Dissecting A Marketing Strategy: 5 Hour Energy As he returned from a natural products trade show, Manoj Bhargava wondered to himself, “If I’m tired, do I also have to be thirsty? ” As he contemplated this realization, he began to process it as a comparison of treatment of both a stomachache and a headache. Six months later he was entering one of the most saturated markets in the country, with a revolutionary product and a marketing plan that evolved from the placeholder name it still bears on the 3. 5 million units sold each year. -Hour Energy grossed north of $600 million last year and currently holds a 90% market share in the energy-shot business. Much of the company’s success can be attributed to a stringent customer-focused marketing plan, intent on distinguishing themselves in a competitive market by sharply reacting to customer focus groups. In dissecting the marketing strategy of Living Essential LLC’s 5-Hour Energy, I will detail how the company was able to successfully target a market and position its’ product for sustained, long-run profitability. Market segmentation” is described as dividing a market into distinct segments that have similar needs or behaviors and behave in similar ways. Living Essential’s Bhargava had a product he believed could compete in the rapidly expanding energy drink market. The focus now shifted to identifying target groups of individuals that could be pulled away from the major players, such as Red Bull and Monster. With a goal to ambush the energy drink market with a customer-responsive product, Living Essential began laying out a $60 million research plan to identify a target market and develop a solid positioning strategy.
The team of statisticians and psychologists embarked on a 36 month, nationwide research quest, utilizing focus groups, behavioral data collection, survey research and cross-sectional market analysis. At the core of this effort was a belief that in a monopolistically competitive market, the product needed to differentiate itself by directly fulfilling customer demands. The most glaring result of the company’s massive marketing research was that creating a profitable position in the energy drink market was only going to be possible by differentiating 5-Hour Energy from much larger conglomerate distributers.
The product, in and of itself, possessed a points of parity laundry list when compared to other energy promoting soft drinks. Research showed that consumers were virtually indifferent as to the flavor, content and end-results of popular brands. The data did, however, produce several key areas where the potential for product differentiation shown out like a beacon of light in a cavernous black hole. Living Essential’s marketing team began swiftly developing a plan based on these very points of differentiation, which would slingshot the company into the market leader in only three short months.
Equipped with the knowledge about the target market they wanted to reach and the competitive advantage opportunities within the market, Living Essential began to refine its’ product. The marketing research results were at the forefront of product development. The decision was made that the company would not compete in refrigerated coolers with larger producers. One of the many customer complaints about energy drinks is that they need to consume nearly 12 ounces of a highly caffeinated, sugary beverage in order to get the jolt for which they were looking.
From this data, 5-Hour Energy’s most important product concept was born: two-ounce bottles. Living Essential founder Manaj Bhargava had unknowingly identified one of the products biggest points of differentiation nearly a year prior on his return flight from the natural products conference: Must you be thirsty, because you’re tired? The answer from product focus groups was a resounding: “No! ” Purchasers of energy drinks simply wanted energy. They were not engrossed in the requisite consumption of needless sugar calories that would, ultimately, lead to a “crash”, once the body had expended the artificial energy.
The 5-Hour Energy product was now developing, in an effort to fulfill customer demand. This was the first major evolution toward becoming a demand-marketed product. Simple observation of the advertising efforts of popular energy drinks will lead you to the target demographic that energy drink producers hope their product will attract. If you have ever seen ESPN’s extreme sports competition, the X Games, the percentage odds are that you are a 13-17 year old boy.
Even if you don’t happen to fall into that category, it would be glaringly obvious that energy drinks have deemed this demographic as their primary consumer targets. Nearly every competitor’s outerwear is littered with red-winged patches and most are promptly provided with a post-competition energy drink, logo facing outwards, at the conclusion of their “extreme” event. 5-Hour Energy’s marketing team consequently posed the question following their research results: “Are teens the only people in this world who are looking for extra energy? After all, it might be said that young boys have plenty of energy without caffeinated encouragement. Living Essential now had its’ second major point of differentiation on which to launch a marketing campaign. Seeking a niche that would give access to the energy drink market, Living Essential positioned itself as a product focused on individuals who work long hours, maintain non-traditional schedules and hold alertness-critical positions. Contrary to their competition, 5-Hour Energy attempted to appeal to demographics such as stay-at-home moms, doctors and professional athletes.
Advertising efforts were geared toward weary professionals in contrast to BMX riding thrill-seekers. The underlying theory was that everyone needs energy. That being said, there was no room in the market for yet another energy drink. Living Essential could not bring forth another comparable product and compete with the brand recognition Red Bull and Monster already had in place. Using research data, Living Essential had identified the product’s differentiation advantages and the target market for optimizing sustained profitability in the energy drink market.
The company, still directionally led by market research, now needed to determine at what price consumers would value their product. The conclusion that 5-Hour Energy could not effectively compete with large manufacturers was made, due mostly to the cost of retail space in refrigerated coolers. By making this concession however, it forced the upstart manufacturers to explore the retail spaces and the implicit nature of the product actually created a competitive advantage. The answer lay in the physical size of the product. Because 5-Hour Energy was not marketing itself as an energy “beverage,” it didn’t eed to place the product in coolers next to Pepsi and Coca-Cola. Instead, the company made the decision to market 5-Hour Energy as a point-of-sale item. There was no need to have the bottles chilled, as consumers placed no additional value in temperature of only 2 ounces of consumable liquid. Next, they determined the size of the product gave them a pricing advantage as well. The cost of production for a 2-ounce product, as compared to the average 8-12 ounces of the competitors’ energy drinks, was far more cost effective.
By reducing profit margins slightly, in order to sell 5-Hour Energy at a lower cost to consumer, they were able to increase the product’s value compared to competition. Living Essentials introduced the product in test markets at GNC stores in several geographic markets priced at two bottles for $5. After one week, the health food store reported that some of its stores had actually implemented wait-lists for the next shipments of 5-Hour Energy. The team at Living Essential realized they had a unique product, untapped target market and price point, that had endless potential.
Bound still by the inability to financially support a large mainstream distribution, the company hired small distributors to peddle the product to convenience stores, encouraging them to put it on the counter next to lighters and key chains. It did not take long for larger competitors to take notice of the success that 5-Hour Energy was enjoying. The tiny, upstart package had not only stolen market share from the big names in the energy drink market, it had created from this share an entirely different market. The term Energy Shot was born.
Today, all the major manufacturers of energy drinks have scrambled to enter the energy shot market, but 5-Hour Energy has the only real brand-recognition. Living Essential spends a modest amount on advertising in order to maintain its’ leadership position, but continues with a no-frills approach. Like the name of the product, which was only meant as a place holder originally until a marketable name was conceived, 5-Hour Energy delivers an old fashioned Proctor & Gamble message: Here’s the product, Here’s the features; Here’s the Benefits.
It has been said, that one does not need to have invented rubber to sell tires. 5-Hour Energy did not create a market in energy promoting beverages. In fact, their recognition that they could not have survived in such a market, is the primary reason for their success. The progression of Living Essentials energy shot product reinforces the principles of marketing and the forces that good marketing can have on consumer behaviors. When the focus shifts from selling people your product, to producing the product they want, the odds of sustained profitability are exponentially increased. -Hour Energy utilized fundamentally sound research techniques to develop a marketing plan that emphasized the competitive advantage of the product. With continued attention to the static nature of their target market and demographic segmentations, the company can look forward to a long and prosperous future. After all, people will always be thirsty, and they will always be tired, however, both problems do not need to be remedied with one product.