Up Marketing’s Creek without a Paddle
After SAM 1990 hit bookstores, it seemed only a matter of time before Corporate America would awake to the demographics-driven transformation of the marketplace just getting underway as the last decade of the 20th century was beginning. Articles about the aging of America began showing up everywhere. Ken Dychtwald’s Age Wave was published about the same time as SAM 1990 to sound yet another clarion summons to Corporate America to begin preparing for the largest wave of aging consumers in history. Who wouldn’t take notice of this phenomenon, those of us tracking the event thought? We just needed to get a few facts and figures out there for everyone to see.
But Corporate America was preoccupied with other things, especially information technology from which it was wringing out costs and making historic productivity gains. But one sector of business did not participate in these productivity gains. Marketing, which revolves around information, ironically became less productive during the 1990s.
Television advertising lost much of its punch. The fact that Starbucks, New Balance, and other brands you will read about in this book became superbrands without advertising on television suggests that the tube is no longer the high-powered marketing tool it once was. A 1999 study found television advertising returning only 32 cents for every dollar invested. Trackers of market trends report that consumers are paying less attention than ever to advertising. Growing numbers are using TiVo and ReplayTV to banish on-air advertising from their lives. More and more, consumers are tuning out and turning off.
Marketing’s flagging effectiveness has strained relationships between marketing agencies and their clients. While agencies blame external conditions from media clutter to new wrinkles in customer behavior for falling productivity, clients blame their agencies because good marketers are supposed to know what to do when conditions change the requirements for marketing success. With growing dissatisfaction in ad agency performance, the number of years that clients retain the same agency has declined from 11 years to only 2 1/2, according to an October 2001 survey by consulting firm Pile & Co.
Other areas of marketing aren’t doing any better. Recent research shows that 90 percent or more of sales promotions for packaged goods result in lowered profits. A 1995 study by Information Resources, Inc., found that 70 to 80 percent of new product introductions fail, with each failure resulting in a net loss of up to $25 million. Some observers claim that the failure rate runs as high as 94 percent.
Direct marketing response rates were falling even before anthrax made headlines following 9/11. BAI Global reported that response rates for credit card marketers have steadily declined from 2.8 percent in 1992 to an all-time low of 0.6 percent in 2000. And everyone knows that response rates to Internet-based marketing have sharply declined, driving a slew of Web sites that were dependent on advertising revenues out of business.
Despite this broad picture of decaying efficacy, marketing is consuming a bigger portion of corporate budgets than ever. In an analysis of 20 industries, half had selling, general, and administrative costs (SG&A) of more than 40 percent of every sales dollar, and all had SG&A of more than 30 percent. Between 1978 and 1996, SG&A expenses for the S&P 500 increased from 19 percent of sales to 24 percent—an increase of 25 percent. Spending on advertising increased from around 3 percent of revenues to over 4 percent during the same period—a 50 percent increase.
Thus, in an age when every other business function has had to do more with less, marketing has managed to achieve an unenviable track record of doing less with more.
The Costs (Not Savings) of Automating Marketing Functions
In golf, rule number one is keep your eye on the ball. In marketing, rule number one is keep your eye on the customer. Too many have lost sight of the first rule of marketing over the past several decades, especially during the 1990s when corporate bean counters became Johnnie one-note warriors battling for every dollar they could save. Automation became their weapon of mass destruction. Anything moving that could be automated was fair game. Researchers were replaced by data mining systems, telephone receptionists by automated phone systems, and salespeople by digital filtering systems that shoved product offerings before customers that were tailored to their "preferences" according to computer analysis.
CFOs, with their evangelistic fervor for cost cutting became the dominant force in business in the 1990s. Referring to one of the four largest ad agency conglomerates, I was told by one of its consultants, "The CEOs of the business units in [this conglomerate] are no longer in charge. Their CFOs, who have a direct line to headquarters, are in charge." With the tyranny of numbers that held unchallenged sway over so many companies in recent years, it is no wonder that accounting scandals have arisen on a scale never before seen. When even the once venerable Arthur Andersen gets caught up in such messes, we can sadly appreciate more than ever that when numbers dominate business decisions, morality becomes extraneous. Greed thrives and customers become irrelevant nuisances to the bean-counting priesthood.
Though the information revolution drove some of the largest productivity gains ever during the 1990s, many of the cost savings were illusory and few promises of improved marketing results materialized. As the 21st century began, marketing had fallen on hard times because everyone forgot rule number one: they took their eye off the customer.
