Positioning and Spending Effectiveness:  The Path to Brand Loyalty
By Jim Gabriele, Managing Director

In today's uncertain economic environment, meeting the demands of consumers, customers and Wall Street analysts is no easy task. The senior executives at the clients we serve must contend with the slow economy, reduced consumer spending power, and significant cost increases across the P&L (higher ingredient and packaging costs, higher transportation costs and higher plant operating costs to name a few!). To grow profit in this environment, CPG companies face a stark choice: volume driven earnings growth or cost cutting. Too often CPG companies choose the latter.

In uncertain times, CPG companies tend to view brand building activity and spending as an expense vs. an investment, and in so doing, they justify cutting these "expenses" as a sure fire way to hit the quarterly numbers. Viewed in this context, profitable growth via brand loyalty building is a high risk endeavor with an uncertain payback, beyond the direct control of operating managers.

There is a better way. Best in class CPG companies view brand loyalty building activities as a high odds means to consistent, volume-driven earnings growth in good economic times and bad. They focus relentlessly on the growth levers they have direct control over, including two critical levers that build brand loyalty:

• Positioning effectiveness
• Advertising / Consumer / Trade Promotion Effectiveness  

Improve Your Brand's Positioning Effectiveness

Great companies begin with the fundamentals, and there is nothing more fundamental for purveyors of branded products than positioning. Perhaps only the Bible has been written about more often than the art of positioning. So, rather than a treatise on the topic overall, let's focus on what is different about positioning in top companies vs. others. For the top companies, positioning is a function first and foremost of the Competitive Frame in which their brands compete.  Broadly defined, the Competitive Frame is that array of products, often from diverse categories, that consumers use as direct substitutes in a given situation. It is critical, first to define the Competitive Frame much more broadly than traditional category definitions, and secondly to be explicit about which of these competitors the brand will source volume from. Only in this fashion can you be assured that your brand will focus on delivering the benefits that really matter. In the example below, we highlight a choice that a fictional food company might face in determining a winning positioning for a cheese flavored cracker brand:

	Positioning Alternative #1	Positioning Alternative #2
Competitive Frame	Other cheese CRACKERS	All FLAVORED SALTY SNACKS (including barbecue flavored potato chips, salt and vinegar potato chips, cheese puffs, flavored tortilla chips, etc)
Market Size	100	250
Benefit	Preferred vs. other cheese CRACKERS	Preferred vs. other FLAVORED SALTY SNACKS
Target	Eaters of cheese CRACKERS       (Kids 6-12)	Eaters of FLAVORED SALTY SNACKS (General Population)
Pricing Strategy	Relative to CRACKERS	Relative to FLAVORED SALTY SNACKS
Assortment, Shelf Placement Promotion Strategy	Relative to CRACKERS	Relative to FLAVORED SALTY SNACKS

What this fictional example illustrates is the criticality of the choice of the competitive frame for this product. This choice determines the size of the market the brand competes in, the types of benefits that will be needed to win in this market, the target, the pricing and the customer strategy.

Of course, knowing where your brand competes from a consumer perspective is no easy task. A precise understanding of consumer usage beyond traditionally defined categories is critical. If the organization above only looked at its competition as brands on the monthly market share report – that is, other cheese cracker brands -- it would have missed an enormous opportunity. Best-in-class companies get the knowledge they need via a rigorously defined Market Map that expertly combines usage and purchase information with needs and attitudes to identify the broadest competitive frame possible. Once created, the Market Map becomes the foundation for all the other loyalty-building strategies, including improving marketing and sales spending effectiveness.

Improve Your Advertising, Consumer and Trade Promotion Effectiveness

Once an effective, differentiating positioning is created, top companies turn their attention to improving spending effectiveness. Some companies use blunt instruments such as share of voice to determine spending level. The folly of this approach is apparent given our discussion of the cheese cracker brand above. If the fictional food company in our example had used the "cheese cracker market" as the relevant frame of reference, it would have found that little to no spending is required to win. However, by knowing the brand is part of much larger competitive set that includes big salty snack brands, the company not only understands the true size of the potential opportunity, it also knows the level of spending necessary to compete.

