Branding Strategy Insider

Why a Branding Strategy Blog?

At The Blake Project our sole focus is helping organizations create brands that build and sustain trust. Branding Strategy Insider is an extension of our efforts as brand consultants to help marketing oriented leaders and professionals build strong brands.

Brand Growth Requires Changing The Game

Sometimes when I am faced with a problem, I can only see it from one viewpoint. The result is that I get stuck and can’t figure out how to solve the problem.

I was reminded of this the other day when a group of us were discussing how best to grow the financial value of a brand. Because we tend to think about a brand’s status in the context of its product category, we often forget that the biggest opportunity for growth may exist outside the current definition of that category.

In spite of the fact that most of our efforts as marketers and researchers are focused on growing market share, the evidence suggests that fighting for share within an existing product category is likely to be a long hard battle, with little prospect of victory.

In most established product categories in developed economies, brand market shares change very little from one year to the next. Any action is likely to be countered by the competition resulting in a stalemate. It is not that you can afford to ignore the share fight, because if you don’t fight, you risk losing share. But equally, there is a distinct risk that overly aggressive competition will result in unprofitable share fights and price wars.

So what should a brand do to generate growth? In many cases, this requires stepping back from the current situation and looking at it from a different viewpoint. How can you best change the game to your brand’s advantage? This requires finding ways to change the way customers think about the category, not fighting for share within the category.

I think there are three basic ways a brand can change the brand game to its advantage:

1. Expand the category

2. Disrupt the category

3. Exceed the category

Advertising And The Art Of Making An Impression

The reference to an “advertising message” makes me wince. The word “message” seems to imply that the advertising is designed to convey specific information or an argument. But not all advertising is intended to persuade people by arguing the merits of a brand. And even when it does, I think we overestimate the degree to which people actually comprehend what is shown and said in advertising.

Particularly for dynamic media like TV, online video, radio and cinema, people rarely assess the relevance of an ad at the time of viewing.

There are three reasons for this.

First, there is no pause for thought. If people have decided to watch the ads, then new content is constantly displacing attention on the old.

Second, most people are not in the shopping window, i.e. the subject matter is not immediately relevant to them.

And, third, even for those in the shopping window, the information is understood as a claim, it is not yet a belief confirmed by experience.

But this does not mean that most advertising is ineffective. Provided the ideas conveyed by the ad come to mind when relevant, then it will have an effect, i.e. when someone is thinking about buying the product in that category. So in the vast majority of cases, the best we can hope of any advertising is that the content is noticed at the time of viewing and the idea and feelings evoked are linked to the brand in people’s memories.

This is why I have always preferred the old-fashioned term, “advertising impression.” Although it is typically used as a media term to imply an exposure or ad view, the word “impression” also implies that people get the general idea. They understand the gist of what is being said, without necessarily consciously considering what the ad is trying to convey at the time of viewing. An impression is the mental image of a brand that sticks in people’s minds.

New Requirements For Brand Strategy Success?

A while back, I talked to Chris Stutzman, VP, Principal Analyst of the CMO Practice for Marketers and Agencies at Forrester. The company had conducted a survey about how engagement with brands might be changing, and Chris wanted to gather opinions on what the findings meant for the future of brands. 

Chris proposed that branding is the ongoing quest for relevance. He suggested that the classic model of branding involved marketing activity to create equity and drive willingness to buy, pay a premium or buy more, i.e. buy a new line extension. Chris suggested that in the classic model of marketing, equity is a function of relevance, differentiation, credibility and projected leadership (he spoke mostly about share of mind).

He then suggested that Forrester’s research had identified a new need, one I would describe as the need to “level up” in gaming parlance. Chris suggested consumers are holding brands to a higher standard today. With lots of good quality brands and plenty of copycats, people are spoilt for choice. So brands need to create demand based on additional factors. He identified four:

1. Societal contribution, e.g. as detailed in Jim Stengel's Grow. 



2. Pride, e.g. not just a signal of status, but the feelings enjoyed by the user. For example, one person I  spoke to recently told me that they feel “righteous” when they drive their Toyota Prius.



