These 3 Lines Explain All of Marketing
Summary
TLDRIn a comprehensive Marketing Monday session, the speaker dives into the 'Three Lines Theory of Marketing' learned from a brand strategy sprint at NYU Stern, courtesy of education company Section 4. The theory outlines three critical lines: cost, price, and perceived value, emphasizing that perceived value must always exceed price to ensure profitability. Utilizing real-world examples from Netflix, Ford, Ferrari, and Apple, the speaker demonstrates how companies manipulate these lines to maximize margins or market share. The session also explores strategies like scarcity, advertising, and economies of scale, illustrating their impact on brand perception and customer value assessment, ultimately guiding businesses towards optimizing their marketing strategies for greater financial success.
Takeaways
- 💭 The 'Three Lines Theory of Marketing' includes cost, price, and perceived value; important for understanding brand strategy.
- 📈 The difference between cost and price is margin, crucial for profit. The lines in the theory (cost, price, perceived value) should never cross.
- 📉 Perceived value must always be higher than price for customers to perceive they are getting value for their money.
- 💰 Increasing perceived value can allow a company to increase prices and hence margins, without increasing costs.
- 📰 Market share can be influenced by the relationship between price and perceived value, affecting the number of consumers buying.
- 💵 Examples like Netflix, Ford, and Ferrari illustrate different strategies in balancing price, perceived value, and market share.
- 🔥 Branding is essential in elevating perceived value, influencing consumer's willingness to pay and company's margin.
- 🚗 Ferrari maintains high perceived value and exclusivity by limiting supply, contrasting Ford's strategy of mass appeal and market share.
- 📱 Apple uniquely combines high perceived value with large volume sales, achieving high margins and market share simultaneously.
- 💳 Strategies like Uber's pricing model illustrate how companies may operate at a loss to dominate market share, planning to raise prices later.
- 📄 The importance of maintaining brand value to sustain high prices and margins, using exclusivity or quality as key factors.
Q & A
What is the 'Three Lines Theory of Marketing'?
-The 'Three Lines Theory of Marketing' identifies three key lines: cost, price, and perceived value. These lines explain all aspects of marketing, emphasizing that the perceived value must be above the price to encourage purchases, and the difference between cost and price is the margin, which represents profit.
How can marketers increase their product's margin according to the script?
-Marketers can increase their product's margin by raising the perceived value of their product. The higher the perceived value, the more they can increase the price without surpassing the perceived value, thereby enlarging the margin.
Why is it important that the lines in the Three Lines Theory never cross?
-It's important that the lines never cross because if the price exceeds the perceived value, customers will not perceive the product as worth the cost, leading to a decrease in sales. The separation of these lines ensures a product's profitability and marketability.
What does the difference between price and perceived value represent in the context of market share?
-The difference between price and perceived value represents the potential for market share expansion. A larger gap implies that more customers perceive they are getting more value for the price, which can lead to a larger market share due to increased purchases.
How do Ford and Ferrari differ in their approach to marketing and margins according to the script?
-Ford focuses on achieving a large market share with lower margins by selling a high volume of cars at a lower profit per car, whereas Ferrari aims for high margins by selling fewer cars at a significantly higher profit per car, leveraging brand exclusivity and perceived value.
Why does Ferrari limit their car sales, according to the script?
-Ferrari intentionally limits car sales to maintain the exclusivity and high perceived value of their brand. By keeping their market share smaller, they ensure their cars remain luxury items, which allows them to charge higher prices.
How does Apple uniquely position itself in the market according to the script?
-Apple is unique in the market for managing to achieve both a high volume of sales and high margins, similar to Ford's market share and Ferrari's profit margins. They sell their products at a high perceived value, allowing them to make a significant profit per product while also selling a large quantity, akin to having the benefits of both Ford and Ferrari's strategies.
What is the strategy behind companies offering products at prices below cost, like Uber according to the script?
-Companies like Uber offer products at prices below cost to gain market share and brand recognition. The strategy involves using investor funds to subsidize low prices, attracting customers and potentially driving competitors out of business, with the long-term goal of raising prices once a dominant market position is achieved.
How do scarcity and exclusivity influence perceived value according to the script?
-Scarcity and exclusivity increase perceived value by making items seem more desirable and worthwhile. This strategy is used by brands like Ferrari and in markets for exclusive sneakers and NFTs, where limiting availability artificially inflates perceived value and allows for higher pricing.
What lesson is highlighted by the failure of MoviePass according to the script?
-The failure of MoviePass highlights the unsustainable nature of pricing services far below their cost without a viable plan to eventually cover these costs. Despite gaining customers quickly due to low prices, the company couldn't sustain its business model, leading to bankruptcy.
