TACTICAL SOUP WON’T CURE MARKETING WOES

SoupMotivational speakers Jack Canfield and Mark Hansen created an entire industry with the 1993 introduction of their Chicken Soup for the Soul book series. They have since sold over 100 million copies, and inspired countless authors of every genre. A recent search of Amazon generated 35,024 hits of titles beginning with “Chicken Soup for the.”

One could easily get the impression soup has magical powers to cure just about anything.

However, there is one soup not good for anything except unnecessary costs and market failure. That is a steaming bowl of tactical soup. What is tactical soup? Princeton, NJ consultant Gordon G. Andrew describes the recipe this way:

“Tactical Soup occurs when firms get bogged down in a flurry of marketing activity without placing enough emphasis on how it will help generate revenue and profitability.”

Tactical Soup is served up regularly in businesses where activity is too often mistaken for results, where the urge to “early adopt” the latest craze eagerly overlooks cost-benefit analysis, and where the rush to hop on the newest social media bandwagon precludes any thought of whether your target market is similarly enamored.

To squander limited marketing resources in a valueless caldron of tactical soup is a recipe for disaster. It can be avoided by asking three simple questions:

  1. Where will I find my market?
  2. What is the total cost of the proposed marketing tactic?
  3. What incremental sales volume is necessary to justify the cost?

Marketing is about connecting with the right audiences in whatever communication channel they select, always a moving target. There was a time when most audiences were found through ads in the Yellow Pages, roadside bill boards  and the Sunday newspaper. Finding new customer prospects today is far more complex, and depends on demographics such as age, sex, income and education levels.

Question 2 is the easiest, provided indirect and allocated costs are added to the initial design costs, price concessions, monthly hosting and other recurring expenses.

The final question requires a basic understanding of your cost structure. While cost accounting is too complex to explain here, of primary concern in implementing marketing tactics are the average gross profit (sales price less cost of goods sold) and what volume of sales can be expected from new customers. A product or service with a $100 gross profit is cost justified at a much lower new sales volume than one with a $3 gross profit. Likewise, a service that typically enjoys 6.3 sales per customer supports a higher marketing budget than one where repeat sales are negligible.

Answers to these three simple questions will provide the focus, discipline and accountability to maximize return on marketing efforts and avoid the waste and disappointment of tactical soup.

© 2014 by CFO America, LLC

Too Foolish To Fail

The big buzz on Wall Street is today’s planned IPO of Facebook. I hope it will reverse the recent downward trend (11 of the 12 last trading days were losers). Several months ago, a partner and I were discussing Mark Zuckerberg in the context of starting a new business. That discussion lead to a two-part post, which in honor of his IPO, I repeat in its entirety today.

My partner and I concluded that Mark’s phenomenal success with Facebook is the direct result of three “rookie” mistakes, none of which we would have made.

Those mistakes were:

  1. He was not the first to arrive at the social networking party. Rather than come up with an original idea, he improved on other people’s ideas. That never works. Either get to the market first or stay home, right?
  2. He waited too long to “cash out.” He should have jumped at the first opportunity to raise some serious “beer money” like a normal college kid. If only he had, he would be a millionaire today!
  3. He failed to exercise basic common sense! Anyone smart enough to get into Harvard should know that a dream of launching a worldwide business to redefine a major facet of society is destined to break your heart. Homer Simpson said it best, “Trying is the first step toward failure!”

Let’s analyze each of his mistakes in more detail. It turns out there is historical precedence to support his seemingly illogical behavior in committing Mistake #1.

For example, historians credit German engineer Karl Benz with inventing the automobile. He patented the first gasoline engine powered vehicle in 1885. That was 11 years before a thirty-year-old “techie” at the Edison Illuminating Company began experimenting with his Ford Quadricycle.

Henry Ford’s primary contribution to the automotive industry was to apply “best practices” manufacturing processes including interchangeable parts and a moving assembly line. By combining cost saving efficiencies with a social philosophy that included paying factory workers $5 per day (double the going wage), he transformed the automobile from an expensive curio for the idle rich to an affordable source of transportation for the masses.

Ford put his vision into words. He said, “I will build a car for the great multitude. It will be large enough for the family, but small enough for the individual to run and care for. It will be constructed of the best materials, by the best men to be hired, after the simplest designs that modern engineering can devise. But it will be so low in price that no man making a good salary will be unable to own one – and enjoy with his family the blessing of hours of pleasure in God’s great open spaces.”

