Prentence Mulford, the 19th century novelist, humorist, and “New Thought” philosopher put it succinctly:
Thoughts are things.
What did he mean by that? At one level, he meant that what we focus on is in large part what we get in life. I know that to be true. I can look right now at your life and tell a fair amount about you from where you are today.
Your finances are a lagging measure of your financial habits.
Your health is a lagging measure of your food, drink, and exercise habits.
Your thoughts and speech are a lagging measure of your education habits.
What we focus on is what becomes us. So I’m asking you, in your quest for market domination, to focus on the right things.
The right thing simply stated is this:
Forget ROI. Focus on getting out of obscurity. Focus on mindshare, people knowing who you are, and getting new prospects and customers. Optimize your efforts to touch and be known by as many people as absolutely possible.
ROI will take care of itself.
ROI is a lagging measure of your “knownability” habits.
I’ll prove it to you in this webinar.
This is part two of Dominate your Market and today we are going to talk about optimizing your actions.
A quick recap, as we always do, and I will have a link in the description below, two types of activities. You can either choose to dominate your market or you can choose to compete in your market. I would hope by now I’ve made a convincing case as to why domination is preferable to competition.
Also, to recap, there are three elements we are going to talk about in terms of dominating the market. In the first part of this discussion, we talked about commitment.
Today we are going to talk about optimization, and in the next segment we are going to talk about repetition and scale.
Today’s discussion is about how to think about your investments, whether it’s spending money in ads, whether it’s spending money in marketing, going to conferences, doing brochures.
The question I get a lot of time is, what should I be doing or what should I do now?
Those are really questions about how do I optimize my time to get the results.
Well, if you are looking to optimize your efforts in order to dominate your market, then you have to become less concerned with ROI discussions and more concerned with the real value of customer acquisition.
That’s what we are going to talk about today.
Optimzing Strategies – Winning an unfair game by playing “Moneyball”
What are we really talking about when we are talking about optimizing our efforts and what is the appropriate optimization strategy for firms that want to be dominant?
Well, a movie that I really like that I’m sure you’ve seen, lots of people have seen it, it was very popular movie and it was a very good book too, is the movie Moneyball.
Moneyball story is not just for baseball, but it’s for business as well.
The main tension in Moneyball is the relationship between what are called wisdom based-models of decision-making and knowledge-based models of decision-making.
In that movie, the wisdom-based knowledge decision-making was the Scouts and the coaches and this guy is good because of this and this guy looks the part and this is the way we have always done it.
Those are all wisdom-based models.
When I talk with a business, I can easily detect a wisdom-based model when they say, “Well that’s the way we have always done it”.
Not to spoil movie, but if you saw the movie and even if you haven’t seen the movie, the Athletics wind up winning games even though they don’t make it to the championship.
They wind up winning games because they abandoned wisdom-based approaches in favor of knowledge-based approaches.
The knowledge-based approach that they take in the movie Jonah Hill, who is actually apparently a composite of several people that wind up working for Billy Beane, Brad Pitt’s character, is they apply effectively an econometric model to understanding why do baseball teams win baseball games.
What they find is that teams that win baseball games, they’ve got to get on base.
(This is an addition after I’ve recorded and transcribed this video. If the Moneyball strategy boiled down to hits on base – the “Marketingball” strategy – what I’m asking you to do – is optimize for mindshare acquisition; getting “on base” with prospects so they know who you are. You don’t have to hit a home run and make the sale. You do have to get enough prospects “on base” so that as they move through the diamond (your sales funnel) eventually some of them wind up at home plate.)
Well, there is a business equivalent to that optimization and you’ve heard it.
I mean look, aviation is a sales driven culture. So everybody that’s listening has heard what I’m about to say before which is, nothing happens until there is a sale.
You have to optimize your activities to get more customers.
You get more customers through optimizing your reach and your influence.
People have to know who you are, they have to know what you do, they have to know why you do it, and you have to have opportunities to encounter them so that you can sell them.
That requires a different set of thinking than the way you have probably been thinking about your advertising, marketing, sales function activities in terms of how you should optimize them.
I promise, I’m not going to give you a mathematically intensive approach on this. Moneyball, I thought was great when they did their montage about essentially the econometrics of it all.
I understand most people don’t have a deep mathematics background. I do. I’m probably the most studied mathematician who hates math. I’m not like, in love with math, but I know a lot of math and have had to know a lot of math, because math helps you work through in a knowledge-based model what it is you should be doing.
So we are not going to have tons of math. I’m definitely willing to discuss the math, but instead I’m going to show you graphically through intuition, why you should optimize customer acquisition and not return on investment, essentially not optimizing marginal revenue as a function of your marketing activities.
