Tuesday, May 12, 2009

New Ads Will Stir Up Coffee Wars

“The coffee war between Starbucks Corp. and McDonald's Corp. is coming to a boil this week, as the two chains launch national marketing campaigns.”

As Starbucks Touts ‘Perfect’ Cup, McDonald’s Promises an Affordable Lift
(WSJ, May 4, 2009 - Read Full Article Here)

We discussed a powerful tool called the Value Map which positions products by their perceived tradeoff of price and quality (value). The Value Map was best described in Richard D’Aveni’s book on Hypercompetition and highlights the importance of competitive separation to the stability of the marketplace. I used it very effectively while running businesses as well as consulting them. It helps view the marketplace in the context of the perceived value from a target group of customers/consumers.

It is a construct of the price charged by competitors vs. the market average and the value of delivered, non-price attributes (function and emotive) both as perceived by the customer; it is best accomplished by using a third party to gather the information.

“The faceoff comes at a critical time for both companies: Starbucks is struggling to hold on to cash-strapped consumers, while McDonald's, which has been riding a strong wave of sales, helped by its inexpensive menu, is betting it can persuade people to buy fancy, though still relatively cheap, coffee drinks during a recession.”

First, you establish a list of no more than 10 non price attributes that your customers feel are critical and have the customer rate them from 1 to 100. The X-axis positions your offering as well as your competitors as a % of the total possible rating. The same is done with price by asking the customers what they perceive your price is vs. their competition; this can also be accomplished by an analytical price analysis if you feel uncomfortable discussing prices with your customer.

The Fair Value line (FVL) is the points of equilibrium where your customers feel they are paying an adequate price for the perceived quality they are getting. Now some possible scenarios:
- If your offering is left of the FVL, you are charging more than the perceived value delivered. You can expect price erosion unless you add more value
- If you are to the right of the line, you are not charging enough for the perceived value delivered and should consider increasing your price. This happens to be where most of my DuPont offerings were and we did refocus our efforts on increasing price accordingly.
- The trend over time always favors the customer/consumer (except in healthcare which is another discussion): either pricing will tend to drop for the same value delivered (FVL moves down); or more value will be delivered at the same price (move the FVL to the right); or prices will lower while more value is delivered (the FVL moves diagonally down).

“On Tuesday, McDonald's will begin marketing its coffee drinks on TV, radio, the Internet and in print, portraying McCafé as a fun, affordable brand that can make even the most mundane daily tasks more enjoyable………
But Starbucks has taken barbs seriously from McDonald's and other rivals, including Dunkin' Donuts, and is fighting back. On Sunday, Starbucks began running newspaper ads advising consumers against trading down to cheaper coffee. "If your coffee isn't perfect, we'll make it over," one ad says, "If it's still not perfect make sure you're in a Starbucks."

The battle among Starbucks, Dunkin Donuts, and McDonald’s is a classic example. Before the “wars” started, there was clear separation—McDonald’s was A on the FVL; Dunkin Donuts was B; and, Starbucks was C. Once the “wars” started principally over their breakfast businesses, the competitive separation is diminishing towards the middle. What strikes me about this article is the differing approaches to repositioning themselves to avoid more perfect competition—when everyone is B. The Value Promise or the quality of the FVCL includes function, emotive, and economic components and all must be used in position your offering vs. competition.

It has been awhile since my last posting –I am recovering from our son’s wedding!!

I made an improvement to the blog by grouping the postings by topics highlighted in our “puzzle model” for easier reference in the future. Visit it at http://marketdrivengrowth.blogspot.com/

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