by Bob Walker | Sep 16, 2019 | Marketing and strategy, Marketing research
Do you run a marketing research and insights department, or does a function like this report to you? Having a solid research and insights function is worth its weight in gold – if it is staffed properly and has an adequate budget to complete key research tasks. But if your department is not running as smoothly as you feel it should, or if there have been missed hand-offs or errors, maybe it’s time for a tune-up – but first a little background.
Marketing research and insights teams exist because the world is an uncertain place, and the mitigation of risk (or alternatively, support of successful businesses) is an important business function. Marketing research and insights teams work best when they have the resources and autonomy to investigate customer behavior, explore trends, and the authority to (respectfully) challenge marketing assumptions that may be sub-optimal or simply wrong.
From an organizational standpoint, the head of research and insights should report to a business unit leader. Optimally, this is the President or CEO who is responsible for multiple functions, such as strategic planning, sales, marketing, R&D, customer service, and production (this assumes a traditional manufacturing model – but similar functions can be substituted for categories such as software development, financial services, e-commerce, etc).
The point is that the eyes and ears of the consumer/buyer need to have a direct pipeline to the stakeholder/business owner and key decision-makers. Research should not be beholden to the marketing function per se: the pressures of day-to-day marketing activities can easily usurp the willingness to listen to objective, fact-based decision-making found in great research departments. This is especially problematic in ad agency business models, where research and insights reports to an account team. One must ask: is the goal to understand the consumer and build the business, or simply solidify the client-agency relationship? The conflicts are obvious.
At the outset, let me make it clear that this is not a competition, nor an attempt to say one function is somehow “better than” another. Marketing research and marketing are integral to one another, yet each requires a different skill set. Marketing research is there to help marketing (and the company) succeed, working hand in glove, but with independence.
No one can argue that the pace of business is breakneck. It is unfortunate that business leaders and marketers are overwhelmed with day-to-day fires, absorbed by executional details, and frantically racing to meet promotional or product deadlines. The downside: this can severely limit their ability to focus on larger strategic and business issues, and overall brand health. The marketing function is often a casualty of limited bandwidth, strapped for resources to get even basic tasks completed.
On the flip side, marketing research is also under assault from multiple angles of attack, most notably in-house DIY research and untrained staff. A lack of thoughtful discussion and thinking can produce misleading results. This further diminishes the value and promise of what a research function could be. In today’s environment, an over-reliance on questionable algorithmic approaches, such as social listening and AI solutions, also misses the larger need to understand consumer behavior and how to build brands from that learning. At the same time, there seems to be less and less questioning of data sources and data quality: the assumption is that if it exists in digital form, it must be true. This is simply wrong.
The notion that a marketing research or insights team knows less about marketing principles than the marketing function is also a long-standing fallacy. Marketing research and insights experts have in-depth knowledge of consumer behavior, brand history, and category dynamics. Marketing research and insights can also leverage knowledge accumulated over time to guide better decisions, rather than to assume that no facts exist, so we’ll invent everything from scratch.
Here is a simple checklist to see whether you are really leveraging your marketing research and insights team to the max:
-
How do you feed your new product funnel? What role does research play in helping you generate new ideas and opportunities for future business development?
-
Do you have a planning and strategy session or process (i.e., annually) to anticipate future marketing activities? Is your marketing research and insights team invited to these meetings? If so, what role do they play? If not, why not?
-
Do your plans specify various stages of product testing, such as idea screening, concept development, or positioning and communications research?
-
How do you go about new product development and prototyping to align with your idea screening? Whether you are building a product from scratch or creating a wire-frame for a new e-commerce site, what process are you outlining?
-
Do you have an in-house product testing or evaluation function (typically part R&D), internal or external UX or sensory testing panels, or processes in place to optimize your offering?
-
Who is your target audience: what kinds of strategic research have you conducted to determine who your target audience is?
-
How do you evaluate new product introductions? Simply throw them into the marketplace and hope for the best? Or do you have a comprehensive marketing research and analytics plan to assess performance?
-
How do you benchmark ongoing business performance – are you simply looking at whether sales or units go up or down? What do your buyers say – and what do you do about it?
We know, questions are easy! But if you don’t start asking the questions about how your research function fits within the broader context of your overall new-product and innovation initiatives, chances are that you are going to go sideways rather than forward.
Needless to say, I believe in research. There are some things that research simply cannot answer: the products of genius, the subconscious, and the truly gifted inventor or designer. Research does not have all of the answers. But in the majority of cases, a business needs insights to run. Without the right team in place, your chances of success are significantly reduced.