Outlines
📚 Introduction to the Three Lines Theory of Marketing
The speaker begins by sharing their motivation for learning about brand strategy through a sprint course at NYU Stern, despite a busy schedule. They introduce the Three Lines Theory of Marketing, crediting the education company Section 4 for the concepts. The theory revolves around three critical lines: cost, price, and perceived value, which must be managed carefully to ensure profitability and customer satisfaction. The speaker emphasizes the importance of perceived value being above the price to attract customers and explains how marketing strategies can influence these variables to achieve desired margins and market shares. Examples include Netflix's approach to market share and Ferrari's strategy for maintaining high margins through brand exclusivity.
🚗 Case Study: Ford vs. Ferrari Marketing Strategies
This segment delves into the contrasting marketing strategies of Ford and Ferrari, highlighting Ford's focus on broad market appeal through extensive advertising and Ferrari's emphasis on exclusivity and high margins. The speaker explains how Ford invests heavily in advertising to target the 'everyman' and secure a large market share, while Ferrari limits production to enhance perceived value and exclusivity. This comparison serves to illustrate the varying approaches companies can take towards pricing, perceived value, and market share to achieve their financial goals. The discussion also touches on the concept of scarcity in marketing, as seen in limited product releases and exclusive brands, and how these strategies impact consumer perception and company profitability.
📈 Advanced Marketing Strategies and Monopoly Dynamics
The final segment explores how companies like Apple achieve both high sales volumes and high margins, contrasting this with strategies employed by potential monopolies like Uber and Amazon. The speaker explains how Uber initially subsidized rides to eliminate competition and gain market dominance, planning to raise prices later. In contrast, Amazon keeps prices low to avoid monopoly accusations while dominating various markets. The discussion includes insights into consumer perceptions of value, highlighted by examples like luxury brands and digital goods, where perceived value significantly influences pricing and profitability. The segment concludes with a cautionary tale of MoviePass, underscoring the risks of pricing services below cost for growth.
Mindmap
Keywords
💡Three Lines Theory
💡Perceived Value
💡Margin
💡Market Share
💡Advertising
💡Brand Strategy
💡Economies of Scale
💡Exclusivity
💡Digital Goods
💡Monopoly Strategy
Highlights
Introduction to the three lines theory of marketing as part of a brand strategy sprint from NYU Stern.
The three lines include cost, price, and perceived value, crucial for understanding marketing dynamics.
Explanation of margin as the difference between cost and price and its importance in marketing.
Importance of perceived value being above price to attract customers.
The concept of market share and its relation to price and perceived value.
Netflix as an example of maintaining low prices for higher market share despite the ability to charge more.
Comparison of Ford and Ferrari to illustrate different marketing strategies based on the three lines theory.
Ford's focus on increasing perceived value through advertising to maintain a large market share.
Ferrari's strategy of limiting sales to maintain high perceived value and exclusivity.
Discussion on the effectiveness of scarcity in increasing perceived value, illustrated by Ferrari's approach.
The contrasting strategies of Ford and Ferrari in terms of market share, margin, and advertising.
Apple as an example of achieving both high market share and high margins, a rare success in marketing.
Explanation of how companies like Uber use investor money to offer services below cost for market dominance.
The concept of economies of scale and how it benefits companies with large market shares like Ford.
The failure of MoviePass as an example of pricing too low relative to cost, leading to unsustainable business.
