The past few months have seen
companies across a range of industries announce price increases
(mostly) in response to rising input costs. From Hersheys to
Toyota, Proctor and Gamble to Tim Hortons, no firm is immune to
global economic dynamics shifting up cost bases. Marketers may
believe they can do little to control these underlying economic
shifts, and they'd be right; their tactics alone won't slow
emerging market resource demand nor relax the factors restricting
supply. But they'd be wrong to believe they play no role in
managing and mitigating the impact of these increases.
To start, price is the single greatest
communication tool available to companies. It signals to the market
the perceived value of a good or service, indicating what firms
believe consumers are willing to pay. It carries connotations of
status and elements of desire, and all brand identities - bar none
- are closely tied to their pricing models. One need only think of
Apple, which just recently topped Millward Brown's survey of most
valuable brands. At $153B, it's worth roughly the annual economic
output of the entire country of Peru, and recognizes the ongoing
price premium that Apple products command over competitors. When
prices shift so too does a product's value proposition. This poses
challenges to marketers who must re-define that value proposition
to remain competitive.
Secondly, given that (most) companies
operate in a (mostly) competitive environment, price does not exist
in isolation. One company's pricing strategy in theory impacts an
ecosystem of players, the extent to which depends on a variety of
factors including the availability of substitutes, the closeness of
complimentary products, the presence of switching costs, brand
strength, and so on. To understand what short and long-term
implications are in store for the brand's overall health, marketers
must take full stock of a product's competitive ecosystem.
Finally, price increases have a ripple
effect for consumers. Increases in food and gas prices squeeze
discretionary budgets, leaving less to spend each month on
non-essentials. This shrinking pie forces companies hawking
non-essential goods to get more competitive, with pricing strategy
likely a key feature as companies duke it out for share. Indeed,
this share fight is one of the reasons we're seeing an increase in merger and acquisition activity
this year. For marketers, capturing share will require new
ideas and insights to meaningfully connect brands with consumers,
whilst articulating an irresistible value proposition to encourage
consumers to part with a greater share of their budgets.
So what can marketers
do?
Marketers can play a pivotal role in
this changing environment in two ways: as cost managers and
innovation brokers.
Marketing is not an insignificant
share of cost of sales. An analysis by GroupM Business Science
reveals that marketing costs for the QSR category are anywhere from
1% to 5% of total sales depending on the business (most average
between 2-3%). For the Canadian fast food market, valued at about
$25 billion dollars in 2010, that means a marketing spend of
anywhere from $250 million to $1.25 billion. Marketing as a
percentage of costs in most cases is even higher.
What's astonishing, however, is not
the size of the marketing budget but rather how it's invested:
often blindly. Return on marketing
investment isn't a new concept, but in a time where the data
and the capabilities exist to predict with a great degree of
accuracy the business return of each dollar spent, too few
marketers are taking advantage. The reasons for this vary - from
legacy beliefs of marketing as more art than science, to a general
paralysis due to data deluge to concerns about methodologies and
results.
But for marketers that apply
econometric modelling techniques to their activity, the results
speak for themselves: MediaCom Business Science
analyses typically reveal cost savings or sales generating findings
worth 25-35% of marketing spend, and sometimes more. So, assuming
the entire Canadian QSR category marketing investment in 2010 was
$1B, applying these techniques would return in the neighborhood of
$250M in cost efficiencies and added sales.
These efficiencies can
help marketers to hold out on raising prices longer than their
competitors, thus allowing them to steal share by attracting the
price sensitive.
Marketers can be cost managers beyond
advanced analytics. Take media, for instance. For many advertisers,
media represents the greatest share of marketing budgets. To reduce
this share - or at least get much more out of their media
investment - marketers in Canada need to more fully embrace the
Web. Whereas in the UK, online accounts for more than 25 percent of
advertising spend, in Canada, it's less than 15%.
Granted, British ecommerce
infrastructure is much further developed - its population density,
for one, affords companies a 70m-person market to service easily
through a single distribution point - Canadians frequently rank at
the top of international Internet usage and web media consumption
tables; this alone warrants greater allocation of advertising
budget to online.
If it doesn't, then the ROI
differential between traditional and online media certainly should.
