February 2012 Archives

Another area in which it can be tempting to slash costs in a recession is marketing. The marketing budget tends to take up a lot of space on a business's list of outgoings and it sometimes feels that those outgoings are strangling your margins. After all, what does marketing do exactly? What revenue does it bring in? It's just there because everyone else does it, right? Do those guys in marketing actually do anything all day long?

As we've discussed in previous posts, we believe that SMEs are the key to returning to economic growth and that small business innovation can't happen without taking a chance or two. Increasing your marketing efforts could be one such chance but it could also mean doing more with less - not marketing bigger, but marketing smarter.

So, before you get out that big red pen and start slashing budgets left, right and centre take some time to consider what marketing is, how you're doing it and how stepping up your marketing efforts could actually strengthen your market position in an economic downturn.

What's it For?
Marketing encompasses a range of activities from billboard advertising through to Tweeting. We're not here to tell you what method is best for your business - that all depends on what it is you sell and who your target audience is. What we want to convince you of is that marketing is effective and that it can bring in much more than it takes out - especially in a recession.

In a stagnating or shrinking economy large companies will cut their marketing budgets. But large companies probably had bloated marketing expenses in the first place - sponsorship of sporting events and TV commercials don't come cheap. But that doesn't mean you should cut yours as well. Instead you should be ready to exploit the opportunity that this presents.

What opportunity? I hear you cry. Glad you asked.

Marketing has to happen somewhere - in a physical space like on billboards or newspapers, in a digital space like on TV or on the internet. There's only so much of this space that people pay attention to, that registers on people's internal radar as they go about their day. During boom times we're literally bombarded with marketing messages 24/7 but as large corporations spend less on marketing they start to retreat from those spaces, leaving more room for smaller companies to start inhabiting that space and making their messages more effective (due to reduced competition) when they do.

And that's not all. Lower demand actually causes the price of advertising to drop. Never will you have a cheaper opportunity for, say, getting a TV commercial made than during an economic downturn.

How do I do it?
Now that we've given you the reasons we think that marketing shouldn't be the first casualty of your cost-cutting exercises, what advice can we offer on how to spend your marketing budget effectively?

It all boils down to two words: plan and measure.

Whether you're taking on a marketing company or keeping it in-house, your marketing plan should be thorough and well researched. Delve deep into your customer data to work out how your customers behave: what forms of media are they most likely to pay attention to? What's their typical job title, age range, income or marital status? Your specific plan will depend heavily on the insights you glean from information that customers have given you in the past so if you haven't been collecting this kind of data before, start now!

Your plan should set out exactly waht it is you're trying to communicate to the customer, which channels you're going to use to get that message out and should include clearly defined objectives and goals. 'Increase number of customers' is not a clearly defined goal. 'Make and publish 5 online videos in February' is. One size fits all plans won't do - make sure you have separate plans for the short, medium and long term.

Of course, drawing up a marketing plan is just the first step. Actually implementing it well is probably the more difficult part. In order to succeed you'll need to make sure that the plan's aims and objectives are communicated company wide and that everyone understands them. This is where a small company has the advantage over the corporates - in an SME everyone can get involved in marketing efforts. For example, using real staff in promotional videos not only saves money but customers love it too. Make sure everyone's on board and understands their role.

Now we come to measuring results. Measuring return on marketing investment (ROMI) is a fairly new area of study but there are several god books on the subject like Marketing Calculator by Guy Powell. It's a fairly difficult task to accomplish as there are incidental effects of marketing that can't be directly measured - like increased brand awareness. What monetary value can you attach to such effects and how do you measure them? It's not easy.

This is where online marketing comes into it's own. Tracking tools like Google Analytics allow you to see exactly how many new visitors have been attracted to your website and how many of those visitors turn into customers or prospects. You can also see how they got to your site (e.g. via a link in an email newsletter) making the task of attributing effects to different marketing channels much easier.

