The State of Modern Marketing – Houston, we have a problem

Previously published in New Zealand Marketing magazine, April 2009 under the title ‘Marketing’s Fight For Credibility’. Written By John Varcoe
This article is the first in a series about the state of mdern marketing. You can read the second article in the series here.

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Recent research published in the prestigious Journal of Marketing investigated the actual impact that senior marketing managers have on company performance. Folks, it wasn’t a rave review.

Researchers Pravin Nath and Vijay Mahajan’s research sought to identify the factors associated with the likely presence of a chief marketing officer (CMO) in a company’s top management team; and what are the consequences of the CMO presence for firm performance. The study was a multi-industry sample of 167 firms over a five-year period. The results are not anywhere near as clear-cut as marketers would prefer.

In summary, Nath and Mahajan have shown firms are more likely to have a CMO in the top management team when they have relatively high levels of innovation and differentiation; when they follow a corporate brand strategy; when the CEO lacks marketing experience; and when there is a relatively high level of marketing experience in the top management team. On the other hand, they found that CMOs are less likely to be in the top management team as small firms diversify (although more likely if the firm diversifying is relatively large). But their really telling findings were these:

  1. The presence of a chief marketing officer in the top management team had no impact on firm performance; and
  2. Firms with a chief marketing officer in the top management team did not perform any better or worse than those without.

It’s further evidence that marketing shows every sign of being a discipline in distress, searching for legitimacy and credibility. It’s going to be hard to be seen to be accountable if we’re not actually doing anything that adds real value.

No surprise then Professor Nigel Piercy’s comment in June 2008 as to the state of modern marketing, “Worst of all, marketing as an academic discipline has lost intellectual leadership in its field, and this is what is reflected in its teaching.

“The need is clear‘, says Piercy, “The need is for bigger ideas. The challenge to the marketing discipline is to engage with the big ideas that are shaping the future of organizations and markets.‘ If Piercy’s correct, and I believe he is, then we’re going to really struggle as a profession for some time to come. We need to change our spots.

We now find ourselves in a recession–we daren’t use the D-word—and a rapidly increasing number of cost-cutting CEOs and CFOs are taking a close look at company marketing budgets with a glint in their eye. Some would say it’s D-Day for the marketing profession—time to shape up or ship out.

So, what can we do about it? It’s worth taking a look at some of the operational challenges confronting the profession day to day.

1. Accrual accounting

Most chief executives and CFOs find it hard to see the company’s brand as an asset. No surprise then that brand investments are typically expensed and not capitalised. Pedro Laboy from Tocquigny provides the following example to illustrate this point:

Under Laboy’s Scenario 1 the effect of purchasing a machine on the profit and loss statement for one year is only $10,000. Under Scenario 2, revenue has decreased by $50,000 and, as a result, investment in branding is cut by $40,000 while the machinery investment is left alone. However, as outlined in Scenario 3, the true implications of these investments can be seen only if looked at from a cash basis perspective. When both machinery and marketing are capitalised over only one year, the effect of both investments on cash is the same. Yet in reality, the useful life of the brand is likely to outlive that of the machine.

As Laboy observes, “Capitalisation accounting principles are the main reason why marketing budgets are the first to be slashed when corporations are looking to trim costs. Accrued earnings do not deliver shareholder value; cash does. It is myopic to make investment decisions based solely on short-term accrual accounting implications.”

marketing-fight-table

2. Financial literacy status

(or at least a marketer’s ability to speak the same language as CEOs and CFOs). I’d not be the first to say that many marketers are mass marketing generalists who lack the knowledge and skills required to contribute at a strategic level in a way that will deliver shareholder value. On top of that, their day jobs are often dominated by the cut and thrust of tactical executions—ads, brochures, websites and trade fair promotions. Those relatively few marketers who do take the time to gain financial qualifications tend to move out of marketing roles as soon as they can and they don’t come back. They’re a big loss to the profession, particularly in its attempt to gain more widespread recognition and senior management credibility.

Perhaps it’s no surprise that only a handful of marketing graduates from Harvard, Stanford, Wharton, Chicago, INSEAD or from any of the other well-known international business schools (ie the pick of the global marketing crop)—have ever been employed by what authors Collins and Porras labelled the world’s “built to last‘ companies famous for the outstanding quality of their long-term management performance. Or that since the eighties a number of respected authors have identified the influence of marketing at the corporate strategy level has decreased. A 2004 ANA/Booz Allen Hamilton study, for example, estimated only 47% of the Fortune 1000 companies had a marketing manager in the top management team (which many commentators consider a good indicator of the status of marketing and the commitment to the marketing concept within the host company).

