These 3 Lines Explain All of Marketing

Summary

In 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

00:00

📚 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.

05:01

🚗 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.

10:01

📈 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.

Keywords

💡Three Lines Theory

The Three Lines Theory of marketing, as explained in the video, is a conceptual framework that distinguishes between cost, price, and perceived value. This theory posits that for successful marketing, the perceived value of a product should always be higher than its price, which in turn should be higher than the cost to produce it. The video uses this theory to explain the fundamental aspects of marketing and branding, emphasizing the importance of never allowing these lines to cross in order to maintain profitability and customer satisfaction.

💡Perceived Value

Perceived value refers to the customer's evaluation of the worth of a product or service, based on what they believe it can provide compared to the price they pay. In the video, it's highlighted as the most crucial line in the Three Lines Theory, underlining that customers only purchase items when they perceive the value to exceed the cost. The presenter uses examples like Netflix and Ferrari to illustrate how companies can enhance perceived value through branding and exclusivity.

💡Margin

Margin, in the context of this video, is defined as the difference between the cost to produce a product and its selling price. It represents the profit made on each sale. The video emphasizes that branding is essentially about increasing this margin by elevating the perceived value, allowing for higher pricing without increasing the cost, thus expanding the 'juicy margin box'.

💡Market Share

Market share is discussed in the video as a measure of the number of units sold or the percentage of total sales volume in a market captured by a brand or product. The presenter argues that increasing perceived value without significantly raising the price can lead to a larger market share, as seen with Netflix's strategy to prioritize broad user adoption over maximizing per-customer profit.

💡Advertising

Advertising is highlighted as a key tool for raising perceived value and thus supporting the pricing strategy within the Three Lines Theory. The video contrasts the heavy advertising investments of companies like Ford with the minimal or targeted advertising approaches of luxury brands like Ferrari, to demonstrate different strategies for influencing perceived value and market share.

💡Brand Strategy

Brand strategy involves the long-term planning and development of a brand's identity, positioning, and actions to build customer loyalty, perceived value, and market presence. The video illustrates this through the case study of Ford vs. Ferrari, showing how each company's brand strategy impacts its market share, pricing, and profitability differently.

💡Economies of Scale

Economies of scale are mentioned in the video as a benefit for companies like Ford that achieve large market shares. This concept refers to the cost advantage gained by an increase in production scale, leading to a lower cost per unit. This allows companies to either increase margins or maintain competitive pricing while still making a profit.

💡Exclusivity

Exclusivity is used in the video to describe a strategy employed by luxury brands like Ferrari, where limiting supply increases scarcity and perceived value, allowing for higher pricing. This contrasts with mass-market strategies and highlights how perceived value can be manipulated through controlled availability.

💡Digital Goods

The video touches on digital goods, particularly in the context of perceived value and cost. Digital goods, such as software or online content, have near-zero marginal costs, meaning that if companies can convince consumers of their value, the margins can be extremely high, exemplified by the sale of in-game items like skins.

💡Monopoly Strategy

The video discusses the monopoly strategy in the context of companies like Uber and Amazon, where initially low pricing is used to eliminate competition and gain market dominance. Once dominance is achieved, prices can be adjusted to optimize profitability. This is connected to the broader theme of the video by illustrating an extreme form of market share strategy that sacrifices short-term margins for long-term control and eventual profitability.

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