Thursday, December 27, 2012
Copyright GWR Research 2012
MOVING AN AUDIENCE TO ACT
Since advertising is the primary method for businesses to inform and influence individuals to consider and purchase their products, the question is often asked, “How many exposures are needed to cause an individual to act?” Unfortunately there is no formula available to answer this question but there are considerations that can help.
Roger Wimmer, Ph.D. authored an article, “The Five Stages of Communication/Persuasion”. In his article Dr. Wimmer points out that all people must pass through five stages to make a decision about anything or learn anything. These stages are 1) Unawareness, 2) Awareness, 3) Comprehension, 4) Conviction and 5) Action.
If bringing an audience from the stage of Unawareness to the final stage of Action is the goal, the frequency of exposure to an advertising message will be much higher than that which is required for just moving the audience from Conviction to Action.
Moving through all five stages probably would involve a product or concept that is new to the audience and the initial communications would have to educate the audience. The more complicated the product or concept, the greater the education requirements will be. For example introducing a new drink to a market familiar with drink products will require less education than introducing insurance to an audience unfamiliar with the concept.
Moving from conviction to action is seemingly the easiest and should require the least number of messages to result in favorable action. This however is not necessarily the case. An individual may know there is a need for a product but may be hesitant to make a purchase due to budgetary restraints or the inability to make a choice from many similar products.
IDENTIFYING THE AUDIENCE
Most businesses have a good idea of the composition of the target audience to receive advertising messages. The managers know the products, their uses and the intended audiences. The audience demographic profiles can be fairly broad to very specific. For example, introducing a new computer would suggest those individuals that use a computer are the intended audience of the ad message for the computer. As it turns out, computer users come in every sex, age or other demographic profile.
Offering new roofing can be more specifically targeted to individuals who own homes 25 years old or older who have not purchased a new roof.
Before designing an ad or message, it is recommended that some time be spent on understanding the audience by identifying the stage of the persuasion cycle, the demographic profile and the specific message to deliver. In some cases a general message delivered through a general reach media provides an efficient, effective means of moving individuals to action. In other instances a specifically directed message to an individual may be needed to result in action.
UNDERSTANDING THE MEDIA AND ITS VALUE TO THE AUDIENCE
Choosing the right media for an advertising message should be considered as important as understanding the audience. Broad reach media should be considered effective when:
1) The audience is broad such as computer users or homeowners,
2) The product or concept is new and requires audience education,
3) The product is well known and is available from many sources, or
4) The product has different uses by different audiences.
More targeted media should be considered effective when:
1) The audience can be identified by 3 or more demographic characteristics,
2) The audience has a specific interest,
3) The audience has a specific ethnic, age, industry or target profile, or if,
4) Individuals or small clusters of individuals are targeted.
General circulation newspapers are probably the most effective media for a broad market reach. In 2012, 42.9 % of total adults in the U.S. read a newspaper daily and 44.0% read a newspaper on Sunday1. Advertising messages can be placed in various sections of the newspaper to reach certain subsets such as sports and entertainment audiences. Newspapers also allow preprinted inserts that can be “zoned” to be distributed in specific zip codes or geographic areas.
Direct mail and shared mail programs provide the ability to reach the broader market or very targeted markets. The USPS reports that 74% of households read direct mail advertising weekly. Ad messages can be tailored to specific individuals or can be a uniform message to all recipients.
Radio and television have a broad reach but generally can’t duplicate the reach demonstrated by newspapers or direct mail. Radio and television lend themselves to distributing messages to demographically unique groups that watch or listen to certain programming. While the viewing or listening audience may be large and diverse, radio and TV audiences will be smaller than those reached by a general circulation newspaper or a full market mailing.
The Internet has the ability to reach general and targeted audiences. An ad placed for general viewing on a high traffic site such as Google will be exposed to a wide array of web surfers. An ad that employs key word searches can direct a very targeted audience to an ad or web site. Social media such as FaceBook and LinkedIn can reach very large audiences effectively.
Radio, television and the Internet have huge audiences but they are fragmented due to the number of channel or site choices available. When choosing these media it is important to study the consumers characteristics and target shows and sites that reach the targeted consumers.
Ethnic media provide the ability to reach meaningful audiences in a large diverse market. For example in Houston, Texas, there are newspapers for the African American, Hispanic, Jewish, Chinese, Pakistani and Indian communities. Advertising in ethnic media may open access to markets that are not available through traditional media. These communities are large enough to represent significant purchasing power for products offered and the publications are usually reasonably priced.
