Assessing Marketing & Business Risk

In the last week, other than the royal wedding, the news in the UK has been dominated by three stories; the parliamentary committee report into the collapse of Carillion; Stagecoach and Virgin losing the east coast rail franchise which has been taken back into public ownership; and the report into building control regulation following the Grenfell tower fire.

What links these three stories are businesses who acted recklessly or who did not properly assess the risks to their strategies.

Two of these stories, Carillion and Grenfell clearly involve criminal recklessness which should result in prosecutions and censure of senior board members.  The east coast rail story is a clear case where the bidding firm overestimated potential earnings and underestimated costs.  The result was that Stagecoach/Virgin overbid for the franchise and could not meet expected levels of turnover.  In the words of Chris Grayling, the lamentable transport minister (who causes chaos in whichever department he leads), “they got their sums wrong”.

The assessment of risk is central to the development of marketing and business strategies.

So where do you start?  After all there are a multitude of potential risks in such strategies.  And we can all repeat Murphy’s Law: That anything which can go wrong, will go wrong.  Such a multitude of potential risks means that appropriate assessment of them may seem impossible.

In the book Marketing Due Diligence, McDonald et al. argue that there are three common points in all business and marketing plans:

  1.  The market is this big.
  2. We’re going to take a share of that market
  3. That share will produce this much profit.

These points lead to three risks:

  1. The market isn’t as big as forecast
  2. The planned strategy doesn’t provide the expected share of the market
  3. The target market share doesn’t provide the expected level of profit

These three points therefore capture all the variables that can go wrong in a strategic marketing plan.

Assessing these risks is fundamental to marketing due diligence. It is not a case of counting all the risks with a plan.  It is accurately assessing the potential of these generic risks in your plan.

McDonald breaks each of the three generic risks; market risk, market share risk and profit risk into five sub-categories.

Market risk is that the market is not as big as the forecasts suggest.  When looking for competitive advantage through a gap in the market, it is always worth asking yourself not whether there is a gap in the market but: Is there a market in the gap.

Market risk arises from assumptions in a marketing plan.  All plans are based on assumptions and if they are not adequately tested the can be found to be erroneous and ill-founded.  For example, many Brexit-supporting politicians quote the work of Professor Patrick Minford on the UK economy as gospel.  However, the vast majority of economists (over 90%) see Professor Minford’s Liverpool model as making huge incorrect assumptions and ignoring advancements in economic science since the model was developed in the 1970s.

The five sub-components of market risk are:

  1.  Product category risk:  The product category is smaller than planned.  This risk is higher if you are producing a new novel product or service.  This risk was at the centre of the Dot.com bubble where share values of new internet businesses rocketed with little or no evidence that the market for novel internet products was large enough to provide expected dividends.
  2. Market existence risk:  This is where a segment is smaller than expected.  This risk is stronger in new market segments and lower in established segments.  I do a presentation based on an airline catering firm who produce high-end restaurant quality food for private jets.  The clear outcome of the presentation is that the owner of the business over-estimated the size of his target segment.
  3. Sales volume risk:  This is where sales volumes are lower than planned.  This risk is lower if you use market research to estimate sales volume potential.
  4. Forecast risk:  The market grows less quickly than forecast.  This often because of the incorrect reading of trend data.
  5. Pricing risk:  Your pricing strategy is wrong and reduces the size of your market.

Assessing market risk requires careful questioning of both written and unwritten business plans.  You need a market risk assessment to moderate market size assertions.

A strong strategy will lead to strong market share.  Weak strategies won’t.  So you must objectively assess what makes a strong strategy compared to a weak strategy.  One example of a weak strategy is one which is ‘one size fits all’ rather than one which offers the customer bespoke products meeting their segment or personal needs.

However, you must not define market segments too tightly or too loosely.  For example many in the press will offer Millennial as a segment; yet the Millennial generation is roughly a third of the UK population.  Equally, if you are only aiming the target one-legged Welsh farmers, then it is unlikely that you will meet your market share expectations.

A ‘one size fits all’ strategy only really operates in quasi-monopolistic situations.

The five sub-categories of market share risk are:

  1.  Target market risk:  Your strategy works for only part of your targeted market segments.  This risk is higher if you use homogenous target market segments e.g. ‘millennials’, as opposed to homogenous needs.
  2. Proposition risk:  The proposition you develop for customers fails to appeal to some of your target market.  This risk is lower if segment specific propositions are delivered.
  3. SWOT risks:  SWOT stands for Strengths, Weaknesses, Opportunities, Threats.  This risk occurs if you do not leverage your strengths, you do not take up opportunities, you do not protect against threats or if you do not remove weaknesses from your business.  Each of the four SWOT categories must be rigorously assessed and leveraged.
  4. Uniqueness risks:  This is where you compete with others in your market head on rather than leveraging difference.  It is higher if you offer identical products nad services to those of your competitors.
  5. Future risk:  This is where you do not properly account for changes in customer needs or market expectations.  A prime example is Kodak who continued to produce 35mm film for cameras when most consumers were going digital.  The Kodak situation was worsened by the fact that the digital sensor for cameras was invented by Kodak.

Profit risk arises by not properly assessing competitors’ response to your strategy.  So how do you assess what your competitors will do?

Again there are five sub-components to profit risk:

  1.  Profit pool risk:  This is where the total amount of profit available in a market is less than forecast.  Therefore your competitor’s actions have a direct bearing on your profits because they do not react as you expected.  This risk is higher if the overall profit pool is static or shrinking e.g. in mature and declining markets.
  2. Profit sources risk:  This risk is higher if your plan is to take your growth in profits by seizing customers from your competitors.  It is lower if you are seeking to leverage growth from new customer segments.
  3. Competitor impact risk:  Profits are less than planned because of the impact of your strategy on an individual competitor.  if there is a single dominant competitor in your market, e.g. Amazon in the case of digital retail, and your strategy affects their survival, you may face stiffer competition, harder reaction and therefore lower profits than you planned.
  4. Internal gross margin risk:  This is where profit margins are lower than planned due to a rise in the cost of making your product or service.  This is one area where Carillion went wrong.  The company’s directors operated on very slim margins and had a policy of gaining contracts by undercutting their competitors’ bids.  When projects began to be delayed and the costs of raw materials rose, those profit margins disappeared.  Similarly, Stagecoach found that by over-bidding to run the east coast rail line, they weren’t able to make their expected margins.
  5. Other costs risks: This is where other costs associated with production, such as the costs of marketing or delivery is higher than expected.  These higher costs impact on expected profit margins.

