Why do more than half of all start-ups fail? Because they bungle their marketing, according to Leonard Lodish, a professor of marketing at Wharton, and co-author of two books, Entrepreneurial Marketing and Marketing That Works. “The dogs won’t eat the dog food is the way venture capitalists describe it,” Lodish says. The key lies in how a marketing plan is crafted. In this installment of the podcast series for the Wharton-CERT Business Plan Competition, 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 at 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 at 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 at 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 at 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. 

For one of the data points in our entrepreneurial marketing book, Marketing That Works, we surveyed two groups of people about their marketing activities. One was a group of run-of-the-mill Pennsylvanian entrepreneurs; the other was Inc 500 CEOs [of the fastest-growing companies in the U.S.] When you asked the run-of-the-mill entrepreneurs what the most important marketing decisions are that they need to make, they talk about tactics. When we asked the Inc 500 CEOs the same question, they talked about positioning and targeting. That explains a lot.

Arabic Knowledge at Wharton: What is the relationship between marketing and sales? And what do entrepreneurs need to understand about this relationship to succeed?

Lodish: Marketing is the process of structuring exchanges so that they are valuable. Sales people implement those exchanges. In successful companies, the marketing people and the sales people work very closely together. In fact, in the second of the two books we’ve done — Marketing That Works — we added a chapter on marketing-enabled sales because for your sales people to be successful, there are a lot of things marketing can do to support them, including explaining to the customer how the product works and developing proposals that the sales people can use. Marketing amplifies sales, and sales amplifies marketing. But marketing has to happen first. If you have the right product and service and the right target, sales is an implementation vehicle.

Arabic Knowledge at Wharton: Most entrepreneurs I have met have been intuitive marketers. When they launch a start-up, what aspects of marketing are innate? And what do they need to learn about marketing?

Lodish: They need to understand the important strategic concepts and how to make some of these tactical decisions. There have been a lot of people in a lot of marketing departments — especially here at Wharton — who have spent a lot of time working on those decisions. But the biggest thing they can do is go into the marketplace and generate evidence about whether people want to buy their offering at a price that makes sense. You can do that by very simple in-market or concept testing. You can do stuff on the web. But you need to, in a structured way, get people’s reactions and get their intent to purchase. That is very low in cost but extremely valuable.

A good example of that is a company called CarsDirect.com, which is the largest automobile dealer in the U.S. It is part of Internet Brands. It started in 1999 when somebody asked, “Could we sell automobiles over the Internet and deliver them to people with a bow on them?” They glued together a site over a weekend, bought some search words in what was the prelude to Yahoo’s overture search called Goto.com and sold cars at something like $50 over invoice. They sold four cars over the weekend, but they proved they could sell $30,000 or $40,000 cars over the Internet. That cost them $15,000, including what they lost on each car because they weren’t buying in bulk. From that, they got $200 million in venture capital and are now the largest auto dealer.

Arabic Knowledge at Wharton: Could you give one or two points of practical advice for entrepreneurs who want to be better at marketing?

Lodish: Don’t be afraid to do something different to be noticed. Once you’ve done your positioning and targeting, the first thing you want to do is leverage your happy customers. Give them as much inducement as you can to tell their friends — coupons to give their friends or a reduction off on their order when they sign up friends. That’s what Diapers.com does.

If you are not going to do that, the next thing to do is leverage public relations and publicity. The best example of that still is what Josh Kopelman did when he launched Half.com [a website selling used CDs, DVDs, books and video games]. He went to Halfway, Oregon, [in 1999] and convinced the town council in return for [financial donations] to change the name of the town from Halfway to Half.com. That got him on Katie Couric’s “Today” show for five minutes talking about his website. When it was launched, even though he thought he had industrial-strength servers, the demand was so high that the servers went down. A year later, [Half.com] was bought by eBay [in a stock deal valued at about $350 million]. It was a good purchase for eBay because Kopelman had created so much value. But he had to fight with his VC firms that financed him to not spend money on TV advertising, which everybody else was doing, and to do these creative things.

The other thing he did that summer was what he called “guerrilla marketing” — he gave some Wharton students rubber gloves with holes in them that said, “Don’t piss away half your money. Go to Half.com to save half,” and put them in every men’s room in New York City…. That got him a lot of notoriety, but that was the one of his marketing activities that Meg Whitman stopped when eBay bought Half.com.