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July 23, 2017

Why marketing is not enough anymore (and what you can do about it)

By Cesar Perez-Carballada




All consumer companies are dealing with a number of increasingly difficult challenges: political and economic uncertainty, value-conscious consumers with fast-changing needs, and increased cost pressure due to retailer consolidation.

Traditionally, companies have tried to confront these challenges by improving their marketing impact and reducing their costs. Consumer Packaged Goods (CPG) companies are a prime example. Against all the difficulties, they have typically relied on their main strengths: their brands and marketing expertise. However, it seems that those elements are not enough anymore.

Despite large ongoing investments in marketing and brand building, three out of four packaged goods categories have seen a decline in brand loyalty between 2011 and 2015 (1). Among the top 100 consumer brands in the U.S., 90% have been losing market share and 68% have experienced falling sales (2).

Although private labels (store brands) seem to have peaked, they have grown significantly during the past decade managing to capture 18.1 % of total sales in the US (where they have an average price advantage of 11% vs. the national brands) and 47.4 % in Europe (where the price advantage is 36%), all of this at the expense of the traditional brands (3).

Consumers choose store brands for practical reasons such as price, familiarity and availability. On the other hand, they tend to choose national brands for performance and emotional reasons, such as love and trust (2).

And there resides the problem: brands are losing their advantage in performance, esteem and trustworthiness. Consumer reports show that the performance gap between national and store brands is eroding (4) and, even worse, according to Y&R’s Brand Asset Valuator (a database which includes more than 38,000 brands measured on over 75 metrics from 1993 to the present) brand equities have been falling sharply over the years. For example, over the span of 12 years, trustworthiness dropped nearly 50 percent, esteem fell by 12 percent and brand quality perceptions fell by 24 percent. This fall continued, even accelerated, after the Great Recession of 2008 (5). 

Interestingly, the situation is worse for large companies since growth has been particularly elusive for the largest CPG players: according to a study by McKinsey & Co. large food-and-beverage manufacturers—which account for about half of total consumer packaged goods sales—have remained stagnant between 2012 and 2016, growing only 0.3 percent on average per year. By contrast, midsize companies have expanded sales by 3.8 percent and small companies by 10.2 percent (6)

This trend is confirmed by other studies: according to a report by BCG and IRI (7), large CPG companies have lost 2.7 percentage points of market share between 2011 and 2015 while small ones gained 1.1 pp (mid-size companies gained 0.6 pp). This means that more than $18 Bn in industry sales have shifted from large to smaller companies since 2011.


THE REASONS OF THE FALL 

Why are consumers losing their esteem and trust in traditional brands and why are new small CPG companies performing better than the large old ones? 

The answer is “innovation”. Or the lack thereof. Coca-Cola soda (introduced in 1886), KitKat bars (in 1935), and Clorox cleaner (in 1913) are decades, near-centuries old, and the companies that produce those brands still rely on them to generate a vast proportion of their revenues. Just imagine if giants in other industries changed at a similarly slow rate—we might still be listening to music in clunky Walkman’s and watching ‘Games of Thrones’ in bulky black & white TVs. 

As Ryan Caldbeck, sector analyst, writes in Forbes: “Innovation at large consumer and retail companies is dead. Look to consumer giants L’Oreal, Unilever, Coke, or Kraft: the number of new brands they’ve developed in the last ten years is essentially zero. (8)” 

Large brands consistently miss new consumer trends, judging them to be fads or small niche plays not worth pursuing. Or trying to tweak their existing product lines, a new logo here, a new tagline there, to capitalize on a trend. But slapping “gluten-free” and “organic” and “non-GMO” stickers on stale old products and brands hasn’t worked. It would be akin to Motorola trying to sell today the same “brick” phone that they sold 20 years ago but calling it “smart”. 


