CMO Mondays: Marketing as a Capital Expense

We’ve entered annual planning season for many companies. As with any other corporate function, marketing teams are developing their plans for the next fiscal year, including lobbying for budget. All too often, the budgets that marketers request are simply based off of the current year’s budget allocations. Occasionally, marketers are more proactive in seeking new budget to test new channels or programs. Perhaps they even piloted a program this year that had some measurable success and are lobbying for expanded investment for next year. But, most of the time, marketers are simply taking the budget that their CFO allocated to the CMO and being told to do what they can within what they’re given.

Why does this happen? Because marketing gets stuck being perceived as an operating expense instead of a capital expense.

Below is a definition of operating expenses from Investopedia:

“An operating expense is an expense a business incurs through its normal business operations. Often abbreviated as OPEX, operating expenses include rent, equipment, inventory costs, marketing, payroll, insurance and funds allocated toward research and development.”

Below is a definition of capital expenses from Investopedia:

“Capital expenditure, or CapEx, are funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. It is often used to undertake new projects or investments by the firm. This type of outlay is also made by companies to maintain or increase the scope of their operations. These expenditures can include everything from repairing a roof to building, to purchasing a piece of equipment, or building a brand new factory.”

The issue with these definitions is that they fail to recognize that sound investments in marketing are investments in growth – in profitable revenues, in asset value and in scope of operations. So, should some marketing expenses be considered CAPEX?

Consider that each marketing discipline has a payback period on investment. Some are longer and some are shorter, depending on where they land in the buyer’s journey / sales funnel. For example, SEO and paid search are going to have a shorter payback period because these are primarily bottom of the funnel disciplines. Good SEO and paid search captures potential customers when they’re looking for a specific solution and have high intent and immediacy to acquire that solution. On the other hand, social media and display advertising tends to focus earlier in the buyer’s journey – driving brand/product awareness. Thus, social media and display tend to have a longer payback period. A marketing department should have a handle on three key metrics:

  • Customer acquisition cost (“CAC”): the cost to acquire a customer
  • Customer acquisition time (“CAT”): the time it takes to acquire a customer (i.e. the average duration of the buyer’s journey)
  • Customer lifetime value (“CLV”): the amount of revenue that each individual customer generates during the entire duration that the customer uses the company’s product

A strong marketing department will also have an understanding of how each marketing discipline / channel contributes to these metrics. This context then gives marketers a foundation to lobby for investment.

How much does your company want to grow next year?

Let’s look at a very basic example: assume we have a $50M revenue business, and we want to grow 20% year over year. That gives us target revenues of $60M for the next fiscal year, which means we need to acquire $10M in new revenues. If our product sales price is $200, then we know that we need to acquire 50,000 new customers ($10M / $200 = 50,000). And, if our CAC is $100, then we know we need to invest an additional $5M (50,000 * $100 = $5M) in order to achieve our revenue goals. (*Note for startups that are still figuring out their business models: your CAC should be less than your unit sales price in order for you to have a sustainable, profitable business.).

Running a basic calculation like this enables you to come into budget talks informed and prepared to make your case for budget based on business imperatives. Equally important is understanding how each marketing discipline – search, CRM, social, paid media, PR, etc. – contributes to your CAC and on what payback period, so that you can allocate your budget appropriately.

Think with Google is just one tool that helps us understand this. The below image shows us the general buyer’s journey to online purchase.

general-online-customer-journey

As you can see, each marketing discipline / channel plays its part in driving a buyer (i.e. customer) to make a purchase. Organic search, brand  paid search, email and referral are at the bottom of the sales funnel (i.e. closer to the point of purchase). Thus, these channels have a shorter payback period. As these channels are directly driving revenues, they may fit well in the OPEX budget. But, how about those activities with longer payback periods?

