Sunday, June 29, 2014

Marketing Budget Shifts From Traditional to Digital Are Slowing

For most of the past decade, numerous research studies have documented two clear marketing trends:

  • First, spending on digital marketing methods, channels, and tactics has been growing rapidly; and
  • Second, companies have funded a significant portion of the increased spending on digital marketing by moving funds from traditional advertising and marketing budgets.
Two recent studies indicate that the reallocation of spending from traditional advertising and marketing to digital marketing channels and tactics is slowing.

The CMO Survey

The first study to reveal the slowdown is the latest edition of The CMO Survey from Duke University's Fuqua School of Business. The CMO Survey has been conducted semi-annually for the past several years. In the February 2014 survey, CMO's on average predicted an 8.2% increase in digital marketing spending over the next 12 months. In the two surveys conducted in 2013, CMO's projected increases of 10%, which was down from projected increases of 11.5% in the August 2012 survey and 12.8% in the February 2012 survey.

Meanwhile, CMO's are less pessimistic about traditional advertising spending. In the August 2011 survey, CMO's were projecting an increase of 1.3% in traditional ad spending. By February 2013, they were forecasting a 2.7% decrease in traditional ad spending. In the February 2014 survey, CMO's said that spending on traditional advertising would be essentially flat (-0.1%) over the next 12 months.

The chart below shows the projections for both digital marketing and traditional ad spending from August 2011 through February 2014.

The SoDA Report

The second study is the 2014 SoDA Report by the Society of Digital Agencies. The SoDA study was based on a survey of global digital marketing decision makers and influencers. Forty-two percent of the respondents were from corporate brands, while 43% were from agencies and production studios.

In the 2014 survey, 25% of client-side respondents said they were increasing their digital marketing budgets by reallocating funds from traditional marketing activities. In the 2013 survey, 39% of client-side respondents said they were funding digital marketing growth by taking funds from other marketing activities.

These studies suggest that the dramatic shift from traditional to digital marketing channels and tactics is slowing, at least. Marketing thought leaders have been predicting the demise of traditional advertising and marketing tactics for more than two decades, but that clearly hasn't happened. It's unlikely that large brands will completely abandon TV and radio advertising in the foreseeable future. It's more likely that we are approaching some kind of equilibrium as marketers fine tune their marketing investments to match customer preference patterns.

Sunday, June 22, 2014

When Will Price Changes Be Profitable?

Price is one of the traditional 4P's of the marketing mix, and pricing is or should be a core component of every company's business and marketing strategy. Unfortunately, many marketers today focus almost exclusively on marketing communications (the promotion component of the 4P's), and they have largely ceded the remaining components of competitive strategy to other business functions. As a result, marketers often have little influence over several factors that drive business success.

In my view, marketing should play a leading role in formulating competitive strategy, and this necessarily means that marketers must get more involved in pricing decisions.

The reality is, no marketing strategy is complete unless it addresses pricing issues and includes a strategic approach to price setting. That's because pricing can be the single most powerful tool that company leaders can use to impact profits. To illustrate the power of price, consultants with McKinsey & Company analyzed the average income statement of the Global 1200, an aggregation of 1,200 large, publicly held companies from around the world. The objective of the analysis was to quantify the profit impact of various types of financial improvements.

The McKinsey researchers found that a 1% improvement in pricing would yield an 11.0% increase in operating profits at the average Global 1200 company. By comparison:

  • A 1% decrease in variable costs would produce a 7.3% increase in profits
  • A 1% increase in sales volume would yield a 3.7% increase in profits
  • A 1% decrease in fixed costs would produce a 2.7% profit improvement
Pricing decisions are typically based on input from several business functions, but marketing should play a leading role in these decisions because marketing is (or should be) particularly well-attuned to the company's external market and competitive environment.

One issue that arises fairly often is whether a change in prices will result in more profit. Decisions about increasing or reducing prices are inevitably challenging because of the inherent uncertainty about what the financial impact of the changes will be. Company leaders must ask themselves:  If we lower prices, will we generate enough new sales to increase our profits? If we raise prices, will we lose so much business that our profits will be harmed rather than helped.

These questions are extremely difficult to answer. In fact, to answer them accurately, company leaders must know what the "elasticity of demand" is for their products or services. And unfortunately, your company's elasticity of demand isn't something you can find via a Google search or at your local library.

The good news is that there is a simple calculation that can help company leaders make more rational decisions about price changes. The calculation is simple because it doesn't try to predict what will happen if prices are increased or decreased. Instead, this calculation describes what must happen for a price change to be profitable.

