Are we in a Depression or a Recession... and what are the Implications for Marketing Strategy?

There are a lot of articles on the value of marketing in a recession. Most of these were written around three recessions: 1982; 1991; and 2001. These recessions ranged from severe (1982) to mild (1991 and 2001). The current "downturn" is definitely a "severe recession"--the question is, is it a depression? I'll set the following rules, somewhat arbitrarily, about separating a recession from a depression. A depression must satisfy 4 of the following 5 conditions:

• Negative GDP growth for at least eight consecutive quarters
• Unemployment > 10%
• Stock market down > 50% from peak
• Real Estate values down > 40% from peak
• Deflation in corp CPI for at least two consecutive quarters

So, using my definition above, which probably passes a sniff test and little else, are we in a depression? We'll have to use probabilities, because these data aren't complete yet.

Negative GDP growth for at least eight consecutive quarters. We're at three now. It'll definitely be five (no one sees growth in the 2nd quarter.) Bernanke says we "might" see growth this year... I'd put the chances at 33%. So let's call this 66%.

Unemployment > 10%. Most are calling 9% this year. I'd argue we could easily see 10% late this year or early next year. I'd put the chances at 50%.

Stock Market Down 50% from Peak. Dow peaked at 14,164 and hit 7,114 yesterday. Good enough for government work. Bingo.

Real Estate Value Down 40% from Peak. Home prices are down 27% since the 2006 peak. Most see 30% as inevitable. I'd put 40% at a 25% chance.

Deflation in Core CPI for at least 2 Quarters. Core CPI slowed to 0.8% in 4th quarter. It'll probably be slow in the current quarter too, but I doubt it'll go negative. So let's call this one 5%.

So I'd put our chances of being in Depression at about 10%. (.66 * .5 * .25). So, one in ten. Unsurprisingly, that's better than Joe Biden's 30% comment, into which probably no thought went. The hair spray probably just got into his brain for a few seconds and he was overwhelmed.

Why all this analysis? It's because if we're in a recession, there's a lot of past data to rely on, but if we're in a depression, we don't have much to go on. So, I'd argue we have to follow recession marketing rules. Here are some snippets gleaned from the press with the help of our friend Dr. Spekman at UVA / Darden about recession marketing rules of thumb / observations:

• An American Business Press / Meldrum and Fewsmith study showed that companies that increase / establish an aggressive market stance coming out of recessions (the 1970 one, in this case) do much better coming out of the slowdown.
• A similar study showed the same thing for the 1974-75 recession.
• A McGraw-Hill study found that 600 B2B companies that increased their spending in 1981-82 grew significantly more than competitors that did not.
• A Cahners and Strategic Planning Institute study of the 1981-82 recession showed that larger companies who spend more on marketing do better in downturns than their smaller competitors. Not surprisingly, this is already being borne out in 2008-09, with Ford and Sears taking share from sick competitors (Ford from GM and Chrysler; Sears from Circuit (bankrupt) and local appliance shops).
• AMA found a similar trend in 1990-1991, with larger / healthier companies spending more and taking share.
• BMW grabbed share after 9/11 in 2001 and credited its success to taking an aggressive market stance with advertising and event marketing. Good quote from BMW: "We change before the market forces us to change."
• After the 2001 recession, B2B Magazine found B2B ad spending recovering and focused on three areas: Supporting established brands, focusing on integrated marketing campaigns (multi-tactic, same creative and targeting) and measuring ROI.
• In 2005, Arvind Rangaswamy and Gary Lilien at Penn State did an analysis of the 2001 recession and found that well positioned companies benefit from increasing spend in downturns. A good analogy was "Athletes often choose times of stress to mount attacks; strong runners and bicycle racers may increase their pace on hills or under other challenging conditions."

The message is both (1) don't cut back on advertising, because that's silly. But it's also that larger, healthier companies with cash get a triple effect in recessions:

1. There is less ad spending out there so your ads / DM get more attention.
2. Ads are cheaper because media companies are struggling for business.
3. You force weaker competitors into an arms race they can't win, forcing them to choose between bankrupting themselves or losing share.