Consider social media. This discipline / channel typically plays two key roles in the buyer’s journey / sales funnel. See the sales funnel below:

customer-purchase-funnel-01-1

First, social media builds awareness for your brand. This is earlier in the buyer’s journey. But, social media also enables and amplifies advocacy on the tail end of the funnel / buyer’s journey. Advocacy is where customers share their enthusiasm and support for the brand/product. This advocacy helps in the consideration and preference stages of the funnel, as potential customers value the opinions of people in their social networks and other customers that have experienced a brand. Thus, when done well, social media can increase the value of your brand by lowering your CAC and increasing your CLV. Your brand is an asset to the company. So, while it may take longer to achieve the ROI on social media (i.e. there is a longer payback period), this should not preclude the business from investing in the channel. Also, since social media helps to build the value of an important business asset – the brand – over a longer period, should we consider social media a capital expenditure?

We could think of CRM in a similar fashion. A robust email list of customers and potential customers is a business asset. As you can see from the buyer’s journey image above, email sits at the bottom of the funnel – close to the purchase decision. So, how valuable is customer data that will enable the company to market more effectively and efficiently to drive revenue?

While moving organizations – and, in particular, finance teams – to think about marketing expenses as both OPEX and CAPEX (vs. just OPEX), depending on the marketing activity, may take some time, it’s a worthwhile exercise to consider. First, it will ensure that marketing teams are accountable for their primary objective – driving revenue- and that they are putting the right KPIs and analytics infrastructure in place to measure impact. Second, it safeguards the marketing organization from mid-year budget cuts all too typical in large organizations. It’s never made sense to me why companies cut marketing budgets when they don’t hit their numbers; this is when they should be investing more in marketing. See the Virgin Atlantic vs. British Airways case study that I reference in this blog post.

Another way to think about making this shift is considering the marketing P&L. Paul D’Arcy, CMO of Indeed.com, wrote about this in his blog post “It’s Time to Kill the Marketing Budget and Think About a Marketing P&L.”

Regardless of what approach you take, come to your planning meetings informed with data and couching your budget requests in the context of the business impact to expect to make. Your CFO speaks numbers; be prepared to speak her language.

The Purpose Economy, Part 1: The Reciprocity Theory

Charlie Bit My Finger

Back in 2010, I left the movie business to work in digital and social media. I was fascinated by the accelerated growth of Facebook, YouTube and Twitter, and how they were disrupting the content industry. In the movie business, reliable A-list talent weren’t driving people to the box office anymore. But, Charlie Bit My Finger was getting millions of views on YouTube. Seemingly overnight, what was once our audience had become the talent. They’d become the celebrities themselves. And so, as I made a career move into social media marketing, working with bloggers and vloggers and other content producers and startups like BuzzFeed – and working with brands like General Motors and Colgate Palmolive to make sense of it all – I became fascinated by human behavior online. And, I thought deeply about the core motivators that drive participation and action in social media and online.

Newton's Third Law_Ice Skaters

As I thought about these core motivators, I kept thinking back to Newton’s Third Law of of Physics, reflected here with two ice skaters. So long as the force that each skater is acting upon the other is equal, they maintain a balanced relationship. But, as soon as the force of one exceeds the other, the relationship is thrown off balance. In other words, the relationship is mutually dependent, or, reciprocal. Similarly, reciprocity in social psychology refers to responding to a positive action with another positive action, or a hostile action with another hostile action.

This notion led me to a model I call The Reciprocity Theory. At its core, The Reciprocity Theory believes that social motivation is based on each person’s desire to (1) be recognized as an individual, and (2) belong to a community.

Reciprocity Theory_Individual, Community

And, this is what makes social media so sticky: you get to define yourself and showcase yourself as an individual, while belonging to a bigger community. And, so long as you are contributing some definition of value to the community, you will earn an equal value in return. Like the ice skaters, the relationship is reciprocal.

Now, when I took a step back and looked at this model, a few things occurred to me. At the intersection of the individual and the community lies the individual’s purpose. It asks the question, what unique value can I, as an individual, contribute to the community – to the world?

