The Implications On A Leaky Bucket Model

I recently started a project for a small and brilliant business which sells convenience to time pressed parents for their kids.

They have the classic "leaky bucket" business model because as the kids grow up, the product becomes less & less relevant to the parents – the parents' need it less. They basically have a window of 4 years to build awareness, drive consideration and develop an increasing loyalty with their customers AND turn a profit all at the same time.

So how can they build sales? Well let's continue the thinking of the leaky bucket by remembering the children's nursery rhythm - There's A Hole In My Bucket.

Then fix it dear Henry, dear Henry, dear Henry... - can we develop a broad range of strategic options to fix the leaky bucket that doesn't require straw, a sharp axe, sharpening stone or another bucket...

Option 1.
Fill the bucket right over the brim, so that they can maximise what is left in bucket. In the real world, this would mean driving more parents to consider and then buy this product. Simple to say, difficult and potential expensive to do... It relies upon a strong understanding of the target audiences needs (insight) and being able to communicate a strong & compelling message that meets those needs that only they can meet. One option to do this is to think about increasing advertising impact and reach - both of which require a bit of a gamble on how effective its going to be. Another way to consider increasing awareness & penetration is to look at similar products that target the same parents and piggyback with them, either indirectly (e.g. through usage association such as tonic with gin) or through direct link saves (such as placing tonic & gin in the same part of the store). Agencies such as dunnhumby can offer an understanding of what shoppers put in their baskets and utilise their coupon system to drive linked purchases. However, linksaves are not as effective in driving awareness as advertising or PR. Promotions can be another key way to increase penetration in store, but come at a high cost and are rarely effective in increasing long term loyalty.

Option 2.
Capture the waste water coming from the leak - in other words, capture the parents that fall out the bottom of the bucket by extending the proposition to include a new offering that meet the needs of children from 5 plus, especially given the investment in those 4 years to recruit the consumers in the first place. Again easy to say and tough to do. Innovation is a particularly challenging thing to do, with academic studies siting numerous different success rates, but basically it's no more than a 10% chance of success. However, brand extensions are more likely to succeed (marginally though...) as long as the new extended brand has a relationship with the original brand AND meets the need of the consumer in a unique way – a great example is how Proctor & Gamble took the Fairy brand from simple washing up liquid into washing powder.

Given what I know about this client and in particular their brand offering, I think this is unlikely as the brand is tied to a specific age and occasion.

Option 3.
Accept that it is a leaky bucket and make more money out of the leaky bucket than is currently being made. All of the following sub options are designed to drive more value from the existing core target consumers.

Option 3.a.
Increase the weight of purchase. From interrogating their data, my client knows that 35% of their shoppers make up 60% of their volume (a simple Pareto analysis or 80:20 rule) and they know that these shoppers buy 5 or more packs every time they visit a store. Brilliant news!

But how can they improve on that? Well, many other categories have increased their weight of spend by introducing multipacks, such as soft drinks, beer, toilet paper, washing powder etc. Basically these brands offer the convenience of buying multiple products in one easy shop and sometimes offer a discount for buying in "bulk". The best example of this is in beer, where 20 years ago, beer was bought in 4 pack cans. Now the variety of packaging formats (cans or bottles) along with the size of each type of format combined with the number of units per pack means that for some brands they have in excess of 200 SKU's just for one brand! The basic premise for each of these SKU's is to increase the weight of purchase and increase the value overall.

My client is lucky as they can not only play around with the number of units in a pack, the weight of each unit, but also have a number of different varieties to develop an infinite number of possibilities for multipacks.

Option 3.b
Increase the relevancy of the product. Again from their data, they know the number of times a shopper puts their product in one of their baskets. It's less than once a month. So how can they increase the frequency that a shopper puts their product in their basket? By understanding how the core shoppers (the 35% of shoppers that buy 60% of the volume) use their products they can look at other occasions that might be suitable. Pimm’s has tried for years to make it a drink outside of the sunny British summer (is there a sunny British summer????) and have had some marginal success in developing new products aimed at widening the frequency. With my client, until they undergo the analysis, it’s difficult to see a straightforward answer.

Option 3.c
Increase distribution. Using the nursery rhythm analogy again, this might be seen as increasing the number of times you can refill the bucket. Distribution has a marked and funny effect as not all stores are created equal. In the UK, each retailer classifies their stores into different groups and each group targets different types of shoppers or the same shopper for different occasions – e.g. not all Tesco's are in fact big supermarkets. Generally speaking, the more bigger stores that you can gain distribution in the higher the Rate of Sales (ROS) will be overall. Great news. This is down simply to being sold in more stores - availability drives demand - being available in more stores means that demand will grow. The same is true in my home with Tunnock's Caramel Wafers... if they are in the house, I'll eat them. If they're not in the house, I won't.