It’s not that consumer companies don’t launch “new” products. The problem is that what CPG companies call innovation is typically no more than cosmetic changes to existing products. An analysis conducted by CircleUp and the Cornell Venture Capital Club for CB Insights reveals an unambiguous reality of what’s actually “new” in new product launches (9). 


On average, among the largest CPGs, only 39% of launches are actually new products. The other 61% of the so-called “product launches” are just incremental changes, such as new packaging, a new range extension, formulation or variety, or a re-launch. Indeed, a brighter orange color for the Frosted Flakes tiger or the addition of a blue M&M in your candy are likely to be the “new” products the largest CPGs are launching. 

When looking at the sub-categories, we see that the malady is common across all of them. Carbonated Soft Drinks, Breakfast Cereals, Bakery and Soup are especially immobile, void of significant new product innovation. Some sub-categories over emphasize packaging launches, such as Carbonated Soft Drinks, Breakfast Cereals and Dairy, indicating a focus on selling the same old formula in new ways, without real product innovation.

 

This reality is more striking when we look at the level of investment in R&D. Data shows that the largest CPG players invest an average of about 6x more in marketing and advertising than they do in R&D, with R&D accounting for a mere ~2% of revenue investments. In tech, where product innovation is front and center, the investment shares are nearly the opposite (9).

 

This lack of real innovation explains the reason why consumers have turned their back to many brands and lost the trust in them. It seems logical than consumers stop being loyal to brands, it would be illogical if they didn’t. 

It also explains why small CPG companies are gaining market share: their ‘raison d'etre’ is to disrupt existing categories by out-innovating incumbents. People are voting with their wallets, making it abundantly clear that authenticity, value and innovation win—as emerging brands such as Califia Farms and Julep are proving. 

Some large CPGs may argue that they would love to launch new brands and products but retailers have a limited shelf space. That was valid 5-10 years ago but today retailers are now much more willing to put emerging brands on the shelf because consumers are increasingly buying niche brands: they don’t want to eat the same cereal their parents ate; wear the same makeup their mothers wore; or buy the same cat food they grew up with. Go to any supermarket beer aisle today and you’ll see dozens of brands on display. Two decades ago, there would perhaps have been a dozen while four decades ago, maybe six. Consumers are demanding a more personalized offering that meet their unique needs and retailers are happy to oblige. Visit Costco, Whole Foods or PetCo to see this first-hand. 

In addition, alternative models like subscription commerce—BirchBox, Love With Food, Trunk Club (before being acquired by Nordstrom), etc.—are making it ever easier for emerging brands to thrive. Direct channels are also growing fast in many categories. Many of the most successful recent brands have leveraged this approach with excellent outcomes: Bonobos and Betabrand are two apparel companies that gain the majority of their sales directly via their websites and maintain close connections with loyal followers. Own physical stores can also help: Warby Parker has built high-volume, high-sales physical locations to serve as adjuncts and marketing arms for the online business (Warby’s stores drive $3,000 per square foot, more than Tiffany’s or Michael Kors and close to Apple) (2). 


Cutting out the middleman has never been easier: for large and small companies alike, distribution challenges are not a valid reason to get away from innovation.

WHEN MARKETING IS NOT ENOUGH

Thus, what should incumbents do?

Stop being timorous. Stop living off of past glories. Dare to embrace the unknown (after all, the future belongs to those that have the courage to navigate in uncharted waters).

To do so, companies need to spot the right opportunities and then throw the full company’s weight behind them. The problem is that current methods to identify opportunities may not work.

CPG companies typically use two primary methods to spot opportunities. First, they rely on their brand managers to detect and evaluate ‘significant’ trends. However, it’s unlikely that a brand manager of a $500 million brand will find a $2-5 million company interesting. Her focus will always gravitate towards larger brands — even if they aren’t growing, precisely the opposite of a nascent opportunity which is generally small but fast growing. Secondly, companies scout new opportunities by looking at retail sales data from sources such as Nielsen, IRI or SPINS. That’s valuable but it’s only historical data. Sometimes the past is a predictor of future but not necessarily with a substantial shift like what we are seeing from millennials and the personalization of consumer.

