Basics of Entrepreneurship: Why Start-ups Fail at Marketing -- and Possible SolutionsPublished: May 04, 2011
In this installment of the podcast series for the Wharton-CERT Business Plan Competition, Wharton marketing professor Leonard Lodish explains that marketing plans must take into account three critical strategic and tactical factors: positioning, targeting and pricing.
The following are edited extracts of the conversation.
Arabic Knowledge@Wharton: Professor Lodish, you have said that marketing is the reason why most ventures fail. Could you explain why?
Leonard Lodish: The biggest problem is that when push comes to shove, whoever needs to buy the product or service that the venture is selling either won't buy it or won't buy it at a price that justifies all the costs involved in making and selling the product. The dogs won't eat the dog food is the way venture capitalists describe it. And depending on whose numbers you look at, 50% to 60% of ventures will fail because of reasons related to marketing, and the reason I just mentioned is probably the biggest one.
Arabic Knowledge@Wharton: So a new venture or start-up needs a marketing plan. What should the main elements of a plan be?
Lodish: Three decisions are crucial to the success of any entrepreneurial venture.... Two of them are strategy decisions and one is the tactics that implement it. If you do them well, the venture is much more likely to be successful. If you do them poorly, no matter if you do everything else right, you are still probably not going to do well. If you ... do a reasonable job with those three, even if you are not so good on some of the tactical things which we will discuss, you will do okay. The three things are positioning, targeting and pricing.
The first two are basically asking: What am I selling and to whom, and how am I structuring the perception of my offering? I'm using the word "offering" instead of "product" or "service" because it is a bundle of attributes that people perceive. And then: How is my perception going to be different than that of competitors in a way that is attractive enough to a target group of people, who we have to define and who want to buy it for enough [money] to make the whole thing work? It's important to understand that you need to make these decisions in an environment where you are concerned about not only the present, but also the future. Your major concern has to be [achieving] sustainable, competitive advantage, which is crucial for an entrepreneur because with little resources, little time and few people, you can't compete on commodities. It's just not going to work. You can't compete on price. You have to have a differentiated offering.
You need to develop or leverage distinctive competencies and make sure your positioning [guides] how you are perceived. Leverage those distinctive competencies in a way that the purchaser will see value versus your competition, buy your product for a price that makes sense, and give you some insulation from your competition over the foreseeable future.
It's not as simple as that because invariably your competition does something that you don't anticipate and you have to readjust continually. But [it requires] thinking in basic terms about what am I selling and to whom. Why am I different? How can I get sustainable competitive advantage? What are my distinctive competencies? And you need to come up with distinctive competencies that have value to an end user. Putting them in a package is what makes successful ventures.
Once you get that making sense and you have a [proven] group of people who would buy your product, the rest of the marketing plan decisions -- the distribution, advertising, promotion, PR, logos and all this other stuff -- is much easier to determine. Sometimes it is pretty obvious.... But a lot of entrepreneurs don't think about it that way when they start their companies.
Arabic Knowledge@Wharton: As you correctly noted, when entrepreneurs start companies, they are strapped for resources, and marketing budgets are especially small. Are there any creative ideas that they can use to become effective marketers with little money?
Lodish: The most effective marketing vehicle by far -- for new and existing companies -- is word of mouth from existing customers. You need to treat your first customers as if they were gold and make sure they are delighted with every aspect of what they are buying from you, then encourage them to tell their friends. If you can do that, you can be successful without spending anything. An example is a company called Milo.com, started by a Wharton undergraduate student, which allows you to check if a product is in stock at your neighborhood retailer. It has a million users and has not, as far as I can tell, spent any money on marketing. But it has optimized Google's search engine.
Another example of a company that has done this very well is Diapers.com. Again, it was started by a Wharton student, and 35% of its new users comes as word of mouth from existing users. It has been the fastest-growing Internet retailer for four years running.
Arabic Knowledge@Wharton: What are some of the most common errors that entrepreneurs make in marketing, and how can these be overcome?
Lodish: The most common, as opposed to the most important? The most important error is developing and coming to market with the product and not being able to sell it. You end up failing. I described that a little bit earlier.
There are all kinds of other errors involving people thinking they have to advertise to get their brand out there. In a lot of cases, you can do that much cheaper because the biggest asset, again, is word of mouth. If you have people telling their friends about you -- and there have been studies about this -- it is 10, 15, 20 times more valuable than having somebody see an ad. [So the error occurs with] people wasting a lot of money and being more concerned about tactics than strategy.