If any of this intrigues you, or you would like to discuss the idea of building your research function into the powerhouse it needs to be, give us a call. We like discussing ways to make the research and insights function a truly beneficial one for companies of all sizes.
by Bob Walker | Aug 10, 2019 | Business strategy, Marketing research, NPS
In May 2019, The Wall Street Journal published a comprehensive article on the use – and misuse –of customer satisfaction programs that heavily rely on a single measure known as the “Net Promoter Score” or NPS*. Titled “The Dubious Management Fad Sweeping Corporate America”, the authors shared a review of 40,000 earnings call transcripts for 688 companies that are or were in the S&P 500 from 2003-2018. Last year (2018) the words “net promoter” or “NPS” were cited more than 150 times in conference calls by 50 S&P 500 companies. That’s four times as many mentions, and three times as many companies, from five years earlier. Last year, “net promoter score” was mentioned in 56 proxy filings. Some companies, including American Express, Best Buy, and Citigroup list NPS as a compensation metric, alongside share price and EPS. So what is really going on here?
Regrettably, the Net Promoter Score or NPS has morphed into something well beyond its scope. Originally intended to foster product and service improvement, many corporate leaders now treat NPS as a pseudo-financial metric. Management seems to believe that they must follow peer group practices, including the use of benchmarks collected by their own competitors. Misinformed stock analysts add pressure by implying that companies who do not use NPS must be out of touch with their customers.
The companies that continue to use NPS as a mantra are apparently oblivious to its corrosive effects. Much like “teaching to the test”, they ignore the fact that the measure can be manipulated. For example, a recent trip to my local Honda service center produced a text message from the Service Manager (see inset). He implored me to give him high ratings. What larger goal does this accomplish? Knowing that a survey is coming, management is unwittingly diverting his time and creating anxiety – and missing valuable insight into my service experience. And what if the initial technician who took my car had an attitude? Do I tag the Service Manager with that? A far better approach would have been to ask: “What aspects of your visit to Honda need to be changed or improved?” Or, more specifically, probe on multiple dimensions of my visit so that the employee is not associated with my evaluation of the entire experience.
Of course, the error can go in the opposite direction: companies can collect feedback that is too narrow and not actionable. Another example: I recently had to ship something, so I went to Staples and bought some bubble wrap to protect my item. Staples sent me a customer satisfaction survey asking me about my “bubble wrap experience”! Seriously?
NPS May Capture Intent, But Not Actual Behavior
Regrettably, management teams incorrectly believe that they need just one measure (NPS) to predict sales growth, profitability, and retention. This misperception also diminishes the role of insights professionals and research departments who are often closest to the customer. Many of you may recall that the NPS buzz began with Fred Reichheld’s 2003 HBR article “The One Measure You Need To Grow”. His quote: “The only path to profitable growth may lie in a company’s ability to get its loyal customers to become, in effect, its marketing department” became gospel. A “willingness to recommend” formed the basis of the NPS question, and an entire industry was born. The assumption was that a recommendation can drive both growth and retention.
This is certainly plausible — if such recommendations are ever made — but recommendations are, in fact, rare and intent is not the same as action. Other self-reported measures of behavior, such as purchase intent, have long been known to be directionally associated with in-market behavior, but the magnitude varies tremendously and is highly sample-dependent. Over the last 15 years, research has also failed to prove a clear connection with one’s willingness to recommend and profitability, growth, or retention. And the assumption that any of this can be accomplished at near-zero cost is also dubious.
Common sense must be used, and adjustments made, as companies learn more about their customers and business performance. Virtually all businesses require more than a single measure to understand customer needs. As I have previously written (“Rethinking NPS”), customer feedback is essential; it is NPS that is inadequate.
It seems that nothing will be able to stop the NPS locomotive. According to the WSJ, J.D. Power has signed an agreement with Bain & Company to become the officially recognized authority for benchmarking the “Net Promoter Score”. Much like J.D. Power’s customer satisfaction awards in automobiles and other categories, can “NPS awards” be far behind? In its next life, NPS will no doubt morph into support for advertising claims and other puffery. For devotees of W. Edwards Deming, this should feel familiar: NPS will become a slogan, and more manipulated than ever.
Have Courage: Use Measures That Matter
But what to do? If you are in leadership, focus on how internal processes can be improved, rather than (mis)placing the responsibility on individuals or your front line staff. An employee is responsible for bringing problems to leadership’s attention, but your job is to improve the process itself. Be wary of salespeople claiming to offer magical and simplistic answers to difficult problems. Look at the big picture and choose from appropriate (multiple) measures linked to customer happiness. Build your own normative database to best meet the needs of your unique business. One size does not always fit all, and it will cost money to truly understand what is going on with your customers and your business. But at least you will have measures that make sense.
At Surveys & Forecasts, LLC, we have been doing just that for 25 years.