Once the opportunity is identified, companies need to develop the brand/product to leverage it. They can do so internally via bold R&D and also externally via M&A.

Bold R&D means going beyond incremental minor improvements that are easier to undertake and are less risky but that are not very relevant for consumers. This approach doesn’t necessarily require high investments because a smart development process can identify failures rapidly in order to reduce the losses and to re-channel the investment to the most promising opportunities. Bold R&D also means going beyond the internal lab to leverage external resources. This requires eliminating the syndrome of “not invented here” as P&G does with the program “Connect & Develop” which finds the best external ideas and bring them in to enhance and capitalize on its internal capabilities.

M&A can be another opportunity for large companies to leverage a successful small brand by plugging it into their vast distribution channels. High profile acquisitions, such as Walmart buying Bonobos, are only the tip of the iceberg: there have been 1,343 M&A deals in retail and consumer sector during 2016, with an average transaction of $83 million per deal (10). The number of transactions is growing steadily showing that more and more CPGs are using M&A as a way to penetrate new segments. Over the past few years, we’ve seen General Mills acquire Epic Provisions, the young meat bar brand in Texas, Pepsi acquire the probiotic beverages producer KeVita, and Estee Lauder snatch up the millennial cult favorite Too Faced cosmetics.

Some skeptics may argue that new products are risky. It is true that only 15% of newly introduced consumer packaged goods succeeds in the market (11) but risk is an inevitable component of innovation. As Theodore Roosevelt said: “the only man who never makes a mistake is the man who never does anything”(12). In any case, there are many ways to intelligently manage risk. For instance, CPGs can leverage the concept of CVC or ‘Corporate Venture Capital’, which is basically the investment of corporate funds directly in a minority stake of external start-ups in a way that the investment is limited but, if the small company is successful, the corporate investor can fully acquire it to leverage its innovations. Free from its parent and its brand managers, a CVC fund is able to find and delve into truly innovative trends. Some active CVCs in CPG sector are Unilever Ventures (which participated in 18 equity funding deals over the past 5 years), Anheuser-Busch InBev and General Mills Ventures (13).

Independently of the specific approach, companies need to start generating real innovations that will catapult them to the next level by reinvigorating their existing brands with new products and by creating new brands that will capture the consumer’s imagination.

***** 

Marketing alone is not enough to solve all your company problems and now you know why. Don’t underestimate the consumer with superfluous changes. And if you still decide to do so because it’s the easy route or perhaps you need something to impact your bonus in the next few months, then do so at your own peril: consumers are not stupid and will continue turning their back. It’s far better to build a sustainable future via real innovation.




                                     


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Sources:  
 (1) “The 2015 American pantry Study – the call to re-connect with consumers”, Deloitte, June 2015 (2) “Why Early-Stage Consumer Entrepreneurs Are Having More Success Fundraising”, Ryan Caldbeck, Forbes, May 4th, 2016
(3) “Private Label in Western Economies”, IRI Special Report, June 2016  
(4) “Private-label foods often meet or beat the big brands”, Consumer Reports, August 2013 
(5) “Your Brand Needs Energy!”, David Aaker, Prophet, October 2012  
(6) “Winning in consumer packaged goods through data and analytics”, Kari Alldredge, Jen Henry, Julie Lowrie, and Antonio Rocha, McKinsey & Co, August 2016 (based on Nielsen data)
(7) “How Healthy, Protein-Rich Foods are Nourishing Growth in the Consumer Packaged Goods Industry”, IRI and BCG report, April 2016
(8) “As Young, Startup Brands Flourish, Innovation At Large Consumer Companies Is Flatlining”, Ryan Caldbeck, Forbes, May 19th, 2015  
(9) “The Product Launch Fallacy Of Big CPGs”, Ryan Caldbeck, CB Insights, March 20th, 2017 (10) “US Consumer Markets Deals insights Q1 2017”, pwc, Q1 2017  
(11) “2016's Breakthrough Consumer Packaged Goods: How To Succeed In A Challenging Industry”, Monica Wang, Forbes, June 28th, 2016
(12) “The Person Who Never Makes a Mistake Will Never Make Anything”, quote investigator, December 16th, 2014  
(13) “Big CPG Corporates: Where They’re Investing In Food, Personal Care, Tech, And More”, CB Insights, April 25th, 2016

