The "Great Product" Conundrum: How come this high-end car company's profitability levels are only average?

Tuesday: Return Driven Strategy FROM THE DESK OF MILES EVERSON: Return Driven Strategy is one of the most effective frameworks I’ve encountered in my years of working with and guiding independent professionals. This pyramid-shaped framework has 11 tenets and 3 foundations, which, if implemented properly, are helpful in conducting business and achieving wealth and value creation for your firm. Today, let’s discuss this framework with a focus on Tenet 2―Fulfill Otherwise Unmet Customer Needs. Do you want to know how you can successfully achieve this tenet and eventually, ethically maximize your company’s wealth? Read the case study below to find out. CEO, MBO Partners Chairman of the Advisory Board, The I Institute

The "Great Product" Conundrum: How come this high-end car company's profitability levels are only average? According to Statista’s data, there are about 582 million entrepreneurs around the world as of 2021. These people establish and manage their own businesses, and their offerings vary depending on the industry they’re in. While it’s true that brands differ in terms of their target market, products, services, etc., one thing that remains common among these companies—no matter what sector they are in—is this: To succeed and continue to thrive, they need to gain loyal customers. How can they do that? By fulfilling their customers’ otherwise unmet needs—Tenet Two of Return Driven Strategy (RDS)! In the book, “Driven,” authors Professor Joel Litman and Dr. Mark L. Frigo wrote, “The path to the creation of wealth is through the customer by fulfilling their unmet needs. This is the recipe for achieving high returns on investment. High-performing businesses deliver an offering that the customers believe is not otherwise available.” This means as a business leader or owner, manager, marketer, copywriter, or independent professional, you must have a process for continually identifying these two concerns: The needs that make customers buy what they buy. What customers would want to buy if an offering is available but they cannot due to personal or financial circumstances. What else? You must focus on the real reasons for purchase and not simply on the functional attributes of an offering. You also have to realize that competition and pricing wars do not always come from another organization’s attack but on an internal inability to create offerings that fulfill customers’ needs uniquely. By identifying these concerns and understanding the real reasons for purchase, you’ll be aware of the factors that affect customer needs and build unique capabilities that will help you fulfill those needs. Let’s take a look at Tenet Two in the lens of this brand’s case study… BMW is a luxury vehicle company headquartered in Bavaria, Germany. It has a significant motorsport history, especially in Touring Car racing, Formula 1, and the Isle of Man TT. According to Professor Litman and Dr. Frigo, BMW has a “great product” conundrum. Why did they say so? There is no doubt that BMW provides an incredibly “high-end” offering to the market. However, if you would look at the company’s performance, you would see that its profitability levels have only been at corporate averages at best. Wait a minute. Something’s not right here… Think about this: BMW’s slogan is “The ultimate driving machine”—and that’s with good reason. Consumers who have had the pleasure of owning a BMW 7-series have likely contemplated selling their house and moving into their car. On top of that, the BMW 3-series consistently shows up at the top ranks for the “Most Satisfying Cars to Own.” The company also often wins awards such as “Top Customer Satisfaction” from data analytics company J.D. Power. So… how come BMW shows earning power levels that are just average? If you analyze the brand’s earning power, you will realize that the business is not nearly as great as the product it provides. A huge factor for that is the impact of the substitute of offerings, or the presence of 2 or more competing forces that are adequately available for fulfilling a particular need. In that case, no matter how satisfied consumers may be with BMW’s products, a slightly cheaper replacement with similar utilities will easily draw them away from the brand. Sure, BMW offers high-end products, but so do Mercedes-Benz, Audi, Lexus, Cadillac, etc… and since there are lots of alternatives to BMWs, the Bavarian brand has little pricing power. Here’s the thing: A company with little pricing power will less likely have sustainable, high cash flows. As long as substitutes of offerings exist for fulfilling a particular need, customers will almost always choose the cheaper yet high-quality products or services. Compare that to a situation where no substitutes are available for a certain brand’s offering. In that scenario, customers freely pay based on the value they receive. That makes an ENORMOUS difference in a brand’s performance or earning power! The bottom line? It’s not enough that consumers recognize your brand as a “great business.” You must also strive to be a “great business with a great offering.” A great business with a great offering sells unique, high-quality products or services that make customers happy and generate high revenues. Without that offering, customers’ needs would have gone unmet. … and when a business generates high revenues, it also generates high cash flow returns. That’s how you know you’ve achieved Tenet Two of RDS! — Professor Litman and Dr. Frigo said that a firm that fulfills customers’ otherwise unmet needs is naturally a different, high-return firm. As a result, that business always offers a product or service that is different. BUT! While being different is a natural state of successful, high-performing companies, it should never be the goal in and of itself. You cannot force your entire firm to be different just for the sake of being different. To achieve Tenet Two of RDS, you must focus on your customers’ needs and how you can fulfill those needs extraordinarily. This will not only make your brand stand out naturally but also enable you to achieve Tenet One—Ethically Maximize Wealth. We hope you learned a lot from BMW’s case study! Take note: A robust financial state is society’s reward to your business for fulfilling consumers’ unmet needs. Stay tuned in the coming weeks for more business case studies that are relevant to RDS’ Tenet Two! Hope you found this week’s insights interesting and helpful. Follow us on LinkedIn. Stay tuned for next Tuesday’s Return Driven Strategy! During the “Build Your Financial Future” webinar’s information session in May 2021, Valens Research Chairman and CEO Professor Joel Litman discussed 4 steps to achieve financial freedom. Learn more about holistic communication in public speaking in next week’s article!