* [1] Net promoter score or NPS is a registered trademark of Satmetrix Systems, Inc. a privately held experience management company headquartered in San Mateo, CA. Along with the Bain & Company and Fred Reichheld, Satmetrix Systems co-developed the Net Promoter Score (NPS).
by Bob Walker | Jan 5, 2019 | Marketing and strategy, Marketing research, Strategic research
I always tell my children that life is not linear. Neither is business. Things rarely go in a straight line, and companies can never sustain super-normal growth in either sales or stock price. Yet we were somehow surprised this week that Apple reported significant declines in iPhone sales. But should we have been that shocked? Apple has been making superficial changes to the iPhone now for several years. Didn’t Apple urge us to “think different”? Had they done any research to anticipate this obvious shift in consumer preference?
I continue to be amazed at the perceptual blinders that companies, or financial analysts, wear. The pattern is very familiar: management ignores any initial signs of trouble, they reassure themselves (and consumers, employees, and financial analysts) that all is well. In Apple’s case, they try to deflect by saying “look over here” (for example, by refusing to release unit sales). Denial and the refusal to believe the facts are powerful forces of inertia in every organization. Denial is a basic human instinct.
It is also the innovator’s dilemma (see Clayton Christensen): entrenched interests force managers to set aside obvious facts in favor of perpetuating the status quo. History is replete with examples. Hewlett-Packard never wanted to introduce ink-jet printers (the margins were too low). CVS, not doctors, conceptualized Minute Clinic (primary care that was “good enough”). Intel is overshooting processor power even though most consumers will never need it (although AI may change this dynamic). Chevy recently dropped the Volt, an electric car for which there was minimal underlying consumer demand. And why didn’t Sears become Amazon?
Apple is a great company and they will probably recover. A reset was needed eventually. But it raises the larger question of why companies stubbornly ignore facts about their customers, markets, and competitors? Why do managers assume that they already know everything that could potentially affect their business?
Great research is needed now more than ever.
I believe that it comes down to one basic factor: fear. But what does that really mean? Fear of having to think outside of normal patterns… a fear of disruption, which may force people to behave differently, which can be uncomfortable… a fear of having to adapt to a new way of working… a fear of a job change, or even worse – a job loss.
But you can’t anticipate or plan for what you can’t see. Don’t assume that you know everything that might affect your business. If you are in a position to recommend marketing or customer research, advocate strongly for it. Your company’s survival depends on seeing what is happening out in the real world!
I suggest a few simple rules for paying attention to what is going on in the world:
-
Actively listen! Talk to as many of your customers as you can, qualitatively or quantitatively.
-
Construct honest and non-biased questions to uncover real understanding, and identify the real dynamics in your market.
-
Validate your findings with enough respondents to give you the confidence you’ll need to make the hard decisions. Individual or small group feedback is a great start, but always verify, verify, verify.
-
When doing external (non-customer) research, work with reputable sample providers who have the expertise to manage consumer or business panels. To use a gardening analogy, the sample is the soil. If the sample is wrong, everything else is compromised.
-
Have an opinion about what your research results mean and implications for the business. Get out in front of the story; add value. If you abdicate your role, others will write the story for you – and then wonder why you’re there.
-
Let management question the results – but also make sure that they accept the findings. Management buy-in is essential.
Management philosopher Peter Drucker preached that all organizations have two functions: innovation and marketing. Marketing research is at the heart of both. Never stop asking questions, and do so with the frequency required for your industry.
Follow these simple guidelines and you will have an insightful, productive, and happy new year!
Let’s continue the discussion.
by Bob Walker | Nov 13, 2018 | DIY software, Marketing research
So by now many of you have heard the news: Qualtrics is being bought by Germany’s SAP for $8 billion in cash. I also received an email from Ryan and Jared Smith announcing the news.
But what exactly did SAP get for its money?
For the first nine months of 2018, Qualtrics generated $289.57 million in revenue ($386 annualized), up 40% from a year earlier. It posted a $2.3 million operating profit in the same period ($3.0 million annualized), nearly double its year-earlier operating profit (but is still paltry). The SAP price values Qualtrics at 14x forward revenue (not earnings). Based on earnings and an $8 billion price tag, Qualtrics’ PE is 2700. SAP itself has a PE of 24. The market seems to like it; SAP shares were up about 3% today. But does this make sense?
There are only so many ‘large’ customers ($100K+ in fees a year) that can continue to fuel a 40%+ growth rate. Much will depend on how much running room Qualtrics gets from SAP. The love fest will last a quarter or two, but soon the vulture capitalists will get paid, the growth curve will flatten, and the cost accountants will swarm in. Then redundant positions (in sales, marketing, and support) will be eliminated. Prices will also go up, and the quality of support will decline, as staff reductions kick in and the acquisition costs weigh down SAP’s P&L. It’s a familiar story.
Culture also matters. With SAP’s 95,000 employees and German influence, the Qualtrics hipster culture will fade. The relatively few Qualtrics employees can’t swim against the SAP tide for long. And there will be many companies that will now see Qualtrics as a conflict: those using Oracle, Microsoft, or Salesforce won’t want SAP snooping around, and thus they will hesitate. Many SMBs who may have considered Qualtrics will now have second thoughts, as they never envisioned bringing in such a behemoth.