___________________________________________________________

Author: César Pérez Carballada

Article published in
http://www.marketisimo.com/

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June 11, 2017

7 ways to replicate Coca-Cola´s success in your business

By Cesar Perez-Carballada





Coca-Cola is one of the iconic companies of our time.

Created in 1886, the company managed to expand globally and its brand has captured our social psyche.

 To say that one can replicate that success may sound oblivious of reality and overly ambitious. But, actually, if one analyzes all the factors that are behind Coca-Cola success, one comes to the realization that it’s not only possible but also likely.

By replicating Coca-Cola success I don’t mean to have a mere good brand or nice advertising but rather to build a global $ 180 Bn business that generates $ 6+ Bn of pure profits every year, one that leads a large non-monopolistic category and that enjoys large competitive advantages (a “moat”)  to guarantee its long term survival. The answer is neither secretive nor complicated, it’s actually rather simple, however it requires many dissimilar elements to be achieved at the same time: a combination of human psychological tendencies with business fundamentals, and that is where the complexity resides.

Let’s start by dissecting the elements that would be required for your business to replicate Coca-Cola’s success. We can think of 7 key elements as follows:

  1. Huge market size
  2. Branded business with conditioned reflexes
  3. Product with operant conditioning
  4. Brand with classical conditioning
  5. Social-proof effect
  6. Efficient logistics and distribution
  7. IP protection

Let’s cover one by one.

(1) Select a category with huge potential market

This is a variable that Venture Capitalists consider to be the most important in any new endeavor. (1) As the founder of Sequoia Capital and pioneer Dom Valentine said: “Give me a giant market - always”. (2)

In order to achieve not a mere large success but a huge one, at the level of Coca-Cola´s, we need a product with universal appeal. Just a niche segment will not do. Only a product with universal appeal will harness powerful elemental forces to attract a large number of people.

The need to select a huge market will probably limit our selection to mass B2C categories such as food (Nestle), beverage (Coca-Cola), clothing (Levis), shoes (Adidas), mobile phones (Samsung), Internet services (Google) or intermediaries selling any of the above (Walmart, Amazon).

This requirement will also force us to target the world. Of course we cannot start global operations from day one but once we achieve product/market fit we need to have a clear/aggressive growth strategy.

As McDonalds started in Pasadena, California (13) and spent 15 years there before opening a store in a different state (its first franchising licensee was in Phoenix, Arizona in 1952) and 28 years until its first international expansion attempt (Central America in 1965)(3), as Starbucks started in Seattle, WA and did not open the first store outside North America until 25 years later (in Japan in 1996) (4), Coca-Cola also started small in Atlanta, Georgia but did not expanded globally until 41 years later (5). All of these companies seem to us giant mastodons today but all of them started as fragile local operations. Even when the lapse of time required to achieve global leadership is becoming shorter and shorter, no company becomes a global leader overnight. The key is to dominate a local market, then move to the regional/national level and finally to the global level.


