Carve Up The Market

Published Date: 02 Nov 2017

The access to clean water is a fundamental human right. Each State is obligated to ensure everyone has access to a sufficient amount of safe drinking water for personal and domestic uses (United Nation General Assembly, 2010). Quality of drinking tap water in most EU Member States is relatively high (Hulsmann, 2012), people worldwide drink 89 billion liters of bottled water each year (Ferrier, 2001) and this number is constantly grow (Gleick, 2008). Taking into account that bottled water may be no safer, or healthier than tap water in many countries, it is selling for up to 1000 times the price. It becomes the fastest growing drinks industry in the world and is estimated to be worth US$22 billion annually (Danone, 2000). Population has been brainwashed to believe that paying such a huge amount for individual plastic bottles and not taking advantage of our readily available tap water is a rational idea (Gleick, 2010).

People no longer consider water as a basic human right. For most of us, it becomes an ordinary product. According to Gleick (2012, p. 107) "we no longer drink from public water fountains and having easy accessibility to bottled water has decreased their demand. The more we buy bottled water, the more we are convinced that bottled water is not a luxury, but rather a necessity".

Approximately 75% of the earth’s surface is covered by water, but only 1% of that it is available for human consumption (Soechtig, 2009). What is of particular interest about statistics is the fact that people receive safe tap water every day (Mackey et al., 2003) and still they are paying for something what flowing from their taps. According to Dave Dempsey (2008, p. 48), allowing bottled water is a step towards "transformation of water from the public commons to private ownership."

Studies stress major factors which determine the choice for bottled water. People usually say they buy it for following reasons: convenience, taste, style and fear of their tap water (Gleick, 2010). Another study (Doria, 2006; Klein & Huang, 2008) confirms bottled water’s popularity is mainly motivated by two reasons: dissatisfaction with tap water (especially taste) and health/risk concerns. Moreover, Chapelle (2005, p. 18) states "people like their water to be clean and stylish, preferably both."

There are many reasons why we should drink water regularly (American Medical Association, 2011). It eliminate waste from your body, regulate its temperature and helps to distribute nutrients to cells. Fluoridated water is essential for helping to prevent tooth decay and tooth erosion. Many people do not know that most bottled waters do not contain naturally occurring minerals (including fluoride). Therefore, even though they are buying bottled water because they think it is safer, they do not provide their body with needed minerals.

Nowadays, water producers in order to establish hierarchy and value through connoisseurship and competition are following the example of other beverages. Bottled water become an example of the power of branding which turned public good into meaningful part of our life - branded commodity (Wilk, 2006).

Research Motivation

Managerial Motivation

Elizabeth Royte (2009, p.18) asked herself: "If we believe water is a basic human right – such as freedom from persecution or equality before the law – then why would we let anyone slap a bar code on it?". Indeed, some of factors that cause consumers to purchase and use bottled water are perceived falsely. Knowing that bottled water may be no safer or healthier than tap water, the bottled water consumption increases globally by an average 7% each year. (Ferrier, 2001). Although bottled water is a huge market success, it is not a sustainable solution for the global community due to the massive amount of fossil fuel burning required for transportation and packaging (Emily & Janet, 2006). Furthermore, the bottles degrade slowly, and incinerating used bottles can produce toxic byproducts. The Earth Policy Institute estimated that bottled water can cost as much as 10,000 times more than tap water.

It becomes necessary to retrace consumer’s behavior in order to help governments and local suppliers to promote the culture of drinking tap water.

People need to identify themselves to the brand. It is also crucial to examine whether tap water can be considered like other soft drinks which no longer satisfy only the physical needs but also emotional ones.

Academic Motivation

The media have a powerful influence on our society. We are exposed to media messages involving beverages, especially on television and the Internet. There are many adverts promoting drinking different soft drinks, school canteens offer sweet drink options, vending machines are also full of them.

It is difficult to imagine a more basic commodity than water. Matt Michel (2008) assumes that "water lends itself to marketing differentiation through brand strategies, then we can assume that any other commodity can be branded". Currently, commodities have a strong brand with values, emotions around them. The bottled water producers in order to escape from commoditization its product and to not lose differentiation across its supply base invest in creating strong branding strategy.

The well-known example of Coca-Cola and Pepsi blind test where consumers were not able to recognize their favorite drink clearly corroborated the point that our perception of taste is biased by our perception of brand. By this research we would like to test if the consumption of tap water is caused by brand effect or in this case lack of branding strategy.