In summary, the risk of not delivering the promised margins is high if your market is small and shrinking, your market contains one dominant competitor and you are over-optimistic in your assumptions about costs.

 

It’s all about risk

Whilst studying for the Chartered Institute of Marketing qualifications, I was told a possibly apocryphal story about the beginnings of the Starbuck’s coffee shop chain.

I was told that when the first Starbucks café was opened it struggled to make a profit.  Faced with such mounting losses, the owners could easily have decided to close the café.  Instead they opened two more outlets.  The result was that the business took off.  Sales at all three of the businesses premises rocketed.

The result is history, a catering behemoth was born.

The owners of Starbucks took a huge risk.  If they had closed the original store, their finances would have taken a hit but they would have ‘lived to fight another day’: If the new outlets had failed, they would have been bankrupt.

Last week, I saw a newspaper article regarding Starbucks opening its first store in Italy.  Again the businesses owners are taking a big risk.  How coffee is drunk in Italy is virtually a religion.  For example, no one would be seen drinking a cappuccino in the morning and most Italians prefer a dark oily espresso which would knock most Starbuck’s customers for six.

Personally, Starbuck’s opening a store in Rome is great PR but I shall be extremely surprised if it lasts more than six months.  The reason the big American coffee chains have ignored Italy so far is that their business model clashes with Italian cultural norms.

Julian Richer, the proprietor of Richer Sounds, the specialist Hi-Fi retailer, has gradually built his business to fifty stores over forty years.  Unlike many retailers who plan to open several new stores a year, with the aim of having a presence on every high street, Richer prefers slow, steady growth over the long-term.

Other specialist retailers, such a Jessop’s and Maplin’s have tried the rapid expansion route and have failed.

So what is the definition of business risk?

Risk is an event or action that may adversely affect an organisation’s ability to survive and compete in its chosen market, as well as maintaining financial strength, a positive public image and the overall quality of its people and services.

A few weeks ago, I was discussing the collapse of Carillion with an entrepreneur who had worked for over 40 years in the construction industry.  He described it as a sector where many businesses “fly by the seat of their pants”.  They take massive risks and the continuation of the business is often reliant on the next contract tender or the next paycheck.  he was wholly unsurprised at Carillion’s collapse.

Of course, the definition of an entrepreneur is a manager or business owner of a business enterprise who through initiative and risk attempts to make a profit.  Disruptors are a specific form of entrepreneur who uses new technological advances to disrupt accepted business practices and models.

In most industries such laissez-faire risk-taking as that taken by Carillion is, in many sectors, no longer seen as acceptable management practice.  Managers are expected to mitigate and predict possible risks through forecasting and business planning.

Fred ‘The Shred’ Goodwin, the former CEO of Royal Bank of Scotland has been vilified for collapsing that bank.  His strategy, if you could call it a strategy, was to turn RBS into an international investment bank, rather than its traditional role of a retail bank, through high risk acquisitions and trading.  The criticism he has received can pretty much be described as his inability to assess risk and to plan for it.

Risk arises from a failure to exploit opportunities as well as from external threats.  There are four types of business risk:

  • Financial risk
  • Strategy risk
  • Operational risk
  • Hazard risk

Risk can be broken down into risks driven internally within an organisation which should be under management’s control; and risks driven by external events which are out with an organisation’s direct control.

Internally driven financial risk includes liquidity and cash flow. Strategic internal risks include research and development, intellectual capital and the integration of cultures after mergers and acquisitions.  Internal operational risks covers areas such as ICT systems, recruitment, supply chain and accounting controls.  Internal hazard risks include public access to the business’s premises, employees behaviour, maintenance of buildings and product and service safety.

Much of my career in consumer protection was taken up with this last hazard risk where I advised businesses on product safety risk assessment, legislative due diligence and product recall protocols.

Externally driven financial risks include interest rates, foreign exchange rates and the availability of credit.  External strategic risks include competitors’ actions, changes in customer dynamics, changes in industrial practices and variation of demand.  Operational external risks include regulators, changes in cultural expectations and board competition.  External hazard risks include contracts collapsing, natural disasters, failures by suppliers and environmental change.

Managing the above categories of business risk better can lead to clear and obvious benefits including:

  • Stronger and better business growth
  • Better business stability with less exposure to market and environmental change.
  • Better quality employees who understand their responsibilities
  • Stronger relationships with your suppliers
  • Better channels to market
  • Better customer acquisition and retention
  • Cheaper finance; and,
  • the driving down of costs

As a professional marketing strategist the process of developing strategic marketing plans plays an important role in risk reduction.

There are two main aspects to strategic marketing risk.

Primary demand risk is similar to financial risk in that it is beyond the control of marketers.  It relates to the general effective demand in the marketplace and customers ability to pay.  It is driven by economic life cycles, currency and exchange fluctuations, government regulators and technological change.

I am furiously opposed to Brexit precisely for its likely effects on primary demand risk.  This is already showing in the UK economy where productivity is in the toilet, retail sales are beginning to collapse, inflationary pressures are developing and interest rates are starting to rise.  Exporters have been able to rely on the fall in the pound whilst stocks of commodities bought with a its higher valuation lasted.  Those raw materials are starting to run out and factory gate inflation has been as high as 18%.

The second aspect of strategic marketing risk is market share risk.  This risk is relative to your competitors, not absolute as with primary demand risk.  This risk can be defined by asking yourself whether you are better at assessing the market than your competitors or whether they have a superior ability.

Organisations which are better at assessing the market tend to garner more market share and make better profits than those which are less able.