But top companies also know the optimal spending of each element of the marketing mix (Advertising, Consumer Promotion and Trade Promotion). That's because the analytical framework that was used to create the Market Map can be combined with a brand's P&L to determine the total spending level and mix that maximizes brand profitability. For example, the cheese cracker brand discussed above has an enormous Competitive Frame, which is comprised of millions of usage occasions that include all flavored salty snack occasions, not just cheese cracker occasions. This is an enormous pool of potential occasions from which to source volume. By understanding the precise flow of volume that has occurred historically between cheese snacks and flavored salty snacks due to different types of spending (Advertising, Consumer and Trade), our fictional food company is able to accurately predict the mix of spending that will grow volume from available usage occasions until marginal profit becomes negative.

This level of precision provides operating managers with a high degree of confidence in and control over their decisions about both spending level and mix. No longer are these critical decisions based on simplistic benchmark ratios like share of voice, or historical percent of gross revenue. Instead, managers can make decisions based on the ability of each type of marketing expenditure to maximize profit growth and build brand loyalty.

This is particularly helpful when evaluating the tradeoff between advertising and trade spending. With the advent of retail scanner data 25 years ago, the impact of trade promotion on short-term sales became eminently measurable, resulting in a mass migration from equity building activities to Trade Promotion tactics. The result is that most companies we work with are over-spent on trade promotion, and substantially under spent on advertising. But because they do not have a fact-based and uniform way to understand the impact of Trade vs. Advertising spending, they often feel powerless to make significant changes.

The Market Map analytical framework can help here as well. Best-in-Class companies are able to precisely identify the mix of Promotional and Advertising spending that maximizes total marginal profitability for their Brands. If under spent on advertising, they can choose to increase equity and loyalty building spending with incremental funds, given the confidence they have in the volume this spending will deliver. Or as is more often the case in our experience, they can choose to fund equity building activities by shifting spending away from Trade. Since they know the point at which trade spending becomes unprofitable, they know precisely how much Trade money they have available to be repurposed toward advertising. And they can begin confidently repurposing that Trade spending without risking significant losses in volume. That is because the Market Map is created via analysis of millions of individual occasions. It can be used to pinpoint exactly the types of Trade Promotion activities that create brand switching, vs. those that simply reward loyal users.

With this knowledge, managers can maximize the trade tactics that create switching and minimize all others, enabling much greater Trade Promotion effectiveness with fewer dollars in spending. Thus, the inherent risks of reducing Trade Promotion spending are confidently mitigated and managed. For top companies, moving a brand to optimal Advertising spending can be done with great speed and a high degree of confidence.

This level of operating control is contingent upon the knowledge provided by the Market Map. Without it, the fictional food company in our example could not have known that volume flows between crackers and salty snacks; nor would it have had a way to calculate how much of that volume flow is profitably driven by advertising vs. consumer vs. trade spending.

Now this loyalty-building approach does not come easily. It requires a new expectation for growth from mature businesses and demands a new level of accountability from Marketing and Sales management. It requires a few new tools including the Market Map. Perhaps most significantly, it requires a commitment to the arduous work of long-term brand loyalty building, quarter after quarter, year after year. In short, brand loyalty building is a strategic and organizational paradigm shift for many companies.

Not surprisingly, success is highly correlated with direct sponsorship from top operating managers, quite often including the CEO, CMO and other senior executives. But for those companies who have ventured down the loyalty-building path, the rewards have been significant:  more consistent, volume-driven earnings growth; sustainable competitive advantage in any economic environment; a greater level of management confidence; and, not least importantly, a higher degree of employee satisfaction, as line managers take firm control of their own destiny.