Reciprocity Theory_Individual, Community, Purpose

It is also the basis for influence.

Reciprocity Theory_Individual, Community, Purpose, Influence

If you are truly contributing value to the community, you develop some level of influence on them. In marketing, we talk a lot about influencers. Not just how to engage them with your brand, but also how the brand itself can become one.

And, so I asked: where does a brand fit into this? How does a brand reach the individual – or the community of people?

If the brand interjects itself with traditional, antiquated advertising, then it will throw off the balance and the individual and community will retract. The individual and the community will continue their relationship, but the brand won’t be a part of it.

So, how can a brand earn a seat at the table in a new world where the individual wields more power than the brand? By becoming a valued member of the community as well. By being purpose-driven and enrolling customers into their community.

In this series on what I’m calling The Purpose Economy, we’re going to discuss why The Reciprocity Theory and being a purpose-driven brand is so essential. What are the fundamental shifts in our economy that make this community, purpose-driven approach so critical? And, how a brand can do it. How does a brand operationalize this – institutionalize this? We’ll do this in the following posts on Foundational Human Behavior, Technological Revolutions, Socio-Economic Evolutions, and Business Transformation.

Click here for the next post, where I discuss foundational human behavior.

The Purpose Economy, Part 2: Foundational Human Behavior.

Building a Content Platform

Blogging

Yesterday, I discussed content as a platform. Today, I’m going to provide tips for building your content platform.

The 90-9-1 Rule

The 90-9-1 Rule is more of a benchmark, but it states that 1% of the online population is highly participatory (producing original content), 9% participates some of the time (usually curating content – taking an action with the content from the 1% such as commenting, sharing, reposting etc.) and 90% “lurk and learn” or do not participate (they consume the content, but they don’t take an action with it).

It stands to reason then that the 1% are the most influential people on the web, followed by the 9%. But, what about those that produce original content AND curate? They reach influence at scale.

Some brand publishers are already doing this; I touched briefly on the subject in my post, “The Valuation of Content”. The Huffington Post sets the bar with a mix of original content from its editorial staff, curated content where they write two paragraphs and link to another publisher’s content and content from third party bloggers. But, this alone, isn’t enough. They have treated content as a platform, using a social layer to encourage their audience to participate.

Optimization for Participation

One quick look at The Huffington Post homepage, and you can see they’re serving up, not just the latest content, but the most popular, the most discussed, “Hot on Facebook” and “Hot on Twitter”. Dive into an article, and you’ll find it’s easy to comment on posts and share the content through social media.

What does this mean? The Huffington Post are experts at getting their audience to participate, and effectively making content go viral. Their content gets engaged with, curated and broadly syndicated by its own audience because The Huffington Post makes it easy for their audience to find great content and engage/curate/syndicate.

How Can Brands Build a Content Platform?

Ten Tips for Building a Content Platform

  1. Don’t be a used car salesman (i.e. a good content strategy focuses on building a relationship and trust with the audience)
  2. Identify what kind of content your target audience finds valuable
    • Is there a reoccurring complaint about your product/service? Offer up a piece of content that helps them troubleshoot the problem.
    • Are they looking for guidance regarding a topic in which you’re company has domain expertise? Offer up content that can help them (e.g. tips for managing personal finances, a guide to eco-friendly living, considerations when selecting a safe car for your teenager, etc.).
  3. In what format do they like to consume that content (e.g. video, text, photos, slide presentations)?
  4. Where do they like to consume that content (e.g. YouTube, blogs, Instagram, Slideshare, Facebook, Google+, Twitter, Tumblr, etc.)?
  5. Select a product/platform on which to build your hub (WordPress, Facebook, Google)
  6. Add a social layer (commenting and sharing functionality), if it doesn’t already exist. A great tool to incorporate here is Disqus, which is a comments community, serving as the comments engine for over 1MM sites and has almost 60MM users.
  7. Produce original content that meets your audience’s needs.
  8. Curate content that adds value to your original content and to your audience
  9. Engage with your audience, as they comment and share on your content
  10. Listen and improve

The image below represents the type and amount of content you should produce against the 90-9-1 rule. In the end, you want to product content that instigates your audience to take an action, including creating more content for you. As a brand, you likely won’t be able to produce enough good content yourself, in-house. And, it’s not your job to either. But, if you use content as a platform for your advocates to create more content about your brand, then you’re reaching scale both in volume of content and syndication of your content.

