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7 Principles of Marketing

2012 August 22
Rodney-Dangerfield

If it weren’t for lawyers, marketers would probably be the most reviled professional class.  Rodney Dangerfield has nothing on us.

Lately, the criticism has gotten unusually shrill.  One prominent ad agency executive recently said that marketing is dead.  Somebody else wrote the same in Harvard Business Review.  A prominent VC says that marketing is just for companies with sucky products.  It seems like we never get any respect.

I think that part of the problem stems from the fact that other professions have qualifications.  Doctors go to medical school, engineers build things, financiers make money and even lawyers need to get admitted to the bar.  Meanwhile, any jackass off the street can call himself a marketer.  What we need are concrete principles.  Here are seven.

1. More than Half the Value of a Typical Business is Intangible

Many financial types want little to do with marketing.  They want to see hard assets, dollars and cents.  The last thing they want to hear about is any softheaded notions of brand image.  They want us to show them the money.  Plain and simple.

Unfortunately, many financial types know little about finance.  The fact is that, for most companies, intangible value makes up more than half of the total market value.  Take a look at the chart below:
 

 
The chart compares market capitalization (i.e. the value of a company alive) with book value (the value of a company dead).  What’s left over is intangible value.  If a business was merely a balance sheet, nobody would ever pay more for one than its assets minus its liabilities.  Even a casual examination quickly reveals that’s not how the real world works.

A few things that I want to point out initially.  First, intangible value is enormous, making up the majority of the worth of a successful business.  Second, the ratio of intangible value does not depend on the industry (I’ve color coded competitors to make comparisons easier), the size of the company or even the age of the business.

So what does intangible value depend on?  As I’ve argued before, brands are promises and the value of a business is the value of the promises kept.

2. Marketing is not Advertising or even Promotion, but Identifying “Jobs to be Done”

Another interesting fact borne out of the chart above is that intangible value is not a matter of mere promotion.  Wal-Mart has a higher intangible ratio than the more promotionally oriented Target, for example.  Even in industries that require enormous capital investment, such as telecom and oil, intangible value is huge.

While effective promotion is obviously a very important part of marketing, it is certainly not the only, nor even the primary task.  An effective marketing program identifies consumer needs and preferences, helps determine how those needs can best be met and how much people will be willing to pay for them.

In other words, successful marketing is mostly about finding profitable opportunities for value exchange.  Often, those opportunities are product related, but they don’t need to be. For instance Zynga has unlocked value in people’s social relationships while American Express Open Forum has profited by giving their consumers valuable content.

In a nutshell, people need jobs done for them.  The main task of marketing is to identify which jobs their organization can do most profitably and make sure people know about it.

3. Owned and Earned Media are More Influential

Watching Mad Men, you get the idea that promotion is all about snappy taglines and slick TV commercials.  In the past, that was mostly true, but digital media and the data that came with it, has changed a lot of what we thought we knew.  Clearly, we now live in a post-promotional paradigm.

We were always aware that word of mouth existed, but had no idea how powerful it was. The new social era shed light on the fact that recommendations from people we know are more influential than anything else.  Further, the digital nature of those recommendations means that they can go viral and get picked up by mainstream media as well.

Owned media, such as websites, Facebook pages and storefronts have the additional advantages of allowing for deep product information, customer service and conversion to purchase.  Not surprisingly, publishing has become an increasingly important marketing skill.

4. Paid Media is Easier to Activate

The rise of owned and earned media has caused many to believe that there is no reason to pay for media anymore.  That’s a mistake.  While owned and earned media certainly have some advantages, they don’t guarantee that you will reach anybody.  There’s no use having a party if nobody shows up.

TV is still the best way to reach a majority of your consumers in a short period of time. Want to reach 60% or 70% of your target this week?  No problem.   Banner ads, while much maligned because of low CTR’s, offer more sophisticated forms of targeting and can guarantee you the audience you want.

Most of all, advertising messages are effective.  While some believe that they are impervious to brand messages, abundant empirical research says otherwise.  Highly sophisticated, profit driven enterprises will spend over $400 billion on paid advertising this year, with good reason.

5. Evaluate the Path to Purchase

One of the most important innovations in recent years is the rise of path to purchase models.   They have, in fact, become so pervasive that even consulting giant Mckinsey has gotten into the act.  The wide array of different approaches can be confusing, but they all rest on three pillars:
 

 
While different brands in different categories might want to add more detail in different places, if you perform in these three areas, chances are that you’re doing pretty well. Awareness, sales and advocacy should be considered the three core tasks of any brand and marketers need to continually track those indicators of brand health.

While marketing is still very much alive, promotional strategy needs to embrace new realities and new paradigms.   Competitive path to purchase analysis plays an increasingly important role in evaluating opportunities and pointing the way toward effective strategies.

