What follows is a very long think piece I have been writing for general use over here at Bell Pottinger.
While as a self confessed PR man these days I clearly have an ax to grind. But I also have some new data that (IMHO) adds grist to the mill...
(enough grinding metaphors, here is an early version - it doesn't have all the data in but the missing ones are well known "facts" like interest rates have dropped rapidly).
Whenever a recession comes around, Marketing Directors and their Advertising Agencies rapidly pull out the findings from the PIMS Study (Profit Impact of Marketing Strategy) that is based on long term tracking of 4100+ businesses around the world.
They will use PIMS to argue, beyond all reasonable doubt, that companies who maintain or increase their advertising spend in a downturn have no worse ROI’s during the tough times than the ad cutters, but go on to make superior returns during the recovery. After a typical cycle of 5 years, those that increased their spend are typically 1.2 share points up on their cost cutting competitors and 5.1 % points up on ROI. (see a recent example of this at www.ogilvyonrecession.com)
The reason this bold strategy works is that if a company maintains or increases spend when others cut theirs it gets a sudden surge in “share of voice”. Many studies have shown that if your “share of voice” exceeds your “share of market” then the latter (all other things being equal) will tend to grow. And we know that this leads to greater profitability; other studies have shown that market share correlates strongly with profit margin.
While this all joins up neatly, is admirably numerical and so talks the language of finance, the slick salesmen often overlook a few important points.
Firstly, within the UK data set, 65% of the sample cut their spend, 24% maintained it and 11% increased it. So a more accurate finding would be: “when a majority of players in a market cut their spend, those that maintain or increase it, get above average returns”. Or put another way, we don’t know what would happen if everyone maintained their spend or everyone decreased it. So it’s still perfectly rational to cut your spend and hope everyone else does too.
Secondly, the PIMS analysis shows similar patterns for those who maintain/increase spend on “customer perceived quality”, “product R&D” or “introducing new products” : they all perform better over the cycle. So while the Marketing Director can use PIMS to forcibly defend their budget so can the Operations Director (quality), the Technical Director (R&D) and the Sales Director (new products). Note that this finding is not often reported by the Marketing Director (well, it is called the “Profit Impact of Marketing Strategy” study for a reason).
This links to a third point, that in downturns companies often need to survive the short term to get to the long term. Many departments may be able to prove that their investments give good long term rewards, but when cash flows and/or access to credit are much reduced, these arguments are not very helpful. Something needs to go. But what?
So rather than just turn to PIMS perhaps the Marketing Director needs to find other data to decide how to allocate their, in all probability, reduced budget. In particular they may find statistical evidence that what we may broadly call “PR” is a better investment to make in a downturn than advertising.
One group of commentators who have already reached this conclusion is the City. In a November briefing note “You Have to Keep Communicating: Marketing Communications in a Downturn”, Numis Securities opined :
“Current valuations do not fairly reflect what we think are crucial changes in the media landscape….technological developments have had a profound and complex impact on patterns of media consumption and hence the industry itself.
In a digital age of internet advertising, blogs, social media, and 24-hour news the corporate-consumer relationship has changed, and companies, governments and organisations can no longer afford to cease communication with customers, citizens and stake holders. We believe this is driving structural growth in marketing services like public relations”.
Further more, to look at their share price forecasts, they believe that advertising oriented groups will recover slowly over the next two years but PR centric businesses will flourish
Company ‘08 Share Price Forecast 2010 Price Forecast Growth
Chime 69 139 101%
Huntsworth 39 66 70%
WPP 340 447 32%
Aegis 50 57 15%
M&C Saatchi 85 75 -12%
Numis appear to be arguing in the quote above that there are some structural shifts occurring here. To break these out :
- customers/audiences respond to companies differently these days
- the media between the audiences and the companies have changed
- hence, the means by which companies communicate have had to change
What the data we will produce below shows (to put it simplistically):
- these days, people seek sources they trust
- recommendations from “people like me” are the most trusted
- hence media/channels that convey “recommendations” are the best
- and so PR has become a more effective tool than advertising
This explains the Numis prediction: advertising budgets will be cut this time round, and PR budgets will replace them. As Numis puts it : you have to keep communicating these days.
The New Data on “Talk Value”
Historically the advertising industry has been better than the PR industry at producing hard data to show the business effectiveness of their service most notably in the long running IPA effectiveness awards. But ironically, a new “meta-analysis” of 880 award winning IPA papers from 1980 to 2006 shows that what DDB Advertising terms “Talk Value campaigns” and the study calls “The Fame Model” are more profitable than any other type of communication campaign. Surely “fame” and “talkability” is what PR people claim to deliver for clients.