3. Special experience, e.g. Amex or Red Bull hosting exclusive events for customers and consumers



4. Indispensable value, e.g. enhancing the value of the offering to a “must have”. (He did not give an example, but I would assume that the Apple ecosystem of iPod + iTunes would fit)

You can read more about Chris’s viewpoint here. Subsequent to our conversation, a few more thoughts occurred to me as I discussed these ideas with colleagues:

Brand Licensing Strategy

Branding Strategy Insider helps marketing oriented leaders and professionals like you build strong brands. To that end we're happy to answer your marketing questions. Today we hear from Kate, a business reporter for National Public Radio in Rochester, New York who writes…

"Kodak cameras and related products will be back in the marketplace this year, but they won't be made by Kodak. The photo pioneer stopped making digital cameras about a year ago. Now it is licensing its brand name to another camera maker. Please answer a few brand licensing questions for me."

1. What if any concern should Kodak have in licensing their brand?

As with all brand owners, Kodak should be aware that JK Imaging or any other licensee will have certain rights to the Kodak brand and through their licensing relationship, JK Imaging could adversely impact Kodak brand equity. This could result from the sale of poor quality products, the sale of the Kodak licensed products in an unauthorized channel or region, or from not ensuring the manufacturing facility used by JK Imaging complies with safe international working standards. To mitigate this risk, Kodak should have first vetted JK Imaging through a rigorous due diligence process to ensure JK Imaging can deliver against the Kodak brand promise in all products they manufacture. Second, Kodak should ensure they have a thorough approval and auditing process to affirm that all products sold in the marketplace meet their standards and that all facilities are compliant with government and trade guidelines. By picking a best in class brand licensee, Kodak will continue to reinforce their brand equities as they engage with consumers across all channels and regions where the brand is licensed.

The Drivers Of Brand Storytelling Strategy

Customers own the story of the brand now. What brands say is far less important than what brands actually do to serve the well being of the faithful. Whereas before, the brand conversation was based on delivery and interruption, successful brand conversations are now participatory in ever more technology driven channels.

Storytelling is at the very heart of how we humans share and connect what we value about our heritage, our communities and ourselves. Brand storytelling is about connecting the outer value the brand provides to the inner values of the customer. There must be a deep affinity between the two or the relationship is just a transaction.

The foundation for this affinity is built on the shared stories between brands to consumers, customers to brands, and consumers to consumers. Like all relationships, there has to be chemistry. Brands have it or they don’t. How well these collective stories line up with the experience customers have is what creates “insistence without substitutes” in the minds of customers.

Brand storytelling is a strategic imperative not a promotional tactic.

Many marketers confuse the two. In our brand consulting work, I’ve heard many marketers complain, “We just don’t know what our brand story is about”. Or worse, “no one seems to get what our brand story is about”. Seemingly ubiquitous marketing obscures the transcendent storyline of what makes brands matter to people.

The Brand Architecture Workshop

Organizations often find themselves at a stage in their development in which the number of brands and named products that they are managing has gotten out of control. This could be due to a series of mergers and acquisitions or just the continuous growth of new products and services over time. These organizations find that their portfolios of brands and other named entities have gotten too difficult or expensive to manage. Frequently, there are no naming standards. Each new product or service is named as it is created, with no view to the overall picture. And sometimes, employees are creating variations or new versions of existing brands for entities and programs such as internal training programs, company picnics or employee reward programs.