Targeted or niche publications reach audiences that are smaller and have more defined characteristics but may still be quite general in nature. A Vietnamese newspaper in a large metropolitan area would still reach individuals that have a wide array of needs and interests. Trade and topic focused magazines would reach more defined professional groups that are comprised of a large number of demographic profiles.
Outdoor advertising has the ability to reach the general audiences or targeted groups through the number and geographic placement of signage.
If an audience is reached by a media that doesn’t mean the advertising message will be received. The ad may not be welcomed in certain media. The term “junk” mail was coined as a phrase describing advertising mail that cluttered the recipient’s mailbox. TIVO and then cable ready versions allow television viewers to eliminate advertising messages. The popularity of these programs suggests that in certain instances advertising is not welcomed. On the Internet the ability to screen “junk” email and close or prevent “pop up “ and others modes of advertising also suggests that ad messages are not wanted at times.
WHAT IS EFFECTIVE FREQUENCY?
Effective frequency is the number of times a message needs to be delivered to the right audience to result in action and is within the cost constraints of the advertising budget. Effective frequency requires that the advertiser understand the audience, the stage of the persuasion process, the cost of delivering the message and the best media to deliver the message.
For most products the general audience media is the best place to start unless the intended audience is a very small subset of the general population. General audience advertising can be supported with more targeted media to promote action. For example adding ethnic publications may be a good way to reinforce advertising in the broader reach newspaper. These messages followed up with messages through the Internet key word searches or direct mailing will further enhance the ability to move audiences to action.
Another approach is to support a series of ads in a targeted media with fewer ads in a general audience media. Directing messages through key word searches, direct mail or targeted publications for specific audiences can be enhanced by an overarching ad in a general market media outlet.
The frequency of ads will generally be determined by an advertising budget. The mix of ad media should maximize the number of messages delivered to the targeted audience. If the budget is very limited and the target market is small, a well thought out series of direct mail, social media or email messages may be appropriate. For example a direct mailing to 10,000 CEOs might cost between $3,500 and $5,000. If there were ten messages needed to educate the CEO audience and lead them to action, a $50,000 budget would be required. An email or social media campaign could cost less.
If the desired audience were all CEOs in a large area, a general circulation newspaper might be a good choice. For around $10,000, a quarter page ad can be purchased in most major newspapers. If ten messages were required, the newspaper budget would be $100,000. A positive consequence of this form of advertising is the reach of non-CEOs who would also have interest in the product. If the total number of CEOs in the market were 150,000, a direct mailing follow up might be prohibitive and could be replaced with an email, social media or niche product advertising campaign.
Gary Randazzo is founder of GWR Research, a media marketing and management consulting firm. Mr. Randazzo served as Senior VP at the Houston Chronicle and EVP and General Manager of the San Francisco Chronicle. He can be reached at firstname.lastname@example.org.
1) Newspaper Association of America
Friday, December 21, 2012
developing new media solutions
+Kristina Ackerman and +Deena Higgs Nenad authored an article in the March 2011 edition of Editor and Publisher that described what 10 newspapers that “got it right” were doing to improve their franchise. These were excellent examples of what newspapers can do to connect with their communities and improve the sustainability of the business.
The Seattle Times partnered with established bloggers and provided consumers with a blog vetting process and a means of building a web based news interaction with the community.
The Detroit and Seattle newspapers and others that have made significant progress are finding ways to create a symbiosis between the established and new medias.
In truth every media in the marketplace, old and new, is working hard to assure its success by providing new products and new approaches. A major challenge is finding a way to focus these efforts to improve the success of each effort and the overall success of the organization.
Providing Focus for Development Efforts
Harvard’s Clayton Christensen has said that understanding what job a product is hired to do can help develop successful marketing strategies1. To better understand how established media can transition to being leaders in the new media environment, a closer look needs to be taken into the jobs the media is being asked to perform.
