Investing In A Bad Economy

The oldest rule in investing is “buy low, sell high.” You can apply the same rule to marketing your company.

Over the last 100 years there have been 20 recessions - ten since World War II. Simple arithmetic would indicate that we’re roughly two years away from the next one.

Why are we talking about a poor economy during this period of economic growth? For that matter, why are we discussing economics in an advertising column?

Simple. An economic recession is your chance to “buy low.”

Your opportunity is coming. There will always be another economic recession.

This is not a prediction of doom and gloom. It’s an attempt to draw your attention to an opportunity. Like the proverbial ant, you'll be preparing for winter while the grasshoppers are playing.

When the economy heads south 75% of U.S. companies respond by cutting back, hunkering down, and trying to “tough out” the tough times. Advertising is the first expense that gets eliminated.

The overall level of advertising drops. Media feels the pinch and drops rates. This is the equivalent of buying stocks at the bottom of the market. Think of it as dollar cost averaging. Buy more as the price decreases.

There are two other advantages to aggressively advertising during economic recessions.

1) Your “share of voice” becomes multiplied as the advertising noise reduces.

2) Your “share of mind” is often uncontested for months at a time. During these times your more timid competitors will fall behind and likely never catch up.

Take a look at this graphic.

It’s a summary of the McGraw-Hill Research study of the 1981-82 economic recession in the U.S. The study analyzed 600 companies covering 16 different SIC industries. Year one on this graph is 1980. Year six is 1985.

You’ll note that the aggressively competitive companies represented by the black bar had only a slight edge over their competitors in the years leading up to the recession. Their sales growth was in the middle of the pack as the recession hit. But while their competitors cut back in year one, or year two, or both, they continued to invest in getting their message out.

These firms grew nicely during the recession, but the real news happened in the two years following the end of the economic downturn.

Two years into the recovery, the competitors who did cut back had all stalled out at levels the aggressive companies had blown past during the recession. By the end of 1985 the companies that didn’t cut back had grown a whopping 256%.

During the recessionary period 1989-1991 Kraft salad dressings, Jiff peanut butter, Bud Lite, Coors Lite, Pizza Hut, and Taco bell were in the aggressive group which increased advertising expenditures. Jell-O, Crisco, Hellman’s, Green Giant, McDonalds, and Doritos cut back on advertising during this period. Predictably the first group had showed growth during the recession ranging from 15% to 70%. The second group’s sales dropped 26% to 64%

During our last economic downturn, while aggressive marketers such as Proctor and Gamble took advantage of reduced media rates to expand their advertising program, K-Mart decided to decrease advertising during September and October, 2001.

The result? K-Mart sales dropped a resounding 5% during October. By late fall the company had lost far more in sales than it had saved in marketing expense.

At least a dozen other studies ranging from 1923 through 1991 show nearly identical results. Meldrum & Fewsmith showed in a series of six studies that, for all post World War II recessions, those firms that kept advertising aggressively increased profits as well as gross sales during the recession.

It's important to remember that during a recession consumers don’t stop buying. They become more selective. They look much harder for “value” in their purchases. They are going to buy from someone. They're likely to buy from businesses that they know and like.

Make sure they know you.

The more visible you are, the more confidant your customers and prospects become. The more they are reminded of your legitimacy and staying power, the more they'll be inclined to believe you'll be there for them tomorrow.

Remember too that during any period of economic downturn your best customers become someone else’s best prospects. When you stop inviting them to do business with you, a more aggressive competitor may become much more attractive.

So, in addition to advertising heavily when the economy is soft, what else do you need to do?

1) Never take your focus off your customers. Cherish them, and make sure they know it. Make their Personal Experience Factor exceptional.

2) Media pricing is driven by market demand. Take advantage of the weak demand and the resultant drop in price to buy even more market presence without increasing your advertising budget.

3) Start learning now about relationship marketing, permission marketing, and database management. Learn the names of your customers. Learn their sizes. Learn their preferences. Make sure they know you, your values, what you stand for, and what you won’t stand for.

4) Define your core values. Continuously share them with your customers, and your prospects, through your advertising, merchandising, and public relations. This is your opportunity for true brand building.

If the recesion were to start today, what would you change about your marketing message?

How might that revised message play right now while times are relatively good?

How much of a head start would the revised message give you over your competitors? By the time the next recession hits, could you successfully associate those changes with your business in the minds of your customers?

