Wednesday, July 29, 2015

The Moldy Middle

While taking statistics during my quest to get an MBA and while earning my engineering degree, the professors always emphasized the importance of finding the statistical mean of any population by using the Central Mean Theorem (a.k.a the highest point of the Bell Curve).

As an engineer, this was essential in order to maximize throughput, minimize cost and waste, and ultimately make a better, faster, cheaper widget. A funny thing happened on the way to the dark side of marketing. I discovered that the only thing in the middle of the road was quite literally dead road kill.

I do not know if you remember stores like Bradlees, Ames and Service Merchandise (just to name a few), but they all folded because the environment changed and they were caught trying to service the mythological “average customer.”

Part of that change came when Wal-Mart began its juggernaut with the discount department store. Wal-Mart did two things right: 1) Focused on “mobile” consumers, and 2) Focused on offering goods to cost (not value) conscious customers. In order to get cost down to bare minimums, Wal-Mart made sure for most of its products, it achieved the lowest price possible for its goods. Wal-Mart is not known for high quality, but it is known for low (and often the lowest) prices.

Still, you cannot buy everything at Wal-Mart (like rechargeable batteries, and Pepperidge Farms). So, there is a window of opportunity for competition (Target), that will be in another blog called Differentiate or Die.

In order to be recognized in the business world you have to stand out. Essentially, if you try to service the average customer, you will essentially look like everyone else. You must Differentiate or Die. Everything else is white noise.

Unfortunately, when most companies try to position themselves to service the average customer (the largest area under the bell curve), find that they actually get the fewest customers and the fiercest competition. Actually, when you position your product or service, you first have to carve out a niche in one of a very few extremes.

These extremes include:
Price (high versus low)
Quality (high versus good or average)
Service (personal versus automated or outsourced)
Features (high versus few; or simple versus complex)
Status / Value (High versus mundane)

Notice volume and profit are NOT on this list, since they are dependent on what extremes you choose.

I know this sounds counter-intuitive, but look at some of the successes:

Starbucks: They offer a high value / high status; high price coffee (and ultimately reached high volume & profit). Had they been another “average” coffee shop they would have not reached the status they had.

Dell: The offered a low(er) cost computer, with lower customer services (automation) but with a high feature set (custom made).

Proctor & Gamble: They segment their product offerings to cover a variety of extremes within a specific segment (toothpaste, shampoos) etc. To date, they are the most successful consumer goods company in the world.

Toyota: They offer extremely good quality, with a rich feature set (high gas mileage, extras, warranty), for a high value customer at a reasonable price.

Of course there are many others. What these companies need to be weary of is the temptation to try to get more market share at the expense of abandoning what made them desirable to begin with. The law of scarcity sometimes is a good thing.

So, if you are starting a new company, or releasing a new product, or looking at how to improve the perception of you existing product, look at what you are tying to do, and see if you are targeting the moldy middle. If you are, make some real effort to move away from that segment as quickly as possible.

21 comments:

matt said...

Great post. It seem then that the bell curve is incomplete. The curve is stating "# of N" over population, but the assumption is that population served = success. Your assessment is that population may equal mediocrity.

So maybe the missing ingredient is some coefficient of market opportunity (i.e. the reciprocal of commoditization potential?). Adding in that factor would seem to yield more useful results.

The Profit Prophet said...

Thanks. Funny how looking at the same curve, when applied to a different criterion, results in a totally different conclusion.

Just something I have observed over the 15 years of sales & marketing.

matt said...

That's true. The reason we draw graphs is to make the raw data easier to understand. The problem is that while a graph is generally does make interpreting the data easier, it's almost too easy to assume that the graph encompasses all variables that affect the data (i.e. context). Thus, it's easy to assume that "good" on one graph means "good" on another.

I like the quote, "All models are wrong, but some are useful." That's what we have here. The bell curve and supporting data is a model. In your context, it doesn't encompass enough variables to make it useful.

Sorry, I'm sounding too much like an engineer here.

The Profit Prophet said...

Excellent insight, and so true. Data is data, but not knowledge.

matt said...

By the way, I do remember Bradlees, Ames, and Service Merchandise. And Jamesway too. They were all around where I grew up in Upstate NY.

The Profit Prophet said...

Cool. There were lots more....

matt said...

Montgomery Ward comes to mind. They were all in my local mall growing up... Sears and JC Penny seemed to have made it.

The Profit Prophet said...

Yes, and K-Mart almost did not!

matt said...