That’s almost what everybody does. Especially big competitors, they optimize for marginal revenue not mind share and acquisition, and it kills them.
Let’s get to it. This graph is meant to represent in the aggregate all of your outreach activities and the effect that they have, namely the reach and influence.
I think we can all agree that the deeper your reach and influence, the greater your sales will be.
Now, in a perfectly dominated market, the reach and influence would be 100%. In a perfectly competitive market, the reach and influence would be zero.
In a perfectly competitive market, no one advertises. I mean, why would you? You are all the same. In a perfectly dominated market, monopoly, you are the only game in town, so you are the only one advertising.
Put aside those extremes for a moment, but that is what these extremes in this chart, this is what we are really talking about.
The function between advertising effort, your blood, toil, sweat, tears, your time, your hard spend, the marcomm people you have in your firm, if you engage in agency, whatever, that’s all on the bottom. The impact you have on the market is the Y axis. The relationship between those two is what we would call polynomial function.
The polynomial function that I’ve graphed for you guys here is very typical of all types of media channels. It’s somewhat of an aggregate.
Depending on the media channel we will be talking about, this curve would shift a little bit, but its basic shape is going to remain the same. More importantly, the sweet spot box doesn’t change. It may shift left or right depending on how much effort is required to get there.
That’s why there are no dollar amounts and that’s why there are no percentages or anything like that. I don’t want you to focus so much on the numbers because I want you to understand the dynamic of the underlying function at play here. That’s what the real important issue is.
Group One – “Tried it and it didn’t work”
The first group of people we encounter in this market, and if this is you, I’m not trying to call you out, but these are people who say, “Oh, I tried marketing and it didn’t work”.
They’ve got all these excuses and justifications. Being an expert on marketing and advertising, I always know what the issue is, which is they didn’t spend enough or they did it wrong. As a consequence, they wind up in this little box.
Honestly, this is how Google and Facebook and most digital advertising are actually predicated on preying on people in this little box by the tens of thousands of businesses. They take their money and they get very little in return, where they just don’t spend enough and they then complain about the results.
Group Two – Marketing is an Expense
The bigger section of the market, and this is where like 90% of the people in the market are, they have what’s called ineffective spend.
You can see they get a result. They get some reach. They are spending a lot of efforts, so they think, “Hey, I’m really doing it right. I’m spending all his money. I’m spending a zillion dollars in my mind and oh, look I’m influencing the market. People know who we are when we go to the trade shows”. That’s all great.
The problem is they don’t see the relationship clearly enough between the investment and marketing and advertising and outreach aspects and the customer acquisition costs.
So what happens is, in bad times, and let’s face it, you guys are watching this because you think a recession is coming, in bad times, what happens is they cut marketing pretty much immediately. I can appreciate why by looking at this graph.
If you notice, and again you don’t even have to have mathematics background, but if you notice, you can reduce your advertising effort without immediately seeing a dollar per dollar reduction in reach and influence.
This is why the competitive firms, they contract and expand their marketing based on their sales activity, whereas they don’t understand their contraction is actually what causes their sales contractions and expansions, not the other way around.
How much effort they are willing to put into outreach influences their sales. Their sales don’t influence how much they should be willing to put in their outreach. But that’s how people play it.
This is why most people think marketing and advertising is a necessary evil and they don’t think it generates much, because they ineffectively spend.
The sweet spot – “max ROI” to “max mindshare”
This is the sweet spot of optimization.
The question is, where in this box?
Interesting things happen in this box. You have the inflection point and you have two really important points where the returns for most businesses, the marginal revenue for most businesses are the same. But one set of decisions leads to dominance and the other set of decisions leads only to competition.
Let me show you what I’m talking about.
Points A and B are inside that box. For those of you who do have math skills, you will notice that the derivative at points A and B are equal. They have the equals slope. Those two lines, those two red lines will never converge. They won’t touch. They never converged. They are parallel.
What those lines represent is what the marginal revenue would be from the activities at A and B. If you will notice, what they are telling you is that the marginal revenue at both points A and B are the same.
These are the two magic points.
At A, this is where you get the guys who focus on ROI. The whole point of me showing you this chart is to basically tell you to stop focusing on ROI and start focusing essentially on domination of the market as measured through customer acquisition and mind share.
The guys who focused on ROI, they are going to be at A. These are guys that are spending a lot and these are guys that are getting a lot. They are fine tuned. I will find clients who have had professional management of their media and their advertising spends and what not and they are all at A. A is a perfectly legit place to be if you just want to be a competitor.