The study shows that different communication models are more or less successful at producing “very large scale effects on profit”:
Communication Number of campaigns producing
Model very large scale effects on profit
“Fame” 39%
“Emotional involvement” 28%
“More complex*” 26%
“Information” 24%
“Persuasion” 13%
(* typically a combination of two or more of the other techniques)
Furthermore, while each model has its strengths and weaknesses, when using the tough measure of “had a very large effect” the Fame Model is almost always the most likely to perform well:
Frequency of very large Ranking of Fame Model
effects occurring in based on frequency of
“Fame Model” cases effect occurring
Sales 58% 1st
Profit 39% 1st
Penetration 33% 2nd
Market Share 31% 2nd equal
Loyalty 11% 1st
Price Sensitivity 8% 1st
The IPA data seems to show that the generation of fame, talk value (and quite possibly recommendation) has been the Marketers secret weapon for several decades (this data set goes back to 1980). But the questions that come to mind is “why is this approach so effective?” and “has its moment as the prime mover for marketing communications come?”
The New Data on 3rd Party Communications
“Awareness” exist in an individuals head. But Fame (and its black sheep of a relative, Notoriety) is something that is based on an understanding of what “everyone else” thinks. It relies on people talking about it. Similarly, when you receive (or request) a recommendation, it’s a social thing; the value does not come from just the raw facts you receive but more from who is giving you the advice and what you think of them.
So PR has always been about getting 3rd Parties (whether journalist, celebrities, or people’s friends) to do your selling for you.
So looking at the Numis data, and the IPA data bank, something rather interesting is happening (or has already happened) with 3rd Party recommendations, or what we might term “PR” in the broadest sense of the phrase.
So why is PR so effective these days (and can we use data to answer this question?).
There seem to be three areas where data shows us what is happening:
- PR seems to be as efficient as advertising at reaching audiences (albeit through indirect channels) these days
- PR stimulates social recommendations whereas advertising enhances perceived image.
- In tough times people would rather take the “recommended safe option” than the “best possible choice” and hence seek sources they trust.
The New Data on Reach
While it is easy enough to find data that shows the reach of journalist controlled channels like TV, newspapers and magazines, it has always been harder to support the claim that PR practitioners make that “word of mouth” and “people passing messages on” is PR’s unique value.
We will return to the extra credibility and power that “sideways” (as opposed to “top down”) messages have but just how widespread are they?
Fortunately, by using the web and phone texting, companies who specialise in using “Customer Evangelists” to spread the word have now got some good measures on this. This is another example of the “structural changes” that Numis referred to : bringing hard data to the ephemeral world of PR.
The rule of thumb that Word of Mouth practitioners use is that about 15% of all conversations contain a reference to a brand, company or service. This proportion exceeds the frequency of commercial messages at peak time on ITV (8 out of 60 minutes {check}). So the average person is as surrounded by word of mouth messages as they are by TV commercials (arguably they are more surrounded as people talk while watching TV!).
Word of Mouth has great reach (if you can get your message in there).
So, on the distribution of messages, companies like Wildfire and ChatThreads report the similar metric that one well motivated and well equipped “advocate” (or upset customer) will pass their story on to 100 other people, whether directly or indirectly. (The way this works is that – on average - the advocate talks to 15 people, who in turn talk to another 45 people who in turn pass it on to one more person each to give a total of c.100).
There are many ways that PR puts the message “into the system” but for example one vivid, talk-worthy event that directly reaches 10,000 people will eventually reach the ears of 1,000,000 based on the 1->100 finding.
Again, this is what Numis was talking about with the effects of technology: stuff just spreads so much more easily these days. If you want to pass something on you can send it to 100’s or even millions with just one click. If you want an opinion, one text or one Google and it is yours.
The Cash Value of Recommendation
If the data above shows that social recommendations pass have great reach, do they convert into behaviour change and sales.
For some time, the best evidence we had was the correlation between Net Promoter Scores (basically a measure of how many of your customers were actively recommending you) and total growth for a company. We had nothing in between.
But now new studies how us that people who pass on information about your brand make a big contribution to your bottom line. Indeed these “active recommenders” are almost as important to you as people who buy lots from you.
A Harvard Business Review study found that for a telecoms company in the USA , their top 10% of customers were worth $1,933 each to the company in terms of annual purchases. However, they were rather “silent fans” as their recommendations only brought in another $40 of value from new customers.
