Samuel Scott

OBJECTIVE AND ENTERTAINING MARKETING SPEAKER

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How Marketing Departments Can Survive the Coronavirus Recession

by | Jan 21, 2019 | Marketing Essays

(Note: This is a talk that I debuted in mid-2020 — see my marketing speaker page for more information on my various presentations.)

Summary

See the example deck here: https://www.slideshare.net/samuelscott/how-marketing-departments-can-survive-the-coronavirus-recession

In this new keynote talk, Samuel Scott, a global marketing speaker and The Promotion Fix columnist for The Drum, will explore the best practices during prior recessions to highlight what businesses and marketing departments should do today. For example, CMOs need to learn to “speak CFO” to defend their budgets as companies start to cut back. Then, he will share his prediction that economies will likely recover and return to 95% pre-crisis normal quickly based on what happened during the last global pandemic. The pain we are feeling is brutal, but it will be short.

Full Text

Interesting times. Challenging times. Unusual times. However you describe it, the coronavirus pandemic and resulting shutdowns have severely affected our economies and businesses. Many, if not most, countries have fallen into recessions. So, the challenge for marketers today is to figure out how we should respond.

In this talk, I will show the best marketing practices that companies have done during past recessions, highlight how we can be more effective and save our budgets, discuss why we need to “speak CFO,” and then end on a positive note by showing how the pandemic will change things a lot less than we think.

But before I address that issue, a brief introduction. After careers in both journalism and marketing, today I write The Promotion Fix column on marketing and media for The Drum and speak around the world about what I report. I use my dual experiences to discuss the marketing industry with the mindset of a neutral, trade journalist with nothing to sell except his ideas. So, let’s begin.

First, and this might surprise you, we need to begin at the financial accounting level. What CEOs and CFOs think about.

You see, we think of marketing — and communications specifically — as an asset and investment. We spend X amount on advertising, and we will hopefully get some positive return. We want to spend $1 million in ads to get, say, $3 million in sales revenue. And we know that building a brand is building a long-term asset that increases the value of companies over time.

But while CEOs and CFOs understand that point, they must think differently.

Under the financial reporting rules in most countries, marketing must be considered an operating expense that is taken in full the moment that the campaign money is spent. Even if the results of a brand advertising campaign are not seen for a few years, for example, the full cost must be reported today.

The reason is that marketing and communications expenses are not predictable. That is why they cannot be considered assets. If your company owns property, that can be considered an asset because you can predict, to a degree, the change in its value over time. But we have no idea whether a marcom campaign will result in $1 million in revenue or a loss of $1 million. So, the bookkeepers must consider it an expense to be safe.

And that is partly why marketing is the first to be cut within companies whenever a recession hits.

Think about it. Say you lose your job tomorrow. What is the first thing you do? You cut expenses because you have more control over the money going out than the money coming in. And under financial accounting rules, marketing is just another operating expense for companies to cut during hard times.

And here is how it plays out. In the US, Forrester’s updated ad spend forecast projects a 25% decline from $236 billion to $177 billion. Gartner’s new CMO Spend Survey found that 44% of CMOs expect their budgets to decrease.

In the UK, the IPA’s Bellwether report revealed that just over half of companies slashed their marketing budgets and that two-thirds of survey participants reported a pessimistic financial outlook.

So, what is going on?

Well, we have two major problems. First, CFOs view marketing as an expense to cut. I will address that later. Second, our budgets are also getting cut because advertising has become less effective in modern times. Here’s why.

According to the IPA and System1 Group in the UK, advertising effectiveness has continued to decline since the Great Recession in 2008.

One reason is that we have had a rise in short-termism since that economic downturn. And short-termism does not help long-term effectiveness.

Why? Well, ad campaigns have generally focused less on emotional, long-term, right-brained responses and more on rational, short-term, left-brained responses. But as I’m sure we all know, emotion is what builds long-term brands and leads to the greatest long-term advertising effectiveness.