If some or all of this applies to your organization, you likely need help clarifying and simplifying your branding structure. The Blake Project can help. Our brand architecture workshop has been validated by a wide range of organizations and results in the following advantages:

• Significantly lower marketing costs
• Brand naming clarity
• Ability to build brand awareness more quickly and efficiently
• Better (and more comprehensive) customer understanding of your product and service offerings, including decreased product confusion
• Increased flexibility for future brand extensions

In this full-day strategy workshop, we will help you:

• Map out your current brand architecture
• Identify brand architecture-related issues
• Develop your brand architecture strategy as it relates to your overall business and marketing strategies
• Create a simplified architecture based on customer input and sound brand management practices
• Identify the ideal number of brands and how they should each relate to one another
• Test the new architecture against all current and potential uses, including all marketing vehicles and communications applications
• Establish naming conventions for all future named entities, including decision rules for when it is appropriate to create new brands and how they should relate to the current brands
• Gain consensus among the brands key stakeholders on the each strategic decison
• Set up an ongoing brand architecture management process

7 Things Great Marketers Do

I often think about why there are so many really smart people in business, yet there seem to be so few really great marketers.

Here are seven actions I have seen define great marketers:

1. Seek Deep Customer Insight

I'm always searching for an insightful data-driven customer fact. At Pepsi, it was that consumers would consume as much beverage as we could get into the household inventory. This fact led to our development and marketing focus on the first 2-liter plastic beverage container. At Apple, the early days in the PC industry were mostly about empowering people with spreadsheets. Steve Jobs recognized the opportunity to empower people with a personal publishing system that was inexpensive and easy to use. This led to the creation of desktop publishing.Today, I'm very focused on an impressive fact that my business associates and I discovered in a survey we ran last summer: 24% of the US population has visited a walk-in urgent care clinic at least twice in the past 12 months. That's a big insight about the opportunities for disruptive retail health services.

2. Seek A Wide Range Of Expertise

The most disruptive breakout opportunity requires expertise in more than one domain. My focus currently is in the three converging domains of the complexity of health care reform + mobile and cloud technology enabling services + Big Brand consumer marketing. Most very successful big companies are focused on the domains that made them successful in the past and are under-skilled in the new domains needed for disruptive innovation. Steve Jobs had domain expertise in user experience computer design. He recruited me despite the fact that I had no previous computer background because I had domain expertise in something Steve wanted badly, Big Brand consumer marketing. The advantage of having a leadership team with multiple domains of expertise is that it really helps us as marketers to connect the dots and develop differentiated strategies from our competitors.

3. Make An Iron-Clad Commitment To The Customer

It’s always about the best possible customer experience. Great marketers are uncompromising about not saving money at the expense of their customers’ experience. Big brands are always built around strategies that focus on customer trust and loyalty. Some of the biggest mistakes are made when companies, for various reasons, chip away at their products, hoping their customers won't notice. Customers always find out, eventually, and they don't like it when they do.

What Does The Future Hold For Marketing?

William Gibson, speculative fiction writer, has several times stated:

The future is already here — it's just not very evenly distributed.

The truth of this statement lies in the fact that trends are formed by the adoption of something new that facilitates an unchanging human motivation: a need, want or desire. For instance, the advent of Facebook and other social media did not create the desire to share our lives with others, but they have enabled the ability to share more easily, immediately and widely than ever before.

So whatever the future holds, its roots are here with us in the present. The real trick is to predict which thing is going to be the next big thing, which is why Mark Twain was right when he said:

The art of prophecy is very difficult, especially with respect to the future.

Here are three mini scenarios for 2020. My question for you is what will really happen? Do these seem likely or do you envisage an alternative scenario?

1. Scarcity of Time

• People find themselves increasingly short of time, and can no longer get by with less sleep. 
• Lifestyles become less planned, more immediate and volatile. 
• People become reliant on technology and brands to facilitate their lives. 
• Consumers expect to be able to get what they want when they want it, leading to a boom in on demand and delivery services. Product brands seek to add levels of service and just in time accessibility to their offer. 
• People expect packaged goods, food and drink, to be resupplied automatically. As a result, brand owners must focus on initial brand adoption rather than encouraging brand switching.

