Managing the risks of marketing

Posted by Prof David Corkindale on November 1st, 2006 at 9:40pm

Marketing is risky
I was teaching a marketing course for some executives in Zurich in January. I asked at the start what they most wanted to learn about marketing. One person from a big German bank who had just been put in charge of marketing for one of their Divisions said that he wanted to know the risks of marketing and how to manage them. I thought: that’s a good question but nobody has asked me that before. I also know that it is not covered in any textbook!

However:
Marketing = change = risk

Companies usually engage in marketing activities to produce a change in the market place and a change in their sales performance, both now and/or in the future. For example: new advertising, a promotion of some sort, new products and services and the use of a new channel outlet. Planning to induce change brings with it increased risks.

Do marketing people, and the companies that employ them, know the risks that they run? Do they manage the risk? In many other walks of corporate life you have to have a risk management plan. You can not even hire a park from your local council in which to hold a little event without supplying your four page risk management plan. So, should we not do it for marketing activities?

CEOs and General Managers should be engaging in much more risk management of their marketing departments or activities as the examples below illustrate. How this can be aided is indicated later in the article.

Some examples
A famous case was the Hoover promotion in the UK which cost the company $128 million and dragged its name through the mud in the 1990s. The marketing department dreamed up a promotion that was to help get rid of a large inventory of old model vacuum cleaners and washing machines. The promotion was that for every 100 pounds a customer spent they got two free airline tickets and this included flights to the US. Thousands of people took up the offer and demanded their free tickets. Hoover was overwhelmed and tried to find loopholes to deny claimants their tickets. The scandal escalated to there being TV programs on it and questions raised in Parliament.  Hoover had wildly underestimated demand, or put another way, had not estimated the risk they were running. The advertising that supported the promotion had the headline “Two return seats: Unbelievable”. Unfortunately it was and commercially disastrous.

A case in South Australia was when the marketing department of SA Brewing had a cash-back offer on the side of a slab of one of their beers, aimed at consumers. They estimated a redemption rate of 4% which would cost $20,000. The wily distributors and retail trade cut the offer off the packaging and sold the bottles individually. They claimed the cash-back and the redemption rate was over 90% which cost the company around half a million dollars.

A very well chronicled marketing debacle occurred after Southcorp and Rosemount merged. The discounting policy on wine brands in the UK resulted in not only loss in profits but loss in brand equity. One of the outcomes was that they were taken over by Fosters.
Marketing is inherently risky. Another classic mistake was the substitution of traditional Coca Cola in the US by ‘New Coke’ that cost millions of dollars and lost goodwill and prestige. McDonalds spent a lot in the US developing a burger especially for adults, called Arch Deluxe, only to find that such a market did not appear to exist.

There are many other examples of marketing mistakes which testify to the fact that the risks of making bad decisions are ever present and are made by even the most supposedly expert and experienced marketers. One of the most potentially costly is that of harming the brand. Given that a brand’s value can represent the major part of some companies’ worth, it seems irresponsible that there are not careful procedures in place for seeking to minimize the risk of harm to the brand and therefore company. The AWB [Australian Wheat Board] have dented their reputation by indulging in a sales incentive scheme that has backfired!

Are marketing risks being managed?
Given what is happening in many markets – globalisation, dominant retailers, increased competition, media fragmentation – marketing is likely to be more risky today than in more certain times. Yet, in many cases, about the only risk assessment that is done is the credit-worthiness of customers!

The ethos of many in marketing is all about success; there is no possibility of downside. Much of what is popularly written on marketing is very triumphalist. Yet a book on “Brand failures: the truth about the 100 biggest branding mistakes of all time”* says that only one in ten new product launches are successful in the longer term and quotes a senior Proctor and Gambles marketing executive as saying: “It’s easier for a [new] product to fail than to survive.”

I have always seen that one of the main roles of Market Research is risk reduction. Maybe the time has come for the market research industry to properly emphasise this benefit rather than that of contributing to success. In the book of the 100 branding mistakes one can identify where market research appears to have been used. There are nine where it appears that the market research was deficient and four where it was conducted but ignored; for others it was unclear how market research was used. However, there were 46 cases where marketing decisions were made that lead to failure but for which no market research was conducted at all!

How do we manage marketing risks?
The discipline of risk management is well established now, but not in marketing. There are systematic procedures for managing risks and to evaluating the potential consequences – both financial and reputational.

There are categories of marketing risk – essentially decisions involving each of the four Ps and relational market-based assets, like brand, have risks. The risks associated with a new product’s performance from the point of view of doing harm, so as to avoid product-liability claims, is one of the few risks that are assessed.
There are many other ways in which companies run the risk of being sued because of poor marketing decisions. However, having the legal department check-over a marketing decision on a promotion, or whatever, does not check the commercial risk, as the Hoover and other cases above illustrate.

Market Research companies are often used to provide some information to help assess the riskiness of marketing decisions. However, this is often on an ad-hoc basis. Marketing risks and the management of them need to be done in a careful, systematic way by people with the experience, insight and training that the importance of it requires. I do not see this happening much.

Once having identified the risks that are going to be run by taking a particular marketing decision, quantifying these and the financial and non-financial potential consequences, a manager has four possible strategies:

1. Accept the risk but allow for it in plans and budgets – that is, make sure that if the undesirable does happen it is not a disaster for the brand or the company.
2. Transfer it – in some way insure against it or make someone else carry the risk: a supplier or the customers, maybe.
3. Manage it – commit to limiting its impact and restricting it to a particular level.
4. Mitigate or eliminate it – analyse it and its contributing factors, put activities in place ensure that the causes and consequences of risks are controlled or avoided.

There are well developed procedures, used in many other business areas, for identifying risks, what the consequences could be, what the contributory factors are for each risk and then how to systematically eliminate or manage them. CEOs and managers need to have these applied to their marketing activities.  

 

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