After all, creativity is the second-highest driver of advertising profitability and ROI after market size.

In one specific example, Kantar found that the use of humor in ads has greatly declined since the Great Recession even though humor is what gets remembered and sticks in peoples’ heads over the long term. Here is one of my favorite examples.

So, what has been happening? I have a theory based on what I have seen during my own career. The 2008 Great Recession scarred us. And now that PTSD is returning today.

When a bear – economic or not – attacks you, you think only about surviving until tomorrow. You do not think about making dinner plans next month. The same is true in business. Companies have direct control over money going out but not over the money coming in, so the immediate response is to slash costs and focus on what will generate some revenue tomorrow rather than in six months.

And there is no tolerance for risky creativity that might not work. There is no patience for long-term campaigns.

The solution is to understand what is most effective in advertising. And then we need to know how to communicate that to our CFOs and CEOs more effectively.

So, first, we need to know how to improve the effectiveness of our own departments.

Enter Les Binet and Peter Field. They are two Brits who are some of the smartest marketing academics in the world. They have released many insightful reports based on IPA data from ad campaigns in the UK going back many years.

Some of their most important findings compare the results of brand advertising and direct response. Every time that you do a direct response or sales activation campaign, you will see a quick spike in revenue — the line in yellow. But you always hit an upper limit.

You often don’t see the results of brand advertising — the line in brown — for months or even years. When you add the two lines together, you will see how both brand advertising and direct response together lead to the best long-term results because activation brings quick but small results while advertising brings slow but large results.

Here is a metaphor.

Direct response is picking the fruit — those people have grown, they’re ripe, they’re down in the funnel, and ready to buy. Brand advertising is watering the tree so that more fruit will grow in the future. As Rory Sutherland has said, direct response tells people what to do so they will buy today, and brand advertising tells people what to think so they will buy tomorrow.

Now, why is that important? Remember: company valuations — real ones, not those for companies like WeWork, are based on future cash flows, not present cash flows.

But here’s how everything went wrong. This part of Binet and Field’s chart at the top right explains the rise of short-termism today. Throw money at direct response or activation, and you see quick, albeit small, results. Start a brand advertising campaign, and you see nothing at the beginning. No dials move. No numbers in dashboards go up.

It seems as though the money you spent just disappeared because you have to wait for months or sometimes even a few years to see the big results in the bottom right photo. But Google and Facebook now have a duopoly on online ad spend because they got marketers addicted to quick metrics — but those quick metrics are not always the best metrics.

I once had a senior executive at a tech company who was very impressed with the quick lead generation that he saw from the member of our team who did Google Ads. And he had no interest in our team doing long-term brand campaigns.

But over time, the number of leads declined and the cost per lead increased. Everyone who would quickly be interested in our product had already seen the direct response ads and quickly got sick of them. Our effectiveness rapidly declined.

Because Binet and Field’s research shows that to build a brand for the long term and get sales in the short term, the best tactical media spend allocation on average is 60% to brand and 40% to direct response and sales activation.

But it is a little different in every industry. As I said, the overall average is 60 / 40 in favor of brand. But the best mix in financial services, for example, is 80 / 20 for brand. In B2B — 54 / 46 for activation.

This mix is how we can become effective again.

We have a set of two goals that need to work together, so we need two strategies that are completely different but still occurring at the same time. For each goal, we need to think about our tactical media mixes because — again — different channels are better at different things.

To build long-term brands, you need broad reach and mental availability that are driven by emotion. For direct response and sales activation, you need to target the people lowest in the funnel with rational information and communicate physical availability.

It’s important to note that many in the B2B and online worlds especially think only about the right and never about the left.

But despite the importance of building a brand over the long-term, Google and Facebook are still pushing us to track people, collect their personal data, and hit them with cheap, short-term, direct response. They want the world of Minority Report.