With the benefit of 115 years of hindsight, it is clear his value proposition actually created a market where none previously existed. He sold 15 million Model Ts over its nineteen-year production run.  At one point, half of the cars in the world were “Tin Lizzies.” True to his value statement, he was eventually able to reduce the selling price to $290, a 65% reduction from its introductory price.

O.K., Mark, I’ll concede your first mistake was not a mistake after all. Astute late comers can still profit by improving on an inventor’s ideas and capitalizing on missed opportunities.

What about waiting too long to cash out?

I am frequently surprised at the short-term vision baby boomers adopt in their business planning. I often encounter entrepreneurs who hope to build a successful business and “cash out” in five years or less.

This view is a distraction from your value proposition, the very reason you went into business in the first place. Think about it. Customers are at best indifferent to your retirement plans. Would you pick a new dentist if you knew she planned to sell her practice in two years?

It also introduces a bias that will slant business decisions in favor of maximizing short-term cash flows at the expense of building long-term value. For example, owners will forego investments in customer service and product design if payoffs extend beyond their timeline. This situation is analogous to watching a runner round the bases as you chase a fly ball. There are already plenty of opportunities to falter in business without unnecessary distractions. Do not take your eye off the ball!

It seems counterintuitive that a college student, given the opportunity to finance what would have been a carefree life style, would follow a business plan that extended beyond the next frat party. To his credit, now 27-year-old Mark Zuckerberg has resisted the temptation to monetize his 24% stake in Facebook for 7 years. Instead, he has continued to lead the company according to his vision.

It is hard to argue with his success. Earlier this year, Goldman Sachs valued the private company at $50 billion. Mark kept his eye on the ball, even when faced with what would have been an irresistible temptation for us mere mortals. Cashing out four or five years ago would have cost him billions.

You were right, Zuck. My partner and I were….we were….well any way, you were right. Gloating is so not cool, Mark!

That brings me to his third mistake. Mark should have listened to the voices in his head that are quick to point out all the reasons why his grand plans would surely fail.

Abraham Lincoln once described a general who was unwilling to make decisions under pressure as “acting like a duck that had been hit on the head.” Fear of failure is a powerful motivator. It causes some of us to avoid decision making altogether.

Decision making is a cognitive process involving logic, reasoning and problem solving skills. Unfortunately, each of us enters that process with certain preconceived biases. We are often quick to listen to any voice that supports them. It is normal to exhibit a reluctance to move off those biases, even if faced with new facts, circumstances or opportunities. Therefore, the safe decision (i.e., to spend our career as a corporate wage slave rather than launch a new venture) is often the default decision.

Samuel Clemmons once said, “It’s not what you don’t know that will get you in trouble. It’s what you know for sure that just ain’t so.”

To his credit, Mark Zuckerberg did not let what he did not know about launching a business get in the way of his success. His vision was inspiring; his execution was courageous.

In the final analysis, my partner and I could take a lesson from him. So can you!

You proved all of your distracters wrong! Good luck in your IPO Mark.

 © 2012 by Dale R. Schmeltzle

You Can Have Any Color You Want, As Long As You Want Black (Part 2)

Today I conclude the article on product driven versus market driven companies. I began by discussing the cultural differences between the two. Product driven companies concentrate on achieving and maintaining technical superiority. Market driven companies devote resources to brand development and customer communications.

Companies and industries sometimes attempt to adapt their marketing strategy in response to changing competition and other market forces. For example, conditions slowly but dramatically changed for the entire American automotive industry over the next 50 years. Detroit’s response to the 1973 oil embargo was a textbook case of a failed attempt to adapt. Faced with the first ever non-wartime limit on the availability of cheap gasoline, the American consumer suddenly became very conscious of gas mileage.

At the time, Japanese and European companies dominated the market for fuel-efficient sub-compacts. American manufacturers’ knee-jerk response was to jump headfirst into a market they had ignored until recently. They stepped up production of the notoriously undependable Ford Pinto (voted the worst car of all time), the Chevrolet Vega and the AMC Gremlin.

Detroit’s failure took a personal toll on an entire generation of consumers. My first car was a red, white and blue Pinto. It was a cornucopia of expensive mechanical problems, unrelenting frustration on a 94-inch wheelbase. I sold it just before a massive recall for an exploding gas tank problem that would eventually cost Ford millions of dollars in legal settlements.

My next car, a Toyota, sparked a love affair with foreign cars that continues today. It was 30 years before I bought another Ford, a pickup truck for my son. It took almost as long for American manufacturers to overcome the image of producing inferior cars. It remains to be seen whether they will ever regain the world market share they once enjoyed.

How have things changed since I bought that damn Pinto?

