Companies that Invest in Growth Break Away from the Herd

When companies fall upon tough times it is often the case that executives turn to defensive tactics, and focus their efforts exclusively on cutting costs. Cost reduction is not a bad idea, and can increase margins and lift revenue, but it should be one of several priorities for companies operating in an economic downturn.

McKinsey and Company research of companies operating with decent financial strength in reasonably attractive markets that invest for future growth, rather than cutting Research and Development and other investment spending often experience the best long-term results.

Executives at companies with relatively healthy balance sheets and the courage to go beyond defensive tactics in The Great Recession should consider the following three marketing tactics to drive near-term revenue growth and increase share:

1. Build brand equity by communicating your core brand values. While it is tempting to eliminate advertising spending when times are tough this is not wise. Research has found that consumers have less confidence in companies who don’t promote their products and services in a downturn. "Consumers continue to turn to strong, trusted brands, particularly during periods of uncertainty," said Judy Ricker, division president of brand and communications consulting at Harris Interactive. "Strategic investment in and careful monitoring of your brand is critical in both good and bad times, and will help you navigate the volatile environment." A customer’s willingness to pay for your product or service is a function of their reference price and the differential value they perceive. Your pricing strategy during the downturn will impact your brand health and positioning in the inevitable upturn. Analyze your portfolio of products and services and price elasticity of demand. Ensure that marketing messages reinforce your reference prices and communicate the differential value offered by your brand. Don’t be afraid to raise the prices of goods and services that have a high differential value relative to the competition.

2. Leverage analytic insights from company data. Central marketing organizations have access to customer-relationship-management (CRM) and transaction databases and should find opportunities to more effectively use this data to better predict demand. According to McKinsey a specialty retailer that developed an analytic tool to determine which items to promote online and in circulars experienced comparable store sales increases between two and four percent in test markets employing the tool to increase promotion effectiveness.

3. Improve offline conversion by investing in online advertising. Companies that follow their natural instincts may slash their ad budgets in periods of economic weakness. This makes it an even better time for you to take a long-term view, be aggressive, and increase your share of voice. Procter and Gamble COO, Robert McDonald, calls their approach to thriving in the recession, wejii, a Chinese term that combines crisis and opportunity. The good news is you may be able to accomplish this with fewer ad dollars and some changes to your marketing mix. You can increase offline conversion by investing in online advertising. In 2007 Google and ComScore combined forces to measure the impact of online advertising offline. Their study tracked a behaviorally driven search and display buy and produced a $530,000 sales lift in the new deodorant product, 96% of it from new buyers who weren't swayed by offline, demographic-targeted buys. Kevin Kells, CPG Industry Director at Google believes that "it's not that demographics don't matter, but the reality for most mass brands is that there's not a type of person. There are types of groups, types of communities within them that drive their volume, and they aren't homogeneous."

Companies with strong balance sheets in growth markets can gain strategic advantages through increased investment. Here are three suggestions:

1. Don’t abandon research and development. McKinsey research found that high-performing companies are twice as likely to increase research and development spending in a downturn. Procter and Gamble is an example and is increasing its fiscal 2009 research budget by 4.5% to $2.3 billion according to Wall Street research firm Sanford C. Bernstein. I recommend using social media channels to facilitate customer collaboration and increase research and development spend efficiency. Dell has done this with its site http://www.ideastorm.com/ Here is how Dell explains it, “The name is a take-off on the word “brainstorm” and it is our way of building an online community that brings all of us closer to the creative side of technology by allowing you to share ideas and collaborate with one another. The goal is for you, the customer, to tell Dell what new products or services you’d like to see Dell develop to inform their investment strategies.” Dominique Hind provides a thoughtful overview of the evolution of Dell’s Ideastorm and Starbucks' idea model in this slideshow http://bit.ly/5c3QB.

2. Consider capex expansion in future growth areas. Procter and Gamble executives have a positive long-term outlook on consumer spending and are launching the biggest capital spending plan in their 171-year history: 19 new factories worldwide over the next five years. Wal-Mart is also investing in new regions including Chicago where they are evaluating the potential of a supercenter on the South Side.

3. Grow through acquisition. A study of deals conducted from 1985-2000 by the Boston Consulting Group found that the average merger in a downturn created an 8.5% rise in shareholder value after two years, compared to the average deal in good times that resulted in a 6.2% drop in the acquirer’s share. McKinsey recommends identifying low cost acquisition opportunities in a downturn. In the current recession consumers may not be going on a shopping spree but smart retailers like Toys ‘R’ Us are snapping up their rivals for undisclosed bargain prices. In the past four months it has acquired both eToys and FAO Schwarz. No company today is immune from the pressure to maintain profitability, but those who avoid the temptation to go on the defensive and retrench will be better positioned to participate in the inevitable upturn.

Source: Kevin Kells, CPG Industry Director, Google, SearchRev.com, April 2008; McKinsey and Company, November 2008; Gaebler.com, June 2009; Business Week, June 2009.