There are ways to achive this kind of tracking offline as well. Discount codes which you can change across different advertising methods, specific phone numbers or barcodes can all help you pinpoint exactly how a new customer heard about you. In order for such methods to work though, you have to get your staff to ask and record the information.

All these measurements can then feed back into your marketing plan, allowing you to scrap what isn't working and focusing your efforts on what is.

In our last blog post we laid out the case for not following the predictable path of cost-cutting and downsizing that most businesses fall prey to during a recession. We argued that in the current business climate large companies are mostly locked into a beggar thy neighbour type strategy of cost reduction (in fact where they are pursuing growth, they're doing it through takeovers and mergers) and that small businesses hold the key to recovery through their innovation and risk taking.

Over the next few posts we'll try to suggest some ways in which small businesses can take measured risks in order to reap large rewards. We'll point to some potential avenues of growth that, while they do involve some up front expense to exploit, could lead to capturing some of the markets that the large corporates are too cautious to go after and emerging from the downturn in a much stronger position than before.

The first such suggestion is ecommerce.

Taking your sales online not only opens up your catalogue of products and services to a much wider audience who are suddenly only a couple of mouse-clicks away but also allows you to exploit the accessibility and cost-efffectiveness of online marketing channels. With only a few hours research any business owner is able to start taking steps to promote their business online - be it through social media channels like Twitter and Facebook or by tweaking your website to make it appear higher in Google search results (a process known as Search Engine Optimistion). With an ecommerce website in place, any successful marketing activity will drive customers directly to your place of business and potentialy result in sales.

As well as facilitating this have-a-go approach to marketing using tools like Google analytics with your ecommerce website make it possible to track exactly where on the interent your website visitors are coming from, which search terms they're using to find your site and which ones are actually converting into sales  - allowing you to work out who your best customers are and tailor your marketing efforts for these kind of people.

Getting an ecommmerce website up and running won't be cheap - you're looking at an expenditure of at least £1k for a decent website. In straightened economic times and with bank finance so hard to get hold of we understand that that's no insignificant sum. But when you consider that online sales in 2011 topped £62bn while high-street spending dwindled, and that over the last year the number of small businesses trading exclusively online rose by 31%, you realise that getting your products and services online is a no-brainer.

Preaching to the converted?
Okay, we know we're writing a blog entry here and that if you've found our site because you're interested in the internet and business that you're probably trading online already. So, do we have a suggestion for you, the experienced e-commercant?

Yes: M-commerce.

Mobile phone users were the source of 2% of all ecommerce transactions in 2011 and with the proliferation of smartphones that figure is expected to more than treble over the next few years. With that in mind, ask yourself this: how mobile friendly is my ecommerce site and am I doing enough to embrace smartphone using customers?

If your site isn't optimised for use on a mobile device which has a small screen resolution, limited bandwidth capabilities and possibly no support for Flash you could already be missing out on a significant number of sales - especially if what you're selling is aimed at younger, more tech-savvy customers.

Whether you need to develop a mobile website or mobile app is a question to which you should give careful consideration (and you can get more advice here) but what's certain is that smartphones users are the future of ecommerce.

What is the connection between Russell Crowe and the difficulty that small businesses are experiencing getting bank loans? In this blog post I'm going to attempt to find it but before I do we first need to solve the question thrown up by this post's title: are we in fact in recession?

The official answer is, of course, no: so far we've only experienced one quarter of economic contraction (in Q4 2011) when two are required for a recession proper. In addition, news today of accelerating growth in the UK services sector (FT - registration required) is causing many economists to revise their previous forecasts and predict a revival of UK economic growth across the board.

These predictions however are but one voice among many and it seems that the consensus is not as optimistic. Long term, the picture doesn't seem rosy - especially for small businesses. As the double edged sword of inflation causes costs to rise and consumer spending power to diminish, small business confidence is sinking lower and lower.

