The profitability paradox

The return of inflation has brought with it the kind of profitability crunch that few of today’s CMOs have experienced in their careers. Yet it seems to me that many marketing strategies have failed to adapt to this new context.

As you enter the Indian summer of your life, two things start to happen. First, your tastebuds become so numb that supermarket own-label gin becomes a viable proposition. Second, it dawns on you that, one day soon, your ability to afford any kind of gin at all will be heavily reliant on the dividend performance of a few dozen major corporations.

Vanity or sanity?

This realisation focuses a strategist’s mind wonderfully. The generosity of a company’s dividend is the direct result of its ability to generate profit. And the arrival of nostril hair reminiscent of the jungles of Borneo suddenly puts the importance of a business’s profitability into stark relief. The old CFO’s adage about revenue being vanity and profit being sanity never rings more true.

Growth is, of course, essential for any business that wants to stave off natural entropy, let alone capture new real estate that it can, sooner or later, farm for income. But if it becomes the all-eclipsing KPI, a kind of C-suite virility symbol, trouble awaits. Yes, Amazon’s on-ramp to profitability was longer than most freeways. But we cannot all be category-infinite?unicorns, no matter how many business books we buy.

Sadly, with the exception of energy companies and arms manufacturers, profitability has been something of an endemic problem for businesses over the last few reporting cycles. Given the circumstances, this was inevitable. But the numbers are pretty stark.

According to an Ernst and Young report (EY-Parthenon Profit Warnings report, January 2023), the number of profit warnings issued by UK companies increased by 50% year-on-year during 2022. A full 36% of UK-listed companies in consumer sectors issued a profit warning during the year. In H2, more companies issued a profit warning than during any second half since 2015.?

Think about that for a second. More second half profit warnings were issued last year than?at any time during the COVID pandemic.?

The bad news doesn’t end there. In 2022, 31 listed companies issued their third consecutive warning in 12 months compared to 23 in 2021. Of these, 13% have been through a restructuring process, and 35% have changed CEO or CFO. The report does not record what happened to the CMOs.

I was struck recently by a quote from Gartner’s chief analyst Ewan McIntyre (reported in Decision Marketing, May 2023), speaking about the results of his company’s 2023 CMO Spend and Strategy survey. “In 2023, CMOs need to become a new type of enterprise leader. This goes beyond serving at the helm of the brand but also assuming a more business-focused role that pivots into a period of investing for profitability versus growth. Those that carry on status-quo will face significant challenges in the near-term.”

Strong words indeed. Whenever I set out to advise the C-suite, I remember my own time at the helm of a business. I lasted precisely seven weeks until I was found out. However, as I ponder the chances of me ever enjoying a retirement holiday in a locale other than Torquay, I feel compelled to speak out about three big things that are bothering me.

Performance anxiety

The first is the thing they call performance marketing. Perhaps because of its clever branding as much as its apparent accountability, it has become many a marketer’s acquisition staple. However, realistic attribution analysis (the kind that goes beyond the last click) frequently indicates that performance marketing spend has little incremental effect on sales.?

Too often, it seems to me, performance marketing is the goal-hanger of the communications world. It lurks around at the bottom of the funnel and shamelessly claims credit for sales that would likely have occurred anyway. At no insignificant cost to the marketer.

Perhaps that is a little cruel. Performance marketing does have a role to play in the early growth of a business or a new product line. But the work of Field and Binet, built upon by the redoubtable Tom Roach ('Is Your Brand Stuck on the Performance Plateau?', www.tomroach.com, November 2022), shows that a point occurs at which available demand becomes saturated, and general advertising becomes advisable to expand demand.?

But the thing that’s really bothering me right now is that over-reliance on performance marketing puts profitability in jeopardy, as well as growth. By mistaking the bottom of the funnel for the whole marketing battlefield, discounting frequently becomes the weapon relied upon to win the fight. The compounded effect of this over time can become ruinous.?