Live Entrepreneurially: Harnessing Luck

luck is in small things(42/365)
This is part 2 of 2 of the “Live Entrepreneurially” series. In part 1, I wrote about finding purpose. Today, I’m going to explain how preparing with purpose can harness luck. Instead of presenting the ideas here as theoretical, I’m going to use examples from my own career.

I’m not a marketer. Yet, my last two jobs have been in marketing. Why?

The last year I was in the film business I thought a lot about my intrinsic motivations and purpose, and how those manifest themselves in business and into a career. What aspects of previous jobs did I like / dislike? For example

  • I like high volume, high stress work environments. If a workplace is too slow, I get anxious and antsy and start working on side projects to keep myself busy. I need to feel productive
  • I have self-diagnosed A.D.D., so, to stay interested, I need either (1) one project that is progressing quickly and needs all of my attention, or (2) several projects that require less personal attention, but sum up to a high volume of work in aggregate. That said, I generally like having my hands in several different projects at a time
  • I love to mentor – maybe because I didn’t get a lot of direction when I was growing up
  • Also worth noting, while I like mentoring (or consulting) people (e.g. students, clients, team members, etc.), I don’t like holding people’s hands. This is because I believe time is my most valuable asset and I can’t stand when people waste my time. I expect people to be at least as passionate and resourceful as me. Otherwise, I don’t want them in the room
  • I like being in a position where I can influence the strategy/direction of a business

I have many more of these, but I’ll stop here. When I mapped these qualities against a growing interest in technology and social media and how they were affecting the way we communicate and consume content, I concluded that I wanted to start my own company and eventually move into venture capital to fund and mentor other entrepreneurs.  That’s when I started thinking about social TV.

President Abraham Lincoln.

“I will prepare, and one day my chance will come” — Abraham Lincoln

I started preparing – thinking about how the internet, mobile and social media were affecting content consumption and how to disrupt mainstream Hollywood. So, when opportunity presented itself and I was introduced to Avi Savar (Founder of Big Fuel) I was prepared. I connected with their Content to Commerce business model, helping brands connect with their customers through content, and the idea of helping them scale their business. And, so I was hired. And, I accepted because the job fit within the parameters of my purpose.

Six months later, when Big Fuel‘s growth leveled out, and I moved more into an account management role than a corporate development role, and my workload decreased, I got the startup bug again.

I got to work planning two new companies – one being a location-based network and the other a social business consultancy.

Again, opportunity came knocking, and again, I was prepared. I was introduced to WCG, which was building out its company much the way I was mapping out my social business consultancy. Had I not been working on my own company, and had developed my own point of view on the nature of the marketing and communications industry and how social media fits into it, I may not have gotten an offer.

I wasn’t looking for a job; I was ready to start my own company. But, the fact that WCG was building business very similar to what I wanted to build, and the fact that everyone I met at the company was smart and passionate, convinced me it was worth taking a shot on them. It never hurts to align yourself with good people and strong leaders, and I was impressed by Bob PearsonJim Weiss and the rest of the team. So, now I’m at WCG.

My last two jobs have been in marketing. Why?

Because technology, content and social media (three interests that fit within my purpose) are disrupting the marketing and communications industry. Brands and agencies need people that can help them navigate the new wild west, and I can fill that role. But, I don’t consider myself a marketer. I consider myself an entrepreneur-in-the-making.