3. Conventional wisdom

One of the great weaknesses of the marketing profession is that it’s largely based on intuition and anecdote. Rules of thumb, the tried and true prevail (again and again) perhaps at the expense of innovation and change.

Consider Armstrong and Schultz’s 1992 paper Principles Involving Marketing Policies: An Empirical Assessment. Like most people they assumed marketing contains many fundamental principles, and so they used an extensive procedure based on pre-specified criteria to search for those principles in basic marketing textbooks. They identified 566 normative statements from nine texts published over six decades. However, these marketing statements were presented in the texts without any empirical support. Of the 566 statements, four raters agreed on only twenty as representing marketing principles. When twenty marketing professors rated whether those twenty meaningful principles were correct, supported by empirical evidence, useful, or surprising, none met all the criteria. Nine of the principles were judged to be nearly as correct when their wording was reversed! The authors were unable to find any useful principles about pricing, product, promotion, or place in basic marketing textbooks.

In a similar vein, take a closer look at Ries and Trout’s so-called 22 Immutable Laws of Marketing, a book that when I last looked had received 100+ highly positive/rave reviews on Amazon, many from tertiary-qualified marketers. Yet most of the “Laws‘ Ries and Trout present are merely speculative positions, they lack quantification and aren’t based on a systematic collection of evidence (they’re simply anecdotes). Some of their “laws‘ are even contradictory, while others are simply platitudes (Law 17, “Things are unpredictable‘ or Law 20, “Things are often different to how they appear in the press‘, for example) of little if any practical value.

If we’re introducing that kind of thinking in our discussions at the board or management table then perhaps the profession deserves to be where it finds itself today.

4. Marketing research is of variable quality

As a profession we give too much credence to industry-generated anecdotal evidence (almost inevitably only good news stories) or flawed or compromised research. Too little notice is given by marketers to sound academic research based on scientific method, while not enough effort is made by marketing academics to make their research more accessible and relevant to the wider marketing profession. This is a fundamental failing, the chasm between the marketing Fantasyland and reality needs to be bridged—either by academics writing in more accessible language (have you read the Journal of Consumer Research recently?) and publishing plain English summaries in the marketing media, or by marketing practitioners with the necessary skills and desire to do that job for them.

“Clearly, wrapping oneself in the concept of share of voice to maintain or increase advertising spending seems like an obvious case of the Emperor’s new clothes to me”

Consider the current round of industry articles and comments reminding us all that we’re in a recession and now’s the time to ramp up marketing budgets and advertise more. Enhance your share of voice (SOV) and you’ll gain market share the story goes—but guess who’s telling us that? The advertising agencies—the very ones whose livelihood depends on marketers buying more advertising. I bet your CEO and CFO aren’t singing that particular tune—they’re much more likely to be requiring you to cut your marketing budget, demanding accountability for every dollar spent and a clear demonstration of marketing’s ROI. And they want it today!

There are a number of studies that claim to demonstrate that spending more on advertising in a recession pays off because it will deliver a greater SOV. Most of these studies however are either funded by vested interests, they use cross-sectional data, or they inappropriately attribute causality to ad spend. It’s difficult to accept the claims made by such studies as credible given those fundamental concerns, not to mention the lack of independent academic research that supports their case.

One study worth further consideration however is the paper published by Frankenberger and Graham titled “Should firms increase advertising expenditures during recessions‘. They were able to demonstrate that firms (note the study was not conducted at brand level) that increased advertising spends during a recession do slightly better than firms that increased advertising spend in other times, although this was not the case for firms in the service industry. More importantly (and it’s a point conveniently overlooked by the ad industry and many marketing consultants) it also showed there was no long-term effect of cutting advertising during the recession. I bet your ad agency’s not told you that little part of the story!

In a recent Marketing News article the well regarded, and wonderfully outspoken Prof Don Schultz also pointed out the questionable value of pursuing SOV, which is at the heart of the advertise-more debate. He highlighted the lack of any relationship between SOV and market share in the US auto industry before concluding, “Clearly, wrapping oneself in the concept of share of voice to maintain or increase advertising spending seems like an obvious case of the Emperor’s new clothes to me.”