So then, out of the bunch, what would you say that JC Penny & Sears did right?

Softwarejanitor said...

I dunno about that. Sears had to get bailed out by K-Mart of all companies in order to survive. Today neither JC Penny or Sears are a pale fraction of the companies they once were.

The Profit Prophet said...

Hard to believe that Sears invented mail order, and now they are just a footnote!

The Profit Prophet said...

Yeah, it is hard to imagine how they failed so quickly and completely given they were still a major force in mail order when I was a child. It isn't like mail order went away or anything.Consumers are fickle. It did not happen overnight, but their stores started to get dingy, their product was not the latest and greatest, their prices were not compelling enough to get you to come back. In short, they got boring! To some extent, Wal-Mart (yes Wal-Mart) is starting to show some of the same signs. There model is running its course, and unless they do something soon, they will also suffer a stunning reversal of fortunes.

BTW, I used to shop at WM (funny, some as Wast Management) all the time, but I rarely go their any more. I prefer Target....

Softwarejanitor said...

I agree with a lot of what you are saying in regards to Sears... but as for the quick demise of their catalog sales, it just seems like they more or less gave up on that business. The only explanation I can think of is that perhaps printing costs of the catalogs combined with escalation of shipping costs played a part in it. It seems like the internet has done a lot to rescue home shopping, but that came 25+ years too late to save the traditional catalog merchants like Sears, Pennys and Monkey Wards.

As for Wal-Mart, I'm not sure I agree there. They seem to be doing better than average in a time when many other retailers are struggling because customers are becoming more price driven. I'm personally not a really big fan of Target just because they carry basically the same Chinese made junk but usually at a higher price because of their slightly fancier stores. I think a lot of people are happy to accept boring if its cheaper.

The Profit Prophet said...

Actually, there is a big difference between Target and Wal-Mart and I will give you one example:

If you go to Wal-Mart and purchase a colored tee, it costs about $5 and is 50/50 poly-cotton, if you go to Target and purchase a similar tee, it costs $6 but is 100% cotton. The difference is that the $6 tee will last twice as long at the $5 Wal-Mart piece.

People are starting to figure this out (at least I have and I am not too bright).

If you look closely, many of the exact same things that Target and Wal-Mart carries, Target is less expensive.

I totally agree, less expensive is in vogue now, but when the economy comes back (and it will) watch for the shift.

Softwarejanitor said...

I don't buy t-shirts at either store -- I've got such a huge glut of them I could almost never buy another one for the rest of my life and not go naked for lack of shirts.

I have to say that I haven't noticed what you say to be true about such things as socks or underwear. Not only is Wal-Mart usually cheaper for identical name brands like Fruit-of-the-Loom, Hanes, etc, but they actually had socks that were Made-in-USA which Target did not. To be fair, Wal-Mart had some imported socks as well, and not all the imports in either store were from China some were from Mexico or Egypt (if memory serves).

The Profit Prophet said...

Good points! I have found Wal-Mart not to carry the slightly higher end products as of late, but I have been known to be wrong (and often).

matt said...

I think mail order via catalogs is becoming irrelevant for consumer goods given the web-based variety. But I think Sears et al. started their demise earlier than the Internet though, so we can't blame the web completely. I agree that a number of those department stores seemed to become complacent - dingy, same-old, boring.

Walmart vs. Target reminds me of the same phenomena. Walmarts can be dingy (depending on where you go), whereas Target seems to position themselves as upscale. Problem is Target's prices are significantly higher than the WM equivalent, so I will often put up with Walmart for the lower price. After all, when I can pay $2 at Walmart for a lime juicer, and it costs $5-10 at Target, I'll hit Walmart. If the prices were the same though, I prefer Target.

Jay Frazer said...

I still believe that in many cases, the bell curve is not truly an even distribution, unless or until your population is large enough. Thus, take intelligence for example. In smaller samples I challenge you to find an even spread. But as you expand your geography, the data fills the curve better.

The Profit Prophet said...

Supposedly, with an n greater than 31, and a truly random sample of a large population, the bell curve works. Now, the margin of error is greater for smaller samples. Of course, if you population is small, you will can sample a large enough percentage to get a more accurate distribution.

The definition of a "population" is key here....

Jay Frazer said...

Of course, the Bell Curve works. The definition of "population" or at least sample size, is key, yes. I just believe that empiricle evidence of the surrounding "sample set" belies statistics.

The Profit Prophet said...

Agreed, sort of like seeing a jumbo jet fly. It just looks like it shouldn't but it does!