As Tim Cook said, “We rarely control the timing of opportunities, but we can control the preparation”.

So, I will continue to prepare. And, I hope you will too. Find your purpose and prepare. Opportunity will come.

Addendum

On a side note, you don’t have to jump from company to company to find roles that fit within your purpose. Please take the time to read this short post by Steven Tomlinson, Professor at Acton MBA in Entrepreneurship, where he speaks about tweaking your existing job to make it more satisfying.

And, if you haven’t seen Professor Tomlinson’s TEDxAustin speech, I urge you to watch the video below now.

Practice Social RECIPROCITY, not Social MEDIA

As Gary Vaynerchuk so astutely pointed out in this video, “social media” is a misnomer. The word “media” makes brands think that they can still push out their messages and advertisements like they have for decades through traditional media, but now they’ll earn some kind of positive, “viral” reaction just for doing so through social media. Not the case – not by a long shot.

Here’s what traditional advertisers and brands don’t seem to understand: social media isn’t about pushing out messages or distributing amazing branded content or even about innovation in technology. It’s about human behavior. It’s about creating efficiencies in, and scaling, basic human behavior. Or, as Ted Rubin so aptly says, “Please, please remember… Social media is NOT about tools or technology, but about PEOPLE.”

To paraphrase “The Thank You Economy”, it’s a big world out there, but social media makes it a small town. And, you better mind your manners.

I named my blog “Reciprocity Theory” because it keeps me focused on the human intuition that powers social media: RECIPROCITY.

People inherently want to do business with people (and companies) that they enjoy doing business with. If you’re going to spend the vast majority of your time at work, don’t you want to spend that time with people you connect with? Same goes for consumers. They want to buy products and services from companies that they connect with – companies that value their customers and show it. Social media empowers brands to connect with their customers in a scalable, yet personal way.

Zappos is the pinnacle of reciprocity. They have built a billion dollar company by developing a culture focused on delivering happiness. They deliver happiness to their customers, sure. But, they deliver happiness to their employees and partners first. Every year, every employee and vendor gives their honest assessment of the company, and all those perspectives – good and bad – get published publicly in their culture book. The company truly listens to, and cares about, its people and partners, and that culture of caring – of delivering happiness – trickles down to Zappos’ customers. It’s a reciprocal effect of epic proportions. (Side note: if every business and marketing professional read Tony Hsieh‘s book, “Delivering Happiness: A Path to Profits, Passion and Purpose”, the world would be a better place…honestly).

I always say that small to mid-size companies are better structured than large companies to take full advantage of social media’s power. That’s because social is a real-time medium, and practicing social reciprocity means trusting and empowering your team to make decisions in the customers’ best interests, in real-time. That starts in the c-suite. It starts with the company’s visionary. Only s/he can decide to reinvent the company’s culture and make customer caring and innovation a priority, and hold his/her team accountable for developing that culture. That’s easier to do for the owner of a local coffee shop or president of a privately owned, boutique hotel group than it is for the CEO of a publicly owned, Fortune 500 company. But, that shouldn’t stop the latter from trying! Because the effects of social reciprocity are well worth the efforts.

I discussed the ROI and opportunities presented by participating in social media here. Ultimately it comes down to what Ted Rubin likes to call ROR (“Return on Relationship”). “Relationships ARE the new currency”, says Rubin – “honor them, invest in them, & reap the benefits!”

Social media isn’t so much an investment in money, as it is in time and relationships. Care about your customers. Develop a corporate culture that cares about its customers. Then, use social media to practice social reciprocity.

Defining ROI of Social Media by Identifying Opportunities with Social Media

There is a lot of buzz about social media.  There is also a lot of noise. So, I’m never surprised when brands are confused and misguided about what the value is of participating in social media and how to begin.I came from the movie business where the trades analyze box office numbers like sports stats. The whole industry has become focused on opening weekend, and if the movie doesn’t perform, it’s likely not going to be given the opportunity to develop an audience. It’s all about creating excitement and anticipation before the movie’s release vs. allowing the content to gain positive word-of-mouth and momentum after its release. It’s all about winning the sprint.The social media industry as a whole is following a strikingly similar approach.