Hummm.

What's holding you back from making those changes right now?

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The Big Three And The Single Quarter Manager

WARNING: The following article contains bragging. (I’ll let you know when it’s going to get thick).

I was first introduced to the concept of the Single Quarter Manager in 1994 over lunch with Ben Rast; Senior Vice President of Morgan Stanley’s office in Columbia, South Carolina.

According to Rast, the Single Quarter Manager’s objective is to make himself look good in the short term, without ever considering the long term effect of his actions on the future of his company.

In an effort to boost cash flow he fires the Research and Development staff, along with the Maintenance staff.

He tells Sales that anyone who can’t meet his impossible sales goals will be joining their unemployed brethren from Maintenance and R&D. As you might expect, the salespeople cut every sleazy deal with every potential customer with no regard to the profitability to the company, without even regard for next quarter's sales.

At the end of the first quarter, the Single Quarter Manager's division boasts an all-time high profitability. In fact, the Single Quarter Manager has set such records that he’s immediately promoted to a corporate job at company headquarters.

Now, consider the plight of his replacement.

The division can’t sell any more stuff.

With the profitibility of these deals so low, they can’t show a profit offering the original products to any additional customers - not that there’s any additional product to be had. Between the sleazy deals pushing the demand curve and the breakdown of the equipment from lack of maintenance, there’s no extra original product to offer.

There’s no new product to offer existing customers, either, ‘cause the R&D staff departed without developing one.

The next manager of this division will fail in the most spectacular fashion, achieving the worst profitability in the history of the company.

Searching desperately for answers, the company will replace him. They will systematically replace at least two more just like him. None of the Single Quarter Manager's successors will be able to turn the division around.

The company's only solution is to hunker down, tough it out, and start growing new customers.

That takes time.

A lot of time.

I was reminded of Mr. Rast’s description in early June of this year when, like you, I first learned of GM’s “Employee Pricing For Everyone” promotion.

GM had just posted a loss of over a billion dollars. That’s billion, with a “B,” in the first quarter of 2005.

This was followed by a thirteen percent decline in May sales, which was blamed on the increase in gas prices.

Dealers had a three-month inventory of ‘05’s on their lots. With the downturn in sales, it appeared that those units might not sell before the ‘06’s came out.

How did GM’s management react to the May sales slowdown?

They announced a workforce reduction of 25,000 and a new sales incentive, which they called the “Employee Discount For Everyone.”

Ford quickly followed with a discount program of their own: “The Ford Family Plan.”

Then Chrysler piled on with “Employee Pricing Plus” which gave customers the same price as Chrysler Group employees, plus additional cash back of up to $3,500.

The programs, said one analyst of the auto industry, “represent a desperate and necessary move for desperate times.”

“Now that,” said I, “is a spectacular example of Single Quarter thinking.”

It came as no surprise to me on Monday of this week to learn that in the first nine days of October, U.S. auto sales tanked. It seems that the end of September coincided with the big three domestic auto makers ending their summer “employee discount” offers.

“GM's sales fell 57 percent and Ford's fell 45 percent as sales in the U.S. auto industry dropped 33 percent from a year earlier.

"The aftermath of the employee-pricing programs is having a dramatic impact on automotive retail sales in October," Jeff Schuster, executive director of global forecasting at J.D. Power and Associates, said Friday.

“Ford's chief sales analyst, George Pipas, said Thursday that October sales would likely fall because the employee discounts spurred customers to buy sooner than they might have.”

Arizona Republic, October 14, 2005

Really? (He said incredulously, with just a hint of sarcasm). Discounts spurred customers to buy sooner than they might have? Who’d have thought?

(Brace yourself; the bragging starts here).

Seems I predicted this maneuver, as well as its outcome, on pages 20-22 of Fishing For Customers And Reeling Them In.

I said:

“Pretend for a minute that you’re a small town automobile dealer. In any given month you’ll sell about thirty cars. That’s about the demand in your community for your brand of vehicle.

“Then your new sales manager has an idea. “Let’s do a ‘cash back at signing’ event. We’ll draw in record sales.” So you do the event and you sell forty vehicles this month. GREAT NEWS, HUH?

“Well, actually you got the thirty customers who would have purchased from you anyway, and ten more. Where did the other ten come from? Chances are there were not quite ready to buy, and the cash back convinced them to commit early. The extra ten customers may well have come from next month.