6. Seed, Share and Convert

While the concept of paid, owned and earned media has become pervasive, it really isn’t all that useful.  It merely provides us with a taxonomy, not a basis for action.  What really need to do is to seed, share and convert.

Seeding:  When social media first appeared, its advocates claimed that it would mean the end of traditional media.  That never happened and it doesn’t look like it every will.  It soon became clear that marketing without paid media simply doesn’t work.  Nothing can replace the speed, efficiency and consistency of mass media.

Regular readers of this blog know that I’ve long advocated a big seed strategy along the lines formulated by network theorist Duncan Watts.  The fact that most popular brands on Facebook and Twitter invest heavily in traditional media bears this out.

Sharing:  Promoting sharing is problematic because we it’s not something we can directly control.  Social media strategy is still in its infancy and we are still learning how to do it.  My experience is that common sense usually goes a long way.  Compelling content, along with respect for the consumer and ample sharing opportunities are good, basic policies.

Converting:  Turning prospects into paying customers is another thing marketers generally know how to do well (albeit some better than others).  Couponing, website optimization and in-store promotions are all areas of considerable expertise.  Shopper marketing has also come a long way in the last decade.

However, recently become an area of vigorous innovation, especially at the point of sale. E-commerce and physical retail are converging with screens technology to create a new digital battlefield and new, mobile marketing technologies such as near field communication will revolutionize how we buy products and services.

7. Marketing is not a Science

As I noted in the beginning, one of the great frustrations of marketing is that we don’t really do anything on our own.  We don’t build things like engineers or argue cases in court like lawyers or even create financial returns like Wall Street traders.  We are not successful on our own, but enable others to be.  Often, our efforts go unrecognized.

That’s led some to focus on what we can quantify and optimize.  That’s a mistake. Marketing is not a science, but a business function.  Much like other worthy endeavors, it is best practiced when it is informed by science and adopts some of its methods, but that is not the same thing.

One person who deeply understood this was Steve Jobs.  As I’ve explained before, he had little talent as an engineer, but had a knack for understanding what kind of jobs consumers wanted done (i.e. 1000 songs in your pocket), a flair for promotion and a deep devotion to building a community of like minded people.

Most of all, he understood that creating efficiency is not the same as creating value. Marketing will live on as long as dreams do.  Identifying and fulfilling those dreams is the essence of good marketing and good business.

- Greg

14 Responses leave one →
  1. Stuart Nicholson permalink
    August 23, 2012

    Good post, Greg.I am in agreement with your seven points.
    However, with respect to McKinsey i feel that, while it is a good thing to try to make things as simple as possible, their three pillar structure ignores an important fourth strand.

    It is no longer sufficient for brands to simply build awareness,What is also crucial is to create involvement, or engagement in order for consumers to react to communications in a positive way.Awareness may communicate functional benefits, but engagement is a two-way and more personal area which is required more now that there are so many more ways for consumers to come in contact with brands.While there are many nuances of the pillars, in my view this one deserves to be be more fundamental to any modern model of marketing.

    [Reply]

    Greg Reply:

    Er, um Stuart, the 3 pillar thing is mine, not McKinsey’s. I agree that it’s usually a good idea to add another metric or two, depending on the brand and the category and that is often some kind of involvement metric (but more often a consideration metric). The three pillars are really the base case.

    - Greg

    [Reply]

  2. Ajoy Vakil permalink
    August 26, 2012

    Hi Greg

    Wonderful post, as usual! I feel that today’s path to purchase is not really as linear as it was once. And advocacy is becoming an increasingly important pillar – one look at the conversation on various forums shows us how important this is…

    Ajoy Vakil

    [Reply]

    Greg Reply:

    Ajoy,

    Overall, I agree with your sentiment, but I don’t think the path to purchase was ever linear (although it’s much more convenient to present it that way). You can easily advocate something you’ve never bought or make an impulse purchase of a product you were never aware of.

    Path-to-Purchase analysis is more diagnostic than it is descriptive.

    - Greg

    [Reply]

    Ajoy Vakil Reply:

    I see what you mean Greg! Thanks!

    Ajoy

    [Reply]

  3. August 29, 2012

    Hi Greg,

    Thanks for this thought provoking post! Would you think that there is ground for arguing that value network partners could also capitalize on intangible value? That is, is there a case for sharing your intangible value growth with network partners, when a part of intangible value is actually created by them, but not monetizable through a product/service transaction?