Now, a lot of marketers watch that and think, “Wow! When can we do that?” But remember: The 99.9% of people who are not marketers saw Tom Cruise getting scanned for ads and were horrified. Remember, the world in Minority Report is a dystopia. It is a reflection of everything in the world going to hell — including the marcom.

So, how can we adopt those principles today in the middle of a recession? Here is some research I found that looked at prior recessions.

During the tech bubble crash in 2001, the IPA published research based on historical data. In overall terms, they found that the best practice is to INCREASE spending on marketing, R&D, and product development. Then, maintain or cut prices, fixed assets, and working capital relative to the market average. Lastly, cut administrative and overhead expenses.

Now, if you ask marketers if you should increase marketing spend, of course they will say “yes.” But here is how you can justify the spend.

Remember the long-term effects of brand advertising that I discussed earlier? Well, the more that you cut today, the more that it will hurt you after the recession despite any short-term savings. The more you cut, the longer it takes to recover. Because if you cut brand advertising spend, people will forget about you and not buy you when the economy recovers. You will no longer be top of mind.

As the IPA report stated: “Following a budget cut, a brand will continue to benefit from the marketing investment made over the previous few years. This will mitigate any short-term business effects and will result in a dangerously misleading increase in short-term profitability. The longer-term business harm will be more considerable but will not be noticed at first.”

That’s the fact. Here’s the theory. In general, a company’s advertising share of voice should be higher than its market share. Excess share of voice (or ESOV) is share of voice minus share of market.

During a recession, most competitors will cut their spends. But as long as you have greater ESOV than them, your brand will benefit. Increase, maintain, or cut your spend only as much as needed to keep your ESOV high.

After all, short-term direct response does not provide long-term returns without concurrent brand-building as well. Short-termism is only a quick fix at most.

But what happened during the Great Recession? Look at this four-year trailing data. ESOV fell sharply after 2008, and the results were not fully seen until 2012.

Even though the advertisers who maintained the greatest ESOV benefited the most during and after the economic downturn.

Now, here’s another example of what you can do during recessions.

Recessions are times for everyone to think and reflect — what performs well, and what performs poorly? The best practice is to focus on core competencies. Recessions are not times for risky bets because resources are scare. So, look at what returns the greatest revenues, margins, and profits.

Agency holding companies might close the worst-performing agencies. Brand holding companies might eliminate the worst performing brands. During the early 2000s recession, for example, the Nautica clothing brand was sold to VF Corporation.

Now, once we understand how to be more effective both in general and during recessions, the next challenge is to know how to communicate those best practices in terms that the CEO and CFO can understand.

Recently, LinkedIn’s global B2B Institute and the IPA released a report on how marketers can, in effect, market themselves to the c-suite. Just Google “How to Speak CFO” and “LinkedIn,” and you will find it. Here, I will highlight the major points because I think these insights will be the most important things to know this year.

First, the CMO and CFO have overlapping duties. And all too often, Marketing lets Finance take the lead and dictate the strategy. And that makes us look less important and less valuable. One basic example: Price has historically been one of the 4 Ps in product marketing. But today Pricing often lies with Finance and not Marketing.

The reason? Marketing has too often been reduced to communications. Everything else is some other department’s responsibility. And we wonder why we get little respect. But marketers will need to learn much of this to survive this recession.

And why is that? Well, Marketing has always owned the brand. And here’s the interesting part. If you ask companies for their priorities, they say margin improvement, growth, future cash flow, and profitability. But few of them understand how brand contributes to all of those priorities. That is our most important challenge.

When I was the first director of marketing at a high-tech company, our team was working wonders. But we had yet to do any real advertising specifically.

So, I wrote myself a brief and then created the outline of a brand advertising campaign that I then delivered through a creative and humorous company presentation. We sold log analysis IT software to IT professionals, so it was a mock episode of the famous British comedy The IT Crowd.

