Are you electrifying your business or electrocuting it?

The pitfalls of a ‘one size fits all approach’ to stage of life business marketing, and why not everything that sparkles is gold. 

A few years ago I wrote an article about how our industry often descends into binary ‘thinking’ like digital versus traditional or performance versus brand. It’s been on display again this year with NFTs and the Metaverse. Look at any comments section below an article about either and it’s clear that they’re either the best thing ever invented or a ridiculous waste of time.

Looking back over the last decade, we’ve seen an unhealthy obsession with (and a ridicule of) the likes of performance marketing, attribution modelling, e-commerce, agile, failing fast, mobile first and growth focus to name a few.

Recently, I listened to a couple of lectures by two non-marketers that, in combination, might help explain why this happens so often in marketing and why both sides of such arguments can be simultaneously right, and wrong.

The first non-marketer was NYU Stern Business Professor Aswath Domodoran. He was speaking about how every business, just like every human, has a limited life span (something we tend to forget). He used this metaphor to explain the three life stages of businesses. First, start-ups are fragile like young children and need a lot of help if they are to survive and, of course, not all do. If a company is lucky (and luck is almost always involved at some level) a company evolves and grows to become profitable and stable, no longer requiring the constant help of others to survive, much like someone middle-aged. The third stage signals decay and decline which sets in as a company reaches ‘old age’.

Professor Domodoran says the metaphor is very effective in teaching students to assess and value a business. He says there are only three core things a business should focus on; a good story, maximising profits and returning shareholder value. And the stage a business is in (start-up, stable or in decline) should define which of these things it should focus on. Start-ups have no shares and no profit so they need to focus on telling a good story. Stable businesses should focus on maximising profits and as a company starts to slip into ‘old age’, profits decline so the company should concentrate on shareholder returns.

Professor Domodoran’s points got me thinking about our industry. It’s inevitable that stories around NFTs, web3, Buy Now Pay Later (BNPL) and the Metaverse promise amazing things when they first launch. They’re start-up companies and/or technologies, they can’t talk profits or shareholder return so a good hype story is all they’ve got and it has to sound compelling to secure investor funding or to get people to buy and use the product.

Many of these stories have unravelled over the last few months. The gloss has come off the BNPL story rather quickly this year with the likes of Klarna’s share price dropping over 80 percent.

Despite the glamorous support from the likes of Paris Hilton, Justin Bieber and Snoop Dogg, NFT trading volume has gone down as ridiculously fast as it went up. It’s also not clear if the seductive story about decentralisation will be anything other than a story given the current ownership distribution of NFTs.

Looking more specifically at MarTech, recent stories like ‘why waste money with mass advertising when you can reach your exact audience, at the right time, with precision, over here etc.’ sound convincing. The e-commerce and direct-to-consumer (DTC) stories like ‘why bother with the expense of stores and staff when you can just sell online?’ And ‘why let a retailer take your margin when you can keep it all for yourself?’ also sound compelling.

However, over the last year or so, a variety of people have pointed out some of the flaws with these stories also. JP Castlin and James Hankins have written (and presented this year at Cannes) excellent articles unpicking the details around e-commerce ‘profitability’ and the commercial realities of the DTC story. 

The likes of Professor Mark Riston, Field & Binet and James Hurman have all written about the problems with performance marketing, and Professor Nico Neuman has been pointing out the limitations of digital attribution modelling for years. 

Next time you are reading about a new start-up company and their amazing story you might do well to remember Professor Domodoran’s wisdom. Just because it sounds compelling doesn’t make it correct, useful or real. Outlandish promises tend to secure headlines and funding far more effectively than sensible improvements do. 

The second non-marketing lecture was by neuroscientist Chris Fields. He spoke about the scientific principle of emergence. Essentially, it’s a term △ used to describe properties or behaviours that exist, or are present, at one scale but that are different, or not present, at another scale. For example, looking at water at a particle level, H2O, tells you nothing about waves in the ocean and looking at waves isn’t at all that helpful in understanding water particles. Apologies to any scientists for my overly simplified explanation but you get the picture.