In such an economic climate the temptation is to batten down the hatches, cut costs and try to ride out the storm. Of course, the effect of many businesses doing this at the same time only leads to worsening economic conditions, higher unemployment, less household spending and increased chances of going out of business. Is there any way for a small firm to break the cycle?

This is where Russell Crowe comes in.



Okay, not really Russell Crowe but one of the characters he's played in the movies: John Forbes Nash Jr - mathematician, troubled genius, subject of the film 'A Beautiful Mind' and potentially the provider of key insights in how to manage a small business during a time of economic contraction.

Nash's principal field of study was game theory a branch of mathematics that studies circumstances, in games or otherwise, where the success of one 'player' depends on the choices made by other 'players'. One of Nash's most famous contributions to this field was the concept of Nash Equilibrium.

In very simplistic terms, a Nash equilibrium is a situation in a game involving two or more players where, for any player, changing one's own strategy without the other players changing their strategies leads to no benefit. In other words, every player is locked into playing the same strategy in order to avoid their opponents gaining an advantage - regardless of whether the combined strategies are beneficial to all the players overall. In some instances of Nash equilibrium, all the players could increase their pay-offs if they could all agree on changing their strategies to some new solution of the game.

(Those who've seen the film 'A Beautiful Mind' should think back to the scene in the bar where Russel Crowe convinces his horny mathematician colleagues to all agree to ignore the unattainable blonde and instead concentrate their attentions on her less physically well endowed friends. This way all of them get a fair crack at going home with a date rather than following their natural proclivity to compete for (and get rebuffed by) the blonde thereby ruining their chances with the other girls ).

The most famous example of a Nash equilibrium is the Prisoners' Dilemma where two prisoners are questioned independently. If both stick to their story then neither can be prosecuted but if one 'defects' and implicates his partner he escapes prosecution while the other goes to jail. The outcome that is best for both players overall is to stick to their stories but the Nash equilibrium has both players defecting - because each serves his own short term interests in doing so - and both players therefore facing prosecution.

So how do Nash equilibriums inform our perception of the current UK business climate?

Applying game theory principles to economics is nothing new - in fact, Nash was awarded a Nobel Memorial Prize in Economic Sciences in 1994 - and I am a strict amateur so what follows should be taken with more than a pinch of salt. Nevertheless, I think there are insights to be gleaned.

Let us remember that the UK is no longer the workshop of the world as it was in the 19th Century. Manufacturing and exporting is no longer our main game. Economic health in this country depends to a large extent on consumer spending power. When that spending power is diminished, as has happened recently, large retailers and service companies take a hit to their revenues and start cutting costs. Which often means layoffs, leading to greater unemployment and further reduced spending on the high street. No individual large company can go against this trend as they can't spend money on growth when there is no market (i.e. employed consumers) to take their product. Large companies answer to their shareholders (read pension funds) who would see such risk taking as reckless and unwarranted. Each large company is locked into a strategy of downsizing and cost cutting until the economic situation somehow improves, even though the most profitable strategy all round would be for them all to spend more, pay more wages, raise consumer spending power and create a larger market for their goods and services.

So when does this cycle end? Inevitably when the reduced spending of large companies allows small businesses to start making inroads into the market space concede by those large firms. Almost always, small businesses lead the charge to recovery (FT).

So what lesson can a small business take from this possibly over-extended metaphor?

At the moment finance which allows small businesses to expand is incredibly hard to come by as the banks are trapped in a Nash equilibrium of their own (making). But there are opportunities out there for the small businesses who are brave enough to seek them out - small firms are not trapped in the same cost-cutting and employment slashing cycle as the publicly traded companies - and growth is possible.

I'm not advocating stupid risk taking or risk taking for its own sake but, if you've got a great idea and confidence in the abilities and resources of your company, now could be the time to attempt to break into the ground being rapidly vacated by the large companies. And alternative funding sources like those mentioned in the last post could provide the capital you need to do so (but be wary of venture capital funds).

Who knows, maybe Russell Crowe can save the economy after all...