Nick Martin's Marketing Pages

Planning for the double dip

Roger Martin-Fagg delivered a revealing workshop at Ashridge management school on the current state of the economy and where we go from here.

His principal theme is that money supply into the economy has dried up, which in mature economies is the primary driver of GDP. Whilst growth turned fractionally positive in the last quarter of 2009, that included the effect of £200bn of new money supply in the form of Quantitative Easing this fiscal, and the massive benefit to the economy generated by the car scrappage scheme, due to end this month. How dramatically would have GDP fallen were it not for all the money pumped into the economy via Government measures? Martin-Fagg believes it would have been apocalyptic without these unprecedented steps.

Here's the catch. In order for money supply to grow back to the 7-11% annual trend growth needed to produce 3%+ annual GDP, the banks need to start lending again. However, they can't, whatever the exhortations of Government, as long as the value of assets on their balance sheets are overstated. UK banks in particular continue to deleverage their balance sheets, and will discretely write down (or write off) parts of their asset base for a while longer in order to build up their Core Tier 1 Capital base and sweep the rest of the bad news under the carpet. Lending therefore will be severely constricted from its traditional source whilst the banks' capital base is insufficient. That can only get worse as global rules tighten, as they will when Basle III requires them to decrease leverage ratios further.

Meanwhile the consumer expects taxes to rise over the next few years whoever forms the next Government, so are paying debt down as fast as they can. Unused debt provisions extended to individuals in the expansionist prior decade are also being withdrawn by banks. 

Quantitative Easing aside, Government has been consistently increasing investment in the economy since early 2008. On the other hand business investment has fallen to around -12% in the last two quarters, and exports have not sustained their growth, so the only thing preventing the economy from shrinking is Government spending. Guess what's going to happen after the May election? Pressure on Government to reduce public sector net borrowings will intensify, leaving very little stimulus left to prop the economy up.

The net result, Martin-Fagg argues, is a further recession in 6 months' time accompanied by further quantitative easing.

He is not alone. A report from the McKinsey Global Institute shares his behavioural-led approach, and realistically highlights at least 2-3 more years of deleveraging.

Here is The Economist's summary of what it means:

Assigning the odds of further deleveraging is not the same as gauging its likely economic impact. To do that, the study looks to history. It finds 32 examples of sustained deleveraging (at least three consecutive years in which ratios of total debt to GDP fell by at least 10%) in the aftermath of a financial crisis. In some cases the debt burden was reduced by default. In others it was inflated away. But in about half the cases—which the report regards as the most appropriate points of comparison—the deleveraging came through a prolonged period of belt-tightening, where credit grew more slowly than output. The message from these episodes is sobering. Typically deleveraging began about two years after the beginning of the financial crisis and lasted for six to seven years. In almost every case output shrank for the first two or three years of the process. 

The Solid red circles on the above chart represent household debt ratios at over 300% of GDP. This compares with 286% after the Second World War. In other words, at a record high comparable with or worse than the worst prior scenarios.

All this means that the economic characteristics over the next few years point to slowdown, asset price stagnation (including property prices), therefore low levels of corporate borrowing and consumer lending, along with higher taxes. 

In business terms, Martin Fagg's predictions are as follows:

1. There will be a wave of innovation across all sectors — creative destruction — as new ways of creating value drive out old, less effective and less efficient business models.
   
2. There will be a marked change in social values and preferences from consuming to being; from transactions to relationships. Trust will be a key differentiator. This will be particularly noticeable in the under 35 age group. Businesses will be required to demonstrate their green credentials and apply more sustainable business models to attract customers — particularly in this age band.
   
3. There will be a significant increase in business failures and start-ups.
   
4. The banks will be bypassed by informal networks of business people linking entrepreneurs with funding.

Taken in context of the long tail theory, this may yet be the best ever time to be specialised and entrepreneurial.

Reshaping strategy through changing consumer behaviour

Barry Clark, of Future Foundation, delivered a thought provoking lecture on the changing consumer landscape at the Financial Services Forum's (FSF) absolutely superb General Insurance Summit.

                                        
 
New behaviours and attitudes are being shaped by the last two years, that he categorised into seven trends that marketers need to take into account in the shaping of strategy, innovation, propositions and communication strategies. Here we review four:

The first is Living Lite, caused by a sense of rising clutter, the war on waste, gathering environmental concerns within middle England, greater awareness of recycling and an entrepreneurial approach to finding new value in old goods.

Trends this is informing include renting vs purchasing, a return to the Radio Rentals model. Owned by Thorn, its Australasian offshoot today rents completely new categories of good, proclaiming on its website 'join the rental revolution'.

The second is a return to professional budgeting. With a middle class squeeze caused by rising education costs and tax, tighter personal budgets are informing budgeting behaviour.

A return to maximising describes behaviour when consumers are scrutinising offers more carefully, resarching as much as possible pre purchasing decision, searching independent views and consulting friends (in today's society substantially aided by user generated content online). As the Chartered Institute of Marketing (CIM) puts it, today we place more trust in the collective voice of complete strangers than we do in the individual opinions of close family and friends.