Consider the jobs that media is being asked to perform and how they relate to a consumers needs:
1. Vet news stories – save time and provide confidence,
2. Prioritize news and information – save time,
3. Categorize news and information – save time,
4. Provide insights into different lifestyles – social acceptance,
5. Provides a means of interaction on various topics, social interaction,
6. Provides a means of connecting with people with similar interests – group acceptance,
7. Provide information on products that will improve lifestyles – self improvement,
8. Provide entertainment and information on types of entertainment – leisure activity needs,
9. Provide information that improves security – safety needs,
10. Provide the ability to improve one’s self esteem – need for status,
11. Provide information on wide areas of interest – self-improvement,
12. Create communities that have similar interests and aspirations – need to be part of a community,
13. Merchandise advertising – physical and status and entertainment needs,
14. Housing information – need for safety and security.
This is a partial list that gives some insight into developing a business strategy that can incorporate functions of the new media with the more fully developed models of the established media.
The more successful solutions will provide an integrated platform that supports new and old media and presents them in a way that will be viewed in a positive way by potential users.
Understanding that one job of the media is to vet information could lead to working with bloggers to post their opinions on certain stories on the media website as the Seattle Times has done.
Another opportunity might be to create community. Using demographic information to find groups large enough to be attractive to advertisers might provide the basis for a social networking site. For example in San Francisco there is a large Chinese community. This could be the basis for a social network that is tied to news and entertainment discussions. Building this community could rely on the Internet, print and broadcast products. The Saint Louis Post –Dispatch did this with Cardinal Baseball fans.
Still another program might be developed to improve the status of audience members by including certain audience members in groups that comment on their areas of expertise or include them in special programming. The Marysville, California Appeal-Democrat is doing this with political forums.
Additionally, there might be a program that helped the audience gather information on various advertised products by creating a panel of experts on various merchandise categories that would be accessible to consumers through a website or email programs.
The point is that there is a shift in the media business and those that capitalize on this shift will be the ones that fully understand the jobs they are being asked to perform. Internet search engines, blogs and social networks do not represent threats to the media but rather, improve media’s ability to perform tasks they are asked to do. Thinking about jobs to be done provides a more disciplined approach to developing products to do the jobs. Efforts without such a construct may yield products that fall into the “fad” category or programs that never get introduced.
1 See Clayton Christensen, Michael Raynor, “The Innovator’s Solution” (HBS Press, 2003) pp. 75-78
Sunday, December 16, 2012
Creating A New Business Idea
How do you identify market needs? How do people come up with ideas that people don’t know they need until they see them?
The simple truth is the need is there and the job the new product will perform is one that needs to be done and may be getting done but not very efficiently.
So is there an exercise that can identify jobs that need to be done more efficiently or begin being done?
Here is a process that works. Go through this example and see if it helps you develop a new product or business.
Let’s pick an ordinary person that is going on a business trip. Here is a list of things that will need to be done:
Prepare for meetings
Make reservations for hotels, cars, restaurants, air travel, etc
Travel to and from destination
Pack clothing etc. for trip
Now break down any one of these categories to activities. Let’s pick Pack Clothing for trip:
Lay out clothes for each day/activity
Layout toiletries and personal items for each day
Fold clothes to fit suitcase
Pack suitcase with clothing and personal items.
Unpack at destination
Keep soiled clothing separate from clean clothing
Repack for return trip.
Unpack at home
Rehang fresh clothing
Launder soiled clothing
Now let’s pick an activity that might lead to an innovative product.
Let’s pick “Fold clothes to fit Suitcase”
There are numerous devices that are designed to help keep clothes neat in a suitcase. Mostly they don’t work. So let’s say we’ll create a device that will allow someone to fit clothes in a suitcase and keep them neat during travel.
First we might describe the worst outcomes of people trying to fit clothes into a suitcase;
Suitcase is flexible and therefore will not hold clothing’s form
Clothing is not uniform and won’t fit evenly into a suitcase
Clothing get’s wrinkled and must be pressed
Device to keep clothes neat actually creates unwanted creases or wrinkles
If suitcase is damaged or gets wet there is high probability clothing will be affected
Now let’s create the new product by addressing the possible bad outcomes.
We could create separate packaging to put clothing in before putting them in a suitcase.
We could develop packaging that fits together in uniform fashion like building blocks to keep clothes in place during travel. One type of container for shirts, one for slacks etc.
This packaging could allow clothing to be fitted on forms to hold clothing’s shape and prevent wrinkles.
This packaging would be water tight and durable to protect clothing even if suitcase is damaged.
This particular example was created in about 30 minutes. With a group it might take longer because there will be more innovative thinking and more solutions that are better.
This process can be used for any activity and it can be used for businesses in any industry.
