Present Thoughts on Advertising

My evolution as a business owner began in the most primary of schools… commodities. The term “marketing” on a row crop farm meant committing one’s self to a price –be it a present cash price, or a future’s contract and an unknown basis. No advertising required. No salesmanship required. My exploration off the farm began at age 13 with a small mobile retail enterprise on the school bus. My merchandise was compact discs. My classmates were my customers. My only advertising was my friendly smile and being sure prospective customers observed present customers taking action. In my 20’s, I chose hand-to-hand, business-to-business, direct-sales. I’m an introvert so this seemed natural. Also in the mid-2000’s, digital marketing and direct sales were synthesizing and exploiting the ability to sell directly via the internet. This provided small businesses a very compelling edge. With laser focus, a tight niche product, and a logical marketing and sales plan, an owner could target and convert, at very high ratios, the prospect into a customer, and the small customer into a large customer. I was thus able to introduce the concept of “Sales & Marketing” into my lexicon. This propelled me for more than a decade. Advertising was generally disregarded as expensive and wasteful. I preferred refining my sales pipeline.

Recently, I have learned a couple of things about advertising and channel sales. I thought I might write them down for my own reflection and organization. Perhaps someone else might benefit. Here it goes:

Since college, I’ve known Advertising and Sales were sub-categories of Marketing. What I did not realize was how and when to prioritize Advertising. As an owner and capital allocator, this is pretty important stuff. I think I avoided advertising because I did not understand it despite having a minor in marketing. This was not foolish, but wise. I stayed within my competency, and away from things that appeared wasteful.

In direct B2B sales and channel B2B sales, the transaction size is large enough to employ a salesmen. Your company can sell direct or it can sell through a dealer network. In both cases, the model is to identify and draw in a specific customer. I will identify this process as “the sales model” (terminology is a big mess in this region of work.)

In the sales model, the emphasis goes toward solving the specific customer’s problem. In software-as-a-service enterprise the $1,000 initial ticket was a bare minimum, but a good rule of thumb to justify a salesmen. Go below that threshold on your initial software sale and you needed a self-service model. In large consultive sales, you wanted to drive the total value as high as possible. This was important because the sales staff was more expensive. The root challenge is to design and refine a strong CAC/LTV ratio (customer acquisition cost to lifetime value.) As you go below a reasonable threshold, you must replace salesmen with advertising. I knew this and avoided going below a certain price per customer size.

Thus, advertising was a safe distance. Advertising seemed too scattershot, and wasteful. What were you gaining over time if you got no feedback? However, I’m coming to understand and appreciate the procedure more clearly now. I’m evolving from a man-with-a-hammer syndrome. I’m widening my competency.

Advertising is extremely inductive and statistical. As the saying goes, half of your advertising works, you just don’t know which half. I think the point of that saying (which I have always hated… I like better odds) is that a very large portion, perhaps even most of your advertising spend does not convert to immediate sales. You waste more than you get… initially. However, over repeated advertisements you eventually turn the mob in your favor. That is, if you have a 50/50 shot of getting paid a positive return, you ought to determine how big the payback is and size your bet proportionately. A coin flip that pays 3:1 is a good bet. Now we are starting to make sense.

A lot of advertising must start as a coin flip. This is Bayesian with no priors. You incrementally improve after you start.

Here is the really tricky secret of advertising… it accrues and compounds. Have you ever heard the saying “it takes someone seeing an ad seven times to become comfortable with it.” I’m not saying that rule is fixed, I think it often deteriorates over time (takes more impressions than seven), but what I am suggesting is that once you cross some tipping point, the onslaught of return purchases and incremental gains are built upon the past victories. That is, your toothpaste, breakfast cereal and soft drink become ingrained in your normal course of life. You forget to think. You do not consciously consider all your options and your present needs. You are not sold. Any old cashier will do. Instead, you affix a decision, perhaps even subconsciously, and you repeat it ad infinitum. The return to the same parking spot, the same seat at church, where you lay your keys down. They all become part of your everyday life. As you consume products and services you simply repeat what you have done before. There is not a linear customer journey associated with each purchase. It becomes mindless repetition. It’s not foolish either. It’s a prioritization of your mental energy. Don’t expend a ton of time and thought buying a $2 soda. But these tiny repetitions pile up and spread. It goes out amongst your family, friends, neighbors and more. Social proof also kicks in. The herd goes a-runnin’.

While mobs form and dissipate without clear cause, this doesn’t accrue profit to businesses as some might have you believe. Sure a business can get lucky, but the passing phase might just move past you. Sustainable businesses don’t just bank on getting lucky. They put themselves in situations where victories accrue.