“So now your sales are lagging in month number two, and the sales manager says “We have to do it again. Remember how well that promotion worked last month.” So, you again offer the cash incentive.

“This time you sell forty-five units. The other twenty who would have been in the market in the second month, and twenty-five from the third month. Can you see where this is leading? At some point you’re pulling from so far ahead of the demand curve that no amount of incentives will convince customers to buy now.

“Then what do you do?

“You’re about to have the worst month in the history of the dealership. It’s just around the corner… and there’s not much you can do to stop it.

“And remember that these last few months of cash back at closing have cut deeply into your profit margins. We’ve already established that you must have full margins to remain profitable. You’re selling more cars and making less money. You’re also trapped on a treadmill that just keeps turning faster and faster.

“This is the problem with Call To Action advertising. And the longer you do it, the less effective it becomes.”

Fishing For Customers And Reeling Them In
Wizard Academy Press, 2004

In his April 11, 2005 column, Motley Fool’s Rich Smith pretty much agreed with me when he said “When Ford lists a car at $17,000 and then incentivizes it down to $15,000, it makes a sale more likely today with the consequence that that sale will not occur tomorrow.”

Ok. Rich and I recognized the danger of such short-term thinking. Done bragging. Now what?

How about two new predictions:

1. Deep discounts from MSRP will now become the way business is done in the auto industry. From this point forward, cars will not sell without a discount. (Hey, I remember life before cash back deals became S.O.P. for the industry. I predicted that they’d never go away either. Oh, wait. I already said I'd stop bragging. Scratch that last comment).

2. I wouldn’t recommend buying stock in Ford, or GM, or Chrysler. They’re all in for a long non-profitable stretch that sill be marked by further desperate moves from the auto manufacturers as consumer resentment toward them continues to grow.

You want evidence of that resentment?

• This summer a Chevy Suburban half-ton, four-wheel-drive LT model, could be purchased by any of us for $9,798 off list. A Silverado 1500 extended-cab pickup could be had for $7,888 off list.
  


• The Lincoln Navigator luxury 4x2 was offered at $9,012 off retail. Price for the Ford Escape became $4,212 off list price.
  


• A fully loaded Town and Country minivan could be purchased for nearly $6,982 off list. The Dodge Durango sport utility could be purchased with zero percent financing for 36 months, and a $4,000 cash rebate.

The big three automakers have each effectively admitted that after shaving $7,000, $8,000, even $9,000 off the price of their vehicles, they're still profitable.

If you've purchased a new vehicle in the last few years, do you now feel as if you didn’t even get kissed?

Will you ever pay full price for a car again? Will anyone?

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Budgeting For Word Of Mouth

You’ve just spent the day, a long day, at a Disney theme park. You’re beyond tired when you finally make it back to your car to find you’ve locked the keys inside. Can you imagine a more frustrating feeling? Now imagine the arrival of Disney’s locksmith.

He reads your VIN, punches the numbers into a computer in the van, which bounces the lock information off satellite, and cuts a replacement key. You unlock the door, and with a fair amount of relief, you ask him what you owe for his service. He tells you that you owe nothing. He hopes you enjoyed your day at the park.

What will you be doing when you get home? And for years afterward?

Yeah. You’ll be providing excellent word of mouth for Disney Corporation.

Positive word of mouth is triggered when your customer experiences something way beyond his expectations.

It isn’t enough to be good.

It isn’t enough to be very good.

To be noticed, and to be so unusual that people want to talk about it, you have to be so far above the norm for your industry that your competitors would never even think about doing what you’re doing.

My partner, Roy Williams has said that physical, non-verbal statements are the surest way of triggering positive word of mouth. These statements can be generated from one of three possible sources: architectural, kinetic, or generous.

I vividly remember a gas station that had a WWII fighter on the roof. When Dad was pumping gas we could climb up a ladder and sit in the cockpit. Architectural word of mouth at work.

The restaurateur in Mississippi who made the 6 o’clock news by throwing dinner rolls at his patrons from across the restaurant understands kinetic word of mouth.

The Orlando car dealer who’s “Good Samaritan Van” provides a can of gas, water, help changing a tire, or jump starting your car, and then tells you there’s no charge has generous word of mouth down pat.

Can you plan one of these strategies for your business?

Absolutely.

Should you advertise it?

Absolutely not.