Specifically, this calculation can help company leaders answer two questions:
  • How much would we need to increase sales volume in order to profit from a specified price reduction?
  • How much could our sales volume go down before a specified price increase becomes unprofitable?
The measure of "profit" used in this calculation is contribution margin (sales minus variable costs), and the calculation uses the actual contribution margin (expressed as a percentage of sales) generated during a base period (usually a year). When a company reduces selling prices, the contribution margin goes down, and new sales volume must make up for that decline before profits will be improved. On the flip side, contribution margin goes up when a company raises prices, and the company can afford to lose some sales volume before profits are impaired. This calculation will tell you where those "breakeven points" are.

The formula for this calculation is:  -(Price Change) / (Contribution Margin + Price Change)

To give a simple example, suppose that your contribution margin during the base period was 80% and that you are considering a 10% price reduction. How much will your sales volume need to increase for the price reduction to be profitable. The answer is 14.3%, calculated as follows:

Breakeven Sales Volume Increase = -(-10%) / ((80% + (-10%))

Breakeven Sales Volume Increase = 10% / 70%

Breakeven Sales Volume Increase = 14.3%

If your company had sales of $20 million during the base period, you would need to increase sales by more than $2,860,000 for the 10% price reduction to be profitable.

This approach can be used to evaluate across-the-board price changes and price changes that apply to individual products or product lines. It cannot be used for individual deals.

I've created a simple Excel worksheet to calculate these breakeven points. If you'd like a copy of this worksheet, send an e-mail to ddodd(at)pointbalance(dot)com.

Sunday, June 15, 2014

Who Should Be Responsible for Acquiring New Leads?

For B2B companies that sell complex products or services, keeping the sales pipeline filled with qualified leads is vital to sustaining both revenue growth and profits. When it comes to acquiring new sales leads, B2B companies must address two distinct but related issues:

  • How can we acquire enough sales leads to enable us to meet our revenue objectives?
  • What is the most efficient and cost-effective way to acquire the volume of leads we need?
Historically, most B2B companies have relied primarily on their salespeople to identify and acquire new leads. "Prospecting" was considered to be a core part of every sales rep's job, and effective prospecting has long been a popular topic at sales training events. Unfortunately, the traditional approach to lead acquisition no longer works very well for many B2B companies. 

Today, buyers can go online and find most of the information they need to evaluate products and services. So, many buyers are delaying conversations with sales reps until later in the buying process, and as a result, it's becoming a lot harder for salespeople to create the initial engagement with potential buyers.

In recent years, a growing number of B2B thought leaders have argued that marketing, rather than sales, should be primarily responsible for lead acquisition. The proponents of this view make two compelling arguments. 

First, they contend that lead acquisition is an inherently inefficient activity that has a high input (work required) to output (success) ratio. Because of the inherent inefficiency, it's important to acquire leads using low-cost resources when possible. Salespeople are expensive resources, and their prospecting activities don't scale because they're labor intensive. Marketing programs, on the other hand, scale very easily, and many can be automated on a cost-effective basis.

Second, moving primary responsibility for lead acquisition from sales to marketing will improve sales productivity. Reducing the amount of time that salespeople must spend prospecting means that they will have the ability to manage a larger number of high-value sales opportunities. This allows sales reps to close more deals and generate higher revenues for the company.

Despite these compelling arguments, it's clear that many B2B companies are still relying heavily on sales reps for lead acquisition. The following table is based on the Sales Performance Optimization surveys conducted by CSO Insights and includes data from the survey results published in 2011 through 2014. The surveys asked participants to specify what percentage of their leads are self-generated by sales reps, what percentage are generated by marketing, and what percentage originate from other sources.

As this table shows, the percentage distribution of leads has remained fairly stable for the past four years. In fact, data from earlier CSO Insights' surveys shows that little has changed for the past eight years.

It's clear that most B2B companies should rely more on marketing and less on sales for lead acquisition. This allows a company to use its sales reps to do more of the things that only they can do - have meaningful, personal, one-on-one conversations with prospects who are truly sales ready.

So, what is the right division of responsibility for lead acquisition? The answer will depend on what you sell and on the economic structure of your market. Based on my work with clients and on a review of current demand generation best practices, here's a framework that should work for many B2B companies:
  • Percentage of leads generated by sales reps - 20% to 30%
  • Percentage of leads generated by marketing - 40% to 60%
  • Percentage of leads from "other" sources - 10% to 20%

Sunday, June 8, 2014

How Small B2B Companies Do Content Marketing

The annual content marketing surveys conducted by the Content Marketing Institute and MarketingProfs are fantastic resources for anyone involved in content marketing. For the past couple of years, CMI and MarketingProfs have published reports that provide separate survey results based on the type of company (B2B or B2C), company size, and geography.