To confirm that the potential global market is large enough, we can use the following formula:

 # of consumers x quantity consumed x % market share x unit price x % margin = size of our business 


In the case of Coca-Cola, the calculation is straightforward. The average person in the US consumes 3.18 liters of water per day, or 1,160 liters per year (48% of which is coming from beverages other than plain water and 18% from food)(6). If the new cola beverages captures 15% of that water consumption (which is closed to the real average consumption of soda per capita: 44 gallons per year)(7) and if we can get 40% of that soda market, then our estimated annual volume is 20.9 billion liters only in the US (considering 300 million people older than 5). Assuming a wholesale average price of $ 0.87 per liter and a profit margin of 22% (both numbers close to reality), then we can generate $ 18.2 billion in revenues and $ 4 billion in profits every year, only in the US, thus the global numbers will be adequately large.


(2) Choose a ‘branded’ business 

We will never be able to build such a huge business by selling some generic product. We must make our brand name into a strong, legally protected trademark. Then we must avoid losing even part of our trademarked name (Coca-Cola made some mistakes in this respect since it allowed other companies to use half of its brand name “-cola”).


Equally importantly, we need to achieve a strong brand positioning in consumers’ mind. Basically, we need to create and maintain conditioned reflexes (8). A brand name (like “Coca-Cola”) and its visual identity elements such as logo, symbols and color will act as the stimuli and the purchase and usage (ingestion in the case of Coca-Cola) will be the desired responses. And how do we create and maintain conditioned reflexes? Psychology text gives two answers: operant conditioning and classical conditioning. Let’s see how to apply both of them.


(3) Develop a product that achieves operant conditioning

Operant conditioning theory (sometimes called “instrumental” conditioning) was largely advanced by the great American psychologist B.F. Skinner (9) and it basically says that the strength of a behavior is modified by the behavior's consequences such as reward or punishment: behavior that is reinforced tends to be repeated (i.e. strengthened) while behavior that is not tends to die out-or be extinguished (i.e. weakened).

In other words, behavior can be shaped by the use of positive reinforcements that occur after the desired response. Therefore, in our company, we need to maximize the rewards of our product and minimize possibilities that those reflexes will be extinguished through operant conditioning by competing products.

To do so, we need to develop a product whose consumption generates as many rewards as possible. The specifics will vary by category. In the case of Coca-Cola, there are 4 elements than can be considered:

  • Food value in calories
  • Flavor, texture and aroma
  • Stimulus such as sugar and caffeine
  • Cooling effect

We need to get as many positive reinforcements as possible thus, if we were developing Coca-Cola, we would need to be fanatic about determining, through trial and error, the flavor and other organoleptic characteristics that would maximize human pleasure while taking in the sugared water and caffeine. Furthermore, we’d need to develop a flavor with no aftertaste to avoid the protective, cloying, stop-consuming effects of aftertaste that are a standard part of psychology developed through Darwinian evolution.




Finally, to avoid that the desired reflexes might be extinguished by operant conditioning employing competing products, we must obsessively expand our distribution to make sure that our product is available at all times. If there is no opportunity for trial, then there will be no operant conditioning by competitors.

However, operant conditioning can take us only so far, we need also to apply classical conditioning.

 
(4) Build an emotional connection with the brand via classical conditioning

Classical conditioning, also known as “Pavlovian” in honor of its major proponent the Russian psychologist Ivan Pavlov (10) who discovered it via experiments with dogs (i.e. the famous Pavlov’s dogs), is a learning procedure that works as follows.

One biologically potent stimulus (e.g. the taste of food) typically generates an involuntary reflex response (e.g. salivation). This reaction is “hard wired” in our nature. Classical conditioning implies pairing the stimulus that provokes the reflex with another stimulus, neutral and independent form the reflex (e.g. the sound of a bell). Every time the organism is exposed simultaneously to the two stimuli, the reflex response is generated (even when only one of the two stimuli creates that response: we salivate because of the tasted of the food, not because of the sound of the bell). However, after pairing of the stimuli is repeated, if we removed the original stimulus (e.g. taste of food), the organism still exhibits the response in what is now a “conditioned reflex” (salivation from listening to the bell).

