In theory, marketing should be the engine of miracles: the creation of rich win-win relationships between customers and suppliers. The supplier starts out with an insight into customer needs or wants, invests resources in designing a product or service, communicates and distributes the resulting offer and closes sales. This generates revenues that enable the supplier to invigorate the cycle with even more research and development, leading to deeper insights and better products, better communication and distribution, and so on. The result is a virtuous spiral where everyone benefits.
What can possibly go wrong? Consider this scenario. In order to justify its investments in research, development, production, communication and distribution, the company generates a sales forecast. If the forecast is met or exceeded, everything is fine. But if it’s not, the company is in trouble.
Very quickly, the forecast becomes a target – and the target is something that just has to be met. All eyes turn to the marketing department. Why are sales so slow? What can you do to beef them up? So the marketing department produces a special promotion, or increases sales incentives for distributors, or pumps out more advertising, or adds some bells and whistles to the product to win customers over when faced with near-equal alternatives.
Celebrations all round! The targets are met and everyone breathes a sigh of relief. Then the chief executive, who is under pressure from investors to deliver even better returns, raises the target even higher. “We did it last time, we can do it this time too,” he cries encouragingly. Suddenly, the whole cycle starts up again, except this time it’s a little harder because competitors are fighting back with their own ramped up advertising, promotions and so on, forcing the company to turn the dial up just a little more to achieve its target.
And so it goes on, cycle after cycle. Every time, the company just about reaches its target. From the outside, it looks successful. But every time the going gets tougher. It’s not just because of intensifying competitor activity. Something else is happening too: somewhere along the line the company all but abandoned its original virtuous spiral. More and more of its time, money and attention is now devoted not to gaining the insights and marketing that bring “Wow!” products and services to consumers, but to an endless war of attrition instead.
The company’s customer focus rhetoric may have reached a crescendo, but the reality is very different. Day to day, virtually everyone in the company, from the chief executive to the humblest sales assistant eyeing her monthly target-related bonus, has turned their attention inwards to the company’s internally focused goals, targets and incentives. What was once a virtuous spiral has flipped into a vicious circle.
Easy to lose the right track
Everyone in business is familiar with these tensions and, sadly, it’s often easier to get sucked into vicious circles than it is to stay on virtuous spirals. That’s partly because of tough, short-term competitive contingencies. But it’s also because the commercial impact of the two approaches has been hard to measure.
New evidence from INSEAD business school’s professor of marketing Jean-Claude Larreche might help here. He looked into the advertising spends, financial and stock market performance of 119 leading US consumer goods and services companies in industries as diverse as airlines, banking, insurance, packaged goods, pharmaceuticals and retailing, over a 20 year period from 1985 to 2004.
He tracked the firms’ spending on advertising in absolute terms, relative to total sales, to profits and to share price. He then ranked them according to the trend line of their total advertising spend relative to sales, dividing them into three categories.
The first is the top quartile of firms whose advertising-to-sales ratio increased over the 20-year period (on average, by 3%). Second, the bottom quartile of firms whose advertising-to-sales ratio fell over the same period (on average, by 4%). And third, the middle 50% whose advertising-to-sales ratio remained more or less constant over the 20-year period.
The bar chart above shows the results. Companies that simply maintained their ad spends relative to sales lagged the Dow Jones index badly. Companies that increased their ad spends relative to sales managed to keep pace. But companies that reduced their ad spends relative to sales blossomed.
Why is this? According to Larreche in a new book* these companies managed to stay on that virtuous spiral, continuing to produce “power” offers that customers really liked and continuing to invest their efforts in the development of more, better power offers. As a result, their advertising and other marketing efforts had a ready audience and generated big responses. (In fact, the “pioneers” actually increased their marketing spends in absolute terms, but ad-to-sales ratios fell because sales increased even faster.)
On the other hand, the “pushers” were increasing their ad spends just to stay still. They were engaged in “compensatory” marketing. Because their underlying consumer offer wasn’t outstanding, they were resorting to increased marketing activity to compensate for this fact. Worse, the more resources they devoted to compensation, the less went into real value creation. For example, over the same 20-year period, the “pushers” reduced both their R&D and production costs when compared to the pioneers: they were cutting corners in their core in order to fund ever-increasing compensatory activity.
Big budgets don’t mean better
Larreche’s research throws new light on age-old debates about marketing budgets and marketing effectiveness. The real issue is not how big the budget is or what specific marketing activities we engage in, but what role marketing is playing within the company. Is it promoting superior products that energise virtuous spirals, or is it compensating for mediocre value? Whether it’s an ad campaign, a promotion or a new product launch it could be doing either.
For Larreche, the biggest implication is that “less is more”. Knowing what to invest your resources in is just half of it, he argues. Knowing what not to invest in is equally important. The time and money you save not doing things that fail to add consumer value can then be invested in things that do. Sound simple? It is. In theory. But in reality, saying “No” when you are under pressure is very difficult. Virtuous spirals require not only great insight it seems, but tremendous determination.
The Momentum Effect: How to Ignite Exceptional Growth by Jean-Claude Larreche, Wharton School Publishing