Factors which affect market share risk include:

  • Not acquiring your target customers
  • Not retaining your existing customers
  • Allocating too many or too few resources to:
    • Customer research and understanding
    • New product development and improving existing products
    • Price maintenance
    • brand distinctiveness
    • communications

The best ways of reducing marketing risks are:

  1. To carefully research your intended market
  2. To develop close relationships with your target customer groups
  3. To improve the quality of your marketing: and,
  4. to increase your share of marketing investment relative to your competition.

 

Why you need a Story

A few days ago I was perusing my twitter feed when I noticed a sponsored tweet from an experiential marketing agency.  To paraphrase, the tweet said, “Forget stories, marketing is now about developing experiences”.

This statement worried me, it smacked of a poorly trained marketer overly focused on one aspect of the profession ( I also see similar messages from individuals and agencies focused on digital marketing and social media).

These individuals tend to concentrate on a single element of the promotional or marketing mix at the exclusion of all others.

The above tweet worried me, not its focus on the development of experiences but its instruction that stories should be forgotten.

Stories are an integral part of our lives.  They help us make sense of our world and our role within it.  Human beings have been telling stories since we were living in caves and eating mammoth.  Every aspect of our communication and culture is packed with stories from literature, music and art to politics and religion.

It is accepted by most sociologists that we do not replace our cultural norms; we add to them.  For example, even if you have no particular faith, the religion under which you were brought up, or which is embedded in your cultural history will inform your character and decisions.

To argue that businesses should forget storytelling and focus solely on the development of experiences is wrong.  Storytelling remains a critical part of developing a marketing communications strategy.

Baker and Gower (2010) found that stories help sell products in that they are critical to selling, communication, change management, leadership, organisational learning and even to design.

Woodside et al (2008), referring to blogging as a form of communication, found that this form of storytelling could be a more effective marketing tool than traditional websites.

Stories matter in marketing because they match the way people think and process information.  For example, most competitors at memory competitions learn long lists of complex information by placing clues to the sequence in a story, a journey with clues in the narrative to the identity of the upcoming items.  Our brains are hard-wired to remembering stories.

McKee (2003) also emphasises that stories are critical to effective promotion because they allow customers to develop an emotional attachment to a business’s goods and services.

A story consists of two elements, a theme and a plot. The latter informs the former.  For example, John Le Carre’s  Tinker, Tailor, Soldier, Spy is a spy thriller plot but its theme is one of false personal allegiance and lost relationships. Moby Dick is the plot of a hunt for a whale but its theme is obsession and revenge.

Theme has the following elements:

  1. Hardship – The protagonists have to endure hardship and overcome obstacles.  At the end of the story something has to have been earned.
  2. Reciprocity – There has to be an appreciation of fair and equal exchange.
  3. Defining Moments – There have to be points which stand out and which change lives.
  4. Anticipation – There has to be a sense of hope for the future.

Plot has the following elements:

  1.  Crisis – Anticipation is often followed by negative feelings that a crisis will disrupt the path to the future.
  2. Help along the way – Crisis is mediated by the arrival of unexpected help e.g. advice from a friend or mentor which results in a period of hard work and endurance.
  3. A goal is achieved – This follows the overcoming of obstacles and discomfort. Then there is time for an appropriate celebration.

Syd Field, Hollywood’s favourite script doctor, teaches a framework for storytelling which he describes as a paradigm.  This is a three act story structure for cinema.

Act one is the set up. This introduces the stories protagonists and sets up the narrative.  This act ends with a major plot point which drives the rest of the story.

Act Two is where the story truly begins.  Here the protagonists encounter a series of conflicts and crises which they must overcome.  At the midpoint of this act, ‘something big happens’.  This is a major story element which will reinvigorate the audiences interest in the story.  At the end of the second act there is another major plot point, a significant set back the protagonist must overcome.

The third act starts with the protagonist overcoming the setback and the story rises to a climax, often a showdown between the main protagonist and the antagonist.  After the climax there may be a coda where the protagonist celebrates their victory over the antagonist.  A fine example of this is the ending of the first three Star Wars films which all end with the rebels celebrating their victory (or in the case of The Empire Strikes Back, their survival) against the Empire.

Field’s paradigm is prevalent in most blockbuster movies and, as more and more novelists write with a potential film in mind, book fiction.  It is even exhibited in long-running advertising campaigns such as the Nescafe Gold romance, the BT couple and even the Compare the Market meerkats.

Field warns against the use of stereotypes (which are often used in advertising as shortcuts) and against story structures which are too tightly aligned to his paradigm.

Stories can be classified into four groups:

  1.  Myths and Origins – How an organisation started and overcame early difficulties.  How values were embedded in a firm’s current status.  This is central to the advertising of Thatcher’s Cider, Stella Artois lager and Scottish Widows.
  2. Corporate Prophecies – Stories about an organisation’s future often based on its past.  The current series of television advertisements by Honda follow this pattern where a racing driver starts a journey in a vintage car and ends up being launched into space in a rocket.
  3. Archived Narratives – Stories which trace an organisation’s or product’s history.  These are often used following corporate mergers or rebranding campaigns.  Fairy liquid, a few years ago, ran a series of advertisements celebrating the longevity of the brand name with clips from their television advertising over sixty years.  These advertisements told the audience two things, that the brand retained its long-standing values and that it was a brand generations of families had trusted.
  4. Hero Stories – How people from the organisation have overcome difficulties.  The current advertising campaign by the Open University follows this model, where former students describe their lives before study (unemployment, drudgery) and how it has been improved through gaining higher education qualifications.  The British Navy’s advertising also follows this path with the example of a sailor whose life was going nowhere before he joined the Navy and how the service had given him skills and self-respect.

Certainly there has been a rise in the use of experiential marketing in recent years as new technology has widened the interactions between brands and their customers.

Experiential marketing can be defined as:

The process of identifying and satisfying customer needs and aspirations by properly engaging with them using two-way communication which bring brand personalities to life and which add value in the minds of the target audience.

It is the development of customer-centric processes.

Shirra Smilansky in Experiential Marketing uses the acronym BETTER to describe aspects of the discipline.  It stands for:

  • Brand personality
  • Emotional Connection
  • Target Audience
  • Two-way Interactions
  • Exponential elements
  • Reach

The first three elements of this acronym have storytelling at their core.