The reality is firms shouldn’t make marketing decisions based on an opportunity to gain SOV at a lower than normal cost. Some companies will simply need to cut marketing costs to survive. Others can do very well by maintaining a business as usual approach. And, if your company has something to say that is particularly relevant in the current environment, then yes it may well be more efficient to say it now than to say it in better times. It needs to be horses for courses and if you do have something important to say you don’t always have to say it through advertising. There may be more much cost-effective channels and tactics.

5. Ineffective spend

During a recession there’s a strong tendency to cut costs, and the marketing budget is often one of the first costs CFOs look at. And why shouldn’t they—just because you’ve always spent 10% of revenue on marketing is not necessarily a good reason for continuing to do so. And just because your major competitors are spending 10% on their brands, doesn’t mean they have optimised their return either.

It’s common sense—while it might be fun to be courted, wined and dined by an ad agency, or to see your brand in the glossiest mag or screen in peak time viewing, put your own ego aside—most ads simply aren’t noticed and of those that are, most aren’t attributed to your brand. In some cases, advertising may not even be worthwhile.

Let’s look at two areas where you might be able to make your budget work harder. First consider an FMCG like wine, where products have to compete in a highly cluttered and competitive category. Recent Australian research indicates most consumers have no preferred wine in mind when they enter a retail outlet to make their purchase. Instead they make a spur-of-the-moment assessment of a wine’s quality for its intended situation of use (that is, if it’s suitable for a barbecue or a special celebration and so on). It’s largely about lowering the perceived risk of purchase in what is a fairly complex decision-making process.

Most wine buyers are far from expert and so rely on extrinsic cues (such as price, label, brand name and shelf position) to assess a wine’s quality. Multiple research studies have highlighted the critical importance of the information available at point of sale and the label in particular. The consumer’s purchase decision is one that’s largely driven by design and appearance on shelf, those extrinsic cues as to a wine’s quality and suitability. Not advertising or promotional spend.

And then there’s the option of paying a premium for advertising placements in a media context targeting relevant audiences. Recent research by Wang and Calder published in the Journal of Consumer Research has shown it’s likely audiences will like a product less if the act of processing an ad for the product intrudes on their media transportation experience (ie their absorption in the narrative of the flow of a story or event). Such advertisers it seems are actually paying a lot more for a lot less.

6. Measurement

There’s increasing pressure on marketers to measure their performance against a range of KPIs, and MROI in particular. The problem with such an approach is that unlike operational investments, the effectiveness of your marketing spend is dependent on two dimensions—the short-term monetary gain and the longer-term psychological response of consumers. It also assumes the required return is a financial one, when clearly that is not always the case in the public sector or for other not for profit organisations. Immigration New Zealand’s Settlement Kit is a good case in point. It was designed to facilitate positive settlement outcomes and its effectiveness (in particular the way it communicated key information to migrants who may not have English as their first language and its perceived value as a future reference) was the key measure of its success. Independent research was able to demonstrate just how successful the design was in terms of those communication and retention objectives.

immigration-kit

The effectiveness of Immigration New Zealand’s migrant Settlement Kit was proven by independent research. Of migrants surveyed: 93% were very satisfied with the physical design; 99% thought the information easy to understand; 96% said they enjoyed reading it; and 94% had retained the kit for ongoing reference.

Most of the MROI tools in existence today handle the monetary return dimension well, but they have no way of really dealing with the cumulative affect that marketing has on moving previously disinterested consumers to a state of mind where they will purchase. As a consequence the ROI on an ad campaign for example that doesn’t quite get additional consumers to that point will be $0, yet if the very next campaign does stimulate additional consumers to purchase it will be considered a success by the bean counters—even though without benefiting from the cumulative effect of the previous campaign(s) it too would otherwise have been unsuccessful in ROI terms.

Some authors have argued that scientifically measuring consumer strength of preference is a way for marketers to incorporate the psychological dimension in their investment planning. The problem is however, while that’s probably a good option for scenario comparisons and selection, in reality I suspect it’s of much less use post event for demonstrating an actual ROI, particularly in an environment of dramatic change, such as a recession. Consumers have a tendency to say one thing and do another, even minutes after the event. In a similar vein, it’s been shown that participants in experiments whose explicit and implicit preferences regarding generic food products and well-known food brands for example were incongruent. They were more likely to choose the implicitly preferred brand over the explicitly preferred one when choices were made under time pressure, yet the opposite was the case when they had ample time to make their choice. Measuring consumer preferences then appears to me, for the moment at least, to be a somewhat unreliable indicator of marketing performance.