This sounds an awful lot like the arms race in the 1980s. Ronald Reagan's 600 ship navy, high-tech fighters and bombers, and stealthy submarines never fought the Soviets, but because we had more cash, we basically forced them to either (1) lose the arms race or (2) bankrupt themselves. So, if you're strong, now's the time to beat your competitors to a pulp. Not sure I have much insight for the weak in this post. I'll try to think on that problem though.

Creative Destruction of the Demand Chain - Part 2

The Problem with B2B Sales and Marketing

By David Bradley, MarketBridge

The new wave of innovation finds too many Go-to-Market functions lacking in readiness to exploit the changes coming. After years of making marginal cuts in Sales and Marketing budgets and limited investment in tools and technology, GTM leaders will not be able to cut costs necessary to maintain positive cash flow without seriously compromising the ability to deliver future revenues. Although there are exceptions to each of the following conclusions, taken as a whole there is a pattern of outcomes and root causes that suggest fundamental changes needed and guide where to cut and where to reinvest.

First among these is GTM organization and portfolio complexity which lead to burdens on organic growth and lack of investment in enablers of sustainable productivity. In large multi-line, matrixed companies the complexity of large portfolios and competing go-to-market priorities have led to a slow, product-centered planning system that fails to focus adequate resources on growth segments. And across the board, marketing and sales organizations continue to invest in traditional campaigns and tactics versus the structural enablers of sustainable productivity.

Second is the disaggregation of the “Four Ps” of Marketing in most B2B companies. No single go-to-market executive can drive the alignment of product, price, distribution channel and promotional tactics. In an era of maturing product markets where defining standard product-based solution bundles and aligning GTM functions to target growth segments through most efficient channels are keys to success, the shortcomings of B2B GTM governance models will become apparent.

Third is the relative lack of sophistication of B2B sales and marketing organizations in identifying and addressing increasingly small growth market segments. Product management, brand marketing, sales management and tactical demand generation marketing each manage their own market segmentation schemes which are rarely treated as part of a holistic view of market structure, much less supported by an integrated analytical and data model.

Fourth is the poor state of marketing data and performance analytics. While many companies have made progress on the basic needs to measure marketing contribution to pipeline performance, these post measures do little to inform marketers of segment-oriented performance. Very few companies have made the strategic and financial commitment to making the majority of their marketing tactics Web-enabled, with the accompanying real time analytics engines and reporting capabilities. Yet in most B2B categories the Web is acknowledged as the most important information source.

The fifth and final fundamental problem is the natural tendency of leaders to be averse to disrupting current – usually maturing – revenue streams. The pressure to maintain period revenues is very much at odds with making radical change in the GTM functions. Sales and Marketing leaders are stuck in separate silos and dated mental models for how their functions should interact. And if history is any indicator of the future, then it is clear that those leaders not able to adopt a new model will find themselves increasingly in conflict with the forces that are shaping the market.

Creative Destruction of the Demand Chain

By David Bradley, MarketBridge

As senior leaders in B2B companies evaluate their alternatives for competing in this time of crisis they will be confronted by a choice of merely surviving, or leveraging disruptive forces to gain advantage. Beyond cost cutting, enhancing the ability to generate sales and creating a foundation for sustainable productivity will require new “go-to-market” operating principles. This paper describes our Firm’s vision of what those new operating principles will be, the market forces that are shaping them, the gaps most companies face in achieving them, and ten practical ways to get started.

The term creative destruction has its roots in early-20th Century macroeconomics and was made popular during the post-dot.com business cycle shift. Based on patterns of two earlier waves of technology-enabled creative destruction in the late-1980s and 2000s that changed key business functions across industries, we are suggesting that a third wave of cross-industry functional creative destruction will occur, and that it will define new success factors for how companies achieve major productivity gains in the go-to-market functions while maintaining and improving revenue growth. The views shared here, based on nearly two decades of work with leading B2B companies across a range of industries, represent a model for companies to embrace structural and strategic change by aligning with forces already at work in the market. Our focus is on the go-to-market (GTM) functions of marketing, channel management, sales and service delivery. Our conclusions are relevant for large multi-line companies and focused category leaders alike.

