‘Organise consumers predicated on their demand'

‘You only have to differentiate a little bit'

‘Demography doesn't predict behaviour'

When you satisfy the most demanding consumers willing to pay a premium - who represent the most profitable demand - the rest will follow; and anything can get pricing power, if it gets differentiated to serve demand better, says Rick Kash.

In the second and concluding part of his interview with BrandLine, Rick Kash, Founder and CEO of strategy consulting firm The Cambridge Group, a part of The Nielsen Company, explains the science of predicting demand, and segmenting customers based on demand, leading to demand profit pools that supply must then be aligned to address. Excerpts:

You speak of market share and profit share. How does one draw the balance?

One is not replacing the other. Market share is about scale. You gain market share to gain scale, and with scale you get efficiencies and that leads to profitability. It's a virtuous cycle.

You need both. For most large companies today, they could win a larger share of the profits, but that doesn't mean that they would maintain enough scale. So you want to win share of market, and also share of profit. That means, you will have to win the most profitable share of customers - they have to be part of your share of the market.

Identifying a set of customers willing to pay a price/premium and creating products to satiate their needs - isn't that something marketers are supposed to have been doing all along? What does The Cambridge Group bring to the table?

Most companies which deal with consumers segment their markets on the basis of demography. The data that you get - how old they are, where they live, income they make - is almost worthless, unless the company is a very expensive automobile manufacturer, or something.

Demography doesn't predict behaviour. A vast majority of companies have for over 30 years been segmenting on the basis of demography and behaviour. Those look out the rear view mirror.

The Cambridge Group invented intellectual capital by segmenting on demand. When you segment on demand, you automatically find that the people who are the most profitable fall into the same demand profit pools. Customers are organised predicated on their demand.

For Hershey's in the US, we found that a pool of 14 per cent of consumers were responsible for 28 per cent of consumption, accounting for 39 per cent of profits. These people don't wait to buy on sale or with coupons - they buy at full price.

Take the case of pet food companies. When we segmented by demand, it came down to the relationship with your dog. If you want your dog to love you, you buy the most expensive dog food - we called that segment the ‘loving indulgers'.

Then there are three kinds of dogs in the family - dog as a family member, which means very expensive dog food; the dog as a family pet, which means nice dog food. Then you have dog as furniture: ‘We've always had one of those, he just lies in the corner.'

When you segment on demand, you find that the people who have the strongest demand for the product are the ones who create the most profit. They are willing to pay a premium in that category, because that category of products is most important to them. The demand business model talks of not just demand, but profitable demand. We tell clients to create supply that aligns with the most profitable demand.

The important thing here is that this doesn't mean you exclude everybody else. When you satisfy the demand of people who have the strongest demand, create the most profit, and are the most discriminating, everyone else comes along. That's also how companies get pricing power.

How can this apply to companies addressing a mass market?

McDonald's addresses a mass market. At every level of market, even with a $ 2,200 car, there will be other cars at $ 2,200 in due course. The critical factor is to differentiate. And you only have to differentiate a little bit.

Data from around the world says that no matter what price point, if your customers believe that you are differentiated, and meet their demand better, three things happen: your profit margin goes up by 250 per cent, your revenues grow 270 per cent faster, and if you are a public company, your equity grows at double its rate (if it's growing at 3 per cent today, it would grow at 6 per cent).

It's less about the price point and more about how you differentiate to meet demand. An upper end car company was the first to introduce cup holders in the US. When Starbucks popularised coffee, it helped to put in deep cup holders so that the cup actually fitted in. My wife wanted to buy the car, and did, and paid more money on a car because it had cup holders in it. Anything can get pricing power, if it gets differentiated to serve demand better.

How does one identify latent demand?

We employ macro-economists, for one. Twenty years ago, someone wanted to get into the dog food business. He looked at human food, and observed that in the US at least, people were getting health-conscious. There was latent demand for healthier food for dogs.

Identifying latent demand is a result of looking for patterns, or, creating hypotheses. 80 per cent of new products in India fail; it's even higher in the US. The reason they fail is because people have an idea, they get convinced that the idea is good, and they go out and introduce the product. The way to find latent demand is to constantly test hypotheses. You look at other categories, you look at macro trends.

One needs to see events and circumstances around us that can create new opportunities; we need to see trends; and always have a set of hypotheses to test. It's a scientific process.

All of medical science is based on hypothesis. A lot of medicines fail. In business, we need to get used to the fact that we need to spend as much time testing new hypotheses, as we spend selling existing products.

How different is your practice from that of consulting companies?

Consulting companies have a traditional marketing practice, while we push demand. We reverse the process because we believe it works better for companies when demand is studied before products are created for supply.

Most senior executives responsible for making business model changes succeeded with the traditional model of supply-to-demand. They are resistant to the idea of change, because they all became CEOs or CMOs working that way.

But now, we're getting a whole new generation of leaders and a whole lot of companies who, when they put in the demand model, are seeing success. That's why we're calling it the demand revolution. Consumers have created this revolution, as we saw in Egypt.

Which are the categories that can easily and quickly adapt to your demand model? For instance, in the auto space, the time it would take to integrate your demand inputs to the supply side, and then production … seems like a long process.

We are working right now with one of the largest automotive companies in the world. We've been in meetings where the president of the company said, ‘This is the first time in 20 years where I've been in a meeting where technology, manufacturing, finance, sourcing, marketing and sales have been in one room at the same time'. We believe everyone in the company should know how to compete and win.

Will it affect tomorrow's cars? I don't know. But will it affect the company's cars three years from now? You bet.

Hershey's turned the model around in one year. You're not re-engineering the company - you are just changing the sequence of how you think and act. You're watching the demand first now.

In the case of McDonald's, we saw them turning around in a year-and-a-half. And that's a worldwide company with complex operations.

Indian companies going abroad - there's a view that Indian companies should grow their domestic business first, given the untapped potential that exists in the market. Your thoughts …

We did discuss that (at the CII Summit). Anand (Kripalu) of Kraft said he sees Indian companies making their mark abroad in the short term. I agree with him a hundred per cent.

If you restrict your view to what you can see, you stop. Right now, India's got a CAGR of 8.5 per cent that is likely to continue for five years. Indian companies should be taking advantage of the profits they're making. The two - domestic business and going to other markets - are not mutually exclusive. Indian companies should be expanding in India, but should also seize opportunities and expand around the world.

Because, among other things, there will be inflation in India. And on an average, 34.5 per cent of the household income in India is spent on food.

You want to go out to other countries now, because in five years, you don't know what any market will be like. In the US, in five years we would have rebuilt the economy.

I am not saying that all Indian companies should go global. You need to find markets where there is demand for what your core competency allows you to offer. Based on the understanding of demand, you align offerings for different markets.

If you have products that can create demand globally, why in the world would you want to only sell them locally?

Read the first part of the interview on www.thehindubusinessline.com

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