Following is the sad story of the entrepreneurial Harry Edgecliffe and his ruthless competitor Spot Pet Foods. Although neither Harry nor Spot exists, their tale provides a number of invaluable lessons for all marketers. Harry Edgecliffe is not a happy man! In recent months, the business he toiled for so many years to build has been introducing incredible stress to his otherwise tranquil lifestyle. For the first time in his life, Harry feels that he is in a no-win situation. He wants to grow his business (he is, after all, an entrepreneur at heart) but whenever his marketshare grows, his margins shrink. This year will be the first in his business’s proud seven year history that it declares a loss. Harry is heart-broken. Harry launched his pet food business with a great product and with what he believed was a powerful competitive advantage. His experience as both a veterinarian and a dog breeder gave him the specialist knowledge he needed to invent a dog food that had all the nutritional qualities of fresh meat while still being able to be stored for long periods without deterioration. Harry’s business grew exponentially in its first few years. His product was an instant hit with dog breeders around Australia and, before long, he was the envy of his colleagues.

‘Simply a better product at a lower price’

Harry’s success formula was simple. He shared it willingly with colleagues and even the business press. ‘We simply sell a better product at a lower price.’ Harry had discovered that he could undercut other popular dog food brands. After all, he didn’t have the operating expenses that the supermarket brands had. He had no corporate headquarters, no commissioned sales reps and no research and development budget. Before long, Harry had saturated the local dog breeder marketplace. But, because his margins were low, he realised that he would have to expand into the mass market to increase his volume and reach his modest profit targets. Fortunately, his product was embraced by a national chain of independent food stores keen to capitalise on his success story. Harry’s product was now well on its way to becoming a household brand. And that’s when Harry’s problems began. Until then, his major competitor had ignored his growing business. It had little interest in competing within his specialist market niche. But, when Harry started to steal Spot Pet Foods’ shelf space, its reaction was fast and ruthless.

A ruthless Spot

Spot Pet Foods was a national company with a number of popular pet food brands. Until now, Spot’s position of dominance in the dog food market had been virtually uncontested. Spot was unimpressed to see a newcomer undercutting its product and ‘stealing’ marketshare. Spot’s brand management team quickly appraised the situation and devised a three pronged defence strategy. Spot’s sales reps began offering retailers enticing volume-based incentives across its range of brands. These incentives encouraged retailers to be loyal to Spot’s brands. Spot recognised that Harry’s perception as a ‘dog nutrition expert’ was popular with dog owners. However, Harry had never had the marketing budget necessary to take ownership of this positioning in the mass market. Spot had no such budgetary limitation. It quickly recruited a television personality (who hosted a show about family pets) as a representative for its dog food brand. This personality was then featured prominently in a new television advertisement. Spot supported its television advertising with an aggressive couponing campaign. Coupons distributed in newspapers allowed consumers to purchase Spot’s dog food at 20% less than the price of Harry’s competing product! To allow its retailers to maintain their margins, Spot Pet Foods reimbursed retailers for the coupons they collected from customers, at face value. Within days of the Spot campaign launch, Harry’s confidence began to wain. Retailers began to cancel orders for Harry’s product as Spot’s dog food brand reclaimed almost all of its lost marketshare. A major discount chain reneged on a deal it was about to sign when Harry could not match Spot’s volume-based incentives (unlike Spot, Harry was a one-brand company). And, while the independent chain of food stores that was distributing Harry’s product was happy to continue the relationship, it insisted that Harry discount his dog food product to make it more competitive with Spot’s.

An entrepreneur with a headache

This morning, Harry Edgecliffe woke up with a splitting migraine. He wasn’t surprised. It was the same headache he’d been living with now for several weeks. Despite think-tanks with employees, discussions with customers and many sleepless nights, Harry couldn’t see a way out of his current predicament. He’d tried discounting to regain marketshare, but each time he dropped his prices, Spot increased the value of its coupons to negate his price advantage. What’s more, Harry’s falling sales, together with his smaller margins resulted in his overdraft being stretched to the limit. This financial year he will post his first loss ever. He’s not sure how much longer his business will survive.

