Marketing npv how much risk bma webcast may '10

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How Much Risk is in Your Marketing Plans?

Pat LaPointeManaging Partner


Profit

Growth Risk

The Finance Mind…


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Exclusive focus on marketing measurement Objectively bridging marketing/finance gap Publishers of the MarketingNPV Journal Advisors to Global 1000 clients including:

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What We Do

We deliver skills, tools, and processes to continuously improve marketing effectiveness and efficiency; establishing clear links between marketing investments and financial value creation.


How Much Risk is in Your Marketing Plans?


Crab buffet leaves Red Lobster all wet By Lauren Weber, ReutersNEW YORK — Americans love their crab. So it’s no surprise that they took notice when Red Lobster offered a $22.99 all-you-can-eat crab special. But when things got out of hand, Edna Morris, Red Lobster's president, lost her job in a disastrous promotion that cost the company $31million in food and over $400 million in market cap value in just a single trading day.

What happened?


The Promotion…• $22.99 All-you-can-eat crab dinner.• 3 months at 679 locations.

The Assumptions:• Promotion would attract many new diners• High price would limit take-up• 1.5 Servings per customer on average

Seems reasonable, right?


The Perfect Storm …

• Just before the promotion launched, the Federal government announced plans to implement restrictions on crabbing in Chesapeake Bay

- Wholesale crab prices rose 20% in one month.- Food costs increased $31MM for the quarter.

• The advertising successfully attracted people interested in the deal.- “It wasn’t so much the second helping that hurt, but the third…and maybe

the fourth.” Joe Lee, Chairman, Darden Restaurants- SEC filings cited “increased crab usage and additional plate accompaniment”

as reasons for earnings declines.


Courtesy of Sam Savagewww.Analycorp.com

In this case:1. Average “take” rate - WRONG2. Average # servings per “cover” - WRONG3. Average wholesale cost/lb. - WRONG

Plans based on the assumption that average conditions will occur are usually wrong.

See also: Murphy's Law (What can go wrong does go wrong).

Enter the “Flaw of Averages”


Risk. Good or Bad?

On airplanes or in operating rooms - generally bad.

In investments – necessary. No risk, no return.

In marketing – critically important. Marketing is all about taking risks.– smart, well calculated risks– unnecessary risk kills programs and careers

The benefit of enhanced marketing measurement is to inspire smarter risk-taking on a bigger scale.


Two Types of Risk

Risk of Uncertainty Risk of Abject Failure


Dealing With Uncertainty

What is the probability of a certain outcome?

• Statistical distributions?• Experiential distributions?

Simulation helps identify the probability of achieving unacceptable results


Red Lobster Uncertainty

Uncertainty #1 - Pounds per customer

Known:- Price per meal $22.99- Fixed cost per meal $3.00

30%

25%

20%

15%

10%

5%

0%


Uncertainty #2 - Price per pound

Red Lobster Uncertainty

30%

25%

20%

15%

10%

5%

0%


Red Lobster Simulation

Only 45% chance of breaking even!

10,000 scenarios evaluated in 2 minutes


Type Two Risk – Abject Failure

Many reasons projects might fail• Project never captures the imagination

of the CEO and gets $0.• Technical failures• Environmental issues• Politics• Regulation• Competitive activity

Culturally, we plan on success. We count on success. Psychologically, we don’t like to think about what happens when things go wrong. Yet most of the time they do.

We plan like the matador, but have the track record of the bull.


Developing a Risk Management Plan – 4 Steps:


Step 1 –Identify

Potential Risk

Factors


Escalated Risks of the Current Economic Environment

Moral and Regulatory “Norms” in flux• Government agencies and media less predictable than ever

Models (particularly regression models, al la Market Mix) are wrong.• Coefficients and assumptions derived under circumstances vastly different

from today’s• Recommended actions are misleading

Research is similarly antiquated.• Attitudes and perceptions have changed• Correlations to behaviors have changed• Especially prevalent in B2B and low-frequency categories

Suppliers struggling or failing.• Suppliers’ own supply chain weaknesses

Competitive intelligence ages or declines.• Increasingly dynamic environment requires continual re-assessment of

action/reaction.

