constant among beauty brands and the distribution channels are limited to retail and DTC what kind of levers exist in marketing? 

1/ Change the CAC/LTV. If Instagram is the new rent, then only acquire customers once. Kilgore’s company Beauty Pie uses a membership model like Amazon Prime. Founder Jeff Bezos said, “Our goal with Amazon Prime, make no mistake, is to make sure that if you are not a Prime member, you are being irresponsible.”

2/ More organic & less paid marketing. Instagram ads may be bid up but Instagram posts are still free. Beauty products have inherent characteristics that make how-to and before-and-after content successful. 

3/ Offer extras. The Beauty Pie boxes are nicely designed but not expensive. The message is “just as good but nothing extra”. The brand has good communication. They’re using alchemy.  

Chick-fil-A and Amazon-orders

MIKELeave a comment

Amateurs talk strategy, General Omar Bradley said, professionals talk logistics. The placement of a product affects the business model. Each method has strengths and weaknesses and trade-offs to make.

There are a few aspects of placement:

The TiVo problem is one aspect of placement. Can innovators gain distribution faster than distributors can gain innovation? White Claw did it. Five Hour Energy did it. TiVo did not. Amazon is hard to compete with because of their placement advantage.

For consumer products there have been four eras of distribution: rural homes and mail, city centers, suburbs, and the internet. When the distribution era changes the incumbents lose some advantage.

In Nomadland, Jessica Bruder writes about the nomads that move from sugar beet harvest to national park service to – at the end of the year – Amazon warehouses. These ‘workampers’ are “fascinated” by “America’s appetite for sex toys” Bruder writes.

Thanks anonymity! Sure, a warehouse picker at Amazon knows Ken Jacobs in Tulsa orders this, but Amazon is so large and Jacobs’s mail is opaque that products with ‘social restricted action‘ have never sold better.

The second is the first Chick-fil-A Manhattan location.

When you think about a restaurant in Manhattan, location ties you down to specific systems that you have put in place. If you have a location with three stories you have to figure out how to split a kitchen in half. Or, how do you refrigerate trash? People don’t usually think abut that. When do you see trash? At night.

For us the biggie was upstream ordering: How do you take a line of people that stretches from 6th Avenue to 5th Avenue and get them through in a fast way? You don’t do it the same way as a suburban location.

Steve Nedvidek, Manage This – The Project Management Podcast, July 2017

Make something sell something is not business. How and where a product gets to the customers matters too. Both sex toy retailers on Amazon and Chick-fil-A in Manhattan had to choose among trade offs when their distribution model changed.

Product packaging strategy

MIKELeave a comment

Strategy is coordinated actions. In the 3P model it means the product, promotion, and placement depend on each other.

Recently I was in a mall which is a collection of “try things on” stores. The 2022 mall is the placement of items, the products are clothes, jewelry, and food. That’s coordinated actions, here are three more examples.

RXBAR switched from (left) an original design done in PowerPoint to something simpler. The new design communicated what the bar was and helped it stand out on the retail shelves.

Aldi cereal has long barcodes because the Aldi aim is affordability. The company sells white label products with long barcodes to speed up the check out.

Haven’s Kitchen offers QR codes on the store boxes. Founder Alison Cayne learned this lesson when she taught cooking classes: teaching people what to eat did not help them figure out how to do it. The QR codes offer extra communication.

Via Modern Retail

Packaging strategy does not mean product will sell but it makes it more likely. This isn’t just sampling bias either.

First, we can think like an economist and look at the market: what works? If for many years many products across many categories have optimized their package design then it has some importance.

Second, we can think like an investor and invert the question: can packaging be bad? Yes!

Great packaging is overrated but packaging strategy is not. The product, placement, and promotion have to fit with each other’s tradeoffs.

All of the Product, Placement, and Promotion posts.

3P Placement

MIKELeave a comment

There have been four eras of modern retail. 

Catalog era. In 1888 the Sears catalog begins. In 1896 the United States begins rural free delivery. Companies can mail catalogs directly to their customers and customers could mail their orders. It’s an important step in the Reconstruction Era. In 1908 the Sears kit house appeared. By 1915 the Sears catalog peaked in size. 

City era. By 1929 half of Sears’ orders are retail rather than catalog. Americans migrate to cities. Stores like Sears and Montgomery Ward get in front of them. Sears buys radio station WLS and locates stores in downtown areas. “Window shopping” begins. 

Suburbs era. Americans move again. Following World War II, Americans seek space and the automobile allows it. At the time Walter Cronkite noted, “When [Eisenhower] approved and pushed through Congress this great interstate highway network that we now have, he changed the entire face of America.” Sam Walton opens his first store in 1945. The American mall begins in 1950, a decade later there are almost five thousand. By 1975 malls account for 33% of all retail sales.

Internet era. In 1994 K-mart reaches its peak store count and Amazon.com begins. Though digital, early websites are niches of catalogs or newspapers: classifieds, shoes, clothes, used goods, and so on.

…

How a business distributes to customers affects how a business succeeds. The four eras of modern retail demonstrate how the placement of goods and services changed over time. 

A niche of the internet era, DTC, is a modern example of how the terms change. The DTC placement is, or used to be, quite cheap. Businesses warehoused goods away from expensive city centers or suburbs. Or dropshipped across the Pacific Ocean. They didn’t worry about fighting for shelf space when public and private and last-mile couriers were happy to work for them.

DTC brands also succeeded because they chose good products. Glasses, rings, clothes, razors, and makeup are all easy to ship, similar in scope, and don’t expire. They’re also products with favorable margins. 

Lastly, the internet provided unique promotion opportunities. The internet allowed cheap websites and cheap – though growing expensive – advertising on social media sites. There were no gatekeepers and they told their story on podcasts and in videos. 

