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Wednesday, June 24, 2009

Why some companies that survived the recession may not survive the recovery

In an attempt to get consumers to spend something—anything—a lot of companies have pinned their survival to a recession-long strategy of one sale after another. For some companies, this sometimes relentless policy of price cuts has resulted in razor-thin margins, or even selling at what might be considered an acceptable loss, in the interest of keeping the cash flowing. But soon, these short-term practices must be reconciled with long-term effects.

One of the reasons so many companies have gotten away with these dramatic discounts is that almost everyone is in the same proverbial boat. Manufacturers and distributors were feeling the hurt every bit as much as the retailer or dealer… so, many of these vendors were providing price-cuts that a re-seller could be passed along to the consumer, thereby absorbing some of the low-price pressure. Everyone in the value chain gets away with price-pointing, as long as nothing upsets the status quo.

An economic recovery is likely to upset the status quo.

As the job market and incomes begin to stabilize, demand for goods will likely increase faster than manufacturers’ ability to produce them, due to the diminished inventory and output capacity of people who provide commodities and products. Many producers—from farmers to refineries to factories—trimmed output in response to the lack of consumer spending. If (when) consumption heats-up faster than production, retail costs will be pushed upward by the simple laws of supply and demand.

Meanwhile, remember that the (U.S.) recession officially started in December of 2007. That means that many companies have spent 18 months now… training customers how to not to pay full price.

Implications: Remember that in marketing, a strategy is why people buy… and a tactic is why they should buy now. If you’re like Wal-Mart, Kia or Southwest Airlines, low price might be a strategy. But for most companies, low price is an occasional tactic designed to help clear-out stagnant merchandise or act as a lost-leader to drive traffic. Not a sustainable means of making a profit.

So here’s the million-dollar question: How (and when) should you transition away from short-term, low-price tactics… and return to a conversation with your consumer that is focused on your unique value proposition?

First, let’s talk about the “how.” What were the benefits sought by customers who bought your product or service… before the recession? What are the triggers that put someone in the market for whatever you sell? Once they’re in the market, what criteria must be met to get on the consumer’s consideration list? What issues will the consumer think about as they narrow the field and make their final decision? What is different about the product line you sell? What is unique about the way you sell it?

Does the thing you sell offer personal gratification, family enrichment, status, shelter, or comfort? Does it represent a way to protect their assets or income… or the opportunity to advance their career? Does it save energy, protect the environment, or help support a worthwhile cause? What is the problem customers are trying to solve when they buy the product or service you sell? What attributes do they seek of a provider in your category? Quality? Service after the sale? Romance? Expertise, a warranty or some other assurance? Flavor? Fast service? Some other value-added component?

Next, let’s think about the “when” part of our question. When is the right time to move from heavy price-point tactics to a conversation about your unique value proposition?

Some pundits would suggest that you time the shift to coincide with a recovery, or just before; advice that is only helpful if you happen to own a crystal ball. As we have said before, most of us will not know that a recovery is underway, officially, until months after it has begun. [See "Dateline 2010," posted 6/20/09.]

I would submit that your unique value proposition (your predominant strategy) should always be a staple component of your marketing effort. Right now, sale prices are everywhere; discounts alone do nothing to make you stand out.

Price has been a valuable tactic, helping many companies bide their time and survive the recession. But if the intent of your marketing is revenue and profit, you must anticipate the possibility of higher costs, and consider how you will regain the fair margins that allow you to operate profitably. In other words, prepare to focus less on how little you cost, and more on how much you are worth.

Mike Anderson

Statistics, generally speaking, can be dangerous

I read a Media Post story, recently, which quoted some research about consumer preferences toward environmentally-friendly providers. I will paraphrase: “Nearly 80% of consumers said they would rather buy from companies doing their best to reduce their impact on the environment.”


I’d love to see the make-up of the remaining 20%. I can only guess, but my hunch would be that a very small percentage of consumers (a fraction, hopefully) simply hate the planet and would rather buy from companies bent on destroying it. Another share of this remaining group could have been demonstrating their ignorance or apathy (“I don’t know,” or “I don’t care”). And yet another part of this group had to be thinking, “What a stupid question.”

Implications: Don’t get too far ahead of me, here. I’m not out to indict this body of research. My purpose with this posting is to remind companies that when statistics are used to season a “story”—whether in the trade-press or main stream media—one seldom benefits from the deeper, meaningful data that was uncovered in the study being quoted. Companies must be cautious about using snippets like this as if they were actionable data. General statistics like this might make for an interesting news story or blog post… but they hardly constitute the basis for sound, strategic decisions.

Good research is balanced and unbiased. It yields useful insights and actionable knowledge. It is a process of discovery… not a search for evidence to support existing assumptions.

