How to think critically about your essential investments in marketing

Dec 9, 2019 | Governance, Marketing, Strategy

 

Marketing is almost always seen as an operating expense rather than an investment in the future.

This reality poses an absurd paradox.

We treat investments in capital equipment for our businesses, and various financial instruments for our own wealth generation,  as items on a balance sheet. By contrast, we treat marketing investments, and particularly those made in various forms of communication, as discretionary items recorded in the profit and loss account as an expense.

Why do we make this distinction?

Both forms of investment have as their motivator, the generation of future cash flow. Just because it is a bit harder to calculate the return on marketing investment than it is to calculate the return on an investment in capital equipment, or financial instruments, should not be a deterrent to the effort.

Nothing is more critical to the long term commercial health of an enterprise than the investment in marketing. What could be more important than identifying, communicating, creating transactions and building relationships with customers, that generate future revenue and cash flow?.

There are 3 basic strategies considered by financial investors

Index investment.

This is a passive, low cost, average but relatively safe return strategy, sticking to stocks that reflect the particular index against which the performance measures will be applied. The most usual are the S&P and ASX 200 indices.

Arbitrage investment.

Essentially this is a short term strategy that assumes the investor is smarter than the market, able to recognise mispricing before anyone else, and their IT programs. It involves a lot of buying and selling of stocks, and often commodity contracts, essentially bets on the short term movement of price. Over the long term, there is plenty of research around that indicates that the performance is around the major stock indices. This is also a high cost strategy, in that the constant trading incurs transaction fees, usually not included in the published performance metrics.

Value investment.

Investing for value is a strategy that involves taking a long term view of the businesses in which you invest. This means you engage deeply, not just with the numbers, but with the management and culture, as well as taking a view of the marketplace in which they compete. It is a ‘filtering’ strategy, one where a lot of research boils down the potential targets to a very few, in which you take a significant position. It is a focussing of resources at the specific points where you see there is long term returns available, and are prepared to accept the vagaries of the short term focussed market gyrations.

If you apply a similar frame to the manner in which businesses make investments in marketing, there is a remarkable similarity.

Index marketing.

Doing what everyone else is doing, being average, a follower, and risk minimiser. It also ensures you do not stand out from the crowd, which in a cut-throat marketing world means nobody notices or cares about you, so perhaps you should save your money.

Arbitrage marketing.

Those following this strategy are just applying tactical actions to situations they see, there is no underpinning strategy, just advertising and promotion, usually driven by a budget that has to be spent, and KPI’s that measure the activity, rather than the harder to measure  outcomes of the activity. The driving word is ‘campaign’. A string of tactical activities will be seen as a campaign, and usually there is little flow from one campaign to another. This tendency has been accelerated to stupid proportions by digital, where the cycle time of a campaign, limited as they have been, has reduced from months to days. No longer are we looking for the strategic ‘big idea’ that will engage and motivate customers over a long period, we are looking for 10 ideas for the Facebook and Instagram posts in the next 24 hours.

Value marketing.

Successful marketing requires a solid strategy, well executed with a long term perspective. Over time, you will fiddle with the details as you become more familiar with the minutiae involved, and you fine tune the application of funds as you learn, but it is a multi-year commitment, not a 6 month campaign, and certainly not a few ‘cat photos’ on Instagram. Such ‘cat photos’ may be a tiny part of the tactical execution, but are never a component of the strategy. This takes time, resources, and most importantly, a laser focus on what is important to  the selected group of primary customers. Over time, you communicate your value proposition that defines why they should do business with you, rather than someone else, and do so at a price that delivers you a premium return, while delivering them premium value.  Then you retain their business, increasing your share of wallet, innovating, reducing customer churn, all of which delivers sustainable cash flow.

If any of the above arguments holds true, then it must be that the measures we use to make decisions about our financial selves should be able to be adapted to the investments we make in marketing.

Step one is to see it as a long term investment in prosperity, and not a short term expense to be reported and forgotten, hidden in a monthly P&L.

Step two is to have a robust, well thought out strategy, that is able to optimise tactically in real time.

Step three is to implement and learn relentlessly, seeking the elusive cause and effect chains that must exist between marketing activity and cash flow.

