2/18/2019

When Does Marketing Trump Products?

As usual, I stepped into a discussion about the “importance” of marketing when I should have just ignored it all and let people believe the whackadoodle crap they want to believe, uninterrupted by reality. As usual, the marketing dweebs out-jabbered me and I’m happy to let them wander off into the woods as they usually do. At this point in my life, it no longer matters to me what happens to anyone’s business and I’m less inclined to be interested in anyone’s mission than at any other time in my life.

However, I get to have the last word (if I want to) on my own blog and here it comes.

The question from marketing is always, “How do people hear about the product you are selling if not marketing?" The answer is simple and complicated. The simple part is that word-of-mouth spreads far faster and more effectively than any advertising campaign. The complicated part is that word-of-mouth spreads bad news far faster and more effectively than any advertising campaign can ever hope to repair. From my years in quality management training, I remember a restaurant rule that went something like “It will take $50 in advertising to convince a customer to try your business, 5 seconds of lousy service to drive that customer out the door, and $5,000 in more advertising to get them to try you again.” Something like that.

My favorite example of how effectively word-of-mouth works is In-N-Out Burger vs. McDonalds and Burger King.  When my family lived in California in the 80’s, there were probably a dozen fairly substantial fast food chains. Fast food was nothing more than a commodity to 90% of those businesses. None of them did anything particularly well, so the best marketing program probably “won.” Creative accounting probably helped those chains help convince suckers to both invest in their franchise and to buy their engineered addictive “fat, salt, and sugar” concoctions. You couldn’t drive a block on any busy street without seeing an ad for McDonalds, Burger King, Burger Chef, Wendy’s, Hardies, Carl’s Jr., and/or any of those commodity food producers.

The burger joint of choice for Californians remained In-N-Out Burger and before the internet the best way to find one was to ask for directions from someone wearing one of their t-shirts. There were two In-N-Out Burger stands in Huntington Beach and Costa Mesa and neither of them bothered to do much more than keep their signs lit, marketing-wise, and their lines flowing through their drive-thrus were always long. Like Aldi’s, those lines moved fast, so it was always worth the wait to get a hamburger made from actual beef, fresh tomatoes, onions, and lettuce and fries made from actual potatoes. When an In-N-Out Burger appeared near my daughter’s home in Plano, Texas, her junk-food addicted husband immediately changed his food allegiance to actual food. No advertising required.

Likewise, the pro audio company I worked for in California couldn’t afford an actual marketing department for the first 6 years I worked for the company. When the company started out, in 1973, the founder spent all of his inheritance and some of his siblings and parents’ money promoting a company that had yet to figure out product development and manufacturing. After a brief flash-in-the-pan period of media presence, the company downsized to a half-dozen employees in a cheap business district in Costa Mesa. For the next ten years, the founder worked at learning his engineering craft, the original employees learned how to manage money, purchase parts, and develop a sales rep network. By the time I started work there, “marketing” consisted of very information-strong ads in industry magazines and a couple of sales meetings each year.

That same year, the company released its first professional quality power amplifiers and by the end of 1983 our problems became “how can we make more of these products, service our customers, and maintain our product quality?” For the next six years, we doubled our gross sales every year, maintained a 24-26% profit margin, and led our industry in customer service and product quality.

The company’s CEO idolized Hartley Peavey and Steve Jobs and had a minor hard-on for Donald Trump. He saw himself as a similar marketing “genius” and desperately wanted to reform the company as an “ideas business” instead of a manufacturing and engineering company. In the next few years, manufacturing moved to China, product development became diffused and only somewhat focused on customer needs, marketing became a more powerful force and a larger empire in the company, and it took another decade for the gross sales to double between 1992 and 2002. It’s a privately-held company, so it’s hard to guess what the profit margins are now, but based on the gross sales, the size of the administrative staff (especially in marketing and sales), and the luxury of the new facilities and number of executive officers, I’d guess 5-8% max.

There was an upside for me. Having spent 8 years in an executive position near someone who saw himself as a marketing genius, I developed pretty thick charisma armor. When Donald Trump went public for his one-and-only time with the Trump Hotels and Casino Resorts (DJT) IPO, I remembered the giant space between reality and our CEO’s self-image and, for the first and only time in my investment career, I shorted about 1,000 shares of DJT. I know, not an impressive bet in the scale of things, but it was a big deal for me at the time. My incredibly clever and sophisticated investment philosophy was “anything that the CEO I knew so well believes is a ‘good idea’ is going to be a guaranteed disaster.” I missed the IPO peak by a few weeks, but I still got in when the stock was valued at about $29. I sold off half of my shorted option in 1998 and the rest in 2001 when DJT was pretty much a penny stock.

I have never had that much confidence in a stock’s value collapsing since. I was close with Apple in 1997, but Bill Gates stepped in to save Apple with a $150M investment and a dumbed-down version of Office for dumbed-down Mac users. Peavey is still a privately held company, so there has never been an “investment opportunity” for me to bet against that company. I would if I could, though.

My takeaway from all of this is that marketing is what you do when you can’t do anything useful, original, necessary, and/or well. When what you have to sell is fluff or a me-too commodity or crap, you probably need marketing to convince customers to part with their money and waste their time. There is a price to be paid for shifting resources from manufacturing, design, research, and customer service, too. Regardless of the delusions and propaganda saying otherwise, everything is a zero-sum game: you can’t spend money in one area without taking those resources from other areas. Moving resources to an unexamined, usually poorly-managed area like marketing (especially if the marketing is an external “organization”) too often means that manufacturing (the hardest job in any product-based company) gets shipped off-shore and important, mission-critical skills are lost forever. (And the off-shore vendor gets to refine those skills on someone else’s money, eventually becoming a competitor.)

From the inside, I have since witnessed the farce of marketing-driven mismanagement several times and every one of those attempts at an illusionary business model resulted in spectacular crashes; just like DJT. I don’t really know if marketing actually ever works, but I do know that if you think your business desperately needs marketing assistance you have a lot to worry about.

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