Transcripts
welcome to marketing monday today's
topic
the three lines theory of marketing
let me give you some background let me
give you some context three weeks ago
i decided to expand my professional
career
and so i signed up for what is known as
a brand
strategy sprint a three-week intensive
version
of the senior level mba
brand strategy course at nyu stern
now if you'll know i spend my work hours
working
i spend my after work hours streaming or
grinding hollow knight
[Music]
god so it actually did not leave me a
lot of time
to study for this class in order to help
myself learn the material
for an upcoming final project i'm going
to teach it to you
now i want to give full credit to
section 4
the education company that created this
these concepts are originally from them
i'm reteaching them
in my own words and and with you know my
own examples and stuff but
it is essentially their stuff and if any
of you become marketing professionals be
sure to check them out
when you hear the word branding as a
marketer or someone who's gonna have a
business or even think about your own
personal brand
you should think about the word margin
brand should just be a fancy word for
the word
margin okay so let me start with the
three lines and then we'll explain what
that is
line one the red line
cost line two
price the final line this is the most
important line
for a marketer is perceived value
which has to be above price and these
three lines
explain all aspects of marketing now
the difference between cost and price
is called margin okay
that's how much you make what's
important about the three lines theory
is that the lines can never cross
price can never go above this if the
perceived value is what the
is what the customer thinks of your
product customers will only
buy something if they think they're
getting more value than what it costs
now let's say let's say my margin right
now let's say it's 50 cents
and this is a dollar okay so i'm making
50 cents right here
i'll make a box for you this is my juicy
margin box
all right i want it to be bigger
well if perceived value is right here i
can't because i can't raise prices i
don't have any room
so your goal as a marketer is to raise
this
the higher you get this the higher you
can raise this
and then you can get fat margins okay
now the second part of this is market
share
the difference between price and
perceived value and it means more people
are buying it's about the number of
people buying it okay
if you want a huge market share you can
raise your perceived value really high
and keep prices low okay
for example think about netflix
perfect example netflix could charge
more they would get fewer customers
would probably make more money they'd
have a bigger margin
they don't because they want a bigger
market share they want a lot of people
using it
either way you either get a lot of
people using it or you get a lot of
margin which is a lot of money
those are your two options so your
marketer's goal is people think they're
getting more
that is that is the crux of brand that
is the essential story of brand
uh we could just watch this movie or we
can go more in depth on the brands i'm
gonna do ford versus ferrari
to explain the difference in strategies
with perceived value with the three
lines
in 2019 ford sold
5.4 million cars ferrari sold
about 10 000 actually about like seven
or eight thousand cars
that's it in the whole year and you'd
think wow
one company is just significantly doing
better than the other
there's just no other way to slice it
but
margin wise ford takes about
eight to ten thousand dollars of plastic
and steel and computer parts and makes a
car
and sells it for about eight percent
more than it costs to make
ferrari 52 percent six times more
gross margin okay so ferrari makes a
fat chunk of cash on every car sold and
that's all from the brand
that is purely from the brand it costs
them you know a certain amount of money
to make the car and they
sell it for a lot more than it costs to
make so they have
a gigantic margin but pretty low market
share
few cars sold but a huge amount of price
while ford they have uh
a lot amount of cars sold huge market
share but very little margin okay
but in the end it's all they're both
trying to raise this perceived value so
they can increase their strategy there's
two different strategies
ford's goal is to raise that blue line
through advertising that's why they
spend the most of any car maker
ford spent 3.6 billion dollars on
advertising
that's way more than mercedes-benz uh
and ferrari and tesla
spent zero okay the average age of their
buyer
is 41 years old relatively young for a
car buyer
and has an average salary about 80
thousand dollars okay
ford is targeting essentially the
everyman they spend a ton of money on
ads
and that is why they are the official
truck of the nfl they spend about 40
million dollars a year
to be the official truck of the nfl
that's why you see so many goddamn truck
commercials during the nfl
because it targets this guy exactly
the 41 year old middle of the road
american all right
that's what they're going for get great
deals on ford f-series america's
best-selling trucks for 43 years
like a total savings of 12 691 on the
billboard tough f-150
only now look at this this is exactly
what we're talking about
their strategy is one of the original
the easiest most basic but core
marketing strategies and the idea of
more for less
the idea is literally to show you
how much you're getting at an affordable
price
that is entirely different from how
ferrari
raises their um blue line raises their
perceived value
ferrari literally limits car sales this
is an actual article that i found
ferrari actually on purpose stop
selling cars so they can have high
perceived value
if they get too many somebody said
conor said some dude sat in a board room
and said let's say it's truck month and
it worked
it did whoever came up with truck month
is actually a genius
truck month isn't even a consistent
month you're right they just do truck
month whenever they want you to sell
more trucks
technically all months at ford are truck
month because they sell trucks every
month
but ferrari doesn't do that ferrari
limits their sales they try to keep
a few amount of cars going out because
if there's too many ferraris if their
market share gets too big
they lose the exclusive value of their
brand they lose their perceived value
and they can't charge as high prices
if everyone's got a ferrari then you're
not going to pay a huge amount of money
for it
this is the strategy behind things like
drops exclusive sneakers
nfts a lot of things a lot of things in
in the modern day economy are using the
strategy of scarcity
to get artificially increased their
perceived value human beings generally
think
that things that are scarce are
worthwhile
and so you can spend a lot less on
advertising in fact