Friday, December 14, 2012
TO CLARIFY YOUR MARKETING STRATEGY, START CLASSIFYING YOUR CUSTOMERS
From Texas CEO Magazine, December 2012
By Gary Randazzo
Every business, at some point, will review its marketing strategy. The cause for a strategy review can come from a difficult business environment, a windfall in profits, a change in technology or a change in customer preferences. When a marketing strategy review is in order it can be challenging to decide where to start.
Classifying customers, based on the amount of their spending, can be a good place to begin. Spending used as a metric can help the analyst understand which customers provide the biggest impact:
1) Key customers representing the largest percentage of sales and profit
2) Customers with the potential to provide greater sales (under-potential)
3) Customers that do little or no business with the organization but use products similar to those offered by the organization (nonusers)
This simple classification may reveal some important information. For example, a company may find the key customers located in a specific geography, be of a certain size, have a particular business orientation or other characteristics that may be useful in developing marketing programs to attract new customers. This analysis may also reveal characteristics that define nonusers of the company’s products. Understanding the size of the nonuser and under-potential markets and their characteristics may also prove useful in market growth strategies.
The classification of customers may be enough to launch an ad campaign or promotional efforts but may not be enough to justify new product introductions or significant changes in marketing strategies
Price Versus Cost to Change
After customers have been classified, look at various products and services and analyze them on the price vs. cost to change relationship between the business and the customer. This approach measures the cost of the product offered versus the cost to the customer to abandon its current product and adopt an alternative.
According to this type of analysis, when the cost to the customer to change is equal to the price charged, there is equilibrium. Equilibrium assumes the customer would have to pay the same price to make a change and assumes all other factors are equal. The assumption also is that price is the critical factor in causing a customer to change. If customer service, guarantees, and maintenance are other important non-price issues, then this group of customers could be at risk.
When the cost to the customer to change is greater than the price charged, there is a positive equilibrium relationship. This may provide the ability to increase the volume or increase the price of the product and increase profitability, without jeopardizing the relationship with the customer. Again this assumes that price is the critical factor. If other factors are important and the ability to deliver those factors to the customer difficult, then increasing the price to the customer could cause the customer to consider other vendors.
When the cost to the customer to change is less than the price charged, then there is a negative equilibrium relationship which may provide the customer a reason to find a substitute product or service. This scenario may be an indication that the business has some special strength – not price related. A close study of this group might be useful in setting strategies for the first two groups.
The smaller groups that emerge will help analysts determine if an action taken to affect one category of customer will have a negative impact on another customer group. Thus, if a strategy change is employed to attract more sales from under-potential customers who have a positive equilibrium status this could result in a negative impact to key customers in the equilibrium or negative equilibrium categories.
As an example, a company with a client who is classified as under-potential with positive equilibrium might be a client that has a low unit cost but still spends most of their dollars with a competing vendor. A strategy to offer this client a lower price for increases in spending might be considered. The downside might be key clients in the negative equilibrium or equilibrium categories would now face, at a higher cost, competition from the newly attracted under-potential advertiser. This situation might result in key customers diverting dollars to other vendors or require a price (and profit) reduction for key customers.
The customer categories can be combined with the equilibrium categories so there are now three equilibrium categories for each of the customer classifications.
Customers in negative equilibrium may not be concerned with price as much as they are concerned with intangibles such as customer service or long-term supplier relationships. Key customers in this category are likely to be very profitable and can be subject to special attention by competitors.
Nonusers in negative equilibrium may be those customers belonging to the competition who purchased when their regular supplier was unable to provide product. This group could be worthy of further study and could be an opportunity to win market share from the competition.
From a company point of view, the area of greatest concern would seem to be those products with a negative equilibrium relationship. Negative equilibrium means these customers could change products and save money, thus they are vulnerable to aggressive attack by competitors. Since this group is paying more for the product or service than they would from another source, it is very important to understand where they are placing the value of the business relationship.
It would also appear those customers with a positive equilibrium relationship would be satisfied with the relationship, because changing to another vendor would be more expensive than continuing the current business relationship. There may be an opportunity to increase pricing with this group but it is necessary to understand where the customer is placing the value of the relationship.
Those customers in equilibrium may be worthy of in-depth analysis to determine which factors could cause them to change suppliers, since price is not an issue.