A major aspect of experiential marketing is developing ‘day in the life’ stories of target customer types.

To develop a brand personality, you need a story.  To develop an emotional connection, you need a compelling story which provides authenticity, positive connections and personal meaningfulness.

Storytelling is critical to the development of a brand strategy.  Only after a consumer is emotionally connected to a brand can you introduce sensory rich experiences.  Stories link your brand to your intended target audience (We want people like us or people who want to be like us).

Stories are critical to the development of compelling experiences.  If your experiences are not based within the structure of a story it is likely that you will fail to engage with your target audience.  That means weak customer loyalty and retention.

Rather than replacing your brand story with empty experiences, you need to develop customer experiences which build on and enhance your brand story.

Position, Position, Position

Philip Kotler describes four stages in the development of a value proposition:

  1.  Choose the market position for the brand
  2. Choose a specific position for the individual product
  3. Develop a value proposition for the product (e.g. More for More, More for Less, The Same For Less, etc)
  4. Develop a total value proposition for the brand (Answer the question; Why should I buy from you?)

When building a brand, you have to do more than simply choose a brand name.  You have to develop rich associations and promises for the brand.  You have to manage all contacts the consumer has with your organisation and your brand.  These contacts must match; or better; exceed customer expectations.

Managing a brand at a strategic level than managing it at a tactical level.  Managing at a tactical level does not have the requirement of coordinating all areas of your organisation and integrating organisational behaviour to reflect the meaning and values desired of the brand.

Many senior managers only start to take a brand seriously when it appears as an asset on the company’s balance sheet.  Only then do they consider its true potential.  They start to see brand management as a strategic goal which requires long-term investment, commitment and innovation.

Positioning a brand in the marketplace take place at both strategic and tactical levels.  At the strategic, organisational level, it must determine a unique position in the market which differentiates the brand from those of competitors.  this has significant implications for marketing and communications strategies; they must reflect the competitive position and be designed to create, build maintain and improve that position.

This strategic position will direct the tactical position through a positioning statement which defines communications which reflect the actual and/or desired market position.

Once a strategic position is established, every area of the organisation and everything it does should be coordinated to deliver products and services based on that position.  It will determine your marketing choices.  In particular it will inform your marketing mix, the specific benefits and values associated with products and services.

Consumers attach both emotional and rational values to brands.  These can be displayed graphically on positioning maps.  Usually these take two attributes e.g. customer service versus reliability or innovativeness versus modernity.  On these maps, the basis of perceptual mapping, you place consumers views of your products and the products and brands of your competitors.

Treacy and Wiersema stated that there were three basic value disciplines:

  1.  The operationally excellent firm (management efficiency),
  2. Product leadership,
  3. Customer intimacy.

They also stated that customers only notice excellence or below adequate performance.  Adequate or average performance did not catch the eye of consumers.

Treacy and Wiersema suggest that to achieve a strong market position you should:

  1.  Become the best at one of the three value disciplines;
  2. Achieve adequate sector performance of the other two disciplines
  3. Keep improving your superior position so not to lose out to competitors
  4. Retain adequate position in the other two disciplines as consumer’s impression of what is adequate is constantly evolving.

This strategy can be equated with Michael Porter’s generic marketing strategies in that to try to develop excellence in all three value propositions will spread your resources too thinly.  You will end up with, at best, average performance in each discipline and fail to develop a noticeable differentiated market position.  You will enter a value discipline no man’s land.

There are a vast range of options when it comes to developing a specific market position for  product or a brand e.g. Best quality, best performance, most reliable, most durable, safest, fastest, best value for money, least expensive, most prestigious, best designed or styled, easiest to use, most convenient, etc.

Some firms compete on more than one product position.  For example, Volvo lead their marketing on being the safest car on the market; but in some markets they also position themselves as the most durable car brand.  Fairy market their washing up liquid as the best for cleaning crockery but they also state they are the best value for money as you need to use less and a bottle will last longer than other brands.

Philip Kotler advocates that when designing a specific market position for a product of brand you should consider:

  • Attribute positioning – e.g. first established firm in the market or the tallest skyscraper in the city.  However Kotler warns that such positioning strategies are weak as they often do not involve easily explained benefits to consumers.
  • Benefit Positioning – e.g. Cillit Bang is marketed as being a strong cleaning fluid that cuts through grime.  Most marketing communications are based on benefits positioning.
  • Use/Application Positioning – For example Apple Computers are advertised as the best machines for graphic designers.  Sun Microsystems advertised their computers as the best for engineers.
  • Competitor Positioning – Position your products in the context of your competitor’s products.  Suggest superiority or difference.  Avis described itself as the car hire company which ‘tries hardest’, implying they had better customer service than Hertz.
  • Category Positioning – Kodak means photographic film, Xerox means photocopiers, Hoover means vacuum cleaners, Jacuzzi means jet baths.
  • Quality/Price Positioning – Chanel No. 5 positions itself as high quality/high price. Fairy liquid is best value for the money and better quality cleaning.

Kotler also advises that you avoid:

  1.  Under-positioning- Failing to present a strong central benefit or reason to buy the brand.
  2. Over-positioning – Adopting such a narrow position that some potential customers will overlook the brand.
  3. Confused Positioning – Offering two or more benefits that are contradictory.
  4. Irrelevant Positioning – Offer a benefit few consumers will care about.
  5. Doubtful Positioning – Claiming things consumers doubt you can deliver.

Positioning your product or brand is a critical stage in the development of your marketing strategy.  Your position should reflect your organisational goals and values but it should also differentiate your business from your competitors and attract your target customers.  Doubtful positioning will often mean that your product or brand will fail to meet its potential.

Multichannel Marketing and Integrated Marketing Communications

In the introductory chapter of Principles and Practices of Marketing, the marketing text used by 99% of UK marketing undergraduates, David Jobber compares organisational efficiency against strategic effectiveness.  He describes four states:

  1.  Organisations with efficient procedures and effective strategies will likely thrive.
  2. Organisations with inefficient procedures and ineffective strategies will die quickly.
  3. Organisations with inefficient procedures and effective strategies will survive.
  4. Organisations with efficient procedures and ineffective strategies will die slowly.