Furthermore, the kind of customers acquired through such tactics tend to be deal-hunters. By definition, they lack stickiness and are liable to have their head turned by the next discounter who comes along. Plug even a modest such effect into a time-series spreadsheet, and the cumulative erosion of profits once again becomes eye-watering.

Follow the money

As any unreconstructed direct marketer knows, acquisition is not merely about attracting customers. It’s about attracting the?right?customers. Yes, you need sufficient volume to make the engine work. But make the mixture too lean, and sooner or later the engine will stall.

This leads me to my next observation. It’s about keeping and growing existing customers. At a time when businesses face an unparalleled profitability challenge, I suggest that we need to review the lazy vocabulary of loyalty, customer ‘engagement’, and even customer relationship management. Perhaps it’s time we thought more often in terms of customer?value?management.

Recent work on how advertising works has been a useful corrective to some of the fuzzy thinking around loyalty programmes. When compared with distinctive, continuous and consistent brand advertising, mass loyalty programmes can be singularly inefficient when seen simply as a means of protecting, still less growing, category share.?

Even before Byron Sharp came along, most of the good loyalty marketers I know shared a healthy humility about the power of their programmes. And they still do. As one of them recently told me, “If the customer needs to make a right turn onto a busy road to get to your store, you’re pretty much f***ed, no matter how good your loyalty programme is’.?

But just as Professor Sharp is right, so too was Professor Pareto. When used as a vehicle to nudge specific behavioural segments towards greater states of value, loyalty programmes can make a disproportionate impact on profitability, even when brand size measured in volume share remains static.?

And while a rewards currency is helpful, you don’t necessarily need a loyalty programme, with all its attendant costs, to do it. These days there are many ways to reward the behaviours you seek, from privileged access to personalised utility.

Of course, it helps if you have the right marketing technology. But the current climate makes balancing its cost with the incremental value it will generate more important than ever. Which brings me to my final point.?

We have the technology

If there’s one organisation you’d expect to be talking up the need for new technology investment, it’s Gartner. But let’s listen to their own Ewan McIntyre again, commenting on?their 2023 CMO survey:

“Like gamblers looking to write-off their losses with the next bet, CMOs are attracted to the allure of new technologies. Yet they have seen existing technology investments tumble into new lows of unproductivity, with utilisation rates falling from 58% in 2020 to 42% in 2022.”

This aligns with our own research on utilisation rates ('All the Gear, No Idea.', BBH 2020, email?[email protected]?for your free copy) though our respondents were already down at 42% a few years ago. Perhaps we asked the wrong people. Or ours were more honest. Either way, it represents a hellacious amount of capital tied up in plant that’s generating no operating income.

I suspect that part of the problem is that the phrase ‘digital transformation’ sounds so damn sexy. Who wouldn’t want to be the CMO who led their organisation to the broad sunlit uplands of sustained double digit growth by harnessing the promise of next-generation technology??

But as anyone who’s tried to set up a new digital timesheet system knows, any technology-driven workplace transformation takes time. Even when the leadership will exists to change structures and processes, grass roots cultural change can take longer. Probably all the more so given the suspicion that now surrounds certain aspects of AI.

Transform or perform?

Of course, for many legacy businesses, digital transformation is essential for long-term survival. I would be in even more trouble with my ultimate employers than usual if I suggested otherwise. However, I find it interesting that big consultancies like Bain have started practices devoted to ‘accelerated performance transformation’, with the mission of delivering improved performance in double quick time, using all the levers available to their clients’ businesses. Given the times we live in, it’s a smart move.

As I re-read the above like the good failed copywriter I once was, I realise that I’ve used some pretty strong language. Furthermore, I have no doubt made some absurdly sweeping observations. However, I sincerely believe that now is the time for CMOs to demonstrate their true worth to businesses by showing that they are as adept at driving profits as they are growth, both today, and tomorrow.

If for no other other reason that, some day soon, my ability to put an acceptable volume of gin in my glass will depend on it.

This article was originally published on BBH Labs. As ever, huge thanks to Chris Morey of BBH for his valuable insights.