i don't know if you saw on this ferrari
spends nothing
now this is on tv ads ferrari spends
money on like
formula one sponsorships and major race
influencers and
designing uh custom super cars that can
be shown off at auto shows but they
spend no money on tv ads at all ferrari
spends zero
ferrari goes for um
high-end high-performance luxury
italian foreign
limited vehicles and it shows in the
amount of dealerships so look at this
this is number of dealerships for every
ferrari dealership
there is 104 dealerships and they
attract a different buyer
so i mentioned that this is the average
age
of ford users does anyone want to guess
what the average age of
a ferrari user is who do you think is
buying this car
the answer is a 51 year old millionaire
ferrari despite a brand that
seems to appeal to uh the youth and have
luxury
is mostly bought with people with
mid-life crisis
who have a lot of money the average
ferrari owner owns
five other cars that's a crazy stat
ford does advertising gets his number up
once they get this number up
they do not raise price and if you have
a big
uh market share here you could do
something called economies of scale this
is one of your benefits
so if you're making a gazillion cars
you can use large factories to lower
your cost you can lower your cost
and that way you're getting margin two
so now they're making a little bit more
money and they're selling a ton of cars
that's how ford does it okay
ferrari on the other hand they raise
their perceived value super high
and then they raise their price right up
on the ass of that
so they just get a ton of money per car
it's not as big of a business but it
creates them
a ton of money for significantly less
work they don't have to have so many
employees they don't have to have so
many factories
the risk is lower as long as they keep
the brand value high
they just make an absolute rack load of
money
per car and if you look around the at
any brand you'll see in your life you
can start to see how they all tackle
this problem in different ways
a great example of a company that is the
best in the world
is apple because apple has an incredibly
low cost product
they have raised the perceived value so
high let me see if i can do this
that they they get both they get
the uh sales numbers of ford
and the margin of ferrari they make as
much money per phone as like a ferrari
would on their car and percentage-wise
but they sell as many phones as a ford
would sell cars
it is unique there is no there's no
product like the iphone
that sells as many as it does and still
has the high perceived value
how do monopoly sustain themselves
against companies with lower prices
so for example you're thinking of maybe
um uber or
or microsoft right now with xbox game
pass
where they're they they price it
underneath what it costs to make
what uber does is they get a bunch of
investor money
so rich people invest billions into uber
and then uber spends that money
on offering things under their cost
let's be honest here's the truth of the
matter
the average person did not have the
ability to have a private chauffeur
anywhere they wanted to go okay and now
suddenly since 2014 we have
the reason for that is because it's
artificially lowered
it's not gonna last forever and you've
already seen it uber prices have been
going up a lot recently
because they're burning money it just it
can't be sold for that cheaply
but they wanted market share they want
everyone to know their name and it
worked they got a big brand
and the plan is once you get everyone
hooked on uber
you raise the price back up you've
killed taxis a lot of cities don't even
have tax service anymore you've killed
all the competition
and then you that's how you do you
outlast your competition you lower the
price
outlast competition and then raise price
that is the monopoly strategy
what the really scary monopolies like
amazon do
is they keep these prices low so you
never suspect them of a monopoly
like in the 1920s or 30s they would do
this they would lower the price
drive competitors out of business and
then raise them back up and everyone get
pissed
what amazon does they lower the prices
they keep them low
and then they just use their dominant
market share to win
other things so for example um they want
to win
versus netflix they can now use the fact
that amazon is the biggest
shopping service in the world to bundle
it with prime to make prime video bigger
plenty of people in the chat would see a
gucci belt at like 100 bucks and be like
what the [ __ ]
why the [ __ ] would i pay that much money
for a belt because for you the perceived
value is lower than that price
for some people that's like oh [ __ ] 100
bucks for a gucci bell that's a deal
but for the same people you might be
like oh my god a new valerian skin
for only 20 bucks what a [ __ ] deal
i'll never buy gucci but i'll buy this
knife skin
okay you all fall for the same tricks
you have different preferences okay
what's especially amazing about digital
goods is the cost is
almost nothing the cost is so far down
here
so if they can price it like at 20 bucks
if they can get the blue line up to
where you think that's worth something
they are making racks and again this
applies to every company if you think
about every company you can figure out
what
how what is their strategy where is
their lines at what they're trying to do
it's a great way to think about
marketing in general and i hope
that this breakdown uh has opened some
thoughts for you and helped you think
about it my final example
is when you go too far with that is uh
is is moviepass all right
so moviepass had a pretty decent
perceived value it cost
an absolute [ __ ] ton to make probably
right up here
and they priced it way down here
they priced it so much lower than what
you were getting than what it cost them
they were essentially giving you free
movie tickets for 10 bucks a month you
could watch as many movies you want
and all they were doing is buying those
tickets from the movie theater and
giving them to you
it was an amazing deal and that's why
they were able to attract a ton of
customers in no time
they did they did almost no marketing
but of course
that doesn't work for very long they
were they were losing so much money on
each movie
that the weekend that that that the
mission impossible three came out
mystery possible fallout whenever that
movie came out whenever fallout came out
some of you went to go see it that it
bankrupted the company the best thing
you can do
to grow whatever you're trying to do is
raise this
so i think i've covered it i hope this
helped this to me is a fascinating
subject i know
it's a little it's actually one of my
most intense marketing streams
not too many jokes but i uh i i
i think it's a good framework and now i
can like use that to build off a lot of
things i want to talk about
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