But something else also kicks in. The more stores that a shopper sees a product in, the more credibility the product is given by the shopper and therefore the more likely they are to buy it.

Studies have shown that if you can't achieve a set level of distribution within a set level of time (in beer it was under 66% Weighted Distribution within 12 weeks), then you are guaranteed failure (unfortunately, you can't guarantee success!).

Option 3.d
Increase the average price and there are two main ways to drive up price - directly and indirectly...

Option 3.d.1

Direct price increase - just simply increase the price to the customer. I've yet to meet a customer that likes price increases. In fact, a friend that works for one of the leading grocers in the UK, says that he is targetted on reducing the number of price increases he accepts every year and also on his profitability. So unless you can show the customer that this makes sense to their profitability either through re-investing that money into category volume driving initiatives (such as advertising - see Option 1) that offset the margin loss per unit, or that shoppers are willing to pay more for the product (only when the value equation is increasing can you show this) or that without your product his category will wither can you be confident of implementing a price increase. Achieving a successful price increase takes a great deal of planning (one source at a global soft drinks company says they spend 12 months planning in detail the price increase for the following year) and also requires a great deal of team work to ensure alignment in their messages to customers once hard nosed negotiations start and both parties get locked into their positions.

Option 3.d.2

Indirect price increase - this is really the black arts of promotional effectiveness. This client, like many others operating in the fast moving consumer goods market (FMCG), promote their products with retailers. Walk down any supermarket aisle and tens of products will be on promotion, with shelf cards highlighting the offer. Sometimes these offers drive a huge spike in volume, generally if they are on the ends or on pallet displays. The problem is, that for the brand owners (i.e. my client) they might be doing promotions only to please the buyer or to please the market by winning more market share at the expense of value or profit.

As hinted at in Option 1, the main role of in-store money off promotions is to drive penetration. That is to say, get more people to sample the product and then, ideally, have more shoppers once the promotion ends and the normal price returns. In the vast number of occasions that I have seen, this rarely is the case – I buy all my toiletries this way, simply by buying what’s on deal and stocking up, as the category demand doesn’t increase with availability.

The beer promotions in the 1990’s really highlighted how promotions could drive penetration and weight of purchase because the promotion helped drive overall category consumption - people were buying vast multitudes of beer at a cheap price, to then put in their fridge, which they duly consumed as they went into their fridge everyday, whereas before they wouldn't have any or only a little beer in the fridge, so their overall consumption of beer increased (the availability drive demand scenario). It seems that most people are indeed like me, as one beer is never enough...

Generally, promotions are overused and can become like a drug for brand owners. Brand owners see their volumes get high, and can't face the come down of their brands coming off promotion. And buyers play to that fear, as it's in their interests to have more promotions in their store as they don't really care what brand they sell as long as their category increases, and by having more promotions in store means that shoppers are more likely to come into that store and do their weekly shop there.

By understanding the shopper's behaviour, brand owners can become confident in weaning themselves off the promotional drug. For example, my client knew that only 1 in 20 baskets of their core shopper ever had a competitor product in it, that is to say they had a high degree of loyalty and combined with the other data, showed them that the risk of core shoppers switching out was relatively low. Furthermore, they found out that the promotions were not driving any more people into their products so were fundamentally only about the perceived need to steal share - but they weren't really effective in doing that, just that they were offering a reduced price to shoppers who would have bought it anyway at a higher price. Suddenly they didn't feel like it was rocket science...

Option 3.e
Cost saving. By offering a cheaper product at the same price, they could make more money. But the risk is that by reducing the cost through reduction in quality means that shoppers no longer value the product in the same way. So the trick with cost savings is to reduce the cost of things that add no or little benefit, ideally in things that customers can't see. So the first thing to be clear upon is what is the shoppers' needs and how the current product benefits those needs. Only then can you look to see how you can engineer your products to reduce costs. After several years of reducing costs, my advice is go slow...

So what to do?
All of these are viable and some are mutually dependent but their individual success is largely dependent upon gaining success with their customers. Will the corporate buyers of large retailers understand what they are trying to do and support their plans, especially the potential of a price increases, betting on the basis that they can increase the total value by increasing the volume at a greater degree than the offsetting loss of margin per unit? Persuading those buyers takes understanding, creativity, alignment and passion...