In the same way, the sound of a door slam comes to signal an angry parent, causing a child to tremble. Therefore, according to classical Pavlovian conditioning, behaviors can be modified through via association of stimuli. This is a very powerful concept and most modern advertising relies on it.

In our case, we can use classical conditioning in a number of areas. In advertising and other communications, we can associate our brand with whatever our consumers want to get/achieve to achieve an effect like that of the brain of man that yearns for the type of beverage held by the pretty woman he can’t have.



Thus, for as long as we are in business, we must use every sort of decent, honorable Pavlovian conditioning we can think of so that our brand is associated in consumer minds with all other thing consumers like or admire like Coca-Cola does with the concepts of “happiness”, “popular” and “youth”. As one Coke advertiser liked to remind his creative staff (perhaps exaggerating a little bit to make the point): “we´re selling smoke, they´re drinking the image, not the product (5).



This classical conditioning will create such a powerful set of associations in consumers’ mind that the company can risk to lose all its assets and still be able to re-generate its business (if Coca-Cola company disclosed its recipe, destroyed its factories, fired every employee and burned every hard asset, it would still be able to borrow against the value of its brand and rebuild it all).

Such extensive Pavlovian conditioning will be expensive, especially for advertising (Coca-Cola was already spending $1 million in generating demand by 1911, equivalent to $24 Bn in 2016, making it the best-advertised product in the world)(5), but we need to invest as much as we can for such activity since, as we expand, it will create a gross disadvantage of scale for our competitors to create the conditioning they need (not to mention the advantage of being the first in associating our brand with the most desired attribute in our category).




Considering Pavlovian effects, we need to choose an exotic and expensive-sounding brand name (like “Coca-Cola”) instead of a pedestrian name (like “Peter’s sugared, caffeinated water”). Similar Pavlovian effects from mere association may help us choose the product features. In the case of Coca-Cola, its flavor, texture and color: it would be wise to artificially color the beverage so that it looks like wine instead of sugared water and to carbonate the water so that it seems champagne or some other expensive beverage, while also making its flavor better and imitation harder to arrange for competing products.

Lastly, since we are attaching so many expensive physiological effects to specific product features such as the flavor, we should avoid making any huge and sudden change to it. Even if a new flavor performs better in blind tests, changing to that new flavor would be foolish because, under such conditions, our old flavor will be so entrenched in consumer preference by psychological effects that a flavor change can do immense harm (as Coca-Cola experienced in the 1985 when it tried to launch the “New Coke”) by triggering in consumers a standard deprival super-reaction syndrome (8) also known as “loss aversion” by Nobel Prize winners Amos Tversky and Daniel Kahneman (11). Moreover, such chance may allow our competitors to copy our old flavor to take advantage of the conditioning effects created by our prior work.



(5) Develop “social-proof” effects

There is another tactic that we can implement from the psychological textbook, a powerful “monkey-see, monkey-do” aspect of human nature called “social proof” (12). This effect makes us behave following the observed behavior of others. We assume that if other people are doing something, then that’s the right thing to do and we mimic their behavior. For instance, if we are undecided between two unknown restaurants and one of them is empty while the other has a waiting list with a crowd out front anxiously waiting, we instantly assume that the latter one must be better and we feel a strong urge to go there.




This principle generally works on our favor (that’s why we have adopted it after millennia of evolutive adaptation) but it can sometimes work against us. If we are walking towards the exit in a building and we see two glass doors, one open with people taking turns to go through it and another door next to the prior one which is closed and nobody is using it, we naturally assume that the former door is the only one working, until some venturous individual decides to try the closed door only to discover that it works perfectly, then we realize that we were wasting our time waiting in the line to use the former door (and perhaps we move to use the new door, but only now when we have seen other person doing so, being affected by “social-proof” again).




Social proof is the principle behind the herd mentality. It is also the reason why the lists of “top 10” sell so many records, why bartenders put some bills in the ‘tip jar’ when the night begins, why many advertisers use “testimonials” or show other people happily consuming their products in their TV ads and why nightclubs sometimes keep people visibly waiting in line outside even when there is plenty of room inside.