At the meeting, I began with a short summary of the importance of creativity and how brands grow. I even used a British accent while mimicking the mock IT Crowd characters and acting through the entire script with the accompanying visual aids. I said we would get press coverage as well and that we could add a call to action for the ad placements online.

I gave the performance my all and said it was an initial brainstorm that I could take up the management chain while asking ad agencies for RFPs.

If I had been working at an ad agency, the idea would probably have been well-received. But at the tech company, I failed.

I had focused so much on the creativity that I had neglected to answer one simple question: “What will be the financial benefit of this campaign?”

You see, it’s no secret that CMOs are an endangered species.

Traditionally, marketing had covered everything that makes money – analysing the market, deciding the strategy, creating a product, determining the price, setting the distribution, communicating the value, building the brand and increasing the sales. Everything else was essentially finance or operations.

But over time, everything changed. Have you ever seen a colleague’s responsibilities taken away one by one until he had nothing left and became redundant? That is what is happening today.

First, finance officers took away pricing. Then, strategy officers took away market analysis and strategic planning. Product officers took away product. Operations and logistics officers took away distribution. Sales officers took away sales. And what is left for marketing? Communications.

So, CMOs are increasingly undervalued and replaced after a few years. Or companies are eliminating the position altogether and distributing these functions within other teams.

The basic reason: Marketers are getting less and less respect because too many of us are unable to speak the financial language that the the c-suite and board use. So, here’s a brief introduction.

Here is one example. CEOs and CFOs do not know what “mental availability” is. But we can change our language to educate them.

Here is awareness: “I know that these thirty brands of hot sauce exist.”

Here is mental availability: Say you are looking at the supermarket shelf with all thirty brands. You ask yourself if you should buy Frank’s or Tabasco. Two of thirty. In CFO terms, increasing mental availability places your brand in the “guaranteed consideration set” when people are directly making purchase decisions.

Marketers know that we need to be customer-facing or customer-centric or customer-first – however we describe it. But the most important audiences for our own benefit are the CFO and CEO. And few ever discuss how to communicate the value of marketing itself to them.

We need to use our communications expertise to change how we speak with c-suites and boards. We need to approach them as just another customer segment to save our jobs and budgets during recessions.

And how can marketers do that? I agree with this VALUE framework from LinkedIn’s B2B Institute and the IPA.

Understand how Value is created. Accept Accountability for the metrics that signify value creation. Use the Language of value creation. Grow the Understanding of value creation throughout the marketing team. And Create a mindset based on Evidence.

And once marketers know how our contributions and language can compliment those of finance, we can be a lot more effective — both during recessions and during all other times.

But right now, please don’t worry too much. Despite the stress at the moment, I still think that things are not as bad as they seem.

Countless marketing pundits have been proclaiming that the coronavirus and resulting global shutdown will change everything in the industry forever. But if the 1918 influenza epidemic trend repeats itself today, the economy will recover and return to pre-crisis normal quickly.

That result will surprise many. A managing partner at Artefact wrote that “traditional marketing will finally die.” eMarketer principal analyst Victoria Petrock thinks businesses will use virtual reality to hold events and conferences in the future.

In the greater business and academic worlds, Scott Galloway predicted that dozens or hundreds of universities in the United States may never reopen. A Fast Company headline bluntly stated that “the office is dead”.

Martin Lindstrom wrote that “when we’re released, everything will be different. We’re not going to travel, eat, shop, or exercise the same way… perhaps forever.” Of course, someone had to write about “the Covid generation”. And lastly, a New York Times headline summarised the situation with “it’s the end of the world economy as we know it”.

But, with apologies to REM, we should feel fine. The predictions will almost certainly not come to pass. The coronavirus will not – as the World Federation of Advertisers wondered – “change marketing forever”. My rule of thumb: Do not listen to those who are using the pandemic just to sell something to marketers.

Because the longer this goes on, the more people are hating life and work right now. People who work from home get less recognition and fewer promotions. Teaching kids over Zoom has pretty much been a failure. Divorce and drug abuse rates are increasing.