2. Battle for Control

What Marketers Can Learn From Warren Buffett

In his 2007 letter to Berkshire Hathaway shareholders, CEO Warren Buffett, describes what type of businesses turn him on as an investor:

A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns. Therefore a formidable barrier such as a company being the low cost producer (GEICO, Costco) or possessing a powerful worldwide brand (Coca-Cola, Gillette, American Express) is essential for sustained success.

Buffett is credited as being the most successful investor of the 20th Century (a claim that seems pretty credible given that Berkshire Hathaway’s Compounded Annual Gain between 1965-2011 was 19.8 percent compared to the S&P 500’s 9.2 percent). So it is worth a few moments to contemplate the implications of some of his investment practices.

Buffett takes the long view for his investments. He is looking for a sustainable competitive advantage, not a quick win, and marketers would do well to do the same. There is no substitute for a meaningful positioning that the company can own for the long term. All too often I see new brands and campaigns launched with an eye to making it big quick by tapping into a transient fad or unsustainable claim. Often as not, it does not work, and when it does the returns are temporary. As Buffett states:

A moat that must be continuously rebuilt will eventually be no moat at all. (2007)

Buffett understands that markets are dynamic. Gains are made and then need to be held. A moat is a defensive structure not offensive. One of the most important, but undervalued, roles of marketing is to help protect a business, just as a moat protects a castle, by blunting competitive attacks and encouraging existing buyers to remain loyal. If you can hold share in a growing market you still make more money in the long run, and a loyal user base provides a great platform for new sorties of your own. 

The Trinity Of Brand Strategy

In the business of marketing, words matter. Sadly, marketers disagree over basic branding terminology. Through overuse, the terms  ‘mission’, ‘vision’, ‘value proposition’, ‘mantra’, ‘essence’, and ‘identity’ lack precise definition. The confusion makes strategic thinking about brands more difficult and undermines marketers’ credibility. If marketers can’t agree on basic terms and frameworks, how serious can the business of brand strategy be?

How We Got Here

In the 1990‘s, UC Berkeley Haas School of Business Professor, David Aaker, introduced the concept of brand as an asset to be managed for the benefit of the corporation, thus wresting responsibility for ‘branding’ from ad agencies and putting it in the hands of marketing managers. Since then, many agencies, brand consultants and academics have built on Aaker’s foundation, making their own contributions to the art and science of branding. Years of adaptation, melding and cherry picking have resulted in a world where marketers have no consistent frameworks or proven models from which to work. 

Our experience teaching brand strategy to MBA and undergraduate marketing students and working with brand strategy clients tells us the answer is to integrate much of the work that has been done into a coherent framework, grounded in common principles, terms and frameworks. The work begins with understanding the necessity of Value Proposition, Brand Identity and Positioning. 

Finding Our Way Back: The Trinity of Brand Strategy

Some elements of a brand are (or should be) relatively constant while others need to adapt to a dynamic marketplace. As a result, Value Proposition, Brand Identity and Positioning are all essential components of a comprehensive brand platform.

Recommended Books For Brand Marketers -- 2012

In a word, 2012 has been about data, in particular, getting data right.

The Presidential election trained the spotlight on Big Data analytics and polling precision. Unemployment data roiled politics and policies. Apple Maps proved that data make the app, or un-make it, as the case may be. Data un-make the athlete, too, as Lance Armstrong discovered when the data hit the fan. Superstorm Sandy resuscitated the data debate on climate change; Newtown, CT did the same for gun control. The unearthing of a missing piece of Mayan calendar proved data spoiler to apocalypse party plans. Encyclopedia Britannica announced that, henceforth, its compendium of data would no longer be available in print. And those were just the highlights.

Data is also a theme running through many of the best books of 2012. In a variety of ways, these half-dozen year-end book recommendations underline the critical importance to brand marketing of anything to do with data.

The Half-Life of Facts: Why Everything We Know Has an Expiration Date by Samuel Arbesman.