Most of my clients are small and mid-size B2B companies, and I've often wondered if the content marketing practices at smaller companies differ markedly from those at large B2B enterprises. CMI and MarketingProfs recently published a report that isolates the responses given to the 2014 survey questions by small B2B companies (those having 10-99 employees). This report reveals that the content marketing practices in small B2B companies are similar in several respects to the practices of larger firms.

The table below compares the survey results for small B2B companies with the results for all B2B companies represented in the 2014 survey.

As this table shows, more than 90% of survey respondents from both small and large companies say they are using content marketing. In addition, about the same percentage of respondents from both small and large companies believe their content marketing efforts are effective, and both groups of respondents say they are producing more content then they were a year earlier.

Although it's not shown in the above table, the CMI/MarketingProfs research reveals that small B2B companies devote almost as much of their total marketing budget to content marketing (on average, 27%) as larger companies (the average for all B2B firms was 30%).

One notable difference between small and large B2B companies relates to how they create content. As our table shows, only 34% of small B2B companies outsource any content creation, while the percentage for B2B companies overall is 44%. According to CMI and MarketingProfs, 73% of large B2B enterprises (those having more than 1,000 employees) outsource at least some content creation.

Larger enterprises (both B2B and B2C) typically use external marketing services professionals more than smaller firms, so the gap in content outsourcing isn't really surprising. I suggest, however, that most small companies would benefit by using outside professionals for at least some of their content development work.

Developing authoritative and compelling content requires a specific set of skills that not all marketers possess, and it rarely makes economic sense for a small company to hire a full-time professional to create content. In addition, marketing departments in small companies are often understaffed, and they simply don't have the time to create content at the pace that's needed. Under these circumstances, selectively outsourcing content development is usually the best way to obtain high-quality content on a cost-effective basis.

Sunday, June 1, 2014

Increased Profits, Not Higher Revenues, Determine Marketing ROI

Measuring return on marketing investment (MROI) has been a major point of emphasis in many companies for the past several years. So by now, you would think that the process for calculating MROI is well understood. Unfortunately, I still see far too many examples of MROI that has been calculated incorrectly - in many cases, by people who should know better.

One of the most common and serious mistakes is the use of increased revenues (sales) rather than increased profits when calculating MROI. To illustrate this error, take a look at the following table. I based this table on an example ROI calculation that appeared on the website of a well-known national provider of direct mail services. I won't name the company because they are only one of many companies that use this methodology.

In this example, Return on Investment (ROI) was calculated by dividing Total revenue ($1,250) by Total cost of the mailing ($550), resulting in an ROI for the mailing of 227%

That ROI number looks fantastic, but the problem is, it's flat out wrong. Way wrong.

The basic formula for calculating ROI is:

ROI = (Gain from Investment - Cost of Investment) / Cost of Investment

For ROI purposes, Gain from Investment is the incremental gross profit (gross revenues less cost of goods sold) produced by a marketing investment, as illustrated by the following "waterfall" diagram.

Using incremental sales or revenues in the marketing ROI calculation distorts ROI because most marketing campaigns or programs are designed to increase sales volume. And increases in sales volume are not free - there are always costs associated with producing and delivering the additional products or services. (Note:  If a company has extremely high gross profit margins, using revenues to calculate MROI can be relatively accurate. For example, computer software companies can have high gross profit margins because the cost of producing an additional copy of the program is negligible. However, this situation is the exception, not the rule.)

The first problem with the methodology used in the direct mail example is that it bases ROI on revenues rather than gross profits. If the cost of goods sold of the products covered by the example is 50% of the selling price, the incremental gross profit produced by the direct mail program would be $625 (total revenue of $1,250 X 50%). Using incremental gross profit causes the ROI to drop from 227% to just under 114% ($625 / $550). That's a more accurate ROI calculation than the one used in the original example, and it's still an impressive number, but it's also still wrong

To calculate MROI correctly, you must subtract the cost of the marketing investment from the gross profit produced by that investment and then divide by the cost of the investment.

So, the real ROI produced by the direct mail program would be calculated as follows:

ROI = (Gross Profit - Total Cost of the Mailing) / Total Cost of the Mailing
ROI = ($625 - $550) / $550
ROI = 14%

It should be clear that inaccurate calculations of MROI can lead to unprofitable marketing decisions. Equally important, they can also undermine marketers' credibility with senior company leaders. Would you want to tell your CEO and CFO that a marketing campaign has an ROI of 227% when the real ROI is 14%?

The moral of the story is:  If you're going to calculate MROI, be sure to calculate it correctly.