People want everything to go back to the way it was.

And that is what happened after the Spanish Flu in 1919.

In 2007, Thomas Garrett, assistant vice president at the Federal Reserve Bank of St. Louis, looked at how the global influenza epidemic affected business in the US.

First, the bad news. In one city in Arkansas, companies saw a total business decline from between 40% and 70% because of the mass shutdowns. Those companies together lost $10,000 a day ($133,500 per day in 2006 dollars).

Now, the good news. The US saw a “V-shaped” or “U-shaped” recovery when everything opened following the Spanish flu as soon as it was safe – it just took a while to get through the several waves of infections. There was not a long-term economic depression then, so there will likely not be an “L-shaped” economy today.

Remember: The 1929 and 2008 crashes resulted from underlying economic problems. The coronavirus crash was caused by an artificial, forced, and hopefully temporary closure of all business.

As Garrett writes: “Most of the evidence indicates that the economic effects of the 1918 influenza pandemic were short-term. The influenza of 1918 was short-lived and had a permanent influence not on the collectivities but on the atoms of human society – individuals. Society as a whole recovered from the 1918 influenza quickly, but individuals who were affected by the influenza had their lives changed forever.”

And According to an analysis in April by professors at the Kellogg School of Management at Northwestern University, the Spanish flu had no long-term economic effects in the United States.

They write: “The Spanish flu left almost no discernible mark on the aggregate US economy. The coronavirus arrived to the US at a time of booming stock market values. By contrast, the influenza outbreak in the spring of 1918 occurred right after a downturn: the Dow Jones Industrial Average had actually declined 21.7% in 1917. Yet the stock market recovered substantially during the pandemic, with the Dow index increasing by 10.5% in 1918 and by 30.5% in 1919.”

“It is useful to remember that a global pandemic doesn’t inevitably lead to a grave economic recession or depression,” they add. “More specifically, a large expansion in government demand can go a long way in softening the economic impact of a crisis that clearly threatens to reduce consumption and private investment.”

The findings are even more encouraging because the Spanish flu’s estimated 675,000 US deaths were disproportionately young and middle-aged people in the prime of their working lives. Today, the coronavirus seems most harmful to the elderly. And do not forget that the US recovered quickly from the influenza epidemic even at the end of a world war.

Today, there is no such calamity – and the death toll has been far less. (Touch wood on both accounts.) Plus, the current contraction is not the result of fundamental economic issues as during the 1929 and 2008 US stock market crashes. It is an artificial, forced and likely temporary decline.

For as much as many marketers say our lives will move online, UBS analysts found that 15% of retail sales happened online before the epidemic. During lockdown, that amount has risen to 25%. I will put it another way. Even when faced with the risk of a painful Covid-19 death and with the ease of ordering online, people still bought 75% of their stuff in physical stores.

The world will likely return to mostly pre-coronavirus normal once the crisis has passed. After all, remember that the advertising industry in America has consistently averaged 1.0% to 1.5% of GDP for a century – through growth and decline and through war and peace.

And the overall strategic process of Diagnosis, Guiding Policy, and Tactical Planning will never change.

Do not succumb to business hysteria. Ignore the false Cassandras who claim that everything will change simply because they want to be thought leaders or to sell something to marketers. Think calmly and rationally to determine what exactly the coronavirus pandemic will change in the context of your general industry and specific business.

Make adjustments only as truly necessary. Most likely, little of significance will change. Most things will continue with minor or moderate adjustments, usually to adapt to new health codes and regulations.

Do not obsess about “going digital” unless absolutely needed. Online marcom is often merely a cheaper but less-effective version of offline marcom. Besides, “digital” is a useless term today. Most TV, radio signals, and billboards are all digital today.

In the meantime, wear a mask, wash your hands and do not leave home unless absolutely necessary. Israel has gone through multiple lockdowns because people stopped doing exactly that. Wherever you are, I hope you are doing better.

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