Dell Outlet Demonstrates Social Media is a Legitimate Marketing Channel

Mashable today posted an update on the financial performance of the @DellOutlet program which I blogged about previously. You can read it here: http://mashable.com/2009/06/11/delloutlet-two-million/.

This is a major consumer brand driving real sales in a relatively short time via a new experimental platform. It took them two years to grow their follower base to over 620,000, but the payoff has been tremendous. They reported that they have surpassed $2M in sales through their Twitter channel.

This brings me to a topic that I have begun to think about in the past few weeks. Is social media going to become a new marketing discipline? Should your company be hiring a social media strategist who is an expert in Twitter and Facebook to manage social digital direct response marketing programs? In the short-run considering the weak economic climate and that there may not be a subject matter expert in your organization I recommend you lean on your existing online marketing teams who may manage email, site marketing, affiliate programs, SEM and SEO. If they are resource constrained you could also hire a Summer Intern, or contract some of the work to a social media consultant.

Regardless of who manages the work they should be setting up processes and procedures that are repeatable and scalable and that integrate with those already in place to manage your other direct channels. This is important because in the long-run Twitter, Facebook, and other social media platforms will simply become another direct marketing channel. The social media channel will differ from traditional email, direct mail, and catalog channels in three ways:

1. They are networks for distributing customer communications in real-time at scale to a highly engaged audience who has raised their hand and asked to participate in a relationship with your brand. The messages this audience receives are then spread throughout the networks of each of these customers which increases the reach of your original message.
2. They enable brands to listen and understand what customers think about their product or service. When was the last time you received a promotional email from your favorite specialty retailer that invited you to reply with your thoughts, post it on your blog, tweet it to your Twitter followers or to Digg it? In my experience, never. In fact these 1-way email communications state very clearly in their messaging, "Do not reply."
3. They are a relationship management platform that humanizes brands and allows marketers to engage in real-time 2-way conversations with their valuable customers.

So my advice is don't sit on the sidelines and wait for your corporate strategy, CRM or IT department to determine the impact of social media on your enterprise and how marketing should be leveraging this channel to drive sales. Instead innovate, get in the game, follow the lead of companies like Dell, test, learn and adapt. If nothing else, you'll have fun and who says work can't be enjoyable?

What do Dell Outlet and Kogi's BBQ have in common?

Twitter allows individuals to freely and immediately communicate through the exchange of “tweets,” frequent answers to one simple question: What are you doing?

A recent poll of 3600 LinkedIn users asked: "What is the most important new platform for brands to master." Respondents could choose one of the following online member communities: Twitter, Facebook, the iPhone, Digg and LinkedIn. The number one platform was Twitter, chosen by 30% of respondents. Find a thorough analysis of this poll on ReadWriteWeb: http://bit.ly/9Vgnj.

Twitter may not have a business model, but businesses are quickly developing winning models to leverage the company's open platform to build their brands and nurture customer relationships. Some, including DellOutlet and Kogi's BBQ are using it to successfully drive sales.

These are both great retail cases. I’ll focus on Dell Outlet since Kogi’s case involves hyperlocal targeting, a topic worthy of its own post.

Retail inventory management is probably one of the most complex of all inventory problems to solve, and successful companies like Dell find innovative ways to turn product at the highest margin possible. Returns can be especially challenging and so when Dell Outlet receives an excess number of returns of a particular model it will consider a direct e-mail campaign to promote that particular system, generate incremental demand, and eliminate the excess inventory “bubble.” However, when the bubble is smaller, the major lever to stimulate sales has been to lower the price of the overstocked item.

In March 2007 Dell Outlet recognized that the Twitter platform could be an efficient channel to promote featured products. Its Twitter program now has nearly 600,000 followers. Stefanie Nelson who heads up the Twitter efforts for Del Outlet has two objectives for the program:

1. Increase demand for products for which Dell Outlet has excess inventory by offering Twitter exclusive deals.
2. Become a resource for Dell customers looking for tips and tricks and assistance with products.

The strategy revolves around posting Twitter-only offers to its followers. When a new tweet is posted, it generally provides followers a coupon code to obtain a discount on that particular model in the Dell Outlet. Typically, this coupon is exclusive to Twitter, so they are able to measure the redemptions and know that it was due to being posted on Twitter. Twitter followers may share coupons easily by "retweeting" the Dell Outlet messages to their Twitter friends in a viral fashion.

For Dell, Twitter represented a new way to reach customers and by tracking coupon redemption, in the first year utilizing Twitter as a promotional tool, Dell Outlet generated over $500,000 in revenue in sales of refurbished systems. Dell has proven time and again their ability to innovate in sales and channel management and I predict other brands will follow.

A May 2009 “Top Ten Twitter Trends” study of Internet, mobile and social networking users (n=1,850, twitter users, n=665) conducted by Thinktank Research found that 40% of Twitter users regularly search for products or services online via Twitter. About 20% follow at least one product or service, and 12% note they’ve chosen a service or bought a product online because of information they got on Twitter. To request a copy of the report you can email Robin Boyar info@thinktank8.com.

It will be interesting to watch the evolution of Twitter as it continues to gain momentum as the leading conversational marketing platform for brands.