Part 1 – Lessons from the Past

Over the past several decades we have experienced several major business cycles, and witnessed the decline of major industries and the advancement of new ones. Once-revered leading companies have faltered and new leaders have emerged. Much has been written about the failure of leading companies to anticipate a shift in their business models due to a discontinuity in market forces and product technologies. Harvard economist Joseph Schumpeter’s concept of creative destruction foresaw the need to aggressively transform company business models, and the term has been effectively applied in modern times by several authors. It is our intent to build on those insights.

Our premise is that, beginning with the advent of the Information Age in the mid-1980s, there have been waves of functional creative destruction that have set new standards for functional success models across industries. And further, that these waves, while enabled by advances in information technology, were triggered by business cycles and the ensuing pressure to make fundamental changes in business capabilities and cost structures.

The first wave of functional creative destruction was enabled by affordable CAD/CAM technology and coincided with the recovery from the major stock market “correction” in 1987. The TQM movement was born and the reengineering of the design and manufacturing functions spread across all product industries. Productivity gains were then fueled by the first generation of supply chain management systems and tools. The skills required to run the design and manufacturing functions changed forever.

The second wave was enabled by the Internet and coincided with the post-dot-com bubble burst in 2000. Supply chains were reinvented, manufacturing outsourcing picked up more steam, and innovative supply-chain business models ensued. Once again, the skills required to lead these functions and exploit new capabilities changed dramatically.

The third wave of functional creative destruction is already forming and shaping the effect that demand-side forces will have on business models. It is being enabled by Web 2.0 interaction capabilities and further fueled by Web 3.0 analytical advances, which are triggering a discontinuity in how buyers receive and process information, interact with sellers, and form relationships within communities. Accompanied by an ever-increasing focus on sales productivity and marketing efficacy, the current economic cycle will force people to, once and for all, stop making marginal cuts in marketing and sales headcount and adopt a new model for demand generation and relationship management. While this wave will affect consumer products and services, our focus is on B2B companies where industrial buying behaviors and distribution practices are ripe for change.

Depression Marketing Best Practices

No, we're not in a depression. But, given all the recent depression buzz (Krugman's book, non-stop CNBC pundits who won't shut up about crashes and black Mondays and Fridays,) I pulled Studs Terkel's fantastic Hard Times down off the shelf the other night. There's a section in there called "The Big Money" where he interviews people that actually did well during the Depression. Here are some outtakes from William Benton's interview:

"I left Chicago in June of '29, just a few months before the Crash. Chester Bowles and I started in business with seventeen hundred square feet, just the two of us and a couple of girls. July 15, 1929--this was the very day of the all-time peak on the stock market.

As I solicited business, my chart was kind of a cross. The left-hand line started at the top corner and ended in the bottom right corner. That was the stock market index. The other line was Benton & Bowles. It started at the bottom left-hand corner and ended in the top right-hand corner. A cross... When I sold the agency in 1935, it was the single biggest office in the world. And the most profitable office."

Well, this is an interesting case study, I thought. Maybe I should pay attention. The most amazing thing about Hard Times is how familiar it seems. The passages talking about bubbles, business cycles, people's incredulity at how all this happened is really eerie. So how did Benton & Bowles kick butt in the depression? Here are some best practices:

• They essentially invented audience research. When they heard a lot of people listening to "Amos and Andy" on the radio, they bought it straight away. They put a Pepsodent spot on and sales went through the roof. They worked with George Gallup. They listened to customers. This was new stuff. Lesson: Marketers who listen to their customers in new and powerful ways will win the battle for fewer dollars.
• Radio was the newest new media at the time. Basically, they were investing like crazy into stuff that the big agencies didn't understand yet. They were young--late 20s--and didn't know any better. Lesson: Those who master the next wave of media will rise above the fray. Mobile? Social? Something we haven't seen yet??
• Once into radio, they perfected "audio illusion". Example--they cast two people in one role on "Showboat", a program to promote Maxwell House Coffee. A sexy singer for the audio, and a known actress for the voice. They also started adding in sound clips of the coffee brewing and pouring. Sales doubled and quadrupled, crushing store brands. The other agencies were angry because it was improper to do these things at the time. Lesson: Just because things are done one way, don't fear doing it a totally different way. Thinking outside the box is critical.
• Once this guy had a lot of money, he was able to buy businesses at bargain basement prices. He bought Muzak for next to nothing and built it into a national behemoth. Lesson: Keep some powder dry. The really good investment opportunities are starting now. Once you buy, own and retool. Pretty good time to be a PE company, even if Carlyle is laying off.
• He also comments on how he was able to add incredible talent at low prices because of the glut of labor supply. His salesmen improved every year as they could screen more and more applicants for these jobs. Lesson: Keep hiring channels open and be pickier than ever.