Author Sam Arbesman is an applied mathematician who applies some mathematics alongside a good bit of historical research to document example after example of facts once regarded as certainties that are known now to be false or tenuous. The math is the predictable rate at which facts become obsolete or lose value. The history is his storytelling about the rise and fall of numerous facts, both vital and trifling, across many fields of knowledge.

As one illustration of his point, Arbesman repeats an apocryphal story about a decimal point misplaced in transcription by 19^th century researchers that led to the erroneous belief that spinach is a good source of iron. But this decimal-point story turns out to be urban legend itself. The spinach error was due to poor measurement not poor transcription. Unfortunately, this was learned only after Arbesman’s book had been published. But at his Wired blog, Arbesman called this post-publication discovery “exciting” because it is further proof of his central thesis.

Weakness In The Apple Brand?

People who work in brand admire Apple for very good reasons. An iconic brand that delivers revolutionary, beautifully designed and incredibly profitable products.

In light of recent events we wonder if we are starting to see weakness in the Apple Brand. Recent Wall Street iPhone 5 expectations were not met, brand loyalty is diminishing while Samsung’s popularity is increasing. The share price is suffering too. Is the brand struggling to retain its status as the Apple of people’s eye? Consider these points:

▪ Leadership? Steve Jobs was a superb brand marketer, visionary and was core to Apple’s brand story (starting off in the garage etc). Tim Cook has very big shoes to step into. Can he really match up to Steve Jobs with regards to vision, brand strategy and product innovation? A tough act to follow.

▪ Questionable brand personality? Apple was recently ordered to remove a banner from its site that hid the court ordered apology to Samsung relating to the recent IP case. Apple has also been in the press with regards to questionable working practices. Will consumers identify with this type of brand?

▪ Stronger Competitors? Samsung is launching products people are buying. Similarly, Samsung is starting to poke fun at Apple’s coolness in its recent campaigns. This indicates growing confidence. More importantly, this advertising strategy serves a deep psychological and emotional purpose – to get Apple consumers to question their decision making motives and chip away at emotions concerning conspicuous consumption. Insidious? Maybe. Clever. Definitely. Similarly in brand hungry countries like China Apple’s position is being challenged by increasingly powerful incumbent brands. Apple’s iPhone 5 is also struggling to get traction in China’s mobile market through up-channel relationships with key players like China Mobile. Apple needs a piece of the Chinese mobile market pie but key channels are not playing ball.

David Ogilvy On Good Writing

On September 7th, 1982, David Ogilvy sent the following internal to all agency employees, titled “How to Write”:

The better you write, the higher you go in Ogilvy & Mather. People who think well, write well.

Woolly minded people write woolly memos, woolly letters and woolly speeches.

Good writing is not a natural gift. You have to learn to write well. Here are 10 hints:

1. Read the Roman-Raphaelson book on writing. Read it three times.

2. Write the way you talk. Naturally.

3. Use short words, short sentences and short paragraphs.

4. Never use jargon words like reconceptualize, demassification, attitudinally, judgmentally. They are hallmarks of a pretentious ass.

5. Never write more than two pages on any subject.

6. Check your quotations.

7. Never send a letter or a memo on the day you write it. Read it aloud the next morning — and then edit it.

8. If it is something important, get a colleague to improve it.

9. Before you send your letter or your memo, make sure it is crystal clear what you want the recipient to do.

10. If you want ACTION, don’t write. Go and tell the guy what you want.

~David

Discover more of David's thinking in this now rare book: The Unpublished David Ogilvy.

Sponsored by: The Brand Storytelling Workshop

FREE Publications And Resources For Marketers

Brand Positioning For Professional Services Brands

Unlike product brands that you can pick off the shelf or take for a test-drive, most professional services organizations sell an intangible. The product cannot be fully “experienced” until it’s purchased. That intangible is usually a promise to produce a desired future outcome that improves the condition of the customer.

