Everybody knows that advertising drives sales; cut marketing spend and you'll harm top-line growth. Right? Well, research presented in my book "The Momentum Effect: How to Ignite Exceptional Growth" might suggest that Gap is on to something. We studied the advertising-to-sales ratios of Fortune 1000 firms during a 20-year period (1985 to 2004) and tracked whether changes in that ratio had any impact on revenue, profit and market capitalization.
On first reading, the results are counterintuitive. We discovered that the companies that delivered the highest growth in market capitalization -- growth that outstripped that of the Dow Jones by 80% -- were the firms that decreased their relative marketing spend over the period. We named these firms "Pioneers." Despite cutting their relative marketing-to-sales ratio by 7% compared with their bigger-spending competitors -- firms we named "Pushers" -- the Pioneers massively outperformed the market. How?
This result may seem wrong, but too often increased marketing spending is used to compensate for a less-than-compelling offer. Marketers faced with challenging targets for less-than-perfect products always argue for bigger budgets. Unfortunately this tends to exacerbate the lack of consumer trust that forced the increased marketing spending in the first place. Furthermore, it forces firms into compensating for the increased marketing spending by cutting costs elsewhere, in areas such as R&D and quality -- the very areas where spending is needed to improve the customer offering. This is what I call "compensating strategy," and it creates a vicious circle of mediocrity.
Taking a step back
Gap's move deserves to be commended. It has resisted the usual temptation of pushing further on a compensation strategy when growth challenges are encountered. Instead, it is showing real courage in forgoing the usual quick fix to the problem of falling sales. Our research shows that when a brand faces a fundamental growth problem, it is far better for a firm to pause, take stock and invest the time to face the serious underlying issues.
So, is Gap right? Yes, if it is being a lot more clever than simply cutting its advertising spending. Our research certainly does not say that the way to deliver exceptional growth is to cut marketing budgets. In competitive markets, increased marketing budgets are an essential source of market power, but this increase has to be linked to higher marketing efficiency -- in other words, reducing marketing expenses as a percentage of revenue. Although the Pioneers' marketing-to-sales ratio fell, the amount they were spending, in absolute terms, went up. That's because marketing excellence isn't just about delivering higher sales; it is about delivering higher sales more efficiently.
How did the Pioneers achieve that efficiency? By creating momentum. Momentum is what enables an object to move without the need for an external force. We use the word "momentum" to describe the way that some brands don't need to be pushed as hard as others, yet still deliver superior results.
|ABOUT THE AUTHOR|
Jean-Claude Larreche is the Alfred H. Heineken chaired professor of marketing at Insead, an international business school. His book 'The Momentum Effect: How to Ignite Exceptional Growth' was published in April by Wharton School Publishing.
Why doesn't increased marketing spend eventually lead to momentum? Because most brands lack real customer traction. When a company finds itself falling behind, as Gap did a few years back, it is usually because it is losing its customer traction, both in terms of customer target and perception of its offer. The combination of these two crucial elements is no longer as appealing as it once was.
Gap's chairman-CEO, Glenn Murphy, said that to justify marketing spending its brands would need good product, well-run retail environments, imaginative, creative messages for their target consumers and consumers who were ready to respond to the marketing. But those four points could be integrated in one: To make the marketing spend worthwhile, brands first need to create customer traction. When traction exists, a firm can increase its marketing spend in absolute terms while still cutting marketing costs relative to sales, through momentum growth.
So what does Gap, or any other business, need to do to create the customer traction that provides momentum? In my book I set out an eight-step process for building efficient momentum growth, but for now let us just consider three key elements of that process particularly relevant to the Gap story: customer insights that lead to power offers that lead to customer engagement.
The ultimate driver of momentum growth is customer engagement. Consider the iPod, the iPhone or the Wii. They are not just brands; they are all power offers that have created an enormous level of customer engagement and delivered exceptional growth. For a brand to be a power offer, every aspect of the customer experience must resonate with customers' aspirations, needs and senses of self.
The move from a failing compensating strategy to a momentum strategy requires marketing to do what Gap has had the courage to do: step back from its compulsion to spend big when the offering is not good enough to generate its own momentum. In such situations, marketing indeed needs to shift some of its attention away from its traditional downstream activities -- communication and promotion -- and concentrate on applying its customer-focused skills upstream.
Once some customer traction has been created through a compelling power offer, the momentum it delivers will enable the firm to go back into downstream mode and increase its marketing spending. But at this time, it will be creating growth at a new level of efficiency. From there, a firm will be able to open its own momentum gap and leave its competitors trailing in its wake. Only time will tell if Gap will make the leap, but the first steps are courageous and seem on track.