Clark's next trend is the rise of the discount and free society, enabled by advertising supported economic models, spanning free films, music and information content. In conjunction with maximising behaviour, you might reasonably conclude that this change lies behind the rise of the thriving 99p chain stores.

Yet I would challenge whether this trend is likely to endure. Consumers are getting used to spending money and recognising value differently, as micro-payments. As a result, online music sales are rising (now entirely compensating for offline declines), premium publisher content is being increasingly charged for successfully, and whilst ad-supported models will no doubt continue to flourish, we should take care not to overestimate the strength and singularity of the free services movement.

This is all very well, but will behaviours change with a future return to economic prosperity? The answer is probably yes and no, due to environmental and related attitudinal factors counterbalancing economic ones. In the meantime, the West is quite likely to experience several years of extremely low growth and further declines - at least 5 more years - due to lower levels of large-scale investment as we slowly but surely deleverage. As The Economist explains, it's barely begun.The reasons why we'll discuss separately, along with the opportunities this presents firms that drive efficiencies and better organisational integration.

Generation Y debunked

What a revelation it was to meet a group of 16 years olds at the recent MBA Refresher at Ashridge Business School. These kids are the product of Arrival Education who believe that some of our greatest talent lies in our most deprived communities.

Here were kids who in spite of having very little, were articulate, purposeful and hungry for more.

Between these half dozen teenagers they identified the attributes they look for from leaders, and engaged confidently with a large roomful of MBA graduates. Here is a snapshot of the effective leader attributes they consider key:

1. Help others achieve their goals, challenge others to develop themselves

2. Have compassion and empathy for the team

3. Respect the team and know their strengths and weaknesses

4. Motivate others and adapt motivation methods to suit different people

5. See the potential in everyone

6. Never give up

7. Be courageous and responsible when the team makes mistakes

8. Be someone people want to work with

9. Generate enthusiasm

10. Be open with employees

11. Keep your word

12. Share your own experience

13. Celebrate everyone's success

14. Leave no one behind

They want success, enjoy working in an office, and have a strong preference for firms who have open plan layouts where leaders sit alongside teams in hot-desk configuration, reflecting strong internal communication and teamwork values. They see business as community, aspire to become future leaders, to better themselves and positively impact others, and they see opportunity everywhere.

They are our future, and their wants and value system will be reflected by organisations competing to engage with them, to participate in their network, to have them as customers, and to satisfy them.

At no point did I hear the messages so often reported in the media about disengagement, a lack of direction, a suspicion of business.

Perhaps surveys should focus less on those young people who want for nothing, for whom material possessions have come easily, and focus on that part of a generation who desperately want a better life, thanks to people like Emily Shenton at Arrival Education.

The Internet Villager

Some time ago David Ogilvy said that a brand is built from the sticks and stones that you leave for people to pick up and discover. 

That's more true than ever in a world of proliferating interactive media. Yet the implications of  market penetration in 2010 are considerably more difficult when you consider that 40 years ago just four or five core channels would have reached the majority of your market. To achieve the same coverage today you would need to have a presence across hundreds of core channels.

Marketing channel strategy can no longer be based on the definition of a minimum number of channels that give the maximum coverage. It follows therefore that you need a very large number of sticks and stones to address your market. Or do you?

New research from The Chartered Institute of Marketing (CIM) proposes the idea of Internet Villages, comprising a network of sites that represents most people's home turf. 

'There is an intuitive assumption that the internet widens our communities. However, the reality is that people don’t particularly behave like this. Think about how you use websites: do you go to new ones each day? Do you regularly explore the web, or do you stick to the tried and tested sites? Most of us choose to belong to particular ‘villages’, small clusters of people with whom we regularly communicate, and use a small number of websites that we visit frequently.'

A 'village' typically may consist of portals, destination sites and social media. How you engage with consumers needs therefore to vary in tone and execution from street to street; from established forms of advertising and demand generation to short informational forms eg Twitter, to marketing that doesn't feel like marketing and is easily copyable - for word of mouth and viral eg Facebook, myspace.

Understanding the composition of these villages, and tuning in to your prospective customers, is an efficient model to determine where to leave your sticks and stones, as long as you hang around enough to keep listening in, and adapt to the lessons of the feedback loop.

Digital marketing tipping point

Fresh research undertaken by Ipsos Mori on behalf of the Chartered Institute of Marketing indicates that 17% of all companies surveyed on their marketing spend say that online advertising has now overtaken offline spend, whilst a further 30% expect this further shift within the next 5 years.

To context these findings, in June 2009 PricewaterhouseCooper's (PwC) latest Entertainment and Media Outlook report predicted that online advertising in the UK would take 36% of all adspend by 2013.

Among the losers was offline classified advertising, surely a dead model that will dwindle to next to nothing, supplanted by a much more efficient online range of business models, that generate a measure of substitutive income in different ways.

With share of spend set to decline this current fiscal in direct mail, sponsorship, advertising and internal marketing, and online and email set to displace traditional marketing campaign channels, this latest business poll throws up no real surprises. 