Many small businesses will fit in one of the latter three categories.  For example, only around 20% of small business start-ups will be operational after five years.  Eighty percent of catering businesses; restaurants, takeaways, etc; go out of business within 12 months.

In the last blog entry we discussed digital marketing and the long-tail statistical distribution.  The search engine optimisation strategies of many small firms will fit into state four above.  The long tail distribution makes it highly unlikely that they will achieve the prominence required to achieve a sufficiently high Page ranking.  Their procedures for search engine optimisation may be efficient but as a promotional strategy SEO will be ineffective.

Small firms pursuing SEO as their primary communications strategy may be inefficient in the use of communications budgets and that money may be more effectively spent elsewhere.

I see lots of small businesses advertising for what I would describe as a marketing all-rounder.  Someone to develop marketing strategies whilst at the same time writing copy, building websites and doing graphic design.  I am surprised that they think such people exist as web design, graphic design and copywriting are distinct skill sets.  I also see lots of small firms who appear to be putting their eggs in one basket, social media.  In many cases these are small local businesses who may be better served with more traditional marketing communications tools.

When I have expressed these views, I am treated as a Luddite with something against digital marketing.  This is a false accusation.  Digital marketing should be part of a wider communications strategy.  What part it plays in your communications strategy will depend on the needs, wants and expectations of your target customer base.  For example, a young fashion brand, such as Ugg boots, will have to be all over digital channels including social media.  I saw an advertisement the other day for an industrial lubricants company wanting someone to manage their twitter account.  I suspect this company would be better placed using their social media budget on improving their direct marketing and sales force.

Digital marketing compliments traditional marketing channels, it does not replace them.  Even digital giants, such as Amazon and Ebay use traditional television and print advertising.  They do not limit themselves to digital channels alone.

Digital should not be treated as a cheap option.  Done properly, digital marketing will cost the same as traditional marketing for a similar return on investment. Digital is not cheap and it is not easy.  it is every bit as costly and complicated as other marketing channels.

Social media marketing often relies on the creation of viral content.  As there are no guarantees as to what type of content will ‘go viral’, this means it can be a very risky strategy.

Even experts in digital marketing communications such as Dave Chaffey advocate the use of a wider multichannel communications strategy.  You must develop an appropriate mix of traditional and digital communications channels; a multichannel marketing strategy.

Stone and Shan (2002) described the goal of marketing communications as, “to manage each channel profitably whilst optimising the attributes of each channel so that value is offered to each type of customer”.

Target customers should have access to products and services in the best way to match their lifestyle and behavioural needs.

When discussing the role of promotion in the marketing mix, many marketers use the acronym DRIP.  This relates to:

  • Differentiate – make your offer distinct and different to that of your competitors
  • Remind – existing and lapsed consumers of your offer
  • Inform – Consumers of the attributes of your offer
  • Persuade – New customers to purchase your offer or to switch from your competitors. Persuade existing customers to buy more or to move up to a more expensive option.

In his book Marketing Communications, Chris Fill goes further and describes the purpose of marketing communications as:

  1.  To create a need
  2. To create, build and maintain you brand image, brand awareness and corporate reputation
  3. To educate
  4. To inform
  5. To provide a response
  6. To reinforce competitive advantage
  7. To influence decision makers
  8. to build relationships
  9. To increase profits (turnover) through up-selling and cross-selling.

Traditional retailers have struggled with the introduction of digital giants such as Amazon and in some respects have been hamstrung with large, expensive property portfolios and limited product offerings.  As a reaction many are trying to develop multichannel marketing strategies.  They are adapting their offers to create greater value.  This could be through the creation of destination stores which are as much about offering entertainment as they are about selling goods.  Customers go for the experience as much as the product or service on offer.

Mercedes have taken this concept one step further.  There is a Mercedes owned café on the Champs-Elysée in Paris.  It doesn’t sell cars.  It offers meals and drinks like any other café.  The purpose of the café is to differentiate the Mercedes brand and to put the brand into people’s’ consciousness away from its traditional frame of reference.

Many traditional retailers now offer in store click and collect facilities.  This allows goods to be ordered over the internet and when consumers come to collect their items, there are opportunities for cross-selling other products.  Click and collect is as much about store footfall as it is about providing a product delivery option.

The idea that you can reach consumers through a single communications channel has long since been rejected.  You have to use a number of channels, a multichannel approach.

Markets and audiences are fragmenting.  Take television.  In the 1980s, and audience of under ten million was seen as poor for a prime time programme.  Doctor Who was cancelled in 1989 with an average audience of over seven million.  Today, with the multiplicity of channels on offer, an audience in the UK of 5 million for a particular show is seen as good.

Although this fragmentation of channels is seen as harming the advertising revenues of channel providers, it means that there are increased opportunities for a brand to touch the consciousness of consumers.  This has meant the restructuring of operations to facilitate the use of multiple channels and to target the preferred ‘touch points’ of your chosen market segments.

To make best use of multiple communication channels, you need to categorise your customer base in terms of account potential and the strength of the relationship you have with them:

  1. A customer with which you have a strong relationship and which offers high account potential should be a strategic investment using communications techniques such as social media, a personal account manager and access to an extranet.
  2. Where there is strong relationship but low account potential, you need to adjust and maintain the relationship accordingly.  This could be through the use of email, telesales or the use of sales representatives.
  3. Where there is a weak relationship but strong potential, you need to select accounts and build on the potential.  This could be through telephone contact or the use of direct mail.
  4. Where there is a weak relationship and low potential, communications should be minimised e.g. the use of email alone.

There are many barriers to effective communication:

  1. Variation of style or tone – for example, you advertising is friendly and informal but your written communications are officious or even threatening.
  2. There is a disconnection between word and deed – You do not do as promised.
  3. Distance – the further apart we are, the less we communicate.
  4. Stereotyping – making assumptions (usually negative).  This can include improperly segmenting a market e.g. categorising all millennials as a single undifferentiated mass.  The over-50s have often been treated in such a way.
  5. Information overload – Offering too much information or too many types of communication.
  6. Target consumers not listening – Being distracted by other topics so message is not heard.  This can also be caused by not listening to your customers.
  7. External ‘Noise’ – today we are bombarded by messages so you must be explicit and clear to catch consumers attention.
  8. Consumers internal filters – We all have prejudices and we filter information to suit those prejudices.