A national chain of men’s discount stores advertised, “An educated consumer is our best customer.” For a product driven company in 2011, an educated consumer might be more aptly described as their worst nightmare. Service industry executive and strategic planning expert Michael O’Loughlin recently summarized the reason. He said, “Thanks to the Internet, the consumer has come to believe that no concessions are ever necessary. They expect unlimited choices in meeting their needs.”

Potential customers are only a few clicks away from a myriad of rival goods and services. A consumer with a smartphone can compare competitors’ prices on the spot. Any business, even the smallest local operation, ignores those powerful market realities at their own peril. Broadening your product line or services can help fend off competition by better addressing market needs, and improve customer retention in the process.

The men’s store chain recently filed for Chapter 7 bankruptcy. One analyst said they had failed to keep up with the increasingly competitive off-priced clothing market.

My final point is that few successful companies employ an entirely one-sided strategy. They operate along a moving spectrum on which there are few absolutes, and no strategy guaranteed to bring success or failure.

Consider Ford one last time. Product limitations notwithstanding, they still managed to sell over 15 million units between 1908 and 1927. At one point, half of all the cars in the world were Model T’s. That production record stood until the Volkswagen Beetle finally surpassed it in 1972.

The correct strategy for your business is the one that is executable within the constraints of your cost structure and marketing budget, and that produces the highest net cash flow given all the relevant factors at work in your market and your competition.

I began this article with an old quote. I end with another. A marketing adage says, “You have to sell from your own wagon.” It refers to a bygone era when merchants plied their trade by pushing handcarts up and down urban streets. The adage may be true. However, today you get to decide how big your wagon is, and what products or services it carries.

Go forth and sell!

 © 2011 by Dale R. Schmeltzle

You Can Have Any Color You Want, As Long As You Want Black (Part 1)

This week, I get to incorporate two of my favorite topics, history and old cars, into a two-part article. My title is one of Henry Ford’s most quoted statements. He actually said, “Any customer can have a car painted any color that he wants so long as it is black”.

He said it in 1909, ironically at a time when black was not available. The Model T originally came in grey, green, blue and red. He did not implement his all black policy until 1914. However, He could have accurately said customers can have any model they want so long as it is a 2-door. But his quote sounds better, so I’m throwing journalistic accuracy to the wind and going with it!

I use it to introduce my real subject, product driven versus market driven companies. Henry obviously believed in a product driven strategy.

My first goal is simply to understand the difference between the two strategies and the corporate cultures that define them at the most basic level.

If you were involved in Ford’s marketing efforts back then, your job was to convince potential buyers they needed a black Model T, period! Your marketing approach was something like, “Here is what I have to sell, and this is why you need it.”

Contrast that to a market driven strategy that asks, “What do you need, and how can I best meet that need?”

The cultural differences between product and market driven companies run deep. Product driven companies will spend relatively more resources on product development. Their primary goal is to achieve and maintain technical superiority. In extreme examples, they believe their products are so good they simply sell themselves. Engineers will always outrank marketing in the corporate pecking order.

Market driven companies will devote more resources to brand their company and products, and on customer communications. Technical superiority is secondary to understanding customer needs and anticipating market changes. Product development is less mission critical than advertising, since the marketing department rules the roost.

My second point is that if you are going to sell a limited product or service line, you need to be very good at it. Ford was fanatical about producing cheap, dependable cars. He managed to reduce the original $850 sticker price to $290 by the 1920s. At that price, he owned the working family automotive market. He was so confident that the cars’ features and low cost could generate sufficient sales that he did no corporate advertising from 1917 to 1923.

Unfortunately, being first to market with a technically superior product offered at an affordable price is no guarantee of long-term success. As Ford Motor Company subsequently learned, competitors (increasingly on a global basis) have a long history of unseating early market leaders who grow complacent about ever-changing customer needs and wants.

Being a product driven company is certainly easier if you exercise some degree of control in your relevant market, and if consumer tastes are stable and predictable. Perhaps Ford was lulled into a false sense of security by assuming past market conditions, under which they flourished for decades, would continue indefinitely.

Car buyers in the 1920s were unsophisticated by today’s standards. They could not have imaged, let alone demanded the range of choices, options and features currently available. Ford was not the first company to replace dangerous hand cranks with electric starters. Cadillac beat them to market by seven years. However, when the world’s largest car manufacturer finally made the change in 1919, consumers and the rest of the industry fell in line. Ford defined the new standard, not Cadillac.

I will conclude this article on Friday, when I write about how companies sometimes attempt to adapt their strategies to changing market conditions.

Until then, best wishes for a joyous Thanksgiving holiday.

 

© 2011 by Dale R. Schmeltzle

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