We know from recent history that downturns will accelerate these trends, as demonstrated at the end of 2008 (see here and below) . Were there to be a double dip in the next year or so - as the world experiences rumbling indigestion caused by excessive sovereign debt and a moment of truth when spending is finally, belatedly reined in - I would expect a further monumental shift in marketing spend.

 

Of some surprise to me is the retreat in spend on internal marketing. Recent marketing practise says that taking time to win the hearts and minds of staff determines to a great extent the success of a business strategy. Internal spend linked to innovation, new product or market repositioning ensures money spent on acquisition or customer marketing isn't diminished. On the other hand measuring impact of internal spend can be tough, and the last year has sharpened everyone's appetite for clearer measurement of marketing returns.

The Ipsos Mori poll for the Chartered Institute of Marketing also asked which activities delivered the best return on investment. Top of the charts comes CRM by some margin, followed by online advertising and public relations. Those activities considered to deliver the worst return were direct mail, sponsorship, and internal marketing, mirroring the shift in spend.

What the findings do leave us with is a number of unanswered questions:

Do they reflect the shift away from acquisition in financial services towards customer marketing? Will perspectives on the effectiveness of different channels change with increasing maturity around integrated marketing practise? To what extent is the internet seen as a predominant acquisition channel versus a 'media for all media'? Is the importance of PR an enduring view or does it reflect the need to rebuild flat-lining consumer trust?

Mobile marketing vs innovation

Location based marketing services (LBS), or Bluecasting, is growing fast. 

Subscribers and revenue doubled in 2009, according to Gartner, Inc. Despite an expected 4 per cent decrease in mobile device sales, LBS subscribers are forecast to grow from 41.0 million in 2008 to 95.7 million in 2009 while revenue is anticipated to increase from $998.3 million in 2008 to $2.2 billion in 2009.

Bluecasting is gradually gaining ground as a common term for the provision of any small digital media to suitable media-playing enabled devices over Bluetooth® via the OBEX protocol. Where by "small digital media" does not exclusively mean advertisements but could include photos, podcast style audio content, video, mobile ticketing, games (especially those written in J2ME) or even other applications.

Gartner expects more compelling and useful applications and services to come to market in the next 12 to 18 months such as digital coupons to be redeemed in a nearby shop and points-of-interest search services. This is a well-trodden path, with retail outlets pushing vouchers to bluetooth-enabled handsets to encourage consumers to enter, return or buy more. For example, an application employed by MGM casinos in the US, uses text messaging to encourage punters to return to the gambling tables as they leave the building's perimeter.

However, the scope for this channel to quickly proliferate message volumes and turn off consumers; to focus legislators on levels of permission required before messages can be pushed to users; suggests that utmost care is needed by marketers if this particular golden goose is not to be quickly killed offf. Unfortunately history does not augur well.

Rather than focus on mobile push and pull marketing as a new geographically contextual channel utilising mobile devices' bluetooth and in-built scanning capability, the time has come to focus on how Bluecasting will create genuine innovation and fresh business models.

One such example in the general insurance marketing could transform how consumers buy car insurance, a future raised at the Financial Service Forum's (FSF) General Insurance Summit. 

Telematics, mandatory in new cars soon, is already touted as a technology that will allow for more individualised insurance premiums. The basic idea is that a driver's behavior is monitored directly while the person drives and this information is transmitted to an insurance company. The insurance company then assesses the risk of that driver having an accident and charges insurance premiums accordingly. A driver who drives long distance at high speed, for example, will be charged a higher rate than a driver who drives short distances at slower speeds.

Yet mobile devices bring the opportunity for yet more profound innovation. How about pay-as-you-go insurance pricing, comprised of micro-payments? You would pay when you are driving a car, not when you you aren't. 

Not only would this potentially bring financial benefit to the consumer, but also it could provide a strong offset to the current race to zero in insurance pricing and margins. After all, the experience of other sectors such as telecommunications and utilities suggests that PAYG allows for higher unit usage costs.

 Ironically, adopting pay on use schemes might actually shift consumer perception of insurers away from being a utility provider, as policies become increasingly individualised. 

EU Commissioner lines up Google and Facebook for affirmative action

Fresh to the data protection portfolio at the European Commission, Vice President Viviane Reding has Google and Facebook in her sights.

The issue? Online Behavioural Marketing (OBM).

Underlying the problem is the principle of Fair Processing, that together with Notification form the essential twin pillars of data protection law in Europe.  Hitherto, 'term of use' clauses or privacy statements buried in site terms & conditions that visitors rarely read, have enabled brands to capture personal information and use it for whatever purposes those terms specify.

That could well change under a proposed review of fair processing law when tied to unfair contract terms.

Objections to Google's use of  are ads served that reflect your email traffic in GMail. Whereas users may well generally see benefit in receiving ads that reflect their real-time interests, what about the user communicating via GMail with his wife about a break-up, only to be served marriage counselling ads? The line between value and intrusion or outrage is not always obvious to a rules-based decision engine.

This is likely to be just one challenge to online targeting from legislators who have become increasingly dubious of self regulation.