The existence of such barriers have led to many organisations following an integrated communications strategy.  With such a policy all communications an organisation makes with its customers are treated as marketing communications.  There is a consistent style and tone across all forms of communication and at all stages of the customer life cycle.

A failure to integrate communications can make your offer seem clunky and unsophisticated.  It can turn lapsed consumers into actively hostile consumers.

Integrated marketing communications strategies require a strategic focus across all parts of an organisation not just the marketing department.  You need to understand how all parts of your organisation communicate and the impact those communications have.  You must measure the effectiveness of your communications e.g. ROI for advertising or customer satisfaction for customer services.

Integrated marketing communications broadly include:

  1.  Culture and Behaviour – Brand personality, organisational values, how staff behave to each other, interpersonal skills, communication performance, integrity.
  2. Promotional tools and techniques – PR, advertising, other written communications.
  3. Personal selling – the activities of your sales force
  4. The product or service offered
  5. Customer service. (this includes the three additional Ps of the extended marketing mix, Process, people and physical evidence)

The risk of inconsistent integrated marketing communications is inconsistent promise delivery and an inconsistent customer experience.  This can lead to the loss of customers and poor word of mouth.

So, in a world where communications channels are fragmenting and where there is never-ending communications noise, You need to follow a multichannel communications strategy and integrate that strategy across your business activities.

 

Tomorrow’s World – Where are markets heading?

I am writing this blog the day after British, American and French forces carried out raids over Syria to knock out chemical weapons facilities.  This is just the latest example of how our world has changed since the cold war.  I was listening to an expert on the middle east trying to explain the Syria situation, and even he was struggling to put coherent labels on the situation.  He basically said that Syria was part civil war, part proxy war, part tribal conflict; in short a complete and confusing mess.

And that, at least in the medium term is the state of our world, one of confusion and complexity.

JP Kapferer in his book The New Strategic Brand Management describes our world as one of disequilibrium.  The old certainties, the balance in the world, has suffered entropy and it is going to be a long time before a new set of equilibria are established.

After World War Two a number of equilibria developed which gave certainty to brand planners and marketers.  There was a political balance between the capitalist entrepreneurship of western nations and the planned economies of communist dictatorships.  However, even China is now trying to balance a Communist one party state with capitalist markets.  For a while, following the collapse of the Soviet bloc, the United States was seen as the world’s sole superpower.  It is arguable, particularly with the situations in Ukraine and Syria, that Russia is now trying to re-establish its former status.

For many years, America and its allies had a clear purpose, to defend democracy against dictatorship.  The collapse of the Warsaw Pact and the fracturing of the USSR means that purpose is less certain.  Trump’s ‘America First’ policy is seen as increasingly isolationist and as threatening the economic consensus of organisations such as the World Trade Organisation.  Trump’s election campaign also put pressure on the NATO treaty as he accused other members of not pulling their weight.

In recent years we have seen the rise of the BRIC economies and political commentators have talked of a new world order emerging.

There is also a financial disequilibrium.  China is now the USA’s banker.  The Chinese hold significant numbers of US government bonds.  Households are spending more than ever before but wages are stagnating.  Despite the 2008 credit crunch, consumer debt is rising.

There is an ecological disequilibrium.  For most of human existence, there have been enough natural resources for demand to meet supply and the main concern was variation of price.  Now because of the growing human population; soon there will be 9 billion of us; there will no longer be sufficient resources to go round.  China has been stockpiling resources such as diesel and mineral ores.  In Africa, and other parts of the developing world, China has embarked on a campaign of resources for infrastructure.  China is building Africa’s roads, railways, dams and schools.  In return it is paid in iron ore, copper and timber.

There is a demographic disequilibrium.  There are aging populations in developed western nations where birth rates have fallen.  The world population is increasing but the majority of this increase can be put down to two factors, a high birth rate in the developing world and people living longer as health services improve.

Our world has never been so connected, with the rise of the digital world, but continents are developing divergent socio-economic models.

Sociologists state that human mentalities do not change, they are added to.  Deep in our brains, the ape which climbed out of the trees still exists.  Sports psychologists talk of our ‘inner monkey’, the primitive part of our brain that takes over in times of stress and excitement.

Sociologists talk of four social mentalities:

  • Tradition:  This mentality has been dominant in humans for thousands of years.  It is our tribal instinct, our sense of belonging to a particular community.  It is still relevant in some parts of the developing world.  It means we are all what our parents were.  We inherit tastes, religion and cultural norms.
  • Material Success:  This mentality promotes individual success and breaking free from the tribe.  Existing as a person and not as part of the whole.  China is a primary example of this mentality where the uniformity of the cultural revolution has been replaced by a desire for a western lifestyle.  Many Chinese now see themselves by what they buy and consume.  Shopping is now the primary leisure activity in Shanghai as much as it is in Seoul.  A process described as the ‘malling of Asia’.  It is an attitude of ‘I buy therefore I am’.  An attitude of success through the material goods you own.
  • Individualism:  This is the mentality where the individual is the centre of their own life.  At its extreme this mentality is evidenced by an egotistical, self-centred vision of human relationships.  We can all remember Margaret Thatcher’s comment that, “There is no such thing as society”.  David Cameron’s attempt to build a ‘big society’ went down like a damp squib.  Individualism at its worst can be shown through the election of Donald Trump and to some extent, Brexit.
  • Re-alliance: Sometimes referred to as ‘Me-Us’.  This is an attitude of a deeper me through connection to a greater ‘us’.  It is mirrored by the rise of social media and networking.  It is a mentality of there being no individual benefit if it does not supply collective benefits too.  It is a re-alignment of the tradition mentality.

So what does all this sociopolitical uncertainty and different parts of the world exhibiting different sociological states mean for brands and marketers?