Emergence also helps explain the binary arguments in our industry. Some marketing strategies, tactics and analytical approaches are good and bad depending on the scale of a business.

Simon Bird.

Clearly performance marketing works at small scale as evidenced by the myriad of successful small businesses on the likes of Amazon, TradeMe and Shopify, but when a company is small, performance marketing is mass marketing. 

If I was, for example, launching a start-up running shoe brand, I would, obviously, start with targeting people searching for running shoes online. There are loads of people searching for running shoes, certainly more than a start-up shoe companies’ initial sales targets are likely to be. But, once you get to a certain size, this tactic starts to limit growth. Nike, Under Armour or Adidas could not grow their share (or sales) with this approach, in fact they would struggle to even maintain sales or share this way. There are just too many people who, when they need shoes, simply walk into a Nike store or a Footlocker or such like and buy shoes. No search, no data trail. Big brands, like Nike, need more shoe sales than there are shoe searches, so being data led or performance led is bad for business. Just to be clear I’m not saying that Nike or Adidas shouldn’t target people searching for shoes, or people whose online behaviour suggests they might be golfers or tennis players, it’s just that the total audiences for sports shoes is far larger than the audience leaving a sport shoe data trail behind them.

Similarly, digital attribution modelling can be useful for small, digital-only (both sales and marketing) brands but its diagnostic ability becomes rather limited for large brands who sell primarily offline and spend a large chunk of their marketing budgets offline with a competitive set also selling and advertising offline. Again, once you cross a certain scale and need more reach in terms of offline distribution and offline media, the modelling techniques that worked at small scale no longer work the same way.

Clearly DTC can be effective and profitable at a small scale. It is clear though that DTC also doesn’t scale particularly well. Which is why many DTC brands, including the posterchildren companies such as Warby Parker, Casper and AllBirds, either now offer, or are trying to develop as quickly as possible, bricks and mortar distribution.

One of the fantastic things about digital marketing has been how it has reduced the barriers of entry for start-ups both in terms of selling and advertising. As a result of there being more small businesses we now hear a lot more about successful small businesses but we don’t tend to hear that many stories about the unsuccessful small businesses which means what we hear suffers from survivorship bias. It’s a shame we don’t spend time studying failures, if nothing else it would help avoid erroneous post rationalisations of success. Regardless, it is important to remember that what works well for start-ups will not always work for big businesses.

Being ‘data led’ in all its forms is fantastic for small brands. It’s both efficient and effective. However, this doesn’t translate once a business crosses a certain threshold, there just isn’t a data point for everyone in a category. We know from decades of research from the Ehrenberg Bass Institute that, for most categories, user or buyer frequency follows the negative binomial distribution.

There are a small amount of passionate, frequent users or buyers, often leaving an exhaust of data
behind them and a huge amount of people that buy or use a category very infrequently. Most of this group is ‘data quiet’ at best and ‘data invisible’ at worst. Small companies don’t need to target these infrequent shoppers but big companies do.

A few years ago, a colleague of mine observed that many of the CEOs and CMOs he was speaking to around the world were experiencing FOMO. The combination of start-up stories and industry headlines had convinced them that other companies were embracing some amazing technology that they themselves were not. Clearly in business a healthy level of anxiety and curiosity about your competitors is a good thing. Other companies, especially start-ups, often say/do/build some really innovative things and it’s important to know about these. However, coming back to the life stage metaphor, children also sometimes say/do interesting things and ask innovative questions. They also often have no idea what they are talking about and sometimes they stick their fingers in power sockets.

So, next time you’re thinking about whether an amazing sounding new strategy, tactic or technology is something your company must adopt, ask yourself a few questions. Is this story too good to be true? Is
this something that is going to work the same way at the scale of your business and in your category?
Or is it something that only works well at a different scale or in a different category? Otherwise instead of electrifying your business with fantastic innovation you might instead be electrocuting it. 

This article was originally published in the Dec/Jan 2022/23 issue of NZ MarketingClick here to subscribe.

Simon Bird

About Simon Bird

Simon Bird is Group Head of Strategy & Measurement at PHD New Zealand.

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