While this analysis uses price versus cost of change as a decision point, it is not a pricing analysis. It does help identify actions that are price related and will affect profit and further stresses options available that may be used in lieu of price related actions. The process instills a disciplined approach of addressing strategic marketing issues and helps improve an organization’s chance of choosing the optimal marketing decision.
Gary Randazzo is founder of Houston-based GWR Research, a media marketing and management-consulting firm. Mr. Randazzo served as Senior VP at the Houston Chronicle and EVP and General Manager of the San Francisco Chronicle. He can be reached at email@example.com.
Posted on 08 December 2012
Pat Niekamp, Publisher
Copyright © Texas CEO Magazine.
Saturday, December 8, 2012
THE IMPORTANCE OF PRODUCT PRICING
By Gary Randazzo
The impact of pricing strategies can be critical for the success of new product launches, a company’s image and ultimately a company’s short and long-term success.
REACTING TO THE COMPETITION
I have worked in several industries and found that pricing is often overlooked as a key marketing tool. In many instances pricing is driven by the sales department and is a reaction to the competition. This reaction assumes the competition knows the market better and has a superior marketing strategy.
When reacting to the competition it is important to understand that you are being drawn into a game whereby you play by the competitor’s rules. You are playing their game and changing your strategy. Your hope here is that you can play the game better or that the competitors can’t play their own game very well.
I am reminded of a time where my company was vying for the business of a key customer. The customer was a shrewd negotiator. We understood the value of the customer but valued profit and the perception that our product commanded a higher price. The customer would use the price bids to play the competitors against each other.
Our belief was that this was a no win strategy and decided to bid the price to the point where we would make very little profit and then let the competitor win the bid. We felt that winning the bid was the end game for our competitor and we took the risk that they would lower the price until they won the contract.
Fortunately, we were right, competition won the contract but couldn’t provide the needed level of service. The customer ultimately canceled the contract with the competitor and chose to pay our price for our product. As a result we were able to service the account and make a profit.
If we had chosen to win the contract, thereby adopting the competitor’s strategy we would have lost money, possibly hurt relations with our good customers who were willing to pay a reasonable price for a good product and earned a reputation as a company that placed short term gain over long term success.
PRICING TO INCREASE VOLUME
In other instances pricing is driven by financial need and the belief that dropping prices will increase sales volume and profitability. This approach is based on the belief the product has positive price elasticity. Positive price elasticity holds that as prices drop demand increases enough to insure that the lower margin per unit sold is offset by increased sales volume to the extent that overall profit actually increases.
Using reductions in price to increase volume usually works for a commoditized product that has wide use. This approach usually fails if the product is designed for a specialized use or if the marketing strategy is designed to differentiate the product from others in the marketplace. For differentiated products the volumes and profits might increase with a price reduction but the value of the efforts to differentiate the product is lost.
I was once recruited to take the helm of a company that was in a losing battle for a market that was judged to be large enough to support only one company. The company that I led was weaker, had limited financial reserves and was losing money. This company’s pricing strategy had been adopted to reduce price to gain volume and market share.
After studying the sales volume I found that regardless of the past pricing strategies the sales volume had remained constant. To me this meant that there was a specific value that was provided that was wanted and needed by the consumers. Based on this information I implemented a 17% rate increase. The action terrified the sales group and the owner’s feared financial disaster. Fortunately, sales volumes remained constant and the company went from a loss to a profit in six weeks.
In this instance it would have been easy to assume the company’s products did not have specific value and that the only way to increase profitability was to keep prices low and slash expenses. We, of course, also reduced expenses dramatically but the expense reductions alone would not have saved the company. If we had kept the pricing low we would have failed as an enterprise, and sent the message to our customers and our sales staff that our products were no different from others in the market place and had no intrinsic value.
PRICING BASED ON DIRECT COSTS
Finally, pricing can be based on the information provided by cost accounting that if variable or direct costs are covered then profits can be made. This is indeed valuable information but pricing based on direct costs only concerns itself with the costs of direct materials and labor to produce the product. This strategy is often used when adding a new product to the product mix and is influenced by the need to give the new product every opportunity to succeed.
It also heroically assumes that the established product mix covers fixed costs. This assumption doesn’t account for subtle increases that are difficult to measure such as repair and maintenance costs and administrative costs, which are usually considered as fixed.
At one point I was chairing a new products committee that had developed a new product that had a great deal of promise. The competing products in the market used different production processes and the pricing was significantly higher than was needed to cover our direct costs.