Okay, so consumers would rather buy from companies who are trying to reduce their impact on the environment. To what extent will they put their money where their mouth is? Would they pay a 5% premium? 10%? 20%? Do attitudes vary by product category, and if so, how? How does their willingness to pay an environmental premium change, relative to socio-economic background or geographic location?

Many of us enjoy interesting statistics. But beware… there is a difference between “interesting” and “actionable.”

Here's why I raise the issue: The Great Recession has been marked by sweeping assertions that consumers are cutting back on “want” spending, and spending only on “needs.” While generalized statistics may show that frugality is the tendency of many right now, it is certainly not true of everyone. And even for those who have altered their spending habits, there are varying degrees of “cutting back,” and differing definitions of “need” and “want.”

Case in point: Go to the grocery store and conduct exit-interviews with a few shoppers. Hold up a $600 Big Bertha golf club, and ask them whether the item is a want or a need. Then, head for the first tee box at your local golf course, and ask the same question. You’re likely to get two starkly contrasting sets of answers. Among other things, the answers will depend on whom you have asked, the context of the question, and the perspective or world view of the person at the time the question was asked.

Humans are fascinating people. We are at times unique, conforming, responsible, serendipitous, moody, spontaneous, well-planned, unorganized, rational and irrational. We are capitalists one moment, and environmentalists the next, leaders and then followers, risk-takers on one matter and then safe players on the next.

That’s why, when it comes to consumer research, I implore you to be wary of sound-bite statistics. They often disguise more than they reveal.

Mike Anderson

Saturday, June 20, 2009

Dateline: June 2010. The recession is over... (and it has been for nearly a year)

Remember how the beginning of the recession was announced?

It wasn’t.

For much of 2007, and virtually all of 2008, consumers and companies knew something was wrong. But anytime it was brought up, someone on Wall Street, at the Treasury, or in the White House would essentially say, “No, a recession is defined as two consecutive quarters of negative growth in the GDP, so technically, we’re not in a recession yet.”

Then, on December 1, 2008, it was made official. Not only that we were in a recession, but that we had been for a full year. Why am I re-hashing all of this? Because: A recovery will be announced in virtually the same way.

To say that a recession exists when there are two quarters of declining GDP is not entirely accurate. The basis of a recession involves much more than that, including real trade and manufacturing sales, personal income rates, inventory liquidations and more (including two consecutive quarters of a drop in the GDP). All of this is why I’m not a math person. But the important point is this: These measures are taken over time. And by the time all of these indicators confirm that the recession is officially over, the recovery will have been underway for twelve to fifteen months.

A recession is not one singular event with a clear beginning or end. It is a set of complex criteria, which relies on historic data more than today’s information or tomorrow’s forecast.

Implications: If you’re waiting for someone to give you the green light, indicating that it’s time to start getting back to normal, you’re likely to be run-over from behind.

Editor’s note: I had the privilege of attending the recent ANA conference in New York, where the best speaker of the day was the chief investment strategist from Charles Schwab. Her name is Liz Ann Sonders, and she gave wonderful—useful—clarity to how recessions work, and what we might expect from a series of economic recoveries. I share more about what I learned at that event at a posting titled, “Enough about recessions. Let’s talk about recoveries.”

Mike Anderson

Wednesday, June 17, 2009

Sorry, friend... but I can see right through you

Like many people around the globe, I am watching the post-election unrest in Iran with great interest. One of the most fascinating aspects of these reports: They’re not coming from reporters.

While officials have allegedly cancelled the credentials of many journalists who are visitors to their country, they have failed to stop the export of information. Individuals, working through blogs and social networks, are organizing protests, sharing information, and publishing eyewitness accounts… in real time, world-wide. In this uncontrolled, unfiltered media space, I'm sure some of this reporting is accurate, some of it is not, and some of it is probably outright propoganda. The New York Times had a great story about this people-to-people information exchange in Monday’s edition. It was followed by an article on Tuesday about how the U.S. State Department is doing what they can to help Twitter and other social networking sites stay up and running (click here to see that follow-up story).

It is not my intent to begin covering international affairs at this site. But it is my intent to consider how those affairs are being covered. Remember the days when a company would privately craft a press release, and embargo the distribution of that information until a certain date and time?

Those days are over. Information seeks to be known… and in the age of social networking, it will be.

Implications: Just because News Corp announced a significant layoff of its MySpace workforce this week doesn’t mean social networking is in its death throes. On the contrary, the size of the audiences (or more accurately, the number of participants) involved with MySpace, Twitter, Facebook and other SN sites continues to grow. (The challenge for most of these companies continues to be figuring out how to monetize that critical mass.)

By now, most companies have begun to explore—or at least consider—how to best harness the power of social networking as a marketing resource. (Recently, I heard Rich Godwin of Google deliver a speech about how the Obama campaign leveraged Web 2.0 as an important set of tools in last year’s presidential election… and how marketers could/should be doing the same.)

