Monday, November 24, 2008

Intriguing marketing costs paradox


Ok, first answer this question:

If a product costs $15, but you're able to find the exact same product sold elsewhere for $10, what are you going to buy?

....the one that costs $10, obviously.

Ok, what if you're paying fees or added costs in the $15 that you don't need. Let's say that the product's true price is $10 but the fees cost $5.

....you'd still demand to pay only $10 because you're unwilling to pay for the added fees.

So why are consumers willing to put up with paying for the added costs of marketing?


Think of our $15 product like a cd. How much does the artist actually make on a $15 cd? Probably only 10 cents because the balance is record company profit and expenses for marketing, production, and distribution.

And consumers are getting wise to this.

Now think of it like buying cereal. You'll always purchase Count Chocula. For your entire life you're going to purchase Count Chocula. If you never saw another Count Chocula ad in your life you'd still buy it.


So why are you paying a price for the cereal that includes marketing expenses? It's really unfair when you think about it. You're not receiving any benefit from the advertising for Count Chocula,
so why are you paying Post cereal for the expenses it incurs when marketing to others?

Let me repeat this cause it's important-
why are you paying Post cereal for the expenses it incurs when marketing to others?

This is the weird scenario that's been floating around my head for a while.

Consumers are going to demand greater measurability of the costs of production for them, not some overhead costs that may/may not include them. With greater sophistication and fragmentation of buyer behaviors, consumers are seeking to maximize the value to them of everything they buy. It's not only smart consumerism, but it's also saavy financial management.

I'll happily pay your price for the product, if I know that I have fairly incured the costs you shouldered to produce the product for me!

This is why no one is buying records anymore. Because they are willing to pay the least amount possible (free) and still receive the product.

But what about marketers?

Their costs are actually increasing because we're on a weird cusp where absolute targetability is not yet a fully internalized expense. The value per customer created from a CRM program has not yet dropped enough to equal the value per customer from running mass advertising.

Targeted customers are valuable, but expensive (per person). Mass customers are of poor value, but talking to them is cheap (per person).

So our action items? Think about this marketing paradox:

1. Consumers are not willing to pay more than they have to, and they're angry at having to pay unnecessary marketing expenses in the products they buy.

2. Marketers are faced with a declining margin for marketing on the products they sell. If consumers were previously willing to pay $5 to shoulder the costs of being sold, now they're willing to pay $0.

THEREFORE, how can marketers continue to target the valuable customers? This is expensive. How can they continue to build relationships with customers when their actions are under greater scrutiny,
from both their clients and their customers, to reduce costs and be measurable?

Just something to chew on. Comments are appreciated here with any insights.

BTW, Count Chocula is scary delicious.

2 comments:

Nicholas Fodor said...

I don't think that it is fair in an absolute basis to charge for marketing costs. But then again, there are lots of costs that can fall into this category which are all rolled into the cost of selling a product. This includes research and development costs. For example, when Christmas rolls around and everyone wants a shiny new iPod, they're not just paying for the basic costs of putting the player together , but a huge markup in order to pay for creating and designing the next big thing. Of course it isn't fair, but the costs have to be incurred by someone, and that of course just falls on the people who buy the product for what they beleive is a reasonable price.

There are also some very reasonable marketing costs that we should be payig for. The largest of those are brand value. The difference between a trend and a fad is slim, especially when the difference is effective marketing. Luxury brands have huge marketing budgets not only to gain a new customer, but to sustain and improve the brand identity that other customers have bought into. Again, back to the marketing cow we call Apple; everyone loves those Mac vs. PC commercials. Some of us even YouTube them when we hear there's a new batch. These commercials make owning a mac cool. When you buy a mac you're paying for that, successful or not.

This really only falls into the category of luxury brands, or those we display in public. Do we really care about what brand of toilet paper or milk we buy on an image basis? We can't be gouged on the basis of our vanity in these situations. But then again, we enjoy using these brands in our everyday life. Marketing costs help get and keep customers, ensuring that our brands we are loyal to stay in business. Regrettably, as Max said, we cannot distinguish between those who are already loyal from those who should pay to be marketed to. No one really wants to pay to be marketed to, but that's just the nature of business. But we all love our count chocula that costs an extra dollar over the nearly identical no-name brand.

Lastly, there are also trade laws in place that prevent selective pricing. Laws state that at any one time, the same product must be sold at the same cost to anyone that wishes to buy it. Of course laws are broken, but is it really possible to track and price product differently for each consumer based on brand loyalty?

Good one Max. Now I want some count chocula. I hope you get a commission cheque in the mail.

Ana said...

Count Chocula is a General Mills product. It is not produced by Post Cereal. :)

And you bet it's delicious!