There were several on the committee that suggested that our pricing be just above our direct costs which would, theoretically, allow us to quickly capture the market.
It is important to recognize that customers do not adopt new products based on price particularly if they are satisfied with the results they receive from the products they currently purchase. I argued that a significantly lower price would not recognize the organizational expense and overhead and could possibly suggest to our customers that our product was not equal to the competition since price is often associated with value.
As luck would have it we chose the higher pricing strategy because we felt our product was superior to that of the competition. It took several years to fully penetrate the market but eventually we did capture the market and enjoyed significant sales and profit levels.
If we had adopted the direct-cost pricing model we would have been unable to afford the customer training and interface that was required to have a successful product launch. We also would have been unable to weather the time it took to penetrate the market. The customer training and interface costs were not apparent in the planning phase of the new product and were not considered in the direct–cost model.
Without adoption by the customers the product would have been labeled a loser and dropped from the product offerings. If the direct-cost model had been used and the quality reduced to allow for customer training costs the customer adoption would have been more problematic because there would have been less differentiation from the product already in use by customers.
Because the pricing strategy was based on value, the product never showed a loss using fully allocated costing models and, in the end, this product captured the market and for years has been a major source of revenue and profit streams.
The importance of pricing can be lost when faced with aggressive competition, financial challenges or a changing industry landscape but it is important to remember that pricing can be as important as any marketing strategy employed when positioning your company.
It is important to understand that pricing does not stand alone from the other elements of marketing such as product design, distribution and promotion but rather pricing helps define the value of those attributes.
Revenues and profits that could be realized by unique design, distribution and promotion based on quality can be lost when the pricing strategy is poorly employed.
Sunday, December 2, 2012
Organizational Strategy for Disruptive Innovations
By Gary Randazzo
A few years back I was invited by Harvard’s Clay Christensen to be on a panel at a conference hosted by he and George Gilder. The panel would be discussing disruptive innovations that were impacting the newspaper industry. At the time the Internet was having an impact but it wasn’t clear yet what the impact would be.
The conference was a 3-day program and the attendees were investors and business people looking for the next big investment opportunity. For my part, I told the crowd that I felt like newspapers were likely to survive the Internet and that the new technologies were more of a sustaining technology than a disruptive innovation.
It has taken several years to really try to understand what the Internet has done to the newspaper industry and to try to make sense of how newspapers reacted to the challenge
Basically the disruptive innovation theories say that disruptive innovations are likely to occur when industries continue to improve their products at a faster rate than the new improvements can be found useful by a meaningful segment of the customer base. This allows a new company to come in with a “good enough” product at a lower price that attracts the least profitable customers. Over time the new company (the disruptor) improves its products and takes more and more of the industry leader’s customers. The customers attracted by the disruptor are usually the least profitable for the industry leader because they don’t need all the product attributes offered and will accept a good enough replacement for a lower price.
These theories also introduce the concept of a sustaining innovation. A sustaining innovation allows the industry leaders to better serve their customers.
Throughout the discussions of disruptive innovations Clay discusses how the structure of an organization can prevent an industry leader from successfully competing against an industry entrant with a disruptive innovation. One primary reason is that the industry leader’s most profitable customers demands prevent a focus on innovations targeting their least profitable customers. Clay suggests that the industry leader should spin off an organization that is solely focused on competing in the realm of the disruptive innovation.
For a sustaining innovation, a spin off company is not recommended because the innovation is intended to improve the ability to serve the needs of the current customer base.
A final point for consideration is the thought that businesses shouldn’t focus on the customer but rather the job the customer is “hiring” the company’s product to perform.
With this basic description of disruptive and sustaining innovations it is interesting to consider the impact of the Internet on the newspaper business and how the newspaper industry reacted. More importantly, I think there are answers for how newspapers can move forward and how they might have prevented the severity of the financial impact on the industry. Finally, I think that other industries may be able to use these lessons to improve success in both the disruptive and sustaining innovation categories.
First consider the impact of the Internet on the newspaper industry:
1. It allowed the very profitable classified business to move quickly to technologically advanced format,
2. It allowed newspaper’s largest, most profitable customers to better segment and target their customers by linking to word searches,
3. It allowed smaller advertisers (not necessarily less profitable customers) to rotate digital ads at a lower price than newspapers (not necessarily a lower cost per customer reached).
This doesn’t suggest that newspapers had improved its products beyond the levels needed by its customers. Rather it suggests that there were pent up demands by customers that were waiting for a new platform that better performed the jobs they needed done.