 

Cartoon credit: Scott Adams and Dilbert reflecting on investment strategies.

 

 

 

The new Revenue Generation paradigm

Nov 25, 2019 | Customers, Marketing

When was the last time you made a sale without the customer first doing a google search on their problem, and alternative solutions, before you knew they existed?

A while ago I bet!

Customers no longer need you, the information you have, and  the products you sell, simply because they can easily find many alternatives.

The traditional sales funnel, starting with awareness, moving through familiarity, to intent and action, is dead. The model of a marketing function producing ideas and collateral, which is thrown over the organisational silo wall to sales to use for everything from the cold call to take the order is also dead.

In its place is a flywheel with has customers at its centre.

This simply means you have to know your customers intimately, not just their demographics, their circumstances and behavioural patterns. This in turn implies a great deal of work has been done in defining who is your ideal customer, and being able to reach out to them at a time when they are in ‘buying mode’, with a solution to the problem they are facing, that you can solve better, in some way, than anyone else.

There are no magic bullets to any of this, it takes hard work, experimentation, and persistence, and most importantly, the assistance of those customers you do know well,  to tell you what you need to do to keep them. When you enhance your levels of service, then they will be your sales force, spreading the word, one by one.

The Buyers journey is also an old fashioned cliché, usually represented by a linear process. These days it is no such thing, it is more a series of many interdependent decision points, whose order is often  changed as your ideal customer drops in an out of a decision cycle that is independent of you, the seller.  

No longer should you see Sales and Marketing as separate functions, one feeding the other. Both are part of a highly variable non-linear Revenue Generation process over which you may have some influence, but no control.

The day of the functional silo being efficient is over, thrown out the window by the power of the buyer!

 

 

 

 

 

The curse of insider knowledge

Nov 22, 2019 | Communication, Leadership, Management

When we know something, the automatic expectation is that those with whom we are communicating understand it equally well.

This automatic, unrecognised assumption can be a barrier, and at its worst, a curse.

Participating in a conversation a while ago where I was the outsider amongst a group of Canberra bureaucrats, their verbal shorthand, particularly around the departmental names and programs was incomprehensible to me. The terminology  was perfectly well understood by all of them, and they were surprised at my ignorance, when I pulled them up and pointed it out.

Try a little experiment.

Tap out a song, like happy birthday, with a pencil on a desk, and have people tell you what it is. We expect most to be able to pick it, the tune is obvious to us, singing it in our minds as we do it, but only a few actually pick it.

Of course, this closed communication loop is used all the time as a badge of membership, and a means of exclusion.

It may be that the group I was talking to were expressing their status as insiders by excluding me, but assuming this is not the intent, it was nevertheless the effect.

Every group has its own set of verbal and behavioral tools. These can be used as an offensive weapon, a means of exclusion, or they can be a tool of inclusion, it just depends on how you use it.

 

Header cartoon credit: Scott Adams and his mate Dilbert.

The 3 complications of calculating an accurate ROI on your digital marketing investment.

Nov 18, 2019 | Marketing, Social Media

Self styled ‘experts’, flog all sorts of metrics that are supposed to tell you how well your digital marketing efforts are doing.

Many of them do give useful information,  but it is only ever partial.

I am certainly one who loudly  advocates the extensive use of data to measure and improve the productivity of marketing investments.

Opt in rates

Sales Conversion rates

Earnings per click

Cost per click,

On, and on, and on.

Being an old fart means I like simple stuff, and the simple measure of the effectiveness of your marketing dollar is the return on investment. ROI. The actions taken as a result of the investment divided by the cost to inspire and  motivate that action.

Always has been the best measure, always will be!

Until the digital stuff took over, the best you could do was take an educated guess, informed by some research and experience.

Now you can usually get a pretty good read on ROI if  you think hard about it.

How much did we spend divided by how much we got back.

There are  really only three  complications, beyond the technical ones involving statistics, and the lies that they can tell. Also, unfortunately, many marketers are lousy at statistics and mathematics, which is often a challenge to credibility.