There are many research concerning bottled water industry. However to date, no research has been carried out to study the importance of brand strategy in order to create competitiveness on the market including tap water.

Problem Statement

Research Question

Does the choice between different brands of bottled water and tap water is caused by brand effect?

How do the producers of bottled water turn this commodity item into a branded product? How does each differentiate its brand from all the others?

Contribution

Managerial Contribution

By our research, we would like to show the utility managers how to raising awareness among students of municipal drinking water and encouraging them to drink tap water instead of consuming purchased bottled water.

If the consumption of bottled water is a problem of branding strategy, we would like to point out the importance of building brand awareness around tap water.

Bottled water costs a lot of money annually. Drinking tap water will enable us to pay less for the same product and safeguard environment from big amount of waste.

Academic Contribution

We wish to obtain the results showing that our choice is dictated by effect of branding strategy. We will examine whether the building strong brand around tap water with certain values and emotions will lead to increased of its consumption.

Most of us would contradict the fact of paying more than 10 times more for a product than it is worth. We are doing it every day, even thought we are acting intelligently. By our research we will explain if there is a connection between emotions around the product and our decision of purchase.

Approach

The organization of the study is structured into six parts as outlined below:

Part 1: Introduction

In this section we are giving the background of the study, identifying the key trends in the bottled water industry and providing the context for the research part. It includes also the research motivation of the study which states, both academic and managerial purpose. This part is providing the information about the required contribution of given study.

Part 2: Literature Review

It is a theoretical framework which focuses on relevant theories and concepts necessary to understand the phenomenon of branding strategies and the concept of commodities. Theoretical part enables readers to better understanding the aim of thesis through numerous references to previous studies and literatures.

Part 3: Research Design

This chapter introduces the method used to identify the objectives of the study and research execution. We have chosen experiment which was conducted among students.

Part 4: Results

In this section, collected data from conducted experiment are presented.

Part 5: Discussion

Collected data are discuss and examine if a research problem is answered. The subjective interpretation of the result is provided.

Part 6: Conclusion and Recommendation

The final part of the research highlights a summary of thesis in response to a research problem and offers some recommendations for practitioners. We are discussing the limitations and suggestions for further researches.

Literature review

Theoretical background of branding and its importance

There are numerous definitions of brand. Each expert comes up with his or her own statement. We can categorize those definition by comply them with two main approaches. There are as follow: customer-based definitions and considering brands as conditional assets. A useful starting point for our purpose is the definition of the customer-based approach where the brand managers focus exclusively on the relationship between brand and customer. Here we have his or her loyalty to the brand, willingness to buy and rebuy product based on evoked emotions and beliefs. The second approach has the aim at producing measures in euro or any other currency (Kapferer, 2008). Introducing a new brand into the market has been approximated with a 50 percent probability of its failure. Brand is considered as having an equity which exceeds its asset value (Ourusoff, 1993).

The most known definition of brand was formulated by American Marketing Association (AMA). According to AMA (1960), brand is a "name, term, sign, symbol, or design, or a combination of them intended to identify the goods and services of one seller or a group of sellers and to differentiate from those of competitors" (cited in Wood, 2000, p. 664). Brands could be things, tools, processes. They are used by corporations to fight against other competitors on the market (Holt, 2003).

Another brand theorist – Aaker (1996, p. 21) used the metaphor of battleship to describe brand. According to him: "A brand can be linked to the ship in a fleet facing an upcoming battle… The brand manager is the captain of the ship, who must know where his or her ship is going and keep it course. The other brands in the firm, like other ships in the fleet, need to be coordinated to achieve the maximum effectiveness. Competitors correspond to enemy ships; knowing their location, direction and strength is critical to achieving strategic and tactical success. The perception and motivations of customers are like the winds: it is important to know their direction, their strength and possible changes."

Branding has been used as a way to distinguish the products from one producer from those of another. The concept has been around for centuries (Bamert, 2005). We can find origin of modern branding in the 19th century (A.Room, 1992). Nowadays, building brand value enforces theory that brands exist only in minds of consumers. We are not longer managing brands, it is all about the management of perceptions (Elliot and Percy, 2007) and which we should consider as something more important than reality" (Duncan and Moriarty, 1998).

In order to create a strong brand and be able to manage it strategically, we need to be aware of how perceptions are organized, how they influence the consumers’ behavior and essentially how a brand can compete in the battle for so-called "mindspace" (Corstjens and Corstjens, 1995).