As the Internet’s impact on the newspaper has increased so have the programs to serve its users. Social networking, social gaming programs and interactive entertainment are attracting huge audiences. These are all new programs that could not be performed by newspapers but were wanted by newspaper customers.
The Internet was and is a sustaining innovation. That is, if each and every innovation mentioned above had been introduced by the newspaper industry the customer base from least profitable to most profitable would have quickly adopted the programs.
This can be verified because almost all newspaper customers quickly adopted or experimented with those programs. Facebook, Twitter and similar programs allow networks to share news as it happens. Linked In allows professionals to stay networked. Interactive games allow entertainment platforms that include multiple players. All of these programs and a growing number daily could have been under the umbrella of newspapers products.
So why did newspapers miss the boat? Interestingly, newspapers acted as though the Internet was a game changer. Most newspapers set up a separate organization to operate their website. Most of those remain as a separate entity today. These new organizations created their own programming, content and ad programs.
Unfortunately because they were a separate organization they began to compete with the newspaper and began converting newspaper programs to a website. They didn’t look at new ways to serve current newspaper customers rather they looked at new ways to present the newspaper digitally to the market. Some saw the newspaper website as a means of reaching newspaper readers that had been lost or new markets. This approach led to reformatting traditional news stories, entertainment and advertising.
To jump-start the advertising the newspaper website was given a share of the print revenue. This unfortunately had the impact of making it difficult to determine the success of the website programs.
In other words, newspapers treated the Internet and the products as disruptive innovations when in fact they were sustaining innovations. A corollary to the organizational structure for disruptive innovations is that by treating a sustaining technology as a disruptive technology and creating a separate structure, the industry leader impedes its own ability to serve its customers and opens opportunities for competitors to enter the market. I believe this is what happened to the newspaper industry.
It appears that if there had been a litmus test that could have categorized the Internet as a sustaining technology the outcome might have been different. If the Internet had been defined as a sustaining innovation then the organization would have structured the Internet components as part of the current organization. For example, the web-based innovations for classified would have been structured as part of the advertising department. Rather than determining ways to add on classified newspaper ads to the newspaper website, newspapers might have been the ones to create interactive searches for their classified customers. Instead they found themselves reacting to innovators outside of the industry and giving away any value they might have retained.
The ability to update stories might have provided a marketing assist for the circulation department. Interactive updates might have been the invention of newspapers had the newsroom had the responsibility for the digital news projects.
Clearly, there would have been no organization using newspaper resources and competing directly with the newspaper – a structure that should only be used with disruptive innovations.
Unfortunately at the time of the impact of the Internet, the theories of disruptive and sustaining innovations were new and there wasn’t a widely accepted process for identifying innovation types and relating them to organizational structures.
What should newspapers do now? They should begin integrating the web functions with the newspaper. It should not be a separate entity. Begin finding ways to understand the jobs advertisers and readers are hiring newspapers to do and use all of the technologies to create a symbiotic array of products to do those jobs.
The Houston Business Journal for example, a weekly paid subscription product targeting business executives, has found a way of building on its print product by using new technologies. First it introduced the digital version of the print product and began marketing bulk subscriptions to businesses, which provided a digital copy for each of the subscribing company’s executives. The journal then provided a daily email to these executives updating local business activities through a link to their website. Here the HBJ clearly understood the job that needed to be done was to make business executives more effective in the Houston market and went about doing that job in a way that was meaningful to executives and created a business opportunity for HBJ.
What should industries do in the future? First they should identify the jobs that a new innovation does for the consumers. If it does the same jobs that the industry performs but with greater efficacy and offers product attributes previously unavailable then the innovation should be classified as a sustaining innovation. Why is this sustaining? Because by adding the innovation the current leader improves its ability to serve its best customers better.
If the new innovation does the same jobs but does so at a lower cost with a “good enough” product that offers no new capabilities then it should be classified as a disruptive innovation. Why is this disruptive? Because by adding the innovation the current leader would have to change its business model to compete for its least profitable customers. To be proactive here it is better to add a separate organization that focuses only on that market or that innovation.
Gary Randazzo is founder of GWR Research, a marketing and management consulting firm. Mr. Randazzo served as Senior VP at the Houston Chronicle and EVP and General Manager of the San Francisco Chronicle. He can be reached at firstname.lastname@example.org.