In the startup world there are rumblings of a bubble. It’s sexy to invest in social media startups in hopes of getting in on the next Facebook or Twitter or LinkedIn or even Groupon. The problem is that many investors trying to get into the industry don’t know what to look for, and so many entrepreneurs are, as Charlie O’Donnell so adequately stated in his newsletter a few weeks ago, “solving to get funded” instead of building products that are creating value by improving the lives of the greater population. It’s about the sprint, and the finish line is getting funded by a VC. While any VC or entrepreneur worth their salt knows it’s really about the execution, and that is akin to running a marathon several times over.

In the marketing world, we are reporting on the most-viewed, viral branded videos. We’re creating badges for every action and trying to figure out which new check-in or check-out startup we should use on the next campaign.  We’re confusing brands about what’s important and valuable – probably because this is all still so new that we are, in part, figuring it out as we go.

So, I have a challenge for everyone: keep it simple and focus on the longview.

Here’s what I mean by that:

Social Media Is Not New
Instead of trying to give you a lesson in the history of social media, I’ll just refer you to a series of posts by Mark Suster. Honestly, he explains it better than I could. Here are Part 1 – Social Networking: The Past, Part 2 – Social Networking: The Present and Part 3 – Social Networking: The Future.

What it comes down to is that there is a common thread between the technologies from thirty years ago, and the ones today. What has changed is that the internet is now ubiquitous and the platforms more sophisticated in enabling people to connect with each other, and find, filter and share content that they find relevant and valuable.

When analyzing new technologies, focus on those that solve a real problem for a large audience (broad or niche) and create a community (i.e. a network or fan base) around that product/service.

So, What’s the Value of Social Media for a Brand?
The most valuable thing that a brand can do in social media is leverage its platforms to listen to, and communicate with, their customers to create an owned advocacy network where a brand’s most avid advocates can

  • inform the brand directly on valuable improvements that the brand can make to its product/service
  • help other customers solve issues that they’re having with the product/service
  • gain exclusive access to content that the advocates crave and can use for their own social activities (participating in forums, blogging, etc.)

This is valuable because

  • customers transform into advocates with an emotional connection to the brand
  • brands can implement the insights from their advocates into product/service updates, improving their brands in a meaningful way
  • advocates earn a real voice in the brand’s development and identity, which only deepens their connection with the brand and makes them want to participate more, leading to more insights and more positive word-of-mouth and content (and high search results) for your brand
  • less money and time spent on a customer service team because your advocates are already answering many of the questions that a customer may have. And, they may be answering those questions in a clearer and more timely fashion than your customer service team would

What Does This Really Mean for a Brand?
A tectonic shift in the way a brand manages its business. It must start behaving like a transparent startup, and that directive has to come from the C-Suite down. The value can be tremendous. Social media gives brands a channel to encourage innovation informed by its greatest advocates. It eliminates the guess work when thinking of improvements to your product/service – just listen to your advocates and you know that there will be a consumer base that appreciates the updates.

Bob Pearson describes this phenomenon well in his book “Pre-Commerce”, as does Gary Vaynerchuk in his book “The Thank You Economy”.  I highly recommend both reads.Warren Buffett Says
I’ll leave you with two Warren Buffett quotes:
  • “The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective”,
  • “There seems to be some perverse human characteristic that likes to make easy things difficult”.

Well, essentially, the same goes for social media. The press and ad agencies and VCs and startups generate a lot of noise and make social media sound a lot more complicated than it really is.

Focus on the simple behaviors – the basic actions that people take online. Understand why people take those actions and empower them to do more of it, while providing them value with your brand. And, remember that it all starts with listening.