The Practical Drucker by William A. Cohen

Author:William A. Cohen
Language: eng
Format: epub
Publisher: AMACOM Books

Let's take a look at each, but call them what Drucker really meant.

Seeking High Profit Margins and Premium Pricing

This sin is easily the most common of the five; however, it sounds like common sense. Why shouldn't marketers seek high profit margins? I remember early on being told in an MBA class in marketing that one concept of marketing a new product was to enter the marketplace with a high price and then, as the market matured and competitors joined the marketplace, use the high profits won earlier to fight off the competition—for example, with increased advertising or some other good use of that financial advantage.

Drucker thought this approach was extremely dangerous, and he illustrated his reservations by example. For instance, the fax machine. The strategy of the American inventor company, Xerox, was to keep the profits high by staying ahead of the competition with a “better” product. Sounds good—and right out of a marketing textbook.

Xerox continually added new features to justify increasing the price. Unfortunately, it was clear to sales prospects that many of these new features did little to add value and were largely unnecessary. At best, they contributed only marginally to the product's performance. Xerox might have at least made them optional, so that customers would have a choice. But they didn't. Their eyes were on keeping the margins and profits high, so they could later use that cash to fight off competitors, just as taught in B-School. Moreover, they failed to heed Drucker's cautionary note that it is not what the manufacturer values, but what the customer values that's important.

The strategy was wrong, proven by the fact that the Japanese took over the market, not just in the United States but also worldwide. The Japanese looked at this breakthrough product and did a little reengineering. However, they recognized that the key to capturing the market was not advanced features and high price. When they got it right, they entered the market with a product that did the job well at a much lower and more reasonable price. The Japanese fax machines may not have had all of the bells and whistles, but they captured Xerox's market with great ease. We may still incorrectly ask an employee to “Xerox” a copy for us, but chances are the individual is “Xeroxing” on a Japanese-made fax machine, which today may be Korean or Chinese made.

While it may seem obvious and intuitive that wider margins should lead to higher profits, total profit is margin multiplied by sales. So what the marketer should be seeking is an optimum profit margin that, when combined with sales over time, will equal maximum profits. This still allows for the accumulation of profits with which to take on oncoming competitors, but it does so without creating a market for those competitors.

Drucker considered this sin the worst part of the whole business. He found that the strategy of high profit margins, combined with tactics of premium pricing, invariably creates a market for the competition and can result in loss of the entire market to a competitor.

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