Professional services are sold on reputation and trust, and a strong brand establishes these qualities in the minds of prospects. The prospect buys into the promise based on their level of trust with the provider. For this reason, brand building for professional services companies is often more critical to building business value than for product brands.

In an age where most service brands are price driven commodities, professional services brands have to be positioned in the minds of customers with razor sharp precision. To be effective in creating relevant differentiation for their brand, marketers of professional service brands have to be thinking about building cathedrals in the minds of their target customers, rather than providing bricks (services) to them.

To build cathedrals in the mind, service brands must focus on un-covering their value to clients and customers beyond the functions of service delivery. Service offerings, claims of expertise and quality delivery are table stakes in uncovering the real “value” of a service brand. When “services” are in abundant supply, customers need something more

than ephemeral claims to make purchase decisions, and more importantly, become loyal advocates of the service brand.

If you take a close look at the current claims of most professional services brands in any discipline, here’s a list of the most common (and forgettable) claims:

Branding And Basic Human Needs

As brand marketers, it is useful to understand the basic needs that drive human emotions and behaviors. Abraham Maslow’s hierarchy of needs addresses this, as does Artur Manfred Max Neef’s classification of fundamental human needs. Albert T. Poffenberger, Ph.D. devotes an entire chapter to “An Inventory of Human Desires” in his book, Psychology in Advertising, published in 1925. 

I have been a student of basic human needs for the better part of 30 years.

Here is my list of basic human needs (compiled and revised over time from
numerous sources): 

The CEO Is The Ultimate CMO

Much has been written about chief marketing officers and how they are toiling to come up with unique ways to make themselves useful and productive in their respective organizations. Much less has been written about the fact that the average Chief Marketing Officer’s tenure is quite short. In fact, the last time-span I saw put that tenure at less than two years. But nothing has been written as to why this can be both a difficult and, in some cases, an almost impossible job? All right, here’s the answer in three letters: The CEO. Let me explain why this is the case.

First, let’s start with the internal structural problems with this job. First and foremost, a CMO is in the middle of a lot of people with their own agendas as how to succeed in their organizations. A good CMO will always make enemies if they try to point out the problems with any ill-conceived brand manager’s marketing plan.

Being brutally honest can be an enormous problem in a land of egos, especially high-level egos. I was once asked by a marketing executive to help kill a top management executive's bad idea about his brand. I did this in the form of a detailed analysis that did indeed point out problems with this bad idea. Unfortunately, this analysis was videotaped and sent up into the upper reaches of this company for all to see. I'm not sure what happened to that young executive but he was never heard from again.

Next, there is always the danger of a competing function in the business. Quite often that function is the Chief Financial Officer. Many of these types are very suspicious of the marketing money being spent. It goes back to that old saw once uttered by a retail chief executive, “I know half of my advertising budget is wasted. My problem is that I don’t know which half.” The Chief Financial Officer’s solution is often to kill both halves thus increasing earnings. In my experience, the CFO is more highly placed than the CMO. Justifying marketing expenditures is never an easy task.

Marketing At The Margins

This is the third of three blog posts on the valuable marketing lessons to be learned from the recently-concluded Presidential election. One and two can be found here and here.

Of the many lessons the successful Obama campaign taught brand marketers, one has been largely overlooked. It is this: the current Big Data ramp-up in marketing database infrastructure needs to be focused on winning at the margins.

Stories about the campaign’s voter database continue to dominate post-election coverage of Obama’s victory. These stories are filled with fascinating details about the fusion of disparate databases, the profiles constructed of individual voters, the likelihood scores assigned to each individual, the targeted phone calls made and the frequency of making them, and the experiments conducted to optimize the framing of Obama’s message to voters. But few of these stories describe, or even recognize, the most valuable purpose of these efforts, which was to sway and motivate voters at the margins.

