The Power of Momentum

This is a long one, but certainly worth it. There are 2 key things that I’ve picked up from this article. The first is that you can use the metric “marketing-sales-ratio” over time (in this case 20 years) to measure your marketing efficiency. The second is the importance of building momentum. As they say in this article “Momentum leaders aren’t that passive. They live by this motto: First build your wave, then ride it.”

This study looks at the conduct and performance of well-known corporations among the world’s 1,000 largest, covering a 20-year period from 1985 to 2004. The authors looked at these firms’ marketing behavior and tracked the effect that changes in this behavior had on sales revenue, net earnings, and stock price.

http://knowledge.wharton.upenn.edu/article.cfm?articleid=2033

Introduction

Momentum…Some hold on to it. Most don’t. Slowly, imperceptibly, the tailwind turns around and the momentum disappears, without anyone quite realizing what has happened. The company is still growing, but not as strongly as before, not as efficiently. Everyone’s maxing out, but it seems like there’s molasses in the works. Sound familiar?

The insight came when we realized that if momentum was powering a firm’s success, then its relative marketing spend should be decreasing. Contrary to conventional “spend money to make money” wisdom, our hunch was that firms with momentum achieved superior growth while spending a relatively smaller percentage of their revenue on marketing than those pursuing the traditional “push hard” methods.

We divided the firms into three groups according to how their marketing behavior could be described: Pushers, Plodders, and Pioneers. Because we were interested in the effect of extremes in marketing behavior, our three groups were divided in a 25:50:25 split.

The Pushers were those companies that pushed their businesses hard in the traditional way, seeking to drive sales through aggressive increases in relative marketing spend. Then there were the Plodders…Their marketing-to-sales ratio remained more or less constant for 20 years. These middling firms stayed in the safety zone of past behavior and took no drastic action one way or the other. Finally, there was the remaining quarter — those firms that were, either boldly or foolhardily, heading in the opposite direction from the Pushers, and decreasing their relative marketing spend. Taking these firms’ average marketing-to-sales ratio, we see a 4% drop over the timeframe.

Results

remaining in the safety zone of stable marketing spend is not a viable option: The Plodders underperformed the stock market by 28 percent (over a 20 year period)
Pushers managed, on average, to create shareholder value exactly in line with the evolution of the Dow Jones Index, thus demonstrating the soundness of the conventional faith in the power of active marketing spend to contribute to increasing shareholder value

Pioneers. Despite having decreased their advertising-to-sales ratio, these momentum-powered companies created shareholder value 80% above the Dow Jones Index over the 20-year period.
Over the 20-year period, using the Pushers’ performance as a reference, the Pioneers’ revenue growth was 93% better — almost twice as high. They achieved this massive revenue growth despite decreasing their advertising ratio. And remember: This is in comparison not to underperforming firms but to firms that actually matched the Dow Jones Index.

If we compare the profitability growth of these two groups, we can see that the Pioneers also did much better, with average earnings growth 58% superior to that of the Pushers.

Analysis & Conclusions

our study shows that the momentum-powered Pioneers actually increased their total marketing expenditures in real terms. But while their marketing budgets were increasing, the proportion of their revenue that this expenditure represented was decreasing. In other words, because of the Pioneers’ superior revenue growth, their advertising-to-sales ratio was coming down despite the fact that they were spending more.

The question is: What was improving the efficiency of their marketing investments? This is not simply a case of great marketing, although marketing excellence is a key part of the mix. These firms achieved greater efficiency with their marketing because they found a different path to growth: They exploited the momentum effect.

Momentum Powered Firms

Too often, companies invest more in marketing to compensate for something: an inferior product, a poor pipeline of new products, deterioration of growth prospects, or a general lack of creativity. Firms with such a limited vision compensate for their less-than-spectacular offers by pushing them on an unconvinced market using heavy-handed marketing resources.
The Pioneers show there is an alternative. These momentum-powered firms don’t have to push so hard because they have built up a momentum that improves their efficiency. Rather than just better-than-average growth, they deliver exceptional growth. Their growth is exceptional on two counts: It is both higher and more efficient.
Momentum in Action

WALMART
Sam Walton knew about retail, but his main asset was the fact that he knew about customers. When he started out, he related deeply to a very specific kind of customer — people like him, people from the United States’ rural South.

Walton understood that these customers would value his offering, that they would appreciate being able to shop locally, rather than making long journeys to larger towns. He also realized that these shoppers were worth more than they seemed. Although their wallets weren’t as full as those of people in large cities, Wal-Mart was able to command a higher share of their spending because there was no competition. The combination of cheaper premises, lower labor costs [and] no competition … meant that Walton’s customers were extremely profitable to service.
Eventually, Wal-Mart was able to glean economies of scale in purchasing to achieve its mantra of “Every Day Low Price” (EDLP) and gain further momentum.

EDLP runs counter to traditional retail promotions that lure customers into stores, hoping that they’ll also end up buying more expensive products.

Wal-Mart’s competitors, to their discomfort, failed to understand that, although EDLP was jargon on the surface, it expressed a strong, hidden emotional value deeply appreciated by customers: trust. This customer trust powered the company’s growth for decades.

Unfortunately, momentum doesn’t look after itself. There is a perception that Wal-Mart slowly began to pay less attention to many of the key drivers of its success — respect for employees, local communities, and suppliers — and began to lose its momentum as a result. Momentum is dynamic: Unless it is constantly nurtured, it will ebb away.

TOYOTA
Toyota’s ability to create new, original, and compelling value in the first place that drives its growth. Its secret is its ability to connect totally with customers’ sense of self, to create products that are more than mere goods but complete, perfect, and compelling presentations of value.
Consider the contrasting histories of the U.S. auto industry and Toyota. American car manufacturers are among the best illustrations of the limitations of the Pusher’s strategy. They have given everything a try in terms of efficiency drives, but although they are now leaner, they are no fitter.

Its success is based on a number of factors, but underlying its achievement is a deep understanding of its customers. First, Toyota proved that it could consistently deliver reliable, impeccably engineered automobiles. Once this crucial plateau had been achieved, it went on to innovate its range with cars that were somehow more than mere vehicles.

Join the Momentum League

Our research has shown that increases in marketing pressure can lead to significant profitable growth.

Momentum offers an easier, more efficient, and exceptional form of growth. But it requires the ambition to break free from the traditional reflex of using more resources to fuel it. The very things that seem to push you forward are holding you back. Momentum does not happen by chance. Nor can it simply be willed into existence. Achieving momentum requires an understanding of its source, and then the relentless application of a systematic process. It requires a momentum strategy.

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