For anyone who hasn't read Hard Times or any of the Studs Terkel interview compilations, they are an incredible insight into people's attitudes and behaviors throughout history. I highly recommend them.

MarketingSherpa Article--Boosting Lead Scores in a Downturn

In a previous post, I had mentioned that MarketingSherpa had interviewed me on lead qualification in a downturn. Well, the article's out, and I guess I said smarter things than I thought because there is some good stuff in there. It's honestly worth reading, I swear. There are other people interviewed too, that said smarter things than I did.

Summary of the "Seven Tips for Surviving in an Economic Downturn":

Tactic #1. Emphasize quality, not quantity in your lead database
Tactic #2. Create a behavioral model based on recent activity
Tactic #3. Validate your hypotheses with third-party data
Tactic #4. Emphasize recent activity in your lead scoring
Tactic #5. Reassess value proposition for your core audiences
Tactic #6. Adapt content strategies to your lead-nurturing program
Tactic #7. Use telemarketing to get best insight into prospects’ needs

Recession Hits Direct Marketers

B2B Magazine has a new article here on how the recession is hitting direct marketers. I'm calling it "the recession", btw, because it is one. Among the highlights, most of which are very predictable:

• Hiring is down
• Budgets have been cut
• Layoffs are looming or have happened

List are also cheaper, kind of like gasoline. The biggest decline was in Super Premium unleaded, I mean in b-to-b permission-based e-mail lists, which fell to $293 per thousand, down from $305 a year earlier.

I know, it's not really news. On the bright side, strength remains in:

• Catalogs
• Analytics
• Ad sales

The only surprise here is catalogs. I wonder if people are using catalogs more because they're at home more? Seems plausible.

Lead Qualification in the New (Bad) Economy

I was talking today to Marketing Sherpa. They're wondering if any B2B companies are using analytics to qualify leads on the basis of their "health" or "likelihood to close" given contracting budgets. I wasn't aware of anything specific, but it's certainly SOP in B2C. Car Insurance, for example, are qualifying "real value" all the time just on the basis of the numbers people fill in on display ads.

Businesses do it with BANT--budget, authority, need, timing. This is obviously still in play in today's environment, maybe even more so. However, is there another way to do it that keeps track of industry dynamics... the micro dynamics in an economy? For a company like Microsoft or Cisco that is getting literally 1000s of leads a day through search, display, partners, inbound call centers--what if they could prioritize these leads on the basis of "real economic activity?"

It's an embryonic idea, so pardon if it's a bit crude. The idea is that you take a look at trailing 3 month data on "proposal to close" discrete events. So you're looking for proposals that closed and proposals that actually were lost. Then you'd put a data mining algorithm on it against all the industry and firmographic data you had on the close. So you'd be looking at city, SIC code, company size, etc... all of the variables that are relevant from an economic perspective. This could give you a predictive model that changed daily on which companies are more likely to close in a tough economic environment, and would facilitate reprioritization of closing efforts on these types of companies.

You'd have to be careful on bias here, obviously. But, I think it's an interesting idea. You could even enrich the data with region-specific industry insights. E.g. if the beige book shows a bright spot for small manufacturers around Philadelphia, you could manually crank up that part of the model.

Descriptive statistics would be interesting, too. A daily report could be built showing changes in close rates by company type (SIC code), geography, etc. This could be compared to economic data and would provide a good macroeconomic headlights tool for a B2B company.

These same ideas could work at all stages of the pipeline. I guess this is my first post about specifically "marketing in the sucky economy" and I know everyone's going there now. Time to rev up the contra funds and jump on the bandwagon.