The $8 billion price tag is an amazing achievement – congratulations to all. However, Qualtrics as a brand will persist only as long as SAP leaves it alone.
But it’s impossible not to play with that shiny new toy they just paid so dearly for.
by Bob Walker | Oct 31, 2018 | Uncategorized
Happy Halloween!
As expected, Qualtrics filed its Form S-1 registration statement (IPO) on October 19, 2018 under the oh-so-sexy symbol ‘XM’. Qualtrics, backed by VC firms Sequoia and Accel, has been valued at as much as $2.5 billion; soon we’ll hear what the market says.
XM’s IPO was certainly hurried along by the recent public offering of SVMK (SurveyMonkey). How quickly expectations fade: SVMK began trading on September 26, 2018, as high as $20 and closed at $17.24. Today (October 31, 2018) SVMK closed at $10.71 — a drop of nearly 40% in a month. BOO!
Still, SVMK’s market cap of $1.31B is nothing to scream at.
Interestingly, both companies are roughly the same “core” size (i.e., revenue from subscriptions), although they got there in very different ways. In 2017, SVMK subscription revenue was $219 million and Qualtrics was $213 million. However, Qualtrics adds nicely to their subscription business with service bureau-style programming, sample, and integration services that combined are $77 million (26% of total revenue) for a grand total of $290 million. SVMK is making a significant effort to expand their team and enterprise offerings.
Qualtrics is a different story. While the operating picture is a bit ghoulish, the real story is Qualtrics’ growth rate. According to the S-1, as of June 30, 2018, Qualtrics had an overall net operating loss of -$3.4 million, slightly ahead of its 2017 loss of -$3.7 million (amounting to about -2% of revenue). Conversely, Qualtrics’ subscription revenue grew nearly 50% in the full year ending 2017, and 42% in the first six months of 2018. And Qualtrics’ total revenue grew 52% in the year ending 2017, and 40% for the first six months of 2018. The street likes a Cinderella story (sorry, wrong genre), and Qualtrics is certainly that. But maybe I am missing something.
Still, SVMK revenue grew at a reasonable 6% between 2016 and 2017, and for the first six months of 2018 grew somewhat faster at 14%. But this was not enough to overcome a gaping operating loss of -$27 million (the first six months of 2018).
Given weak financials and a significantly depressed stock price, SVMK looks like a juicy acquisition target. Likely prospects include Facebook (limited survey capability but a vast supply of sample) and Google Forms (part of G-Suite with basic functionality). Are scary spirits propping up the stock price?
With rapid acceleration, costs at Qualtrics have also grown fast. As revenue from labor-intensive “professional services” grows, labor cost growth must outpace revenue. These costs are not as scalable. Qualtrics’ “professional services” gross margin (currently at -20%) drags subscription margins down (which are 80%). Sales and marketing expenses are a whopping 50% of revenue (with R&D at just 15%). License fees are not funding more R&D; instead, fees largely support the sales team, marketing, and the Qualtrics Summit. That doesn’t seem like a very sustainable business model to me. Maybe I am missing something.
Qualtrics says that their “business model relies on rapidly and efficiently landing new customers and expanding our relationship with them over time.” Translation: XM’s cross-sell tentacles quickly reach across organizational boundaries wherever feedback is involved. Qualtrics has smartly leveraged their survey data collection engine across corporate silos with similar data and benchmarking needs (i.e., effectively the back-end of Research Core).
This templated approach is attractive for “large customers” (those with $100K+ in subscription revenue) who seek a familiar look and feel, a shared platform, and a tiered pricing model. Large customer growth has been very fast: +60% in the six months ending June 30, 2018, impressive by any measure. Qualtrics is also able to leverage its technology investment by modularizing its code base.
Qualtrics claims to have created a “new category of software, Experience Management, or XM™, which enables organizations to address the challenges and opportunities presented by the experience economy.” This is largely magical thinking for the IPO syndicators and future investors. In reality, there are only so many whales. The pod is fairly static and growth of 50% YOY is simply unsustainable in any industry. Maybe I am missing something.
Qualtrics has a few options: headcount and cost reduction, price increases, and perhaps packages for lower-end customers (and hope to upsell/cross-sell). These don’t seem likely. Rather, as Qualtrics continues its rapid move into consulting (and away from DIY subscriptions), they will be attractive as an acquisition target for companies in software, accounting, and management consulting. And Qualtrics fits well into a blockchain-enabled, supply-chain world.
No doubt, the IPO will make the founders very rich. But with a sweet acquisition offer, the management team may find itself working for a new employer sooner than they think. But maybe I am missing something.
BOO! That’s a scary story indeed!
