Why Big Companies Struggle to Market Online23 October, 2015 / Articles
For all their rhetoric about a digital future, established firms in most industries still sell mainly through traditional channels, while newcomers seize the virtual territory. Take retail: Walmart sells more than $1 billion a day through its stores but online it sells one sixth that of Amazon. The reasons for this vary to some extent across industry context, but in general one or more of the following factors will be in play:
A focus on highest-margin consumers. This is typically the segment that industry incumbents zero in on. The trouble is that high-margin customers are typically older consumers who don’t feel comfortable buying online. Digitally savvy entrepreneurs, however, typically don’t target these people, focusing instead on younger, lower-margin customers, usually people very much like themselves.
A gold-plated product or service. A typical product or service comparison in most industries would show that incumbents usually have the best products in a given market, which reflects their obsession with high-margin customers. But from the digital consumer’s point of view, the incumbent’s products are often “too good” for what they need — they would prefer a cheaper product or service that is good enough.
A focus on asset utilization. Investors evaluate established firms by their return on assets (ROA). This focuses the CEO squarely on asset utilization, which makes them less likely to consider strategies and business models that do not factor in using the company’s existing assets. The motivation for this bias is strong — if a CEO does not deliver high levels of asset utilization he risks a fall in the share price and exposes his company to a takeover threat.
CEOs aren’t unaware of these problems, of course, and they will usually adopt the classic response strategy of creating a disruptive unit of their own, usually closely resembling the successful newcomers. But this doesn’t seem to pay off as well as they expect. The sad truth is that the new digital business units that industry leaders set up usually struggle to compete with their entrepreneurial rivals. This suggests that there is another factor in play, one that hinders a disruptive unit’s ability to actually craft a new value proposition.
I would venture to suggest that this extra factor is the fact that managers in incumbent firms do not focus on their product’s “job-to-be-done.”
The concept of a product’s job-to-be-done is not new. As HBS’s Ted Levitt pointed out decades ago, people don’t want to buy a quarter-inch drill; they want something that will make a quarter-inch hole. Making a quarter-inch hole is the job to be done. The product that does that job most reliably, easily, conveniently, and least expensively is the tool they will be most likely to purchase.
How leading companies connect with customers.
When entrepreneurs create new companies, they’re very often trying to solve a problem they’ve experienced themselves. These entrepreneurs are, often without realizing it, applying the jobs-to-be-done concept. But when a big firm creates a new product or service to compete with the disruptors, it doesn’t base the value proposition on a problem that it has experienced itself. The manager’s point of departure is classic market segmentation. She usually looks at the disruptor’s web pages, copies what they do, and builds on that with the firm’s capabilities to provide a superior service and a superior customer experience. It all sounds wonderful, but it is, unfortunately, an approach to market analysis that will always be at some remove from the customers.
This does not mean that companies have to mimic the rather hit-and-miss approach of entrepreneurs – after all, the odds of entrepreneurial success are simply not acceptable in the corporate context and executives in large firms will always be quite rightly leery of betting large sums of money on someone’s hunch or personal experience. What I am advocating instead is the adoption of structured marketing research that is firmly based on the jobs-to-be-done concept.
Such approaches exist. In a previous article, for example, I described a six-step approach to building a value proposition that incorporated fairly sophisticated analytic techniques. Approaches such as these are typically structured around finding answers to four basic questions that potential customers ask themselves, albeit often unconsciously:
How likely is this company to offer the right tool for my job-to-be-done? Customers often can’t verbalize precisely in advance what job they want to be done, which makes it difficult to recognize what tools are available for doing it. The first hurdle that a product or service provider faces, therefore, is giving the customer reason to expect that it can actually offer the right tool for the job, whatever this turns out to be. Someone looking for an evening film, therefore, may not know in advance what film they want to see — they will want to browse for it, physically or online.
Can I easily figure which tool I’ll need? The tool must not only be available to the customer, it also has to be readily identifiable as likely to be the right tool. To answer this question companies like Netflix rely on their ability to identify from historical data of its customers’ viewing histories and real-time browsing choices a range of products that is likely to appeal to the customer and data on what they and other people browsing are looking at.
Will using the tool be painful or risky? Next up is reassuring the customer about risks, typically around how difficult the tool will be to use — how easily can I assemble what’s in this flat-pack, for example? Many companies succeed because they take pain or risk out of a product experience. In a recent HBR article, for example, John Mullins points out that Hyundai offered a no-questions return policy on cars during the financial crash, which made purchasing new cars less of a financial risk for the average household.
Will the tool give me status? People instinctively compare themselves to their peers, and choices around which tools to use say something about how smart you look. Companies that establish themselves as “cool” often have an edge in the new economy — Apple being perhaps the most obvious case in point.
The bottom line is this: If established firms are to successfully adjust to new disruptions, they not only need to create their independent disruptive business units but must also make sure that these new businesses depart from traditional marketing techniques. Basing their marketing research and product innovation processes on the jobs-to-be-done concept is a good place to start as it will better reflect the mechanisms through which the new, disruptive players they are competing with are born and grow.