First. Over what time frame do you do the measurement?  For example, the lifetime value of a customer means you need a framework to make the calculation. This involves a lot of data as well as assumptions, and an intimate knowledge of customer behaviour over an extended period. This is very hard to get right, so most just use averages, which are almost always misleading. If my right foot is in a fire, and my left in a bucket of ice water, on average, my feet are at a comfortable temperature. Nonsense.

Second. Attribution. Which part of the investment led to the transaction? Was it the digital marketing activity, or the manner in which the receptionist took the phone call, or a thousand other sometimes tiny things that contribute to the transaction evolving. This challenge is not exclusive to digital marketing, it is to all marketing activity. However, the specific and very misleading claim made by most digital urgers, that you can measure the effectiveness of an investment in digital because you can measure movement through the ‘sales funnel’ is simply ignoring the reality of attribution. The claims made by the urgers of digital that they can reliably deliver attribution sufficient to make micro adjustments to the allocation of resources in an ever evolving competitive context is rubbish. You can get closer than a ‘best guess,’ but not with anything resembling statistical reliability.

Third. There are still things that we simply cannot measure. Most of us would agree that being a good parent is a great investment in the success of our kids, but how do you calculate an ROI on parenthood? Similarly, the impact of being part of an enterprise culture that encourages and values diversity of opinion,  enables all stakeholders to have a genuine voice, and creates alignment of objectives, is hard to measure.

None of the above should restrain you from making the effort, and continuously improving the methodology as you learn more about your customers, and their behaviour, but it is a warning to those who just believe the nonsense peddled by digital urgers with a dog in the fight for your money.

Header cartoon credit: Tom Fishburne at www.marketoonist.com

 

 

13 Ideas to use analytics to improve the credibility of marketing investments.

Nov 10, 2019 | Governance, Marketing

 

Marketing is all about making assumptions about the future, and how your investment in marketing activity will enable you to deliver revenue and commercial sustainability.

Therefore, making informed assumptions then testing their validity as you implement, reassess and improve is a vital part of the exercise in investment optimisation.

CFO’s and CEO;s do not trust marketing: they are often seen as the makers of nice adds and suppliers of pens and mousepads to their children, they do not carry the credibility quotient of an analytical profession.

For a marketer, having credibility in the ‘c-suite’ is essential. You are seeking resource allocation decisions to be made on the basis of your best estimates of what the future holds, an imprecise exercise.

Therefore, tracking the performance of previous estimates, being transparent about those that did not work, while improving those that did,  is an essential part of building credibility.

Essential to continuous improvement of the returns from marketing investment is the ability to allocate scarce resources where they will deliver the most bang for the buck.

  • Shift revenue generating activity from low margin products to  those with higher margins. To do this you need to be able to segment revenues and margins by customers and product, as well as by actuals and percentages.
  • Focus investments in those larger opportunities at the expense of the smaller, maintenance ones. Unfortunately these are often the easier ones to ‘sell’ to the corner office, and it looks like useful activity so it is often the default. Explicitly dropping lower return projects in order to fund those with higher returns, and/or more strategically consistent outcomes builds credibility.
  • Increase investment in reducing customer churn, and increasing lifetime value. Recognising the costs of customer acquisition Vs the cost of retention explicitly, usually makes this an obvious strategy,  often ignored, particularly in commoditised markets.
  • Increase investment in attracting higher share of wallet for strategically important customers. Defining the depth and breadth of the ‘customer wallet’ usually leads to interesting debates that must be sheeted back to strategy, and where strategy is absent or thin, this debate throws a light on that situation.
  • Focus resources in the growing part of the portfolio where there is some level of product differentiation that customers value. As Warren Buffett has said often: ‘Price is what you pay, Value is what you remember’. Understanding the price/value trade-off your customers make is challenging, as there is so much inherent variation between customers and the context in which a purchase decision is made, but being able to articulate the quantitative parameters of those trade-offs builds great credibility.
  • Automate repetitive tasks while increasing the personal engagement at the close of the transaction cycle. The locus of power in the purchase decision has moved from the supplier to the customer by virtue of Dr Google. Potential customers no longer need sales reps, the most expensive part of the sales budget, to provide information, but customers still do often need the reassurance of another person to make the final conversion. Use your most expensive sales resource where you generate the best return from the investment.
  • Move into adjacent market areas, after demonstrating the risks and rewards of such a move.
  • Collaborations through the value chain to deliver leverage to your capabilities.
  • Increase investments in actionable marketing and market intelligence, and demonstrate the impact of good intelligence in the past.
  • Optimise high performing segments. Being explicit about the optimisation of current performance as a means to fund commercial sustainability builds credibility, and enables the more risky ventures to be supported by senior management.
  • Understand the customer journey and focus on the areas where conversion rates can be improved. Conversion rate dashboards are now relatively easy to set up and monitor in real time, and offer transparency and opportunities to improve by being tactically agile.
  • Increase investment in strategic account planning for strategically important customers. This may not always  be your biggest customers, it is those most aligned to your strategic aspirations, where a deepened relationship will deliver long term revenue sustainability.
  • Use the accountants tools, financial ratios, NPV and IRR, in your arguments, showing rolling results that give insights to the trends happening, and providing analysis that explains the trends.