If you want to be the best competitor who ever was, A is perfect. Because at A, you have a fair amount of the mind share of the market and you really can’t improve your marginal revenue, at least not in the short run, because you stay, because of the dynamics of the way this curve functions.
Here is the thing; you could actually increase your marginal revenues by moving up this curve towards B. It’s actually only at the top of the curve those marginal revenue become zero. Otherwise, marginal revenue always remains positive as you move along the curve.
But what happens in reality is firms get scared and they are not prepared to really spend the extra dough to get the reach and influence because they get complacent. They get to the ROI point and they go, “Wow, we are making money. Times are really good”. And they get complacent and they don’t say, well, can we own the market?
If you say, “can we own the market?”, you play at point B.
At point B is where you get the greatest return on acquiring new customers and reach and influence.
Because as you move past point B, you will definitely get more reach and influence. But the rate at which you get more reach and influence becomes less than the amount of effort you have to put forward to get it.
Now again, in order to be a monopolist, in order to be the dominant player, you can’t convert nor should you try to convert every person in your marketplace to your way of thinking. But if you hold the dominant control of the market, well then you are the dominant player. So it may not make business sense to get the last 20% or 30% of your market once you have 70%.
There are a lot of structural reasons even in cases of monopoly where you just can’t get that last 30%. I mean, look at Google. Google has got 70% of the search market. It would probably have to double the amount of money that it is spending in order to get another 10% and it would have to probably 100x its activities in order to get 25% or the 30%.
The question is, business wise, is that worth it? Well, no. We are talking about operating on the curve to the right of B. And so yeah, marginal revenue is still positive, but the rate at which marginal revenue is growing is not optimized.
If in Moneyball, the idea was, look, you’ve got to get on base for airplane ball, which is airplane dominance ball, which is what I’m asking you to play, your key indicator is optimizing for acquiring mind share and new customers.
I want you to stop thinking about ROI and start thinking about, how do we own this market by owning the mind share and getting new customers?
What happens when you agree to do this? Well, you’ve got to increase your spend by this differential in order to get the domination effect and the domination effect is not inconsequential. This is a tough sell in businesses. I understand what I’m asking you to do is difficult. This is why I’m showing you this graphically, so you can appreciate at a concept level why it’s worth the risk.
When you are at A you are making money hand over fist. So say we should go to B is not exactly the easiest of sell. But here is the differential in owning the marketplace. You increase your output by you know, realistically, by the time you’ve got to point A. What are we really talking about?
We are talking about increasing your output by 50%. But your increase in dominance of the market is this box, which is like double the influence you had. So you increase your input by 50%, but your output, your control of the market doubles. That’s not an inconsequential outcome.
So dominators, this is what their world looks like.
They own the space.
I will be frank, if we were to look at like say, Boeing versus Airbus, they control 90% of the commercial market with almost an even split between the two of them at like 43%, 45%, 44%. It goes back, it bounces around, but they are never more than like a percentage or two away from each other.
They are both playing the game at B. They are out there pounding away, getting new customers, influencing the market. They are playing it for keeps at B.
The other 10% of all the manufacturers out there, they are playing the game at A. That’s why they only own 10% of the market. Actually, their A is even farther to the left. It’s way down at the bottom because there isn’t enough reach for them to influence anymore.
But this is what the domination curve looks like. This is what the competitor curve looks like. Look at the unshaded region. It’s not just a little bit more. It’s multiples more. It’s two and a half times the area.
I will be frank, I haven’t done the integration. You actually can use mathematics and figure out what this area under the curve is. You can figure that area out and then you can figure out this area all the way up to B. You would do an integration from zero to A and then you do an integration from zero to B and you can compare the two areas. I don’t need to. You can just look at it and tell that the differential is not insignificant. It’s a huge amount.
So you need to optimize your activity to get known. Get known.
Here is what you are optimizing for.
- Who knows you?
- How many new customers are you getting?
- What’s the cost to acquire a new customer?
- Is that going down?
- Is it going down in relationship to your outreach efforts?
- Who knows you in the marketplace?
- Who can remember your brand?
These things make much more sense than, “Well, we ran the ad and the ad cost $1000 and we got $1500 back, so the ad was a success”.
Again, this is really kind of gross discussion, but that’s how a lot of businesses look at it all.
And that is totally the wrong way to look at this.
(Added after recording: Optimize for mindshare, acquisition, and influence. ROI will indeed take care of itself – I’ve shown you graphically why that’s true.)
That concludes my talk for today. I hope you found it interesting. I know I threw a lot of concepts at you. Please do make comments, ask questions. I’m happy to answer them.