Delivering on What Customers Really Need

28 February 2019 | by Todd Wenning, CFA

In a November podcast interview with Tim Ferriss, marketing guru Seth Godin expanded on one of the most famous marketing aphorisms:

Ted Levitt was the godfather of marketing in the early 1960s. He wrote a paper called Marketing Myopia that changed the game for a lot of people. In that paper in Harvard Business Review, he wrote, “No one buys a quarter-inch drill bit because they need a quarter-inch drill bit. What they need is a quarter-inch hole. That’s what you should sell them.”…What would you possibly need a quarter-inch hole for? What you need is a place to put the expansion bolt so you can put a screw in the wall.  

But actually, you don’t need that. What you need is to put the shelf on the wall. But you don’t really need that.

What you need is a place to put the books that are cluttering your bedroom. But you don’t even really need that. What you need is the way you will feel when your spouse thanks you for cleaning things up. What you really need are safety and security and a feeling that you did something that was important. 

There’s an investing lesson here.

If all Nike was doing was selling shoes, it would have faded into obscurity years ago. Instead, Nike sells an identity – in this case, an athletic identity. You don’t just buy running shoes, what you really need is to feel healthy, active, and accomplished. Nike has connected these things with its brand through decades of smart marketing and endorsements. Growing up in the 1980s, I totally believed that if I could only buy a pair of Air Jordans, I could dunk like Mike. Subconsciously, I probably still do!

As another example, if all First Republic Bank was doing was offering commodity bank services, it wouldn’t have higher net promoter scores than some of the most beloved consumer products in the U.S.

So, what is First Republic really selling? What its high-net worth customers really need is time. The last thing a busy person wants to do is spend an hour with multiple customer service representatives to fix a minor problem. At First Republic, you have one point of contact for holistic financial solutions. Simple.

Finally, aftermarket airplane part supplier Transdigm’s states that they sell “reliable, well-engineered products, and deliver them on time,” but what its customers really need is on-time departures and happy airline passengers. A missing or broken part can ground a passenger jet, costing the airline and its passengers many multiples of the part’s cost in lost time, missed connections and frustration. On-time flights and happy passengers help airlines maximize their return on invested capital.

Knowing what a company is really selling also helps you understand if management is widening the moat or mortgaging the moat. It’s time to get nervous, for example, if you see a high-end luxury brand with an exclusive brand image going into the mass market to boost short-term growth. This strategy impairs the core customer value proposition.

If all a company is doing is selling the best ¼” drill bit, or even promising the best ¼” holes, that’s not enough to build and sustain a moat. Eventually, someone else will figure out how to do it better and – poof! – there goes the moat. Indeed, this is what’s hurting some blue chip consumer staples companies. The type of companies we want to own are those that understand what its customers really need and relentlessly delivery on that one thing.

As of the date of the post, clients invested in Ensemble Capital Management’s core equity strategy own shares of Nike (NKE), Transdigm (TDG), and First Republic Bank (FRC). These companies represent only a percentage of the full strategy. As a result of client-specific circumstances, individual clients may hold positions that are not part of Ensemble Capital’s core equity strategy. Ensemble is a fully discretionary advisor and may exit a portfolio position at any time without notice, in its own discretion.

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