These days, every company wants to have an established brand. It was generally accepted that producers and distributors of fast-moving consumers goods like soft drinks, toiletries, and grocery items are using branding to compete in the market. Nowadays, branding has become a critical issue even in the following sectors: utilities, commodities, high tech, services etc. (Elliot and Percy, 2007).

The importance of developing a strong brand awareness was already mentioned in a study conducted by Buzzell and Gele (1987) which had shown that strong brands achieve more profit than their weaker counterparts. Notwithstanding, branding requires long-term involvement and high level of skills and resources.

The market of mineral waters which was considered as the most basic commodity reminds us that it is always possible to "make a transparent product became opaque" what Kapferer highlighted (2008, p. 32). The major mineral water brands made the invisible visible. They positioned their products in various way, from Vittel as a symbol of vitality to Evian – associated with good health and purity (Kapferer, 2008).

Brand Equity

From consumers’ point of view brand equity is considered as value added to the service or product functionality by associating it with the brand name. However, a company may perceives a brand’s equity as the future discounted value that can be attributed to the price premium of the product. The managerial perspective differs from those above mentioned. It defines brand equity as set of assets that are attached to the brand name or symbol. It includes brand name awareness, brand associations, perceived quality and brand loyalty. The management’ role is to create and enhance these assets. Each of them creates value in different way. Brand loyalty can lead to reduction of marketing costs and trade leverage while brand associations are the main reason-to-buy product and differentiate it in consumers’ mind (Aaker, 1996; Keller 2003). Managers use brand equity as it make them possible through advertising to leverage this equity and increase the consumption of the product by its loyal consumers (Rositer and Percy, 1987). Notwithstanding, brand equity is highly associated to the set of mental ideas consumer has with brand. Higher brand equity contributes to favorable customer response to the advertising of product and therefore to decreasing in sales and greater customer loyalty (Aaker and Keller, 1990).

Figure

How Brand Equity Generates Value

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"Managing Brand Equity: Capitalizing on the Value of a Brand Name, David A. Aaker

There are two methods in the literature of determining brand equity. First approach , premium-pricing method defines how much more a branded product can charge for product contrary to the same unbranded version of it. The second approach, royalty-method focus on the price that other producers are willing to pay to used the brand to sell a product they make (Duncan, 2002).

Brand Loyalty

Commodities

The only way to avoid price competition and be no longer considered as commodity product, management should focus on brand’s development (Aaker and Joachimstahler, 2000). Brandless commodities cannot easily survive the ups and downs of the markets. Kotler and Keller (2006) define a commodity as a something what is presumably so basic that it cannot be differentiated in the minds of the consumer. For many years, we were considered plenty of product as a commodities: soap, ketchup, porridge, chickens, bananas, water. We became witnesses of emergency of companies who change our perceptions. Those brand pioneers: Lux, Heinz, Quaker, Perdue, Chiquita, Perrier were able to convinced consumers the goods in the category were not the same. In some cases, marketers showed to the public that a product was not a commodity and could be different in quality. In other cases, brand has been created by its image and other non-product-related factors because the product differences was almost non-existent. The classic example of how a commodity product can be branded is a bottled water. Its consumers are highly image-conscious and branding of bottled water is vital for success.

However, for some theorists such thing as a commodity does not exist because differentiation is everywhere. Theodore Levitt (1980, p. 1) in his classic article titled "Marketing Success Through Differentiation – of Anything" states that "all goods and services are differentiable".

If we assumed that something like commodity exist, can we put label on? For many companies branding is the way to escape from merely competing on volume and price alone. Kotler and Keller (2006) state that "brands help to differentiate products as they enhance their value beyond their functional attributes. They build preferences versus competing products and therefore create long-term sustainable competitive advantage".

In the traditional commodity pricing approach all consumers are paying the same price which is adjusted according to its transportation and volume. Nowadays, that notions is considered as a myth. The study showed that in some cases, customers paid three or four times more by purchasing comparable volume (Hill, McGrath, and Dayal, 1998).