Remember, you must exceed expectations to make your customer’s experience memorable, and worth repeating.

If you advertise your new architectural, or kinetic, or generous word of mouth trigger, you've just raised your customer's expectations.

Oops.

Budget for your next word of mouth trigger, then hush up about it, and allow your customers to deliver the good news.

_________________________

Wizard of Ads© Partner Mike Dandridge’s book The One Year Business Turn Around is all about generating positive word of mouth. Mike details fifty-two tested techniques that helped him build an electrical supply company to more than a million dollars a month in sales, in a town of 50,000 people, even though he was challenged by Home Depot on the left and Lowe’s on the right.

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A Coffee Shop On Every Corner

I had a meeting with the owner of a coffee house in Spokane a few months ago. We were talking about advertising. He asked an excellent question: “What message could we possibly use that would make people drive across town to buy coffee? There’s a coffee shop on every corner.”

I looked up and said “You don’t need people to drive clear across town. You have thousands of them walking by your store every day. Thousands. What we need to do is convince those people to walk in through your door.”

This is the difference between a transactional strategy and a relational strategy.

Transactional shoppers believe that they know enough about the prospective purchase to make an intelligent decision. They're mostly interested in getting the best price.

Relational shoppers worry that they don't know enough and are concerned about making the wrong purchase. Relational shoppers are looking to find someone they can trust to advise them.

If a customer chooses to do business with anyone for reasons other than price, she's shopping in relational mode.

Please don't confuse "relational" with "relationship." Perhaps she doesn't know the store manager's name. She's never seen pictures of the cashier's kids. She doesn't even know whether the produce manager is married. She doesn't have relationships with these people. She shops their store in a relational mode.

Maybe she chooses a grocery store for it's produce. She doesn't read the paper for the specials before she shops. She doesn't bring "cents off" coupons to the store. She doesn't even have one of their affinity cards which, at check-out, will be swiped through the till to "save you $6.23 this trip." She is there because she likes their produce department. She's shopping relationally.

Does she buy her gas at the station on the corner because it's convenient? She's shopping relationally.

Does she choose a dentist because he concentrates on elimination of pain? She's shopping relationally.

If she watches Good Morning America instead of the Today show because she likes Diane Sawyer better than Katie Couric, she's shopping relationally. (What? You don't think that investment of your time has a cost?)

That whole “We need a message strong enough to get people to jump in their cars and drive here the minute they see it (or hear it)” philosophy only works for businesses trying to force a specific sale RIGHT NOW. It’s a classic transactional strategy.

Those customers who might respond to such an appeal are operating in transactional mode.

Transactional shoppers are very price conscious. They will drive across town to find a better deal (perhaps not for a cup of coffee, but on anything that requires a significant financial investment on their part, they will).

The key to understanding transactional shoppers is to understand that they have no loyalty. They do business with you for this transaction only. Transactional shoppers consider the search for a great deal to be part of the fun.

The conventional wisdom tells you to drop price in order to grow market share. It doesn't work. (Ever wonder why at least one of the major airlines is always in bankruptcy)?

So what does a business do in an attempt to drag shoppers clear across town? Right. They follow the conventional wisdom and drop the price. Often dramatically.

When successful, these transactional (call-to-action) advertisements generate a lot of traffic, and sell a bunch of merchandise. Unfortunately they make no significant profit, and give the shoppers no reason to ever come back. Many times these sales promotions aren’t successful. Perhaps most times they aren’t successful.

If you're in a business with thin margins or if you're selling commodities, like gas or donuts or coffee, what do you do? Drop the price below your costs? Lose a little on each sale and attempt to make it up in volume?

Reducing price is almost always a horrid strategy. And it's so unnecessary.

Most businesses have hundreds of shoppers driving past their businesses every day. Maybe thousands. Target those potential customers instead of trying to drag the transactional types across town.

You get the shoppers to turn in to your parking lot with when you implement a relational (top of mind awareness) ad campaign.

More specifically, this implementation has three requirements.

· It takes the commitment to make relational shoppers aware of you well before they need you.

· It takes the willingness to wait patiently until those people need what you’re selling.

· It takes the staying power to keep putting out your relational message. Day in, day out. Week after week.

Season after season you need to keep reminding people who you are, and why getting to know you is in their best interest.

And then, as those thousands of people walk by your business, a fair percentage of them will say “Hey, this is the place I’ve been hearing about. Let’s go in.”

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