The Revenge of the Margin-Sucking Maggots

If you weren’t at the November 15th Breakfast Speaker Series (BSS), you missed a great event! So great, in fact, that we have two very different recaps of the event (below and here) for you to check out. Be sure to attend the next BSS event – the always popular ad agency panel – in late January 2013 – watch the BCAMA Events page for details.

By Bruce Nickson

For those of you who not are marketing intelligently during this recession or are resorting to the tried (but not true) discounting strategy to ramp up sales, then 40% of you are looking at bankruptcy within three years.

Do I have your attention?

 

 

 

 

 

 

 

 

 

The first Breakfast Speakers Series (BSS) event of the year, on November 15th, certainly got my attention. At first I thought, “Another presentation where a pundit takes some very complex ideas and data and boils them down. You leave with a head full of platitudes, but also thinking, “What just happened?”.

OK, I’m a bit (a lot) cynical, but I’m sure most of you have had the above experience. Well, Thursday’s BSS was nothing like my jaded expectations. And I’m not the only one. I was sitting with one of those deep digital marketing guys who are paid to think and even he was impressed. And he doesn’t impress easily.

And Ken Wong, who is the distinguished professor of marketing at Queen’s University, was good, very good. During an entertaining and occasionally Don Rickles-like performance, he managed to address the universal question “What do I do with my marketing and sales efforts during a recession?”.

Ken’s observation was that “everyone’s going a little bit crazy” in trying to answer that question. And it’s a tough one. Marketing is an expense. It cannot be amortized like office equipment. Once a marketing dollar is spent, the expectation is yield. Immediately. Especially during down times. Thirty years ago, 70% to 90% of marketing dollars went to brand building. Today, 79% of the marketing spend is on sales promotion. “Coke is no longer ‘it’; Coke is no longer ‘the real thing’.”

This is Ken’s suggested approach: marketers already know what to do. Marketing’s fundamental skills are to detect, destroy or avoid the “margin-sucking maggots”. However, the great marketing myth, “Marketing is about volume”, just adds to the confusion. Actually, it’s not about volume. It’s about profitability.

Ken went on to say that what keeps CEOs and CFOs awake at night is revenue: top-line revenue, sales revenue. So what happens when, due to economic uncertainty, revenue volume decreases for everyone? The response is to replace the volume. And the easiest way to do this is to cut prices – with the idea that we can go back to normal when the economy recovers. According to the Harvard School of Business, 20% to 40% of businesses fail by following this approach during a recession.

And here’s why. If you cut prices by 1%, this translates into an 11.1% cut in total profitability. However, the average profitability of a North American company is about 9%, and 1% of 9% equals 11.1% – so, if you cut prices by 10%, there goes all of your profit margin.

Another gem from Ken: “How much would you pay for a seat on a flight that just took off?” Nothing. However, Air Canada and most other companies treat excess capacity the same way. Sell excess capacity at a discount. So one person with a $1,000 seat is sitting beside a person with a $250 seat. What has happened is a new value has been created. The seat is no longer worth $1,000, but $250. The $1,000 passenger has asked him or herself, “What am I, stupid? Paying $1,000 for a $250 seat?”.

So what is to be done? You say to yourself, “I can cut HR costs (no more professional development); I can cut R&D (after all, I will still have product to sell), I can cut marketing and sales (the customer will keep remembering us, at least for a while). Then, after the recession, I’ll put them all back.”

Except you can’t. You’ve created a new margin reality. Customers are not paying $1,000 for your product. They’re paying $250. Just try raising prices. Try it.

In all of this, Ken points out that there is some good news as well as positive directions to vector toward.

Not all customers are created equally. Some people still have cash and the ability to spend it (though cocktail conversation now mostly surrounds what kind of deal we just got). Not all products are affected (luxury car companies are doing well) and not all price cuts are equal. They have been marketed as “best value over lower/lowest price”.

Which led Ken to value strategies – he places great emphasis on coming to terms with the concept of value as it relates to economic downturn, and suggests four approaches:

  • maintain quality and lower prices
  • reduce quality and cut prices a lot
  • raise quality and maintain prices
  • raise quality A LOT, raise prices a little

So how do we bust out of the recession, knowing that the easiest approach (discounting/lower prices) is a very blunt sword? There are four approaches, each with different results. Companies can:

  1. Prevent – cut prices and costs
  2. Promote – keep spending on marketing
  3. Be pragmatic – discover inefficiencies and then spend the savings on price cuts and promotion
  4. Be progressive – develop a new value proposition

Results may vary, however.

Three years after a recessionary period, the companies that focus on prevention experience a net sales increase of 4.4% after EBITDA, whereas the progressive companies experience a net sales increase of 12.2% after EBITDA. The companies that focused on a promotion or pragmatic approach had sales increases between the two extremes of 6.2% and 9%, respectively.

 

 

 

 

 

 

 

 

So what exactly is the “Margin-Sucking Maggot”? Well, let’s say you just spent thousands of dollars on a new voice messaging system. You know, the one that says ‘For Option A, press 3’, ‘For Option B, press 4’ and so on. Which leads inevitably to a second menu set that says ‘For billing, press 1’, ‘For changes to your account, press 2’, etc.? And then there are people like me who press and hold the “0” button until I get to speak to a human being. I’m a Margin-Sucking Maggot, because all of the customer service people that were laid off due to the efficiencies of the new voice system have to be re-hired to handle people like me (and, sometimes, you).

The lesson: If you create a dollar of value through a price cut, the cost will be a dollar. If you create a dollar of value through a quality improvement or a bonus quality offer, the cost will always be less than a dollar.

This Breakfast Speaker Series event was great. Thanks to Ken and the BCAMA for an event real value. And I’m not just talking breakfast!

Bruce Nickson (@brucenix), who is a member of the BCAMA Marketline Committee, observes the Social Media scene and once held the fancy job title of Executive Director.

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