But another set of customers, who only bought $230 of services, talked so much about it that they brought in another $1,020 each from new customers. 82% of their value was as advocates. This suggests that marketing campaigns that get people talking, and in particular recommending, generate significant “free” revenue.
Further data supports the value of recommendations in people’s self reported decision making processes. For example, when asked who had the biggest influence on their choices in general, 59% nominated their immediate family (partner or children), 19% said it was friends, neighbours, workmates or other relatives), 12% said it was the media, 7% said it was an “authority” (e.g. the Government, Doctors, etc) and only 2% claimed it was a direct “commercial” source.
While we need to angle off for people being unaware of the unconscious effects of advertising and “image”, what we are seeing here is the results of an across the board decline in people’s trust in authorities of any kind. In all categories, whether you are a mother seeking a baby food, a teenager buying a mobile phone or a chief executive hiring a banker the number one most trusted information source is “people like me”. In the above example 78% are trusting “sideways” sources (family, friends etc.) and only 21% are deferring upwards (to the media, authorities and commercial sources).
And these recommendations, in this technological age that Numis refers to are coming in from all angles. When asked to what degree different sources influenced purchasing decisions people ranked them as follows
Word of Mouth (someone you know) 8.4 (on a 10 point scale)
Word of Mouth (from Internet supported by others) 6.8
News Story 6.4
Word of Mouth (from Internet, in isolation) 5.8
Advertising 4.6
One take on this is how “social” decision taking is. But the data also suggests that “3rd party recommendation” (whether from “someone I know”, the Internet or the News) is where the true power of PR lies. Perhaps this is why Numis rate PR stocks a “buy”.
Numis’ main stated reason is that the surge of technology has created a media and cultural landscape where stuff spreads and needs to be managed. But there is another more urgent reason why this is so. After all Numis did do the analysis in the early autumn before things really got bad.
For in 2009 the new reason why PR will triumph is to do with fear.
What People Value Right Now
Human beings, whether as individuals, or as “mobs” are getting quite scared at the moment. And when people are scared they take fewer risks and stick with what they know. In other words they start to take advice only from “people like them”.
Right now people are on the receiving end of a lot of scary stuff
- they have become significantly poorer for the first time in 15 years {charts on GDP; house values}
- they have seen governments pulling “violently on the tiller” signalling that they have lost control {step change drops in base rate}
- actual war may be a dim distant memory, or in far away lands, but terrorist attacks have become more spectacular and visible{death count chart}
- and all of the above is now available 24 hours a day on your TV, PC and mobile {data on stress effect of frequency of checking for bad news}
As one commentator put it, following on from the NICE era (non inflationary, constant expansion) we are in the THUD era (Terror Horror Uncertainty Doubt).
All this means that for a lot of people in a lot of categories the issue is no longer “how do I get more” (normal capitalism) but how do I keep what I’ve got (depression behaviour)? Studies [data] show that people are asymmetric and more concerned about possible losses than possible gains. And so right now people are more interested in finding a (any!) safe option than trying to find the best possible choice.
Put another way, what people are more interested in is the solidity of your reputation than the attractiveness of your brand values. What people are hearing about you right now could be the most important driver of your business success over the next couple of years. In contrast to what is said about you, your projected brand’s image could look soon like a rather unnecessary fashion accessory.
So perhaps in tough times, recommendations “from people like me” about companies/brands will become the most valuable asset a company can have. Your reputation will be your prime asset. Warren Buffet, a man who invests heavily in businesses with strong brand assets has this to say on the subject : “If you lose dollars for the firm by bad decisions, I will be understanding. If you lose reputation for the firm, I will be ruthless.”
One definition of reputation is “what you do, what you say and what other people say about you”. While advertising and PR can both lay claims to who is best at putting out “what you want to say”, it is PR practitioners, with their emphasis on 3rd party voices who are experts at influencing “what other people say about you”.
And perhaps this is why Numis see an “Advertising Armageddon” but the “increased importance of PR”.
Which brings us back to the PIMMS study.
This showed that spending in a recession leads to higher share of voice which in turn leads to improved market share, profitability and hence ROI.
Perhaps, now we have both at the data and realised we need to be pragmatic about who gets to carry on spending, we should think hard about which “voice” to choose. We would argue that the evidence has emerged that when compared to advertising, the PR-influenced voice, has great reach, generates profit-boosting recommendations and the reputation-boosting , literally “trustworthy” commendations that are sought in these troubled times.
If there is one voice all companies need to spend more on right now, it is that of the PR operator.
Their moment has come.