But has your company conducted any kind of a risk assessment, with regard to the potential damage that could be caused by an uncontrolled viral campaign? One authored by an angry customer, or a disgruntled employee? Walk through you store, factory, dealership, restaurant or firm… asking yourself this question: “What if anyone could know about anything we do here?”

  • Is there anything with your walls that you would not want someone to photograph with their mobile phone camera, and then post online? (Examples might include a crude poster hanging in an employee cubicle, or a dirty food preparation area.)
  • Have you thought about how your company would respond to the unintended release of sensitive information, or even the distribution of misinformation?
  • Have you provided customers with a way of lodging a complaint within your organization—a system that strives to satisfy their issue or at least makes them feel “heard”—so they feel less compelled to take their issue elsewhere?

I’m not telling you that marketers should operate their companies in a manner that makes them virtually transparent.

I’m telling you that ship has sailed.

Mike Anderson

Monday, June 15, 2009

Where credit is due

More than two years ago now, I began citing a story in the Los Angeles Times about how strange things had become with regard to financing a car or truck. In the story (12/2007), a couple had traded-in their 2001 Suburban toward the purchase of a new F-350 pickup truck. The irony of the story is that they still owed roughly $9,500 against the suburban, and paid nothing down in the transaction. In other words, they drove away from the dealership owing more than $44,000 on their new pickup truck, the sum of debt between the two vehicles.

Extreme? Perhaps. But in 2008, the average car loan was 60 months. And 45% of all car loans were for terms of six years or longer.

But that trend could be shifting. From the first quarter of 2008 to the 2009 first quarter, the number of new auto loans plunged 40.5 percent, according to an Associated Press story that appeared in today’s Minneapolis Star Tribune. The story went on to say that the average auto payment fell nearly 9 percent, to $361 from $395 a year ago.

The bills are coming due, and more consumers seem to be having difficulty making all the payments. The Star Tribune story indicates an increase in debt defaults on a variety of fronts. In the first quarter, 0.83% of car loans were at least sixty days late (up from 0.65% a year earlier). 5.22% of mortgage holders were two months late, and the delinquency rate for bank-issued credit cards rose 11 percent from last year, to 1.32 percent for January through March.

Implications: The de-leveraging of the consumer is not entirely the will of that consumer. There comes a time when the consumer simply cannot find anyone to roll-up ever higher levels of debt into a new purchase. The dealership and the consumer have both begun to realize that they’re not just financing a car; that both the consumer and the dealership might be mortgaging their futures. When so many consumers so up-side-down in debt, their ability to buy a car in the years ahead is impaired, just as dealership and/or lender has diminished their ability to sell to that debt-laden group.

Are you prepared for a return to the day when ultra-qualified buyers were treated like royalty? Circumstances may be in place for the return to a marketing scheme that places premium attention on well-qualified buyers. Special incentives, customer rewards, value-added services?

In a world where customers with outstanding credit ratings might be harder to find… accept that they might also be harder to keep, due to the more competitive selling atmosphere that now obviously exists. Just as the forces of Supply & Demand can influence the value of the product or service you sell, it can dictate the value of qualified buyers. The shorter the supply of qualified customers, the more valuable each one becomes.

Mike Anderson

Furloughed and forlorn

On more than one occasion, we’ve discussed the impact of staff cutbacks on the service capacity of a company, the corresponding satisfaction of its customers (or lack thereof), and impact on remaining workers (survivor’s guilt, increased workload, fear, etc.)

An interesting story in this morning’s New York Times looks at labor market churn from another perspective: Workers who have been cut back, but still show up for work on their days off.

Implications: Whether you’re a customer being served by these workers, a company who employs them, or the competitor of a company that is making full-time use of furloughed personnel… this practice is likely to impact you. Note the number of times “emotion”—or a word that describes a particular emotion—was used in this story. Strong feelings surround this issue, whether it’s the fear of an employee who feels compelled to continue working full time—without full pay—as a means of “earning” their full job back… or the resentment of a worker who senses a “wink and a nod” expectation that they continue working five days for four days of pay.

If you are an employer with “furloughed” personnel, what steps are you taking to make sure workers actually receive the time-off they are entitled to? (Do you expect the same output from your company even after a reduction in human resources? Are your expectations realistic?) What are you doing to keep furloughed personnel informed and optimistic… and their expectations realistic? Candid conversations about future prospects, even if they are bleak, can reinforce the respect and loyalty of the workforce.

If you compete with a company that you’ve heard is abusing the terms of workforce reductions, is now a good time to harvest their key talent? An economic recovery is inevitable if not imminent, and it will certainly arrive sooner and with greater strength for the company with happy and productive employees. But be careful… that immutable truth works both ways.

Mike Anderson

Wednesday, June 3, 2009

Enough about recessions. Let's talk about recoveries.

