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Each issue of CMO Close-up features an interview with a CMO, as well as other marketing executives answering that issue's "Big Question."
This week's feature:
Close-up with Keith Pigues, VP-CMO, Ply Gem Industries
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Direct hit? How the downturn is driving more agency clients to direct marketing
Global economic uncertainty is eroding marketing budgets, but some agencies see the downturn driving more clients to direct By Amy Syracuse
Story posted: October 13, 2008 - 6:01 am EDT
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Remember the good old days, when the credit crunch was an ambiguous phenomenon that concerned only the world's financial elite? What a difference a few weeks can make.
Following the unanticipated demise of an investment banking titan, historic stock market drops and, of course, widespread concerns about the liquidity of the world's financial system, the credit crunch has moved out of Wall Street boardrooms and into American homes and offices. And it's fundamentally changed the way people view expenditures big and small.
For marketers, the most immediate impact has been on long-term planning, said Trish Wheaton, CMO at direct marketing agency Wunderman. “There has been ... a "wait and see attitude' when it comes to budget commitments,” she said. “I think all marketers ... are taking it more quarter to quarter.”
When asked about the credit crunch's long-term implications, other agency executives echoed the “wait and see” sentiment. But as dust from Wall Street's upheaval appeared to be settling, some expressed cautious optimism about what the future could hold for agencies specializing in measurable tactics such as direct marketing.
“Whatever dollars are there are going to be focused on a measurable ROI,” said Spyro Kourtis, president of Hacker Group, a provider of direct and database marketing services.
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ASSESSING THE DAMAGE
In recent months, b-to-b direct marketing spending had been holding its own—even in the face of budget cuts and a general malaise on the part of the U.S. economy. One possible explanation is direct's ROI-driven approach.
The methodologies direct marketing employs naturally weed out tactics that aren't generating returns, Kourtis said. This made it less rewarding for clients to decrease spending by eliminating underperforming initiatives.
Of course, the nature of the b-to-b market also provided some protection.
“In the b-to-b sector ... typically the kinds of goods and services marketed are not discretionary,” Wheaton said. “Rather, they're necessary to competitively conduct business.”
But much has changed in recent weeks. According to Chris French, senior managing director of Winterberry Group, a strategic consulting firm specializing in direct marketing, an unavailability of credit now threatens to disrupt spending across all sectors.
“[It] creates financial turmoil ... as [firms] become increasingly uncertain as to the availability and cost of credit to fund their day-to-day operations,” he said. “This will place a damper on marketing services or, indeed, any spending as firms defer decisions until markets settle down.”
Unsurprisingly, companies serving the financial industry are particularly vulnerable. “B-to-b marketers selling into the financial services verticals will face a more price-competitive landscape,” said Winterberry Group Senior Managing Director Bruce Biegel.
If there is a silver lining, it's that businesses need reliable, cost-effective ways to generate revenue now more than ever.
“If you can't borrow money anymore, you'll have to make it instead,” Kourtis said. “As far as Hacker Group is concerned, that makes our closed-loop, ROI marketing focus even more relevant.”
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OPPORTUNITY IN ADVERSITY
Even before the credit crunch crushed business and consumer confidence, measuring marketing spending was a top priority.
According to Forrester Research's “The Challenges of CMOs in 2008” report, nearly half of executives surveyed were concerned by effective budget spending and resource allocations. The report was based on interviews with more than 300 marketing leaders in February.
If economies around the globe decelerate and marketing dollars become more scarce, this need for accountability is expected to become more urgent.
“People are scared, and scared people put more emphasis on metrics,” said Chad Jones, senior VP and managing director of Javelin Direct, a direct marketing agency headquartered in Dallas.
Measurability and accountability have long been integral aspects of direct marketing. So some direct marketing agencies are banking on these competencies as a way to grow their businesses in the face of adversity.
Hacker Group, for example, has broadened its campaign metrics to include measures that are more closely aligned to the performances of clients' businesses, like cost-per-lead or cost-per-sale. “It's all about what makes the business tick,” Kourtis said.
Grant Johnson, president of Johnson Direct, said his agency has a longstanding record of measurable marketing. But that doesn't prevent the company from seeking more robust ways to incorporate metrics into initiatives.
Because measurement is easier to implement online, campaign-specific microsites have become the response vehicle of choice for direct mail campaigns at Johnson Direct. These sites enhance the quality, quantity and immediacy of data that can be gathered—and often improve response rates as well, Johnson said.
“No matter what the channel, we can measure some aspect of it. This is going to be increasingly important as clients need proof that their dollars are being spent wisely,” he added.
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CHANGING SPENDING PATTERNS
In addition to highlighting the importance of measurement capabilities, economic conditions have precipitated changes in marketing objectives and channel strategies.
At Javelin Direct, many b-to-b clients are moving dollars from acquisition to such objectives as churn reduction or upselling and cross-selling existing customers.
“One year ago, it was "How many new customers can we add?' ” Jones said. “Now, companies are saying, "It costs us $450 to get a new customer, less than $100 to save a customer and just dollars to get an existing customer to buy something incremental. Where is the best place to spend the money?' ”
French said there is an ongoing migration from offline to online spending. “Some agencies are prospering in the digital space—especially if they're in vertical industries that are still experiencing growth.”
And client expectations are expanding due to pressure to maximize marketing dollars. “Agencies are becoming consultants or performance-based partners as opposed to placement agents,” Biegel said.
Along with this trend, interest in performance-based compensation models has increased.
“People are pushing back on large retainers and shifting to project-based work with specific ROIs attached,” Jones said.
Though pay for performance carries definite risks, Kourtis said it can work.
“I believe in pay-for-performance models if you can come up with objectives that are easily measurable and vendors have visibility into how the objectives are measured,” he said.
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A CHALLENGING MARKETPLACE
The pressure is now on direct marketing agencies to leverage their relative advantages. After all, to thrive—or even survive—in a prolonged downturn, they will need to stand out in a marketplace that offers clients more choices than ever before.
There is always the threat of clients moving previously outsourced tasks in-house in order to reduce costs.
According to a recent Association of National Advertisers (ANA) survey, 42% of respondents have established in-house advertising agencies. Of those, 66% use it for brand identity work, 65% for direct mail, 65% for Web site creation and maintenance, and 62% for banner ads and other online creative. The survey of 195 ANA members—including companies like Cisco Systems, Eastman Chemical Co. and Hewlett-Packard Co.—was conducted online in August.
As the lines between marketing disciplines continue to blur, direct marketers also face stiff competition from other types of agencies.
“Direct marketing agencies around the world are feeling the pinch because above-the-line agencies are moving into their space from one end and digital agencies are moving into it from the other,” said Patrick Collister, CEO of Stockbury, England-based Creative Matters consultancy and publisher of the annual “Won Report” roundup of the world's best directing marketing.
Megan Smith, a marketing consultant for Richards Relationship Marketing, said one-size-fits-all agencies could lead to a bad name for direct marketing specialists.
“It's causing [specialist] agencies to work harder to communicate the benefits of direct marketing and set themselves apart from the clutter,” she said.
But the most optimistic of direct marketers believe the returns their agencies deliver speak for themselves—especially in times of economic uncertainty.
“The marketplace has become more crowded,” Johnson said. “But those who can prove results will ultimately win and retain more business, while those who cannot will be out of business.” M
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