    I have recently written a post on this, just pondering on the total lack of access that farmers have further downstream in the value chain. I propose a completely out of the box solution to tackle that through sharing brand value, which would not be very realistic to pursue. But I’m really interested in getting some feedback on the idea. Hope to have your thoughts on that (http://valuechaingeneration.wordpress.com/2012/08/21/what-if/)

    Thanks

    Bart
    Bart Doorneweert´s last blog post ..What if…

    [Reply]

    Greg Reply:

    Bart,

    It’s an interesting idea, but I also think it is important to take into account that distribution is part of the value chain. For someone like Unilever to deal with partners, they have to have local agents, which means that the resources they employ there they can’t employ somewhere else.

    There are efforts to deal with this problem. For instance, USAID has many programs in third world countries in order to make it easier for small farmers to get to a decent market. Mobile technologies are also playing a big role. Another idea, which I wrote about in an earlier post is vertical farming, which brings farming to cities.

    - Greg

    [Reply]

    Bart Doorneweert Reply:

    Thanks for the response! True that it is a risk to put company resources into the value chain. But access to commodities is becoming a big issue in agriculture, as well as maintaining natural resources in such condition that they bring continuity to production. Relations are becoming more specific because of those issues, and they might just merit specific investment commitments.

    Bart
    Bart Doorneweert´s last blog post ..What if…

    [Reply]

    Greg Reply:

    It’s a classic Porter problem. Some prefer to integrate forward, some backward.

    - Greg

    Bart Doorneweert Reply:

    I don’t think it is. It’s a problem of finding a way of co-innovating with your network partners, and sharing the contingent risks/benefits –> http://valuechaingeneration.wordpress.com/2012/03/12/just-what-is-shared-value/

    Bart
    Bart Doorneweert´s last blog post ..What if…

  4. John Ribbler permalink
    September 5, 2012

    Greg, The flaws in this thesis reflect on misplacement of values in every sector of the marketplace. Does anyone else regard profits as more important than sales, market cap, etc? The closest you come is alluding to it by referring to efficiency. But, that’s just the world too many people live in. Is marketing excellence crucial to profitability? Absolutely. But profits don’t get you on the Fortune 500, top market cap and other intangible ratings. Profits are tangible; they are what you take home at the end of the day. John

    [Reply]

    Greg Reply:

    John,

    I’m not sure what “thesis” you are referring to. Could you clarify?

    I defined “intangible value” above as the market value of a company minus it’s book value, which I think most people would agree is pretty straightforward and sensible.

    Profits are related to market value in that it’s standard practice run some version of DCF to determine price, but the discount rate is highly subjective.

    - Greg

    [Reply]

    John Ribbler Reply:

    Greg,

    I read the article last night on my phone and wrote the comment (most certainly too quickly) using the tiny keyboard. What came out doesn’t make sense to me on second reading. Sorry.

    However, I am concerned that you’ve stretched a bit in trying to validate marketing’s overall worth within the framework of your 7 Principles.

    I agree with you that marketing (and all its subsets PR, advertising, etc.) operate in a far too subjective environment due in great part to the absence of concrete professional standards, including licensing. In most places, a plumber can’t install a toilet without being licensed, but anybody can get an executive invest ungodly amounts in worthless promotions.

    At the same time, even though the legal, accounting and securities professions are thickly regulated, their rules are thoroughly manipulated to insure that grades, standards and measurements (which most people assume have some kind of objective meaning) typically hide information that is critical to current and would-be stakeholders.

    It’s within that context that I see an inherent paradox in your formula for identifying the intangible value of a company. I’d contend that the intangible value of any company, at any given time, is inevitably a moving target and the method of truly gauging it is — like beauty — in the eye of the beholder.

    Does Warren Buffet understand that a company has intangible value? Most certainly. Does he have any interest in a company with a market capitalization that’s 50% of the book value? Absolutely not. Is the intangible value of a company affected by the simple fact that Warren Buffet has an opinion on its worth? There we go. The whole thing is more subjective than the world of The Matrix.

    What I’m suggesting is that your 7th Principle essentially belies the need to even suggest the 1st Principle. Marketing is not a science and neither are the decisions made by buyers and sellers all along the chain. In the words of a ubiquitous marketer: “Just do it!”

    John
    John Ribbler´s last blog post ..The business lessons of a random assault by a crackhead

    [Reply]

    Greg Reply:

    John,

    Yes, that’s true and a very good point. Intangible value and marketing are two different things. Lots of people contribute to intangible value that have nothing to do with marketing, just as marketers contribute to finance, product development, etc. However, marketing is the only business function that has intangible value as it’s primary mission.

    My point was that intangible value is demonstrable and incredibly consequential, as I think the numbers clearly show. Book value makes up a small portion of most companies market value. Because intangible value is a core marketing mission, I seems to me that it also says something about the importance of marketing.

    As for Warren Buffet, we don’t have to guess how he values companies, because he’s quite open about it and Graham and Dodd has been a standard textbook for decades. He surely understands intangible value, points to quality of management as one of the key drivers of his decision making along with DCF, etc.

    - Greg

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