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Disrupting markets through value innovation


Disrupting markets through value innovation

It is well known that markets grow by the reduction of unit prices: this is how the computer became a household necessity, mobile phone sales skyrocketed, and so on. In mature markets, the goal is no longer to increase the market in volume, but to increase it in value. There are obvious limits to usage for most products: nobody wants to shampoo their hair four times a day. The main question is really how to make the consumer willing to pay more. This added value will then be shared between the distributor and the producer.

The goal of all brands is to look for value innovations, an unprecedented bundle of attributes that shifts the preference function of consumers (Chan and Mauborne, 2000). ‘Value innovation’ consists in sacrificing some attributes (by suppressing them) in order to raise valued attributes to an unprecedented level. The best example is the Accor Formule 1 hotel chain created in 1985. This became the fastest-growing hotel chain in Europe. How did Accor, Europe’s leading hotel group, achieve this?

The first point was in the identification of an ‘oilfield’, a source of growth nobody had thought of before, or that previously could not have been served profitably. Many people never go to a hotel, because they cannot afford it. This is true of students, young couples, families, workers – a huge potential market. When they travel they tend to stay with friends or family.

This matches their price expectations (it is free for them) but creates a number of disutilities (lack of privacy, obligation to eat and spend time with their hosts, lack of freedom and so on). An analysis of the value curve of this very competition (staying at friends or parents) reveals what bundle of attributes will move consumer preferences. The solution is still to be very accessible pricewise but to offer all the guarantees of a clean, safe, quiet, practical hotel.

How to do that profitably? How to base the brand on a valid economic equation? Only by sacrificing an attribute. The disruptive nature of the Formulae 1 innovation was in suppressing some of the features that all previous players in the hotel market had held to be essential, such as ensuite bathrooms. In Formulae 1 there were no baths or toilets in the individual rooms, but collective ones at the end of each hall, autowashed and disinfected after each usage.

Formulae 1 succeeded in tapping a hidden need, and also adopted a successful development strategy. This strategy consisted in quickly reaching the critical size (250 units) to be able to cover the country (that is, initially, France). Customer approval was transformed into loyal behaviour (which was only possible if they found a Formule 1 hotel wherever they went), and it was also possible for the brand to access television advertising, hence reaching the status of top-of-mind brand leader for the whole hotel category.

This brand did not meet the same success in all countries. In the UK for instance, land costs and the difficulty of finding good hotel locations prevented the fast development of the chain, and hence access to the critical size, essential in the brand and business-building model.

The breakthrough brought about by Virgin Atlantic did not reside in its price or in the logo, but in the ability to create a different in flight experience through a number of innovations that have now been widely copied. In addition Virgin offered business-class travelers a full service before and after the flight itself, adding new benefits to the Virgin experience. They could be picked up at their offices by chauffeurs in Volvo cars and driven to the airport. In addition they were offered access to a shower room after landing, to get ready for their business day. This not only attracted new clients but stimulated a higher frequency rate among all clients.

A disruptive value curve: Formulae 1 hotels

Another case illustrates the concept of value innovation: ballpoint pens. What made the success of Bic, which launched the ballpoint pen on a commercial scale in 1950? Mastering quality at a low price. The prototype is the Cristal model, the all-time best-seller. It encapsulated the values of the brand: reliability, an excellent quality/price ratio and durability. Competition certainly came from lower-priced pens, with a lower quality, sold by discount chains or as distributors’ brands.

However the real challenge for Bic came from Pilot and Sanford, which introduced a lot of value innovations (ink gel, ink points, ink balls, more colors, better grip, new more sensual materials) at around five times the price of a Bic. When they encountered these products, which delivered experiential added values, closing the gap with classical ink pens, and provided a permanent thrill by frequently introducing new collections – as did Swatch, Gap and Zara in different fields – consumers were seduced.

To survive, Bic had to change part of its business model, introducing variety to match what now emerged as very fragmented needs, thanks to an outsourcing policy, which had until then been forbidden within the Bic Group. Innovations now represent 25 per cent of each year’s sales.

Increasing experiential benefits

Anyone who has visited a Nike Town cannot forget this experience. The same holds true for the House of Ralph Lauren, for Ikea and for Virgin Megastores. These places embody all the brand values in 3D, and in addition they deliver a memorable sensual experience. In developed countries, people have met their needs, and are now looking for exciting experiences. This creates a new source of growth: increasing experiential benefits.

The concept of experiential marketing has not emerged by chance over the past few years (Schmitt, 1999; Hirschmann and Holbrook, 1982; Firat and Dholakia, 1998). Consumers in developed countries and mature markets try to build thrills into their existence. This is why, for instance, they love to patronize thematic restaurants and amusement parks, and want to discover New World wines. Through these consumptions, their minds and senses are stimulated. They live differently through the product.

Swatch has based its success on the delivery of repeated experiential benefits to each of its clients, through collections, design and a general sense of fun. Garnier, one of the mass market global brands of the l’Oréal Group, has defined itself as a full experiential brand: this is apparent in everything from the touch and colour of the packaging’s to the internet site and the importance of street marketing in its brand building (with the creation of Garnierowned buses, travelling around the country in Germany as well as in Shanghai). This also means that everything needs to change faster, to maintain the thrill: product lines, advertising, promotions, the contents of internet sites and so on.

In this respect, service acquires more and more importance, even for product brands. This can take the form of making the brand ‘mediactive’, a mode which favours communications among members of a virtual community through consumer magazines, forums and chatlines, FAQs and other communication devices. It can also be achieved simply through levels of service, such as the call centres created by Pampers and by Nestlé Infant Food to answer specific questions about babies.

Strategic Brand Management Related Practice Tests

Strategic Management Practice Tests