10 March, 2009

Why Pay More...Seriously, Why Pay More?

Was flipping through Ad Age’s Annual 2009 the other day (yeah, I know it came out in January, but somebody took the “good” copy into the bathroom). Anyway, I saw a few interesting things. Generally, the company that spent the most money for their particular industry in 2007 earned the largest market share, which makes sense. And usually if you spent the second through tenth most, you didn’t grab a market share that much smaller or larger than you spent. If you spent the second most, you probably finished with a top five market share, and if you spent the 9th most, you probably finished in the bottom five. However, there were some anomalies, and those are the companies we should look at or avoid imitating.

Toyota spent half as much on media as General Motors, but grabbed 2/3 as high of a market share. Ford on the other hand grabbed 2/3 as large a market share as GM, but spent ¾ of what GM spent on Media. Nissan spent nearly half of what GM spent, but pulled only slightly more than ¼ of GM’s market. What were Ford and Nissan doing wrong?

You can see this across a variety of industries. Restaurant chains generally spend more on media than they reap in their share of the market. The one exception was Dunkin Donuts. The DD spent about 13% of what top dog McDonald’s spent, but grabbed 18 % of the share the Golden Arches held. KFC and Pizza Hut held roughly the same market share as Dunkin Donuts, but Pizza Hut spent nearly double what Dunkin Donuts spent, while KFC spent almost 2.5 times as much.

Beverages are the other way around. The top companies generally spend a smaller percentage compared to their share of the market. A huge exception is Gatorade (PepsiCo), who spent more than half of what Coca Cola spent, but only pulled in less than ¼ of what Coca Cola brought in. And that’s just media buys. It doesn’t even take into account how much they paid spokespersons like Peyton Manning and Derek Jeter (although that would at least make more sense). Sprite, on the other hand, sells itself. Coke spent only 12.5 million—5% of what they spent on Coca Cola—for a beverage that grabbed nearly a 1/5 of the market Coca Cola owned. Oh, and did anyone else know that Nestle owns 7 of the top-selling water brands, including Poland Spring and Deer Park? Who needs carbonation and sugar?

Now let’s talk about my favorite industry on this list--How to succeed at selling beer. 1) Be Anheuser-Busch. The Budweiser brewer held nearly 50% of the market, which is insane considering the next closest industry leader was AT&T with 27.4% of the wireless market. 2) So you’re not Budweiser. Then don’t be Heineken. The green bottled Dutch lager spent 1/3 of what Anheuser-Busch spent, but only had 1/10 of A-B’s market share. 3) Be Pabst. The now largest American owned brewer, on the other hand, spent less than 1% of what Busch spent, but held 6 % of Busch’s market share—the only brewer on the list besides Yuengling to reap more market than it sewed.

Now wireless is interesting, because the biggest spender didn’t hold the largest market share. The second largest provider, Verizon, spent $1,717.4 million, while the largest, AT&T, spent only $1,589.3 mil. After that, the numbers pretty much all make sense.

Oh, those poor retailers. When it comes to retail, ad spending doesn’t necessarily mean anything. Top spender Macy’s outspent second highest spender Sears by nearly $300 million, but Sears almost doubled Macy’s market share. Actually, at only 1.0% of the market, Macy’s had the seventh highest market share, and Sears had the fifth. The largest share (as if you couldn’t guess) went to Wal-Mart, who earned almost 11% of the market at about half of what Macy’s spent.

What does all of this mean? Well, marketers put a high value on premium products, but apparently Americans just want products that are cheap--Budweiser, Pabst, McDonald’s, Dunkin Donuts, Wal-Mart. Heineken is a premium product that enough Americans just haven’t bought into, and Verizon is a service that charges higher rates, based on their reputation, but apparently, Americans don’t care.

A big exception would be Starbucks, but when you charge $5.78 for something that costs $0.88, you’d have a healthy bottom line too. And Toyota’s not cheap, but they’ve got a reputation that goes back longer than Verizon’s. I mean, who would you rather steal from—Toyota whose Tundra can survive an asteroid strike, or Chevy, the company that thought it would be a good idea to purchase the Geo line.

The lesson, unless you’ve got an amazing reputation or the best business model since Twitter, “We don’t produce anything, but that won’t stop you,” be easily accessible (re: Budweiser, McDonald’s, Dunkin Donuts) and be cheap.

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