It seems that a meaningful MROI, one that can reliably handle the complexity and subtleties of the consumer marketplace and the mix of short and long-term consumer behaviours, is still a long way off.

7. Untapped potential

I feel obliged to disclose a vested interest in making this next point. I am a director of a graphic design company (Everything Design) and we’re actively looking for clients that are interested in using design ROI methods.

So with that declaration on the table I can, with a clear conscience, say that many marketers completely undervalue the potential of graphic design. Why is that the case?

The thing that differentiates design from art is that it has a purpose. Design is utilitarian in a way that art is not— it is the how of a thing: how to order the parts, how to serve the client’s interests, how to convey or find the information. At the heart of design excellence therefore is effective communication—the delivery of information, the creation of emotion, the satisfaction of the client’s interests.

It’s a marketing opportunity going begging—the commercial value of design is possibly one of the most cost-effective opportunities for marketers to create value.

Consider the opportunity for good design in the consumer packaged goods (CPG) sector—particularly given the very low cost of design compared to advertising—almost 100% of current and potential CPG consumers see a product’s packaging design, compared with only around 7% who see an ad before experiencing the product on shelf. With up to 70% of CPG brands in high-turn selling environments being purchased on impulse, design is the last and the most critical opportunity to influence the sale.

Through the use of design ROI methods it has been demonstrated there is an average ROI of more than $500 of incremental sales for each dollar invested in brand identity and packaging design projects. Authors Schultz and Walters for example, in their book Measuring Brand Communications ROI12, presented a range of case studies where there was no supporting advertising and the only variable that changed was an enhanced brand identity expressed through a revitalised package design. Every dollar spent on brand identity/package design in those case studies generated more than $400 of incremental profit.

More than four hundred to one. Given the very high cost of advertising compared to design, there’s no way a typical CPG ad campaign can deliver anywhere near that kind of return. The ROI for the design-only investment was in fact shown to be 50 times higher than for an integrated project that involved both design and advertising (the ROI for an integrated project was $7, which means the ROI on the advertising investment was very low indeed).

As Prof Bryron Sharp, writing for the Ehrenberg-Bass Institute, notes—”the chances are you don’t need more marketing budget, you can always do better with the money you have”13. For most firms, he says, it’s a fair assumption that less than 20% of their ad budget does any good; the trick is to know what works best. The simple fact, says Sharp, is most ads aren’t noticed and, of those that are, most aren’t actually attributed to your brand. As Schultz and Walters have shown, design doesn’t suffer from that problem. Good design sells. Yet too many marketers leave design to their PR company or ad agency and don’t have a direct relationship with a good design company. It’s time they thought again—the best designers almost invariably work for the best design companies. They’re generally not found working in ad agencies or freelancing to PR shops.

8. Churn

The marketing profession is known for its high rate of churn. The 2008 Gaulter Russell Salary Survey produced in association with Research International and NZ Marketing Magazine14 for example showed 50% of marketing managers were considering a job change in the following 12 months. Being known for such a rate of churn is not doing anything to help the profession gain credibility. It represents a significant cost to companies, in terms of recruitment and induction, and the loss of valuable brand and institutional know-how. This job-hopping can also create a wrecking ball effect, where new marketing managers (often with little experience in their new industry) tip out existing suppliers who were performing well only to replace them with people they had enjoyed working with elsewhere. That can result in the loss of considerable industry and product-know how or the use of suppliers in areas outside their core competencies, while incurring a significant cost to bring the new suppliers up to speed. It may take months if not years to return to the level of understanding and experience that had been so readily swept aside.

Some survey analysts argue the high turnover within the marketing profession might reflect an unsatisfied demand for people with marketing skills. Cynics on the other hand suggest it’s partly driven by the marketer’s fear of being held accountable—of not wanting to be around when the marketing chickens come home to roost. It will be interesting to watch what happens in the year ahead as the recession bites and job-hopping opportunities become much harder to find. Will marketers continue to bail out early in their pursuit of higher salary cheques and a variety of experiences, or will a thicker skin and job security become more the order of the day?