Harry’s problem diagnosed

Although Harry would undoubtedly disagree, he is not a victim of unfair competitive tactics. Rather, he is suffering under his own lack of understanding of fundamental marketing strategy. When Harry began his business, he miscalculated his ‘sustainable competitive advantage’. He then proceeded to engage in a marketing battle that he had little chance of winning. When Harry thought that he could build his business around the age old adage, ‘a better product at a lower price’, he was sorely mistaken. Sure, in his early days, he did appear to have a cost advantage over Spot Pet Foods. But that was only because he failed to calculate the additional expenses he would have to incur in order to build his business. (These included distribution, and research and development costs). When Harry attempted to compete head-on with Spot Pet Foods, he discovered that he had no competitive advantage. Spot had better distribution, a larger promotional budget and ample resources to survive a discounting war.

If Harry had his time again …

Our friend Harry had a good sustainable competitive advantage all along. He just didn’t recognise it. His true competitive advantage lay in his market intimacy. His product was created specifically for a market niche too small to be catered for by Spot Pet Foods. Harry’s niche market (dog breeders) appreciated the virtues of Harry’s product and respected its link with his personal reputation. If Harry had understood that he was a niche marketer (and not a low cost producer), his approach to growing his business would have been totally different. For a start, Harry would have recognised that what was important to him was not ‘share of market’ but ‘share of customer’. (He was really selling relationships, not dog food.) Accordingly, he would have created an entire range of products for members of his niche market. Perhaps he would even have packaged versions of his range for different sub-sets of his niche. Just imagine, a complete care program for poodle breeders (from Harry the dog-loving veterinarian!). This could have included a complete nutritionally balanced meal program, a set of treatments for poodles’ coats, and a poodle first-aid kit (with medication dosages suited to poodles’ small size and delicate constitutions). Would Harry have tried to sustain a price advantage over Spot Pet Foods’ products? No way. Harry’s customers would have had to pay a premium for his unique ‘value package’. Harry would have priced his products so that his business could make a fair profit on a small volume of sales. Of course, he would also have built an allowance for ongoing research and development into the price of his product. Harry’s promotional activities would certainly not have been directed to the mass market. His message would have been targeted at dog breeders (and perhaps those dog owners who seriously loved their pooches). And, rather than competing with Spot Pet Foods for supermarket shelf space, Harry would have distributed his products through the distribution channels used by other specialist suppliers to his niche. In fact, Harry would probably have developed a strategic alliance with another (non-competing) supplier to share its distribution channels.

Is it really all over for Harry Edgecliffe?

Is Harry in too deep? It’s hard to say. Sure, it will be possible to turn his business around – but it won’t be easy. He’ll need a little cash, and a lot of patience. For a start, he’ll have to force himself to undergo a paradigm shift. He’ll have to realise who his customers really are (and who they aren’t). And he’ll have to grasp and apply a new success formula. Harry will have to raise his prices and rescue his margins immediately. He’ll have to re-focus his attention on his niche market. And he’ll have to find ways to add value to his products in areas that will be appreciated by this market. Harry will just have to hope that he hasn’t trained his market to be too price (rather than value) sensitive. If he has, he might just have to conclude that his brand has developed negative equity! (This is when brand image is out of line with intended positioning.) This turnaround strategy will be a bitter pill for poor Harry to swallow. His higher prices will obviously disenfranchise many of his customers (retailers as well as dog owners). The structure and the culture of his business will have to change to embrace a new value system. And he’ll have to make decisions that appear to fly in the face of conventional wisdom. (Just imagine how excited Harry’s bank manager will be about his decision to increase prices and invest in new product development in the face of plummeting marketshare!)

Marketing lessons for all of us …

There are lessons for all business people here – not just specialist dog food manufacturers. For a start, we should only compete on price if we have a genuine and sustainable cost advantage over any current (or potential) competitors. (Remember, accountants recently lost a big chunk of their compliance work to tax agents because they did not have a cost advantage in this area.) If we don’t have a cost advantage, we can only compete effectively by offering more innovative or more customer intimate products. Of course, regardless of how we compete, we have to build a margin into our prices to allow us to continually hone our competitive advantage. (The market just doesn’t stand still.) And we should be careful only to engage in those battles that we have a real chance of winning. (Just think, this year Microsoft upped its research and development budget from $1.5 to $2 billion to compete with Netscape for its share of the Inter/Intranet market. How would you like to be in Mark Andreessen’s shoes?)

A gentle warning

If your phones are ringing off the hook … if you’re struggling to fulfil orders … and if you’re in the midst of expanding into new markets, the last thing you probably feel like doing right now is stepping back and reflecting on your marketing strategy. How could anything possibly be wrong with your business? Fact is, businesses apply a lot of leverage to entrepreneurs’ seemingly simple decisions. If your marketing strategy is just a few degrees off track, it’s possible that success could kill your thriving business. Just ask Harry.