 

Marketing will increasingly become the key  differentiator between success and failure in commoditising markets. Failure to build the credibility with the ‘c-suite’ necessary to make the long term investments in marketing required, will result in a shortened commercial lifespan.

 

Header cartoon courtesy of Tom Fishburne at www.marketoonist.com

 

 

What do bees know about marketing strategy?

Nov 6, 2019 | Collaboration, Marketing

 

Bees are essential to our survival, they are fascinating insects. There is much we can learn from their habits, the outcome of millions of years of evolution. They do not just fly around at random, pollinating as they go, they are highly organised, focused, collaborative, and each plays a specific role in the hive.

As a kid, I used to watch my grandfather catch bees in his fantastic rose garden, cultivated to attract bees. He captured them in a bag, and made them sting him on his knees, believing it eased his arthritis, born of a life of physical labour. Modern medicine has isolated a molecule in bee venom that is associated with arthritic pain relief, demonstrating again, that old wives tales are sometimes true.

Back to  the question, what do bees know about marketing strategy?

It turns out, a lot.

Advertising and mutual benefit.

Flowers, which attract the bees, need to tell the bees that there is something they like, nectar, on offer. However, there is a mutual benefit, as the bees pollinate the flowers as they take the nectar. A mutually beneficial arrangement, with many variations across the varying ecosystems.

Value proposition.

To attract bees, plants that need to be pollinated, have flowers, the bigger and more decorative, in general the better. They want the bees to be attracted, be rewarded for the visit, and return, so they offer lots of nectar. The flower is an attractive façade that makes a promise, fulfilled by the nectar. This encourages the bees to return, which is much better than a once only visit. Bit like building a brand. Invest, attract, and work towards repeat business.

Communication and referral.

Bees communicate, they signal to each other when they have found a good source of nectar by doing elaborate ‘dances’ in the air. ‘Word of wing’ advertising perhaps?

Selective Resource allocation

Plants use a lot of their limited resources producing flowers. Being a world where nothing happens on a whim, it follows that there is more value in the allocation of resources to creating flowers than to alternative uses. Perhaps flowers are just plants with an advertising budget?

Collaboration and innovation.

Bees have roles in the hive. One role is of the explorer. These bees ignore the ‘word of wing’ of their colleagues, and range more widely looking for new sources of nectar. This is a necessary function, as if there was not exploration, the nearby sources of nectar would be consumed, and with no alternatives found, the hive would die out. In commercial terms, these are the R&D or Innovation bees. They are making the investment now, so the longer term survival of the hive is assured.

Not always as it seems

Not everything that appears attractive is valuable.  Orchids are rare, beautiful, and highly evolved, and are traps for the unwary bee. Usually orchids are a one stop shop for a bee, the scent of the orchid lures the bees in, they pollinate the orchid, but then cannot get out. Once word gets around the bee community these plants are dangerous, the bees avoid them, which is why orchids are an early flowering group of plants, and are widely scattered, so the bees have less opportunity to spread the word of the danger. They are like that really  nice looking restaurant in a tourist area, the locals avoid it like the plague, but the tourists go in, and get fleeced, but the owners know the tourists are a once only visitor, so it does not matter, as there is no tomorrow, it is a once only transaction.

 

Metaphors from the natural world abound in management literature, for a very good reason: we can learn a lot from them.