Branding commodities

Branding change the meaning of commodities. It turns them into something with a strong value for consumers (Kornberger, 2010). For some theorists, people no longer consumer product or services, but brands (Douglass and Isherwood, 1979/2005). The major reason why to brand commodity product is to achieve a strong consumer and trade franchise, retailers’ support and to improve overall profitability (Pope, Cullwick, Kennelly, 1998). Production of commodities can become increasingly profitable for companies who know how to use effective branding strategy and implement the ideas of how to differentiate product (by innovation, services, customer partnership) and when to offer a "no-frills" product (Rangan, Bowman, 1992).

There are several ways to turn commodities into branded good. Hill, McGrath, and Dayal (1998) proposed the four steps of approaching the issue of branding commodity products:

http://www.strategy-business.com/media/image/point301.gifFirst, carve up the market from every angle -- profits, needs, behaviors – in order to identify those customers who are the most likely to response to differentiation.

http://www.strategy-business.com/media/image/point301.gifSecond, differentiate your offering in one or more of the six "generic" dimensions of differentiation.

http://www.strategy-business.com/media/image/point301.gifThird, bundle several differentiations into a brand, and then communicate that brand consistently and strongly.

Fourth, align your business capabilities to reinforce and defend the brand and the underlying sources of differentiation.

Carve up the market

The first major step is to carve up the market. Authors called by that the process of identifying the right set of consumers who need, appreciate and will pay for such differentiation. Research of Hill, McGrath, and Dayal (1998) single three classes of customers out:

1. Gold Standard Customers -- These customers are able to pay a premium for offerings that deliver true value in terms of process enhancements, cost reduction or benefits to end-users. They are considered as demanding consumers, willing to pay for their demands.

2. Potentials -- Customers in this segment are characterized by their degree of interest in partnering, although they shy away from long-term commitments.

3. Incorrigibles – The most picky consumers. They are focused only on delivered price. Each slight price difference will cause the switching of supplier. Incorrigibles are considered as waste of time to marketers, no matter what you do, there consumers are not going to love you. Unfortunately, those customers represent half of the market, or more while Potentials generally ranging from 30 to 45 percent and Gold Standard Customers represent only a small part of the market, anywhere from 5 to 25 percent. Therefore, we can assume that Incorrigibles are so important that no supplier can think about "firing" all of them.

Differentiate

In the market place, everyone wants to distinguish his or her product from all others. In case of commodities, the generic product is identical but the offered product is differentiated (Levitt, 1980). Therefore, there is always a way to differentiate through both how you add value and how you deliver it . Commodity differentiation must be tangible, robust and capable of withstanding intense scrutiny (Hill, McGrath, and Dayal, 1998).

However, in the case of commodities, differentiation is often difficult to achieve. Producers, rely upon external characteristic of the product (COO, delivery), or less tangible benefits as packaging (Pope, Cullwick, Kennelly, 1998).

Hill, McGrath and Dayal proposed the six generic ways to differentiate commodities which point out that the value can be delivered through the product itself or through service improvement. Here are the following way by which value is created:

by improving the consistency of the offer

through product customization to the customer’s operation

by making the offer more convenient

Even the most basic commodity, water which is largely tasteless, odorless and colorless, has differentiated in today’s ads in many ways, with respect to its: flavor/carbonation, color, bottle/packaging shape/functionality. Some other producers include the story behind the ordinary bottle like delivery methods, sources, health qualities and even ways to drinks.

Bundle

The aim of commodity bundling is to group related products together in one market offering. Through this process, it is possible to develop a competitive position that create the value for consumers (Lawless, 1991). Bundling involves grouping multiple sources of differentiation -- and then fight ferociously to prevent competitors from unbundling them (Hill, McGrath, and Dayal, 1998)

Deliver

The commodity supplier must have the business systems and processes which are required to deliver the marketed offering. When commodity buyers pay a premium for value, they will measure and reevaluate the purchase many time. Therefore, the value must be tangible and real.

Another theorists (Pope, Cullwick, Kennelly, 1998) defined two different ways to brand commodities: developing a brand for the commodity itself or to develop a brand to embrace the adds-on level, not only the products themselves. In the first instance, brand managers’ attention should be paid to product form, its quality marks, texture/flavor (in case of food), performance relative to consumers’ expectations and distinctive origin. In the second instance, key elements of the branding strategy should focus on packaging, way of delivery (security and continuity), technical support, non-product appeals and value perception of right product.

The phenomenon in the commodities product - bottled water has been branded at both the product level and add-on level. The brand managers used flavor, effervescence, purity, source to reinforce brand messages at the product level. At the add-on level, different shape and color bottles have been used to brand this commodity.