Social proof works better in uncertain situations: when we face an unfamiliar circumstance, it’s more likely that we act based on others’ behavior. Also, the more similar the people are to us, the more we will be inclined to mirror their behavior (which is why we need to adapt the ads to each culture).




In summary, social proof -imitative consumption triggered by mere sight of consumption- will not only help induce trial of our product but it will also bolster perceived rewards from consumption, increasing in turn the impact of the classical conditioning.

Therefore, we must always take this powerful social-proof factor into account when designing advertising and sales promotion.


As we can see now, by combining (i) wonderful-tasting, energy-giving, stimulating and desirably-cold beverage that causes much operant conditioning, (ii) Pavlovian conditioning via brand associations (i.e. brand positioning) and advertising, and (iii) powerful social-proof effects, we are going to get sales that speed up for a long time due the huge mixture of psychological factors that we have chosen in which will resemble an autocatalytic reaction in chemistry, for as long as we dedicate a large portion of the revenues to advertising and sales promotion.


(6) Optimize logistics and distribution


The logistics and distribution of our business must be simple in order to maximize market coverage in an efficient way. In the case of Coca-Cola there are two practical ways to sell the beverage, as syrup to fountains/restaurants, or as a completed carbonated-water product in containers. In order to maximize distribution, both ways are required. Coca-Cola always strove to place his drink “within arm´s reach of desire” via an obsession to provide outlets virtually everywhere. As old-time Coke evangelist Harrison Jones put it in 1923: “let´s make it impossible ever to escape Coca-Cola”.(5)




A few syrup-making plants can serve the world but, to avoid needless shipping of mere space and water, the company requires many bottling plants scattered over the world. The best way to arrange these independent bottlers is as subcontractors, not a buyer of syrup, and definitely not a buyer of syrup under a perpetual franchise at fixed syrup prices (as Coca-Cola did in 1899 and regretted for the next 20 years).(5)

In the same way, our company must utilize a distribution system that makes our product widely available and that, at the same time, minimizes the logistics and distribution costs.


(7) Protect your IP

A strong single IP (intellectual property) right will give an edge to our new venture thus it´s critical to trademark the brand and all its visual elements. For instance, a ordinary can of Coke is protected by no less than 10 federal trademark registrations covering both words and designs.




It is also important to get a patent of the key aspects of our product but if that’s not possible (like in Coca-Cola´s case) we need to work obsessively to keep our recipe or ingredients secret. This secrecy not only will protect our product but it will also enhance other psychological effect known as “scarcity effect” (humans place a higher value on an object that is scarce). Eventually, technology (like food-chemical engineering in Coca-Cola´s case) will advance so that our product can be copied with near exactitude but by that time we will be so far ahead, with such strong brand and broad distribution, that just product (e.g. flavor) copying won’t bar from our objectives. Actually, the Coca-Cola´s “secret” recipe has been identified in the past decades and it has been published as follows (5):

Syrup:
  • Fluid Extract of Coca: 4 oz
  • Citric Acid: 3 oz
  • Citrate Caffein: 1 oz
  • Sugar: 30 pounds
  • Water: 2.5 gal
  • Lime Juice:1 qrt
  • Vanilla: 1 oz
  • Caramel: 1.5 oz (or color sufficient)

7X flavoring formula:
  • Alcohol: 8 oz
  • Orange Oil: 20 drops (0.5 grams)
  • Lemon Oil: 30 drops (0.75 grams)
  • Nutmeg Oil: 10 drops (0.25 grams)
  • Corriander Oil: 5 drops (0.125 grams)
  • Neroli Oil: 10 drops (0.25 grams)
  • Cinnamon Oil: 10 drops (0.25 grams)

Mix 5 gals of syrup with 2 oz of 7X flavor and then combine it with carbonated water at a ratio of 1-to-5 (one part syrup to five parts bubbly water) to make the soda. You can find detailed instructions here.





