In recent months, Kraft Heinz received a lot of press for its poor performance after years of cost cutting. Their stock fell 28% in one day when they had to write down the value of iconic brands like Heinz Ketchup, Kraft Mac N’ Cheese, Philadelphia Cream Cheese, Jell-O and Oscar Meyer. What happened? With the guidance of its parent investment firm 3G, Kraft Heinz cut costs aggressively. Over time, they were they not able to drive growth and their gross margins eroded despite all the cost cutting.
Kraft Heinz’ challenges brought to mind a hot air balloon tour over Napa Valley that I took several years back with colleagues to celebrate Analytic Partners’ 15-year anniversary. The balloons rose up from all the heat generated by the propane burners. The pilot continually pulled on the burners to send us up higher. Once we reached the desired altitude, he let up and allowed us to drift and float and enjoy the view over the vineyards. Only occasionally did he have to heat the balloon to maintain our altitude.
Just like with that hot air balloon, it takes a lot of energy (investment) for an organization to rise to greater heights. That investment takes multiple forms including innovation, marketing and a sales force. And as with the hot air balloon, balancing the investment will hold performance steady, and cutting investment too far will result in falling. The Kraft Heinz story is one of letting the air in their balloon cool down too much.
Keep the Horizon in View
Too often, marketing expenditure decisions are made based on short-term indicators. Or worse, they may be made without indicators at all. Seeing how much is spent on marketing is rather obvious – it’s a line item on the P&L. Accurately capturing the impact of that spend on brand performance, can be very complex, but worth every dollar.
Revenue growth for an organization can be distilled to three core components:
- Increasing the number of customers
- Growing how much those customers spend on their brand
- Retaining the relationships with their existing customers
Where companies get the greatest long-term, or sustaining effect from marketing is through growth in the customer base. Acquiring new customers presents the opportunity to develop repeat or ongoing business over time, which represents value beyond the initial transaction. And while attracting new customers is challenging as companies compete for the privilege, the size of the base, all else equal, is a good measure of business health. It’s a great indicator of momentum for one’s business – whether the balloon is rising or lowering – and indicative of the trajectory for future periods.
Don’t Assume You Can Maintain Altitude Without Additional Fuel
Unjustly, marketing investment is often viewed by finance teams as an expense, with a cut there to fix a profit gap in the near-term. And because only a portion of marketing’s impact is captured over a quarter or half year, those decisions may initially look wise. However, the true impact emerges over time, and the damage to a brand can be significant.
The chart below shows the proportion of marketing effects delivered in the first 6 months versus the portion realized over a longer-term horizon. Industries with a greater proportion of their returns in future periods include those with higher consideration prior to purchase, and industries benefiting from ongoing revenue through services or subscriptions. But even low consideration, frequently purchased goods (like those owned by Kraft Heinz) see around a quarter of their returns beyond that six month window.
% of Returns on Marketing Realized in Short-term
(<6 months) vs. Longer-Term (>6 months)
Always Work With a Long Distance Flight Plan
Equip yourself with comprehensive measurement of your marketing activities. Always ensure you can tie marketing performance back to sales and capture the impact on customer acquisition.
With clear data points in-hand, make it a point to educate leadership and finance teams for a broader understanding within your organization. It is critical to have their buy-in. Having hard data and being able to tie to business sales performance, (either historical or via in-market tests) provides the evidence required for these stakeholders.
Ensure your decisions are fact-based and balanced across short-and long-term objectives. You have new customers to attract, need to deliver on your promise or experience to existing customers, and ultimately expand your relationship with both existing and new customers.
Avoid the pitfalls of goosing short-term bottom line profits at the expense of future topline growth and profitability. As Jamie Dimon, Chairman and CEO of JP Morgan Chase, said when interviewed with Warren Buffet about the trend towards “corporate short-termism”: “A lot of people cut marketing, because it’s an easy thing to do… But it’s like airplane maintenance: you can reduce it, but that’s a really bad idea.” Driving topline growth requires sustained and disciplined investment informed by comprehensive performance measurement.