Hi Everyone:

Often I hear marketing managers complain about their aging products turning into commodities and wondering how they can differentiate them on something other than price. Sound familiar? Read on… if a power generating company can differentiate an electron there is hope for all of us!

For those interested, the July/August Harvard Business Review has a letter in it from me on Tesla.

To all the Canadians – Happy Canada Day and all our American friends – Happy July 4th!

Enjoy the newsletter – Cam

CTipping@iibd.com

(+1) 250 595 8440

(+1) 917 816 5846 M

Volume 15 Newsletter 6

Differentiating Electrons

Talk about a marketing challenge. The EU had decided to deregulate the power grid and almost immediately providers started offering discounts at 20% below the current market rate for residential users. One's imagination didn't need to wander too far to see how this was likely to play out. A few years earlier the EU had deregulated the telecom industry resulting in an extensive price war because providers couldn't figure out how to differentiate except on price.

Bayernwerk AG was a Munich based company that had invested heavily in their power transmitting capabilities in anticipation of the EU opening up the market but the possibility of a price war could have put their plans in jeopardy. Add to that, the industry already had an oversupply of power and one could only assume the worst. Up until this time there was no need to differentiate oneself as the market had been highly regulated but with deregulation, competitors quickly lowered prices and were advertising amply. The marketing team at Bayernwerk was under extreme pressure to come up with an answer to the new competition which raised the question "how do you differentiate a commodity"? Conventional thinking would tell us that one electron is the same as the next.

The marketing manager at Bayernwerks had previously worked for AOL and had been exposed to a marketing tool called a Customer inSight Study or Conjoint analysis. Conjoint analysis helps researchers understand the relative value of each attribute – for example, do you prefer a car with high acceleration and poor fuel economy or low acceleration and high fuel economy? Researchers can study the tradeoffs customers make and determine the value system they use to make their decisions. In this particular case, a study was developed to test four potential trade offs.

1.    Price

2.    Brand (company) that produced the power

3.    Source of power (nuclear / hydro / coal) and

4.    Local customer care vs telephone and internet only support.

Not surprisingly, the study showed that people wanted a lower price but perhaps unexpectedly was that customers were willing to pay a significant premium if they could get power from a nonpolluting source (Hydro) and from a nonpolluting company that was local and caring! Maybe an electron can be differentiated!

To challenge the price discounters, Bayernwerk launched a brand called Aquapower. Rather than giving a discount if you signed up for Aquapower you were charged a 20% premium for your power. Here's how the program worked. Aquapower subscribers were guaranteed that the power generated would come from non polluting resources (hydroelectricity). The electrons received by a subscriber wouldn't necessarily be from Aquapower (there was no way of know from which power source they came) but Aquapower would guarantee that purchased electrons would equal the amount of hydroelectric power produced. Even given this compromise clients were still happy with their choice as they felt they were doing something positive for the environment.

The Aquapower program was an extreme success! The discount power providers were left with very few customers as the environmentally conscious Germans signed up for Aquapower in droves. Bayernwerk had done the impossible – they had differentiated a commodity and stopped the discounters cold. What can we learn from Bayernwerk:

● Anything can be differentiated!

● Conjoint studies often reveal customer needs that can shock even experienced marketers

● Just when you think you know your market well - you likely still have something to learn!

Aquapower, in the end, was such a powerful product launch and had such high differentiation that it prevented the low cost providers from establishing a market base.

Remember - even monkeys can compete on price – great marketers find ways to differentiate their products or services. What are you doing to differentiate your products or services?

Story from a IMD Case Study Bayernwerk A.G. by Mark Vandenbosch