9. Market research—a broken crutch

Most of us know through intuition and personal experience the market research process is flawed – “Does this toilet paper brand make you feel happy or sad on a scale one to five, where one is very happy and five is very unhappy…”. Any adult living in a house with a phone knows what I mean. It’s no surprise either that, on average, only about half of the people interviewed by market researchers ever give the same answer to the same question across two interviews. And this instability occurs even if people are re-interviewed only 15 minutes later. So just how reliable is market research? The answer would seem to be not very. Nowhere near it.

Consider a 2004 study by Horsky, Nelson and Posavac14. They compared the relative attractiveness of performance, dependability, comfort, prestige and exterior styling attributes reported in market research studies (ie what people say) with the same five attributes derived from the actual buying public (ie what people do). There was a dramatic difference—a finding that is particularly troubling because of the heavy reliance of marketing practitioners on research data pertaining to attitudes, purchase intentions, and attribute importance rankings. If predictions based on stated preferences are markedly different from reality, then traditional market research can’t be trusted – simply because consumers are either not willing, or they are unable, to describe their own future state of mind, emotions and, specifically, behaviour. As authors Wright and Klyn15 note in their 1998 study of behaviour correlations in 21 countries, using attitudes to predict future behaviour has shown very poor results. Averages across the studies they investigated show attitudes typically explain less than 10% of variation in later behaviour. Only ten percent!

Market research, despite the claims of the research houses, simply does not generate true customer insight. Market research tools are often used because they’re relatively easy to apply and are available at low cost, or they provide a convenient reason to delay a project until the results are in or market conditions improve. And not because of the quality and value of the so-called consumer insight they claim to deliver. Rather, the evidence suggests market research is based on behaviourist psychological concepts that simply have little, if any, validity. As a result, most marketing organisations actually know little or nothing about their customers—even those that have invested heavily in market research. Put bluntly, marketing managers can’t trust traditional market research. Why is it then that so many of us do?

Where to from here

The ANA/Booz Allen Hamilton study offered six keys to success for senior marketers, which still seem valid today:

  1. Know which of three potential CMO roles you will be expected to fulfill—Marketing Service Provider, Marketing Advisor, or Driver of Growth.
  2. Agree on the contract with the CEO from the beginning, and continually check your progress against it.
  3. Develop organisational linkages, at both the corporate and business unit levels.
  4. Drive the marketing capability agenda.
  5. Quickly making progress on areas such as innovation and ROI marketing that are key to the CEO agenda will be critical to the ultimate success of the CMO.
  6. Take some risks—come up with the big ideas…You can’t have a fundamental impact on a company’s direction without taking a risk.

I’d choose to stress the importance of the latter point and the under-utilised value of graphic design in particular. However, that’s only part of the story. You can’t be an expert in everything. Get the best advice you can, put your personal likes and dislikes aside (you’re not the target audience), team with the best suppliers you can find, and then be brave. Now is the hour.

Hot off the press

The March 2009 edition of the AMA’s highly influential Journal of Marketing includes research by Peters Verhoef and Leeflang on the influence of marketing departments within firms. They sought to identify and explain the level and determinants of the marketing department’s influence, and to gain a deeper understanding of the interplay between that influence and market orientation, and its effect on firm performance. The results are somewhat challenging for the profession. They show a weakened position of marketing departments in the firms studied. More worryingly, their results do not clearly suggest firms need strong marketing departments—because they could find no clear link between the marketing department’s influence and company performance. Nor does Verhoef and Leeflang’s research demonstrate a marketing department’s ability to translate customer needs into customer solutions (and/or products or services) is an important determinant of its influence.

Verhoef and Leeflang however advocate that marketing departments should still work hard to gain influence within firms—they believe a strong marketing department is beneficial because more market oriented firms do perform better. They also offer guidance to marketers about how to go about gaining that level of influence, “Marketing departments should become more accountable for the link between marketing actions and policies and financial results”, they say, and “become more innovative by increasing their share in new product/service concepts, which implies a greater contribution of marketing to organic growth.” They also call for financial behavioural change within marketing departments and suggest the inclusion of a financial section in marketing plans that highlights the financial consequences of marketing actions and a greater use of testing (ROI and other performance metrics).

References

Available on request

One Response to “The State of Modern Marketing – Houston, we have a problem”

  1. Posted by The State of Modern Marketing – Houston, we have a problem - Sales & Marketing Articles on March 4th, 2010 at 9:42 am

    [...] ReferencesAvailable on request. [...]

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