Across virtually all return on marketing investment analyses
performed by GroupM Business Science, online media outperforms
traditional media in sales generated per dollar spent by 10-20X
(and in some cases more than 50X).
Part of this is due to an overall
lower average media cost and part of this is due to the data-driven
efficiency with which online media can deliver results. And, of
course, part of this is due to the lower share of budget online
commands. What this suggests, however, is that advertisers are
nowhere close to saturation or diminishing returns in the online
space, and would be wise to shift more budget share there to
generate superior returns.
A shift to online media has the added
strategic benefit of investing in rich consumer data. As each
online activity leaves a data trail, marketers can take a quantum
leap towards their utopia - complete understanding of human
behaviour. Crunching this data can give companies unprecedented insight into higher- and
alternative-need states of consumers, thus giving them the leg up
on the competition for shrunken consumer discretionary budgets.
And by packaging these insights into
business cases, marketers can become innovation brokers.
Internally, an insight gleaned from consumer data that aligns with
a business' core capabilities can be quickly fed into product
development.
A simple illustration of this is the
MyStarbucksIdea platform, which engages 20m Starbucks fans from a
number of social media outlets. This platform encourages users to
share ideas on how to make their Starbucks experience better. The
ideas are then discussed and voted on. Successful ones get
implemented, like the (very useful) spill-stopping green stick, the
insight for which came from this platform.
If the insight does not align, the
company can look to develop new or extend existing capabilities, or
identify suitable external partnerships to value and commercialize
the insight.
To illustrate, let's take a
hypothetical example. A large packaged goods company has a
strategic goal to reduce its carbon footprint by 50% in the next
five years. As a company with many large brands, it seeks to engage
its customers by challenging them to come up with ideas for it to
achieve these targets. It uses TV, social media and other channels
to drive ideators to its microsite. These enthusiasts come up with
thousands of ideas, from reduced packaging to greener alternative
product components, most of which the company can implement on its
own or with its suppliers. However, they begins to receive
suggestions around green waste management, specifically waste to
energy conversion. This isn't the company's core competency, but it
does know of a few businesses that specialize in the area. It uses
this insight, as well as its microsite communication platform and
consumer data to present a business case for investment in waste to
energy conversion, and shares the spoils with an eventual
partner.
By advertising in this medium and
crunching the data, marketers can develop deep innovation
pipelines, and alternative data and insight revenue streams, both
ways to manage and mitigate the impacts of price rises.
In this higher cost business
environment, marketers must approach their trade more strategically
and scientifically. By leveraging marketing and customer analytics,
and shifting media investments towards channels delivering higher
business returns, marketers can improve operational efficiency,
product innovation, and overall profitability.
This allows them to hold prices steady
longer than the competition, providing opportunities to steal share
and a longer lead time to understand the full implications of
eventual price rises on their competitive ecosystems. It also
better positions them to understand and service the changing needs
of consumers, and potentially frees up budget to explore
value-generating partnerships grounded in rich consumer
insight.
Getting Started
The easiest option for marketers would
be sticking their heads in the sand and pretending the status quo
is good enough. It isn't. Smarter competitors will outflank you
with lower-cost, evidence-driven marketing and innovation,
attracting both investors and consumers.
- Do a data audit. Taking stock of what
you're measuring against the backdrop of critical business
questions is the first step towards answering them. Identify data
and measurement gaps and source partners that can help bridge
these.
- Do a top-line marketing ROI analysis. At
a rough cost of $100-200K, this analysis may seem expensive, but it
will pay back multiples in future cost savings and sales generated
as you begin to understand how to make your marketing budget work
harder. This analysis will also tell you the relative performance
of media channels in driving sales, helping you to understand the
(spare) capacity online media has to return business results for
you.
- Map out an initial data investment
strategy with other key internal stakeholders. What you're likely
to find is significant overlap between business function data
needs; for example, between marketing, public relations, product
development and customer service. Look to make strategic plays in
online media (display, mobile, search, social), analytics and data
management to satisfy multiple stakeholder interests and share
costs.
As Director of Business Science at
MediaCom Canada, Kevin Keane consults clients on data strategy and
how to deliver greater returns on marketing investment.