Like most people, I’ve been hit with relentless waves of information about the recession. So while listening to Liz Ann Sonders at a recent conference of the Association of National Advertisers in New York, I was pretty excited to hear the chief investment strategist from Charles Schwab suggest that we may have hit bottom in the last two weeks of April or the first week in May… and that a recovery may be underway. Then, Ms. Sonders proceeded to go through a checklist of reasons for her suspicion.

She reminded the audience that new layoffs are a better indicator of economic health than real employment numbers… and the number of new layoffs has been dropping of late. She cited the sustained fall of long-term interest rates, the increase in consumer confidence, the low levels of wholesale inventories, and the imminent increase in new factory orders that should follow. And referring to these two elements as the most important indicators of improved economic health, she noted that the sale of homes and stocks are beginning to stabilize. (With the stock market, we’re not seeing the extreme spikes and drops that we saw over the winter. Overall, stock values are showing the power to sustain their gains, relatively speaking.)

But note the nuance, in her opening remarks: She said, “A” recovery may be underway. Not necessarily “The” recovery. Instead of a “V” at the bottom of a chart, our exit from the Great Recession could look more like a W… or a series of W’s. And just as there is no singular cause for a recession, there will be a number of drivers influencing the ebb and flow of these recoveries. But we can all agree that these issues are less scary if you see them coming.

The leading risk: Inflation. Wholesale inventories are low right now, and so are commodity prices. As consumers begin spending, and demand for new products rises, the supply of commodities may not keep up with demand, and a bidding war (inflation) could follow. [Note: An article about this risk, with regard to Oil, appeared here back on April 1st (The Fuel Economy), and in another story on April 28.] Unlike previous recessions, when companies had warehouses full of goods to satisfy their “just in case” strategy… technology has allowed companies to empty their warehouses and operate under a “just in time” strategy. So there’s not a huge backlog of goods to supply any sudden demand.

Another governor that could slow the engine of recovery: The de-leveraging of the consumer. Savings rates have shot up, use of credit has fallen. Retail sales that are credit-reliant (furniture, automotive, other big-ticket items) could see additional challenges on the road to recovery.

Implications: If your company is determined to “get aggressive” as soon as there are some signs that a recovery is underway, beware of two important caveats.

First, the recession and the recoveries may not be as distinct as black & white.

Second, don’t be discouraged if the impending “Ups” are seasoned with a few “Downs.”

Once again, all of this makes a strong case for the Elm Street Economics mentality… that you should focus less on what’s going on with Wall Street, Washington, or Ottawa (the macro economy), and focus more on the way you run your business, and the relationship you enjoy with the consumers who live down on Elm Street (which represent your company’s micro economy).

Let the recoveries begin.

Mike Anderson

Sustained restraint, or re-defining value?

Stories about a new era of conservative spending have been plentiful. In this week’s Advertising Age, there was another story about the new “Consumer Frugality.” It explained how companies like Proctor & Gamble and The Home Depot are reading—and responding to—what they perceive to be a new consumer mindset. (Click here to read the AdAge story.)

Implications: Pardon me, but I’d like to pick a fight over this issue… because once again, too many people are trying to over-simplify and over-generalize “consumers” as one clump of people who move through life, single-file, all the same, like a bunch of lemmings. And anyway… people have not gone “frugal” as much as they’ve simply come to their senses.

A few years ago, lots of people spent as if money was no object, jobs were easy to come by, and we can live like there’s no tomorrow. Now, lots of people have realized that today is that tomorrow, money is an object, and their jobs are worth protecting.

That does not mean they won’t buy anything if it's not on sale, or that anything on sale is worth buying.

Consumers—acting individually—are revisiting how they define “value.” Is this product worth the price? Should I spend more so I might have to replace this item less often? If I “do it myself” instead of calling a contractor, could I save money for use on one of our family’s other priorities? Is there an economic alternative to taking a trip on our vacation this year? Am I choosing this product because it’s really better, or simply out of habit?

Increasingly, companies need to communicate the Unique Selling Proposition (value) of their product. How it enriches the consumer’s life (or family, or job…). How it makes life easier, or better, or more rewarding… in a way that competitive products, services, or options do not. Absent a Unique Selling Proposition, price becomes the default influence over every purchase decision.

Maslow (the hierarchy of needs guy) once said, “If a hammer is the only tool you have, you tend to see every problem as a nail.” Likewise, if the only weapon you have is a discount or sale price… you tend to assume that is what every consumer is after. But today at the mall, grocery store or dealership, everything on sale will not be sold. And everything bought will not be on sale.

Forget about "all consumers." Focus on your customers. Research what matters, why they buy, and why they don't. When you focus on your best customers, and deliver on the benefits they seek, you're not solving the world's economic problems. Just your own.

Mike Anderson