A brand is a name which symbolises long-term engagement, a crusade or a commitment to a unique set of values which is embedded in a product, service or behaviour.  The goal of a brand is to make your chosen name become a reference point, a landmark, of a category or territory it has itself created.  For example, people ask for a Coke, not a cola’ (who has not experienced the ‘will Pepsi be okay?’ response at some fast food restaurants’).  The aim of a brand is for people to make it their number one choice criterion.

One way to examine where branding is heading is to look at the attitudes of young consumers, many of whom exhibit a ‘Me-Us’ mentality.  When asked about the attributes of their favourite brands they point to the following specific characteristics:

  1. Being known by their peers.
  2. Being active in communication.
  3. Symbolising a unique and strong value proposition
  4. Holding a deep, authentic, long-term value
  5. Being flawlessly incarnated into products and services that change the lives of consumers.
  6. Being a brand you can meet, interact with and which provides experiences through people, places and in different modes (both physical bricks and mortar contact AND digitally).  Note that digital contact on its own is not sufficient.
  7. Being extremely ethical.

Many fans of the Apple brand see it as meeting these criteria.  They view the Apple brand as:

  • 35 years of unchanged, meaningful high goals;
  • Consistency in the delivery of brand promise;
  •  Producing disruptive innovations and creating new product categories and changing lives:
  • Optimism and peacefulness;
  • Holding strong values and not compromising on them; even when under pressure to do so.  For example Apple bans apps which have sexual content; a position which caused significant problems for the Playboy corporation.
  • Being charismatic. Often through the executives promoting the brand (e.g. before his death, Steve Jobs).  This is seen as making the brand’s high technology pleasurable and which epitomises the company spirit.  This results in the brand seemingly having a magic touch.  Steve Jobs was seen as performing magic, so Apple products are seen as magic.

Apple is very much a post-modern brand.  It creates passion through the championing of values which appears to change the lives of people for the better.  Contrast this with the current problems facing Google and Facebook.  Google uses the tagline ‘Don’t be evil’ yet there was shock at some of the less ethical investment decisions of the brand’s parent company.  Facebook may be in serious trouble following the theft of personal data and its failure to take seriously data protection issues.  Facebook’s failings may cause a significant backlash from its core ‘millennial’ demographic which has the ‘Me-Us’ mentality.

As consumers move to a ‘me-us’ mentality, brands need to offer both individual and collective benefits.  It is not longer sufficient just to offer individual pleasure.  Hybrid cars are an example.  These vehicles may actually, through their lifespan, be more polluting than a diesel car fitted with a particle filter.  For example, the disposal and recycling of heavy metals in batteries may be an environmental concern.  However, these vehicles offer a ‘Me-Us’ position.  I am individually expressive in my choices but I am also contributing to the greater good by being green.

We are entering a world where big is good but big also needs to be responsible.  Brands need to be leading on ethical values, not a follower.

Future brands need to be optimistic.  The complexity of the current world and the prevalent disequilibria means that consumers face two choices.

  1.  To escape into dreams and to forget realities; or,
  2. To work harder in confronting difficulties and negating them.

Disney is a brand exhibiting the first option.  It is a brand which promotes happiness and which encourages social ties through connectivity, interaction and by being experiential

Nike is a brand following the second option.  It’s ‘Just Do It’ slogan is a hymn to social willpower and the determination of the spirit to overcome adversity (in the sporting world).

We live in a world of rapid change and uncertainty.  We live in a world where social mentalities are fragmenting on continental lines.  We live in a world of increased connectivity but divergent social norms.

To exist in such a world marketers and brand managers need to offer flexibility beyond their traditional values.

Zipf, a Giraffe and the Demise of a Category Killer

The Oxford Dictionary of Marketing describes a Category Killer as:

“A retailer offering a huge range of products, centralised in a single outlet, which far exceeds that of smaller outlets who cannot such a range and such a depth, or with such price discounts, or with such efficiency and which has the ability to attract a large number of buyers.  Examples of category killers include large discount toy chains, sporting goods chains, home improvement stores and office supply stores”

You will note that the first example given is that of “large discount toy chains”.  Obviously, the dictionary is trying to avoid a direct reference to a particular company but when that term is used a single company comes to mind, Toys R Us.  Or at least it did, as in recent weeks, Toys R Us has been liquidated and all its stores closed.  The firm’s liquidation was closely followed by the death of the firm’s founder, George Lazarus.

Toys R Us was the perfect example of a category killer, it led the niche toy market for almost sixty years.  It had 8000 stores, predominantly in the North America, but there were also 800 stores in its international division.  The company was the market leading toy retailer identified by its cartoon mascot, Geoffrey the Giraffe.

The reasons behind the demise of Toys R Us are many.  Prominent is the retail environment in the United Stated since 2010.  This is a period industry leaders are calling ‘the retail apocalypse’, the mass closure of traditional bricks and mortar stores.

America’s middle class has suffered an income squeeze in that period, which may partly explain the election of Donald Trump as president.  They have seen big increases in the cost of healthcare, housing and education.  As a result, they have spent less on items such as clothing and furniture.  There is a big hangover from the credit crunch recession which started in 2008 and banks are less willing to offer consumers credit.

The incomes of moderately affluent consumers isn’t the only reason for the demise of America’s traditional retail model.  It is recognised that there are too many shopping malls in the USA.  There are currently around 1200 large shopping malls in the USA.  Half are expected to close by 2023.  That amounts to nearly 12,000 individual stores.

Many long existing retail chains in the US are heavily leveraged with debt.  This is the result of the bankruptcy of leveraged buyouts.  They are facing rising rents and property taxes which reduce margins and profit levels.

Traditional retailers have not dealt well with the changing shopping habits of consumers.  They have become reliant on consumers binge spending at holiday periods such as Christmas.  Sales outside these periods have collapsed.  They have also dealt badly with the changing attitude of younger consumers.  That demographic has become less interested in the purchase of physical goods.  Instead they have a desire to purchase experiences.  Then there is the rise of internet shopping.

It is these last two factors that have significantly affected Toys r Us.