What’s the next era? No one knows. What’s the question to ask? That’s easy. Where are my customers and how do I talk with them? 

…

There’s a longer look at the four eras here: From farm to city to suburb to circuit. 

3P and pricing power

MIKELeave a comment

3P: Pricing power 

The best business has pricing power. Investor Charlie Munger noted that a business with pricing power is “the ultimate no-brainer.” 

How does that fit within the Placement, Promotion, and Product series? 

Product. Pricing power exists relative to production costs. A knowledge worker uses ‘information’ to create their service. If the price of the information increases and the worker cannot raise their prices they do not have pricing power. 

A coffee roaster might have a different perspective. If coffee is coffee, then one Brazilian farmer raising prices doesn’t affect the roaster. They shop around. Or, they can stick with the roaster and pass the cost increase onto the consumer. Which gets to…

Promotion. Pricing power exists relative to perceived value. If customers buy ‘milk’, a business has low pricing power. But if customers buy ‘milk, from grass-fed low hormone happy cows’, that is different. 

Customers don’t buy one thing. There’s always an intangible. Brands demonstrate this. A Rolex doesn’t just tell time. McDonald’s doesn’t just provide sustenance. 

Placement. Pricing power exists relative to distribution and retail options. Think about location. Landlords have pricing power over restaurant tenants. 

The internet (with shipping) removes the landlord – and their power. Website hosting, online shopping carts, and 3PL have minimal pricing power over their customers. So, online businesses can be quickly profitable. But not all internet services are created equal. Facebook has pricing power for Facebook communities, not so for email newsletters or websites. 

…

Another aspect is Wholesale Transfer Pricing. This is part-of-the-reason restaurants are terrible businesses. 

Batman (part 2)

MIKELeave a comment

What do the following movies have in common? 

American Beauty, The Green Mile, The Matrix, The Sixth Sense, Being John Malkovich, Boys Don’t Cry, The Blair Witch Project, Fight Club, Toy Story 2, American Pie, and Star Wars Episode I. 

They were released in the same year. It was so good they wrote a book: Best. Movie. Year. Ever. 

Was it talent? Maybe. Good economics? Perhaps. Instead, let’s look at this using the Placement, Promotion, and Product Bullseye. If a business ‘hits the bullseye’ it succeeds. 

In 2000, Thomas Tull founded Legendary Entertainment. It was one of the first companies to combine private equity investments with Hollywood movie-making. 

It was good timing. The late 90s saw the highest number of movie screens in America. In 2004, Blockbuster’s store count peaked. A year later DVD sales did too.

The placement for movies was primo. There had never been more screens on which to place movies. Make enough of something and some of them will be very good. 

Tull also nailed the promotion for movies. Prior to Legendary, Hollywood used mass-market advertising – because it worked! Jaws pioneered and Star Wars exploded the model that with national advertising and distribution, movies could be huge. 

But Tull saw national consumers as three segments. There were huge fans, who would pay regardless of promotion. There was also the free tickets and twenty bucks crowd. These people wouldn’t go for free tickets and twenty bucks. Then there was the middle group. It was them Tull wanted to reach with the advertising. Persuade the persuadable and he did just that 

The final piece of the picture puzzle was a great product. Hire great directors – Nolan, Snyder, del Toro – and get out of their way. Legendary’s product was helped too by characters like Batman, stories like We Are Marshall, and laugh-fests like The Hangover. 

The product was also profitable. Movie studios controlled the pricing and theaters earned their keep on soda, sweets, and treats. Ditto for DVD, a product with a high upfront cost but zero marginal cost . 

…

Now flip it. Books are also media. Lee Child is a 3x NYT Best Seller and when Killing Floor was released in 1997 it had a limited audience, was hard to find, and was promoted in a review of books section of the newspaper. Not ideal. 

Books became a better business model. They’re better placed: physical or digital. Promotion is more focused, specifically with the rise of podcasts. But Child still has ‘his biggest fan’ come up on the street to ask when his next book is out. It’s out now, he tells them, go buy it!. The product, for the right authors too, has never been better. But best sellers are not blockbusters.

…

Businesses ask: Where to direct resources? Through contrast, the bullseye model highlights the trade-offs. 

Keep following along. 👇 

…

Part one of Batman was looking at the movie industry from 1975-Marvel in the Batman BATNA post.

Placement, Promotion, Product (Genesis)

MIKELeave a comment

Businesses have to do many things to succeed. But three areas encompass those many things: placement, promotion, and product.

Where is this sold? The placement includes distribution, retail (shelf space), shipping, etc.

How is it promoted? Also known as ‘marketing’ but includes how the customers understand the value.

What is sold? The ‘thing’. What are the trade-offs in the creation?

…

Consider toothpaste. It’s universal in retail, it’s promoted with national, regional, and local advertising, and it is designed to feel good.

Or, your local accountant. They have an office (Main St. USA), sponsor a little league team, have a weekly newspaper ad, and do a service many people don’t want to, or can’t, do.

Even, Google. It’s located in the world of bits rather than atoms, it spreads through word-of-mouth, and is the best search engine ever built.

Remove one area (placement, promotion, or product), and each business changes significantly. What if toothpaste loses shelf space to deodorant, if the local accountant stops advertising, or if Google search results become worse? These three areas are ‘gotta haves’.

We’ll look more at how Placement, Promotion, and Product influence how a business succeeds or fails.

Some parts of this diagram we’ve covered. If Product is the goal, then job to be done is the means. If Promotion is the goal, then Alchemy is the means. If Placement is the goal – well – this one we’ve looked at less, and it’s because of the internet which makes getting bits of data to anyone so simple it’s overlooked. We’ll fix that.

Follow along 👇