We’re getting to a point where – for a clear majority of companies – the most important point of value creation is moving away from production and developing into the communication, conceptualization and marketing of products.
MD often refers to the fast food business example when he talks about this phenomenon: in the fast food industry marketing investments are up with 70 percent since 1999, while the production value is up only 25 percent during the same period, which shows that the business’ value creation is more in the immaterial than the material today.
My favorite example is Zappos.com, a company that once described itself as “a service company that just happens to sell shoes”. From its origins as an online shoe-retailer founded in 1999, the company today has expanded into selling clothes, consumer electronics and other items. Last year it rang up a record $1 billion in sales even as other retailers were struggling. The company doesn’t offer any unique products, instead the key to its success is in “deliver[ing] WOW through service”.
Another great example is provided by Steven Levitt, concerning what value the product Coke actually holds to Pepsi. He makes an interesting point: knowing the Coke’s secret formula is probably worth absolutely nothing to Pepsi – the value is all in the marketing of Coke. Here’s the logic:
“Let’s say that Pepsi knew Coke’s secret formula and could publish it so that anyone could make a drink that tasted just like Coke (just like when prescription drugs go off patent and generic drug companies come in). The impact would be that the price of real Coke would fall a lot (probably not all the way to the price of the generic Coke knockoffs). This would clearly be terrible for Coke, but also for Pepsi. With Coke now much cheaper, people would switch from Pepsi to Coke. Pepsi profits would likely fall.
So if Pepsi had Coke’s secret formula, they wouldn’t want to give it away to everyone. What if they instead kept it to themselves and made their own drink that tasted exactly like Coke? If they could really convince people that their drink was identical to Coke, then the new Pepsi-made version of Coke and the Real Thing would be what economists call “perfect substitutes.” When two goods are essentially interchangeable in consumers’ minds, that tends to lead to fierce price competition and very low profits. Neither Coke nor the Pepsi knockoff of it would be very profitable as a consequence. With the price of Coke lower, consumers would switch away from the original Pepsi to either Coke or the new Pepsi-made Coke knockoff, which would be far less profitable than original Pepsi anyway.
In the end, both Coke and Pepsi would likely be worse off if Pepsi had Coke’s secret formula and acted on it.”
Have you got any other good examples of where the value creation in a business has moved away from the “material” to the “immaterial” side?
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I’m waiting for Zappos to come to Europe, I want to buy service to!
Love the concept and agree… My first thought was the auto industry. Today very little of a Volvo, SAAB, Mercedes is actually produced by the company. they buy it from someone else and market the car. Then I thought of mobile phones which to a large degree are in the same position – remember when flextronics started producing Ericsson phones? Then my mind leaped to nike which of course don’t actually make shoes but sells them. Cosmetics, Perfumes and other luxury items follow the same pattern. I find it harder to actually think of a business that moves in the opposite direction.
Taking this one step further wasn´t this what actually spiked the finance industry? Many banks had to much “talk/image” and to little “material”? My favorite industry of immaterial would have to be art – paint 5 dollars, a brush 2 dollars, the painting pricesless…
Sorry to be such a drag, but you can’t be good at selling if you do not have something good to sell.
And to continue the reasoning: you will never be interested in buying if what you want to buy is not good.
Plus/minus factors in essence.
Fika?
Anna: Hopefully you dont have to wait too long! Zappos is apparently looking into expanding to airlines and other stuff…Virgin seem to be a role model.
Martin: Thanks for all the great examples! My next question then is this: to what extend does it matter how mature the market is where the company is active and does it matter where in the product cycle its products are?
Erich: I beg to differ, I think it’s more a matter of being “good enough” with your product and then “best” when it comes to communication. Look at Pepsi and Coke again: so many blind tests show that Pepsi is the prefered taste, and yet the company continously fall behind Coke in sales. Do you buy detergent because you really really know that the product you’re buying is better or because the Brand holds a promise that it’s better (will Yes really clean your plates better?).
@Erik.
Please beg to differ, that’s what it’s all about
Maturity is an important factor, and to be honest I suspect that the customers you are referring to, and want examples on, operate on just the “mature market” where the plus factors is more interesting than the minus factors.
It would be interesting, from a personal POV, to know exactly which detergent you are using right now (since you bring it up). Why did you buy exactly that and what exactly triggered you to buy that specific brand.
From my personal POV, I drink coke or Pepsi – whatever.
om the topic coke vs. pepsi read the book blink