Toys R Us developed a reputation for cluttered stores and poor customer service.  Rather that being a place children and their parents could enjoy the experience of buying toys, a visit to Toys R Us became a chore; a visit to a poorly laid out warehouse within which you wanted to spend as little time as possible.  It is recognised that the longer you can keep a consumer in your store, the more they will purchase.  You can up-sell and cross-sell.  If the consumer is only popping in, grabbing a pre-selected item and then leaving, the potential for those additional sales is missed.

Toys R Us also tried two brand extensions; Babies R Us, which sold push chairs, cots and other infant products; and Kids R Us, which sold children’s clothes.  Kids R Us failed relatively quickly, and as a result the parent brand took a financial hit.  Babies R Us prevailed but in most cases it was squeezed into one corner of an already cluttered store and left less room for the brand’s main focus, the sale of toys.  These expansions clearly harmed Toys R Us’ niche dominance.

The company also failed to deal adequately with the rise of electronic and computer games.  It’s focus remained with traditional physical toys.  Toys R Us also sold bicycles but this part of the business was affected by the rise of specialist cycle retailers.  As cycling as a hobby has become more popular, those wanting to buy a bicycle for their child look to buy a junior version of the bike they ride, not a specific children’s bike.

A ten-year contract between Toys R Us and Amazon was signed in 2002.  Toys R Us were to be the sole Toy supplier through the Amazon portal.  This contract followed an embarrassing and damaging Christmas for Toys R Us in 1999 when it failed to deliver thousands of toys in time for Christmas day.

Amazon reneged on their contract with Toys R us and allowed other toy retailers access to their site.  The reason given was that Toys R Us could not provide a sufficiently wide range of toys to satisfy Amazon’s customer base.  Toys R Us successfully sued and received damages of $53 million, half the sum initially asked for, but the damage was done.

In response to the collapse of the Amazon deal, Toys R Us began a strategy of buying out loss-making competitors such as FAO Swarz and two smaller internet toy retailers including e-Toy.  The purchase of these firms added to mounting debts.

Toys R Us continued to open traditional bricks and mortar stores.  In 2014 it opened 21 new large outlets.  It also started a chain of smaller outlets called Toys R Us Express.  This at a time when internet sales were rising and sales from traditional retail outlets were falling.  It can be argued that Toys R Us should have been reducing its high street presence and transferring more resources into internet sales.  It should have been consolidating, not expanding.

In 2014, it was clear that Toys R Us was in trouble and emergency remedial action was needed.  The response from consumers was that they perceived the quality of Toys R Us’s stores and service as poor.  Managers invested in measures to improve the shopping experience, to have better inventory management, to reduce clutter in stores and to develop a clearer pricing strategy with fewer complicated offers.  It was clear that this action was too little, too late.

In the early part of the twentieth century, the Harvard professor of logistics, George Kinsley Zipf, decided to examine the frequency of words in well-known English texts.  He suddenly found that there was a startling correlation between the popularity of words in a text and the frequency of their usage.  It seemed that the Kth popular word in a text was 1/K popularity of the most frequently used word.

This correlation became known as Zipf’s Law and it was soon found to apply to texts in languages other than English.

Other phenomena also appeared to comply with Zipf’s law.  For example, the population sizes of American cities.  New York has a population of roughly eight million; Los Angeles, the second largest city 4 million; Chicago the third largest, 2.7 million; and so on.

The size of objects in the solar system also correlated to Zipf’s Law.  It was clear that the long-tail concept went beyond words in books.  It was also noticed that Zipf’s law correlated to the continuous Pareto distribution.  As we know, the Pareto Principle is that 80% of the outcome of an activity comes from 20% of the effort.

Someone then had the bright idea of examining the comparative popularity of companies in a particular market segment.  It was found that the long-tail concept applied.  There was, particularly towards the centre of the distribution, a direct correlation with Zipf’s law.  There were some differences towards the extremes of the distribution which could be explained by competition and anti-monopoly laws.  In virtually every market there were one or two popular firms and lots of smaller, less popular companies.

Internet retailers, such as Amazon leverage the long-tail concept in two ways.  First they use their ability to stock a huge number of different individual items at lower overhead costs than traditional bricks and mortar retailers.  For example,  a small independent book store may stock up to 25,000 books; larger chain bookstores such as Waterstone’s or Barnes and Noble may stock up to 50,000 books in one of their outlets;  Amazon stocks 800,000 books and e-books (not including those supplied by affiliates through Amazon Marketplace).

Amazon monetize this ability to supply a wide range through micro-differentiation (personalisation of supply) and by offering varying margins.  Amazon is willing to take a lower profit element on a highly popular book and a higher level of profit on less popular items.  It is estimated that 40% of Amazon’s sales come from less popular items.  This means that items further along the long-tail distribution of Amazon’s stock provide a proportionally higher contribution to Amazon’s sales.

The second way in which Amazon benefits from the long-tail concept is its prominence on internet search engines.  It invests heavily in search engine optimisation, paid list prominence and PPC advertising.  Amazon’s size of operations means that it will nearly always have a high Page Ranking.

Zipf’s law is often used to describe the path of least resistance.  The concept that humans will always favour a route which means they need to exert a low-level of effort.  In short, if you are near the top of a list, you are more likely to be chosen than someone further down that list.  If you aren’t one of the first links on a search engine the probability that consumers will be taken to your site is minimal.

It is clear that with firms such as Amazon spending millions on SEO, smaller local firms will not have sufficient resources to achieve list prominence by digital marketing alone.  It is crucial that Search Engine Optimisation needs to be one part of a far wider multi-channel promotional strategy.  Search Engine Optimisation alone is unlikely to be a successful strategy.

Changing customer preferences and the ability of large internet retailers are having a major effect on retailing.  We may be moving to an end game where the scale and offer of large internet retailers is going to hit the activities of traditional bricks and mortar retailers.  In the UK we may be seeing the start of our own retail apocalypse.  Perhaps this can been seen in the increasing numbers of retail store closures and the financial difficulties of firms such as House of Fraser.

However, it is clear that the firms most affected by the long-tail effect are going to be medium-sized and large traditional bricks and mortar retailers.  Small retailers still have an opportunity to thrive through the targeting of specialist niche markets and by providing unique customer experiences not provided by larger retailers.