Advertising is about incremental shifts to groups of people, not logical conversions of individuals along a linear path.

Different than the direct sale, many consumer sales do not require the identification of the individual. In fact, in many B2C transactions it’s not only troublesome and expensive to identify the end customer, it may breach some confidentiality or convenience the customer desires. Think of a cash purchase of a soda… the request to register the name and email of the customer would immediately eliminate the sale; so the seller drops the concern, and takes the cash in exchange for the soda. Both are happy and they move on. If the customer is happy he returns.

The sales model allocates resources and expertise toward the closing phase of a linear customer journey. Profits from high sales conversion ratios are poured back into product development. This further improves the next round of conversion ratios and the company grows sales and profits.

In the consumer model resources concentrate around the advertising phase. Profits from current and repeat sales are poured back into maintenance and expansion of awareness. The mob grows. The product remains nearly the same. The habits are reinforced and revenue grows. This increases the advertising dollars available to expand awareness further.

If you follow the above logic, a maintenance level of advertising as a percentage of sales can be found. This is probably not static because some fanatical competitors can pour resources into a marketplace and draw attention of the group away. In other cases, the supply of product becomes sparse and growth occurs despite no increase in advertising expenditures. This final example is what others call tailwinds. I think population growth is the primary driver of this. It’s way easier to grow a company where the market population is growing.

Staying on the above logic of reinvesting in advertising as a percentage of sales, the herd likely shifts based upon the magnitude of impressions. If the herd sees more green grass to the west it will migrate regardless of the quality of grass to the east. So, increase the importance of impression count versus the quality of salesmanship or even quality of the product.

Thereby cost per impression becomes extremely important to the advertiser. Newspapers and television exploited yet another disturbing reality. The minimum cost to sustain a bare minimum of advertising often prevented new entrants. And by this manner, those firms who could outspend competitors based upon present sales volume created a winner-take-all sweep of the market. The herd flocks to the most well-known, not because of quality or convenience but because of leadership in advertising.

So, how does a small business crack this code? Can it? Or, is it hopeless?

I have come to believe that the herd desires to fragment itself into more unique and specialized groups. And so, a small business might attract a fraction from a very large group and come to encapsulate this subset and separated group. This division does not have to be terribly precise.

In auto insurance the primary division is relationship versus price. The relationship is not actually real, it is perceived. State Farm and Farm Bureau own this perception in our area of the country. Individuals, identified as professionals, pretend to care and customers pretend to be cared for. As a result, the retention is high. Advertising reinforces this. On the other hand, there is a segment that identifies themselves as price conscious. They move toward Geico and Progressive. Once indoctrinated, they stick, repetitively in their lane. I believe this is why Geico advertises so heavily on price. Not only do they win on that space, but they win the heart of the buyer for that reason. They capture the self-actualizing portion of their customer’s mind. “I am this type of person.” Once won, they are stuck, following the herd, drifting up and down as premium tides change.

What about the beer drinkers of the world? Take the very large and dominant American lager crowd. Fraction off the craft beer IPA crowd and you enjoy a very nice following. But what if you fracture off the lager crowd into an Indiana group? Then carve off from this group with a craft pilsner? Perhaps, the Workingman’s Craft Pilsner? The artistic, craftsmen’s beer of choice. This is for the creative among us. What then? Greener grass, folks. A portion of the herd turns.

Now execute it more specifically. Take a total beer drinking population in the state of Indiana and carve off 8% as craft beer. Sub divide this group by craft lager drinkers. Truncate the oldest population for shorter lifetime value (yes, advertisers are this harsh), and there is a target demographic to aim at. Alternatively, you can split the total beer drinking population by lager drinkers, and then carve off the 8% that have proven to “go craft.” Sub divide this group by those whom you can win, and there is another target market. Don’t waste too much time here.

Move on to cost per impression. How and where can you enter the market most cost effectively? You wouldn’t do national advertising. You would go local. And not just any local, you would go hyper-local. But, are you down to a neighborhood or something else? For Workingman’s Pilsner, the concentration and cost level is primarily Indianapolis, Indiana. And the lowest cost per thousand impressions is changing. Resources should seek lowest cost per impression like gravity aids water in finding the cracks in the market. Improve over time. Reinvest a portion of sales (or more if you want to be fanatical.)

These are a few of my thoughts and examples on advertising. I wrote this post March 7, 2020, re-read it March 30 (post COVID-19 lock-down), still believed it, and published it today, back-dated to March 7. Advertising will matter in the coming months and years. So will direct sales. Those who understand their channel, and make risk-wise investments will thrive. Those who do not, may fade. I prefer thriving.