In the Classroom
Sony’s Headlines Reveal Valuable Lessons
Sony Europe recently announced a marketing blitz for its PlayStation 3. In any other year, a major expenditure to get out the word about a game system a few months before the holidays wouldn't make the news, but in 2009, it's a headline. While the campaign's €94 million price tag is ambitious, it might still seem a typical pre-holiday effort. As Wharton Marketing Professor David Reibstein discovered, though, it is in fact driven by a rigorous internal marketing assessment program.
Lesson One: A Rigorous Marketing Plan
Today's marketing initiative will bring tomorrow's profits. Sitting back and waiting to see what your competitors do, or waiting for the recession to be over, means you're going to be on the sidelines too long.
–David Reibstein, William Stewart Woodside Professor, Professor of Marketing; Academic Director, Wharton Marketing Metrics™, Academic Co-Director, Competitive Marketing Strategy
Reibstein spoke with Sony's CMO Mike Fasulo about his company's marketing strategy. Fasulo described Sony's efforts to measure their return on marketing investments. The company developed a set of internal marketing metrics that are used to assess all marketing expenditures. As Reibstein explains, "They are very clear about the benefits of every marketing campaign. Many companies spend money on advertising and have no idea what's working and what isn't. Not Sony."
Instead, the company is focused on its objectives, knows which marketing initiatives meet them, and is therefore able to maintain a positive return on their investment. Their marketing ideas aren't based on the economy, or on the season, but are firmly rooted in their marketing metrics program. As a result, Sony has increased spending on some initiatives and dropped others — having better measurement techniques doesn't result in simply allocating more resources to marketing.
Yet with marketing budgets slashed, many companies continue to resist a move like Sony's. According to Reibstein, academic director of Wharton Marketing Metrics™: Linking Marketing to Financial Consequences and academic co-director of Competitive Marketing Strategy, that's a serious mistake. "It's clear that this is a perfect time to reinvest in marketing. While you reduced expenditures, your customer base shrank. Future revenue depends on reaching out to acquire customers now, replenishing that customer pool. Today's marketing initiative will bring tomorrow's profits. Sitting back and waiting to see what your competitors do, or waiting for the recession to be over, means you're going to be on the sidelines too long."
Reibstein examines the value of metrics such as Sony's in Wharton Marketing Metrics™. The program teaches participants how to measure their marketing spending. Highly practical and hands-on, the program uses simulations including a "marketing dashboard" exercise. Participants design dashboards using a proprietary computer program and operate them in a "virtual test drive" in which they make resource allocation decisions. The exercise provides an opportunity to experiment with different measures, demonstrating their effectiveness or lack thereof. "Today, marketing expenditures are scrutinized to a higher degree — if you want funding for your program, you've got to be able to show exactly why it will work, and what it will bring."
Lesson Two: It's All in the Pricing
In conjunction with its marketing initiative, Sony is cutting the price of its PS3 by €100. While obviously a reaction to competitive pressure (the move brings the system within €100 of Nintendo's Wii and matches the price of Microsoft's Xbox 360), Sony's decision highlights another important lesson: the ability to employ multiple pricing strategies.
As Z. John Zhang, Wharton professor of marketing, explains, "Sony has never relied on a one-dimensional strategy such as cost-plus (production cost plus a margin). When it launched PS3 in 2006, the cost to manufacture a system was about $800. But Sony priced it at $550.They understood then, as they do today, that the game system could provide multiple revenue streams."
Zhang continues, "When you do cost-plus pricing, your price is high when your cost is high or vice versa and you do not see any other way. However, the gaming market is a two-sided market. More sales in PS3s creates a large market of players, and more players in turn create a larger demand for innovative, exciting PS3 games. This incentivizes game developers, whose games provide further growth of the market for PS3s. As more game developers want in, Sony collects more royalties. In short, Sony makes money from both players and developers."
PS3 production costs have since been reduced by an estimated 70 percent from their 2006 high. Yet the system was still priced well above its competitor, the Wii. The timing was right to make a move. Sony realized that in order to expand its market share, it needed a lower price.
Zhang comments on the decision, "Most companies don't pay attention to price when times are good. They wait until there's a down market, and their customers start demanding a lower price. But if the only strategy you've got is something simple like cost-plus, it's hard to counter those demands. Giving in to the customer could mean pricing yourself out of business.
"Sony was ready for a lower price because they already relied on more than the consumer for their profits. When the time came to make a pricing move, the company was able to look at both revenue sources — the consumer and the developer. Which side is less price sensitive? Obviously, Sony is betting on the developers."
Zhang notes that Sony's example is a powerful one for participants in Pricing Strategies: Measuring, Capturing, and Retaining Value, many of whom use only a few strategies whose validity has never been questioned. "Cost-plus offers a false sense of security, the belief that if you sell, you make money. Your costs are covered. However, none of that is necessarily true.
"This model also causes companies to look inward, considering only their own costs. Obviously, there are many more pricing variables. Instead of keeping the focus on themselves, they need to scan the marketplace, looking for signals. Relying on one-dimensional models is no way to increase profits. Think about where Sony would be today if it only focused on costs."
Participants in Pricing Strategies learn how to create, capture, and retain value through innovative pricing decisions. They learn the many possible ways to price their products or services. They also assess the value of their customers and gain negotiation strategies for pricing decisions. Zhang asserts, "To take advantage of pricing opportunities, you need knowledge. At the end of our program, the participants are changed. They realize what they can do with pricing, and its power to increase the bottom line."
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