IT Platform fragility in the face of substantial out-sourcing


New Product Launch

NPV $1MM

Temp laborMarket tightens

Dockworkers goOn strike

Supplier shipsVia air freight

Terrorism threatparalyzes markets

CompetitorLaunches channel promo to respond

Sales materialsare delayed

Yuan spikes

Lead volumeis depressedAdditional

Cost-of-goods

Reduction in Incremental

Sales

Example: New Product Launch

Contributing Factor Diagram


Step 2 – Guesstimate the Economic Impact of Each Factor

Risk Factor Expected Cost Range

Dockworkers Strike $5,000 to $10,000Temp Labor Cost Increase $7,500 to $12,500Competitive Activity $40,000 to $80,000 Sales Materials Delayed $75,000 to $100,000 Yuan spikes $80,000 to $130,000Terrorism Threat $900,000 to $1,000,000


$1000’s

$10,000’s

$100,000’s

$1,000,000’s

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%Probability scale

Impact scale

Step 3 – Create a Risk Management Matrix


Yuan Spikes


MaterialsDelayed

Terrorism threat

CompetitorLaunches promo

to respond


Example: National Clearance Sale

Risk Factor

Dockworkers strikeTemp labor tightensYuan spikesMaterials are delayedTerrorism threatCompetitive response


Probability of Occurrence

Mag

nitu

de o

f Im

pact

low

low

high

high

MITIGATE- STOP! Rethink. Get a

new plan.

MANAGE- Assign someone to

monitor and enact contingency plans.

TRANSFER- Insure against or

negotiate for vendor acceptance.

ACCEPT- Ignore it. Focus on

bigger issues.

Step 4 – Action Plan for Each Risk Factor


$1000’s

$10,000’s

$100,000’s

$1,000,000’s

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%Probability scale

Impact scale

Tolerance

Tolerance


Yuan spikes


MaterialsDelayed

Terrorism threat

CompetitorLaunches promo

to respond

TRANSFERMITIGATE

IGNORE

MANAGE

Step 4 – Action Plan for Each Risk Factor


Risk-Managing a Portfolio of Projects

Project Forecast NPV

Loyalty Program $5,500,000Direct Mail Campaign $4,630,000Pricing Promotion $3,150,000 Sales Channel Incentive $2,750,000 Training on New Tools $1,800,000Customer References $1,650,000

Totals $19,480,000

Risk Adjustment

<$2,200,000><$800,000>

<$2,500,000> <$1,150,000>

<$900,000><$150,000>

<$7,700,000>

RevisedForecast

$3,300,000$3,830,000

$650,000$1,600,000

$900,000$1,500,000

$11,780,000

1

2

3

4

5

6

2

1

6

3

5

4


Start

Risk-Managing a Portfolio of Projects

Begin with proposed initiatives

Establish Common Unit of

Measure

ID Risk Factors for

each Initiative ID

conditions for each

risk Factor

Assess Economic Impacts of Each Factor

Assign Probability

to Each Factor

Adjust Expected Value for Initiatives

Select Initiatives to Pursue

Determine Risks to be Accepted

Transfer Factors as

Appropriate

Develop Mitigation Strategies

Implement Active

Mgmt. Plan

Measure Risk

Realization

Report Outcomes

and Learnings

Risk Managing a Portfolio of Initiatives

Risk Managing Individual Initiatives


Big Risks/Big Rewards

The best advice I can offer is to find that ‘Debbie Downer’ in your organization and let her tell you all 1000 ways it could all go horribly wrong. Then start finding ways to ensure those things don’t happen.

-Rita BargerhuffVP Marketing

http://www.7-eleven.com/Default.aspx�


Implementing Risk Management in Your Marketing Department

Winners & Losers - Reward thorough risk assessment, not just project scores

Avoid creating the “Risk Police” - Gamers creatively and artfully avoid full disclosure

Watch out for:

• Sunshine Club - Believe in the power of positive thinking

• Pathological Optimists (aka Marketing and Sales Managers) – “If we just work hard enough…”

Reject projects over $X threshold without accompanying risk assessments.


Recommended Reading:

By Sam SavageAdjunct Professor, Stanford Universitywww.Analycorp.com

By Glenn KollerRisk COE Leader – BP

www.amazon.com


For More Information…

[email protected]

thank you.

E-mail me for a copy of the white paper describing this process

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Marketing npv how much risk bma webcast may '10