That´s the “secret” recipe and it has been already published in a few books. However, no other company has replicated this recipe because what will be its price? Without Coca-Cola scale, it will probably more expensive. And what about its distribution? Most likely not as broad as Coca-Cola’s. But then, why would a consumer purchase a beverage that is similar to Coca-Cola but it’s more expensive when she can purchase the original cheaper version in almost every corner of the world?

Thus, these are the seven elements that explain Coca-Cola’s success and that can help you to replicate it in your company:

  1. Huge market size
  2. Branded business with conditioned reflexes
  3. Product with operant conditioning
  4. Brand with classical conditioning
  5. Social-proof effect
  6. Efficient logistics and distribution
  7. IP protection

*****

Those seven elements explain the success of Coca-Cola, from its origin until today.

You can use them to build an equally successful company. That success is all built in well understood principles: the difficult part is to be consistent in implementing all of them at the same time without being sidetracked while chasing distractive or divergent opportunities.



                                     

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Sources:
(1) “12 things about product-market fit”, Tren Griffin, Andreeseen Horowitz blog (a16z.com), February 18th, 2017
(2) “Donald T. Valentine. Early bay area venture capitalists: shaping the economic and business landscape”, interviews conducted by Sally Smith Hughes, University of California, 2009 http://digitalassets.lib.berkeley.edu/roho/ucb/text/valentine_donald.pdf
(3) “McDonald's: Behind The Arches”, John F. Love, Bantam Rev Sub edition, 1995. Note: The McDonalds brothers opened their first (tiny) drive-in restaurant in Arcadia, a suburb of Pasadena, California, northeast of Los Angeles, in 1937. Due to its success, then they moved and opened a larger store (600 square feet), the now famous store in San Bernardino in 1940 (at 14th and E Streets) which is considered by most reviews as McDonald´s first store, when in reality it was the second one (and it would not be until December 1948 that they would switch to the quick cheap self-service model that characterizes the chain nowadays).
(4) “Pour Your Heart Into It: How Starbucks Built a Company One Cup at a Time”, Howard Schultz and Dori jones Yang, Hachette Books, 1999; Company website https://www.starbucks.com/about-us/company-information/starbucks-company-timeline , http://www.starbucks.co.jp/en/company.html
(5) “For God, Country, and Coca-Cola”, Mark Pendergrast, Basic Books; Enlarged 2nd edition, 2000 (6) “The Average Consumption of Water Per Day”, Angela Ogunjimi, livestrong.com, November 11, 2015 http://www.livestrong.com/article/338496-the-average-consumption-of-water-per-day/
(7) “How Much Water Do People Drink?”, James Hamblin, The Atlantic, March 12, 2013 https://www.theatlantic.com/health/archive/2013/03/how-much-water-do-people-drink/273936/
(8) “Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger”, Janet Lowe, Apendix D, Wiley; New edition edition, 2003; via “Charlie Munger: Turning $2 Million Into $2 Trillion “, Mungerisms, April 2010
(9) “The Behavior of organisms: An experimental analysis”, B.F. Skinne, New York: Appleton-Century, 1938, with the influence of “The elements of psychology”, E.L.Thorndike, New York: A. G. Seiler, 1905
(10) “Conditioned reflexes: an investigation of the physiological activity of the cerebral cortex”, I.P. Pavlov, Oxford, England: Oxford Univ. Press Conditioned reflexes: an investigation of the physiological activity of the cerebral cortex, xv 430 pp., 1927
(11) “Choices, Values, and Frames”, Kahneman, D. & Tversky, A. , American Psychologist. 39 (4): 341–350, 1984
(12) “Influence: The Psychology of Persuasion”, Robert B. Cialdini, Harper Business; Revised edition, 2006




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Author: César Pérez Carballada

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