Desperate for a "magic bullet" to cure mounting marketing woes, companies invested billions of dollars in customer relationship management (CRM) systems to automate customer analytic and transaction processes. Software vendors promised corporate clients a seamless integration of sales, marketing, and customer service around the needs of individual customers. CRM became big business overnight on the strength of such promises. The CRM software market, starting from scratch in the mid-1990s, had reached approximately $10 billion in annual sales by 2001, according to AMR Research. The global marketing research firm IDC estimated that the total worldwide CRM services business generated $40 billion in 1999, and will pass the $100 billion mark sometime in 2004.
Despite this flood of spending, however, the Gartner Group regularly reports that over half of all CRM initiatives fail to achieve their objectives. Many companies have given up on CRM. Wells Fargo pulled the plug on its CRM program in 2002 after spending $38 million trying to make it work. Research by Bain & Company found "an extremely low satisfaction rate and correspondingly high defection rate among those respondents who were already using CRM programs."
Companies are learning the hard way that deploying expensive software "solutions" does nothing to address the fundamental philosophical, methodological, and organizational flaws that bedevil their marketing functions. Merely automating a business function that is deeply dysfunctional to begin with only makes matters worse. Companies must first learn to "do the right things before worrying about doing things right." They need to understand that the right things in today’s more life-seasoned markets are often not the same as the things that were right when the consumer universe was dominated by 18-to-34-year-olds.
Reducing Human Contact May Reduce Payroll Costs but Increases Marketing Costs
Poor marketing doesn’t simply move less product because it’s less effective. It also moves less product because it angers and alienates customers. If the walk-around market research which I conduct on trains, in airports, on airplanes, and in other public places means anything, huge numbers of adults—perhaps even a majority—feel marginalized by most advertising. That’s astounding. It indicates that media clutter, a surfeit of choices, product commoditization, and other commonly cited explanations for marketing’s loss of productivity might not be the biggest problems after all. One of the biggest problems, and one not mentioned often enough in business media, is the dehumanization of customer experiences with a company.
Many gains in productivity over the past decade have been at the expense of the quality of the customer experience. When the only major airline making money these days is also the only one with live telephone receptionists, one wonders how long it will take Southwest’s competitors to realize that automated telephone systems can drive business away.
Despite the ubiquitous "your call is important to us" recording, a company obsessed with automating interactions with customers shows its workers that it doesn’t really give a damn about customers. Workers then adopt the same attitude, because as goes the top so goes the bottom. In any event, cutting their direct contact with customers puts workers out of touch with customers’ hearts, minds, and issues.
CFOs don’t think of themselves as revenue producers, but rather as cost controllers and money managers. As a result, they lack appropriate sensitivity to connections between their cost-cutting objectives and earned revenue production, especially with respect to specific staff relationships to earned revenue production. Think of how much experience, encoded in the memories of long-time employees, has been destroyed by aggressive early retirement programs. The human factor, be it with respect to workers or customers, appears to have become irrelevant in the theory and practice of organizational management.
The American Consumer Satisfaction Index reflects the extent to which a company’s inattention to customers is marginalizing and alienating customers. Nearly 90 percent of the companies in the ASCI index had lower scores in 2001 than in 1995. Dissatisfied customers not only dissolve customer loyalty, they lead to higher customer maintenance and acquisition costs because what companies say in their advertising and other product messages becomes less credible when the human connection is weakened. With eroded credibility, companies have to spend more money to bring new customers aboard and keep them aboard.
The Seminal Cause of Marketing’s Present-Day Woes
Consumer research—the customer knowledge industry—has played a big role in marketing’s waning effectiveness. More companies are seeing this and taking actions that appear to presage the end of consumer research as we have known it. In the face of such high-profile failures as Procter & Gamble’s ill-fated fat substitute Olestra (branded as Olean), on which it spent $800 million to bring to market, confidence in traditional consumer research is sagging. General Mills has abandoned focus groups altogether. It now conducts 60 percent of its consumer research online. One Coca-Cola business unit reportedly is eying context-sensitive software to analyze research subjects’ open-ended statements as an alternative to the restrictive close-end queries used in traditional quantitative research. Another Coca-Cola unit is experimenting with neuroimaging (brain scanning) to divine customer behavior. Research clients are desperate to try something, anything, that will work better than what is being used today.
Aside from contributions made by people-insensitive numbers people, what brought on these dark days in consumer research and marketing?
Mostly, it was the emergence of the New Customer Majority.
In 1989, adults 40 and older became the adult majority for the first time in history. No headlines proclaimed that event, but not since P. T. Barnum earned the title of "Father of Modern Advertising" has one event—not even television—led to so much change in leading consumer behaviors in such a short period of time. Television initially changed how people came to be informed about products, but did not initially generate big changes in leading marketplace behaviors. The New Customer Majority has done just that, and did it in well under a decade. Meanwhile, consumer research and marketing have failed to realize the relationship between changes in the leading values, views, and behaviors of the marketplace and the New Customer Majority.