There were two such marginal effects the Obama campaign needed to accomplish. The first was to get the Obama constituency to the polls. Romney’s campaign made a huge bet that Obama would fail to get the vote out among his strongest constituencies, and thus the final distribution of actual voters would wind up in Romney’s favor. As it turns out, this was a very bad gamble. The Obama campaign was able to use its data infrastructure to turn out likely Obama voters at the margins who, otherwise, would probably have not gone to the polls.

The second effect was to persuade many of those on the fence to vote for the President. Again, this was a marginal effect, one of winning over the next voter, and then the one after that and the one after that, etc., with each successive voter a little harder to convince than the one before.

Digital And Media Marketing Trends For 2013

1. Facebook’s Monetization Drive Will Provide New, Richer Advertising Opportunities For Brands

The Facebook newsfeeds we will see at the end of next year will look very different from the ones we see now. We will see the rise of bigger, bolder, more interactive – and intrusive – Facebook advertisements in 2013.

It was only a matter of time before Facebook sought to monetize and justify its massive valuation. The drive for effective and revenue-generating advertising will draw on its powerful social ecosystem, pushing the creative formats and placements far away from the ads we see today.

Brands will be permitted to be more visible on members’ newsfeeds, growing the use of sponsored stories and video ads (which will become highlighted in users’ feeds). Advertisers will also be prominent across more of the landing page – expandable and richer formats will be prevalent by the end of the year. With these new opportunities will come increased responsibility for advertisers to deliver quality content that enhances the user experience rather than invades the platform.

Facebook will morph from a relatively private social space to a business entity driven by the bottom line. Brands will need to tread carefully as they explore these new opportunities. Some users will tolerate prominent advertising in return for free access to their friends and social connections, but others may balk at increased commercialization. Seeing their personal data sold for targeted advertising may cause resentment, unless brands deliver engaging content that is appropriate for this personal space.

As brands start to invest higher CPMs in more impactful ad units, it will become increasingly important to optimize visuals and messaging. Some of this will be measured in real-time, and copy-testing of Facebook ads will also start to be more widely employed. By the end of 2013 we will better understand users’ reactions to Facebook advertising, and we will know which formats successfully deliver brand impact without alienating users. -- Martin Ash

2. Social Media Listening Evolves From Monitoring To Insight

Brand Pricing Strategy: The Early Apple Way

Pricing strategy is one of the most important marketing decisions. Here’s a little history on how we thought about pricing in the early days of the Mac which may help marketers understand how Apple might be thinking about pricing in the post-PC era.

The early Mac had a higher COGS (cost-of-goods-sold) than the MS.DOS PC. This is because we had to amortize all of our system software development and leading edge proprietary graphics hardware technology across a much smaller number of physical units than PCs. Microsoft could spread its R&D across 9 times more computers and Bill Gates purposefully priced his operating system at a very low price to OEMs (original equipment manufacturers) in order to hold off competitors. Bill’s strategy was to charge a high price for application software and in fact Microsoft’s profit on each Mac was about the same as Apple’s because Microsoft’s MacOffice was premium priced.

Steve Jobs and I disagreed over the introductory price for the original 128k Mac. Steve wanted to sell it for $1999 and I wanted to sell it for $2499.

Here was why we eventually settled on $2499. In 1993, all of Apple’s profits and cash flow came from the 6 year old Apple II. We needed that Apple II cash flow to fund the Mac development and marketing launch. If the Mac were introduced at $1999 there would be insufficient monies to fund both the Mac launch and follow-on Macintosh R&D without systemically reducing Apple’s traditional 40% gross margin. Neither I, nor the Apple board, wanted to reduce our 40% gross margin and the facts were that Macintosh would continue to be a more expensive R&D computer platform than the Apple II. Even at 27, Steve Jobs was a very sharp business strategist and his defense of the $1999 price point was largely out of loyalty to an expectation he had previously set with his Mac team that he would price the Mac as a consumer appliance and back in 1984, $1999 was actually thought of as a consumer price point for a personal computer.