I need to be honest here and say that this week’s study in business financial plan has been unexpectedly hard, but also eye-opening and rewarding. I have run my sneaker business with Roger and taken Economy class so I did speculate that I would have a relatively easy path through my journey in the business financial world. Apparently, the courses I took online proved me wrong, and here is how they did it:
One of the first things I need to introduce is the definition of marketing. Even though a word that seems intuitive, the standard definition of marketing is not quite obvious: according to AMA (American Marketing Association), marketing is defined as “…the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large” (AMA 2013). In a more understandable language, it is from the creation through the advertising to the selling of products in most cases. Breaking down the marketing into steps, smart antecedents of business created a 4P elements of marketing, which are product, price, place and promotion. And I will break down the first two to show how complicated it is to succeed in marketing.
The first part is product, or product design. We all know how important product is to a business, but I want to point out that product design is not suddenly coming up with a fantastic idea to open a steak house on Fifth Avenue: it follows a definition of a product, something that satisfies a certain need, and four criteria of a good product: targeting a specific market, satisfying real need, solving the need smartly and gaining popularity among the market. To bring the conceptual words into reality, I have an example: Ferrari California is a good product because it targets a very specific market: rich people who have an extra million to spend; it satisfies a real need of wealthy people to posses faster and cooler vehicles; it does the satisfaction by having both the advanced technology and the fashionable design and it makes Ferrari one of the most famous racing car brands.
Then you may wonder: why is steak on the Fifth Avenue not a good product? Although it does target a specific market, it doesn’t really satisfy a need because there are already enough restaurants in Manhattan so it will probably not be able to gain popularity within the market; it also fails to solve the problem smartly: it is merely another restaurant. So now the question becomes: if coming up with an idea in the shower is not a smart way to design a product, then how should we design a good product?
Product design involves four steps: user need insights, pain point analysis, solution design and user test. Looking at our steak house, if we are still targeting travelers and customers having fun on the Fifth Avenue, then what is their need? They probably need to be able to taste delicious food while not having to wait a long time because they are having a busy day enjoying the metropolitan. Great, so what is their pain point, or the part of their need that hasn’t yet been satisfied? It is probably that restaurants with good food will take a long time because of the line and cooking time, while fast food restaurants don’t taste as good bothers people. So if we can come up with a brilliant way to somehow serve steaks that tastes as good as the Wagyu Kobe Steak in a McDonalds style, then the only thing left for us to do is the user test. While the creative solution of excelling in both taste and speed is barely possible, I do believe that steak house on Fifth Avenue is most likely not a good idea.
(Wagyu Steak in Texas that costs $144 per ounce)
But let’s just imagine that one of us somehow takes care of that solution and now steaks on Fifth Avenue is a great product, what else is there for us to do? There needs to be a price for the steak. And it is not merely calculating the total cost of making a steak: the addition of fees required for raw materials, rent, salaries for servants, etc., and adding a little bit as profit. we also need to consider our position in the market. Position is why the same bottle of coke can cost 75 cents in a supermarket but two dollars in a football stadium: in a supermarket it is simply a type of drink among a hundred others while in the stadium it can be the only product to thirsty fans. Then, how to find the position of a product in the market? The process is called the STP Process, which involves three steps: segmentation, targeting and positioning. The first step is segmentation. In our steak house, even though our market is specific, there are still different types of people in our market and we will not be able to sell our steak to everybody. So we need to sort them out and figure out who really is our potential customer. In order to do sorting we need to apply the MECE Principle from McKinsey: mutually exclusive and collectively exhaustive. This principle tells us that in our segmentation we need to not only include every type of customers but also not let our segmentations overlap with each other. Applying this principle, we may want to sort eaters on Fifth Avenue into the following: people who either don’t have time or don’t have money, people who have too much time and a lot of money and people who have some time and some money. The first type is most likely going to end up in McDonalds and the second type will go to a fancy palace and spend five hours there, while neither types apply to our steak house, we need to focus on the third type, people with enough money to spend, 45 minutes or an hour to eat and a desire to eat better food than junk ones. Now we have the segmentation and we know our target, how should we place our steak house in the market? It should be a relatively high position in the market, because our customers will be those who have enough money to spend maybe a little bit more than a random steak in order to save themselves half an hour and enjoy the better taste. After we know our place in the market, we know our price: we will sell our steaks at a reasonably high price.
Now we have a product and a price, merely half of the hypothetical section of marketing, and now we see that it really isn’t easy to start a business. Luckily I still have half a year to develop my financial plan and I am fascinated with diving into the world of money. I will get back next week with the second half of the plane and hopefully our steakhouse will be operating soon after.