Low Friction Marketing

What does marketing mean to your organization? Is marketing an operational expense or a profit center? The difference is not academic. It can mean leaving thousands or millions of dollars in profits on the table. In fact, marketing should be a leveraged asset to your company; it should transform a small operational investment into a much larger bottom-line improvement, today and overtime.
Exceptional marketing transcends the sum of marketing activities. This is a case where the 'whole' is much larger than the parts. Two companies can easily invest the same time  and money into equivalent marketing activities and still achieve completely different results.
So how to know the difference? Let's start from the beginning. You hire a marketing expert. She looks the part; from fashionable dressing, to accentuated body language, to chic enunciation. All her descriptions rely on colorful images that seem to float in midair. Her marketing strategy is loaded with the latest trends in social media. Needless to say, it's hard to argue against any of it.
But how effective is all that? A little over 12 Years ago, marketing gurus exulted the value of Flash coding. Flash promised to be a fantastic way to make your website stand out over the crowd while making it much more interesting and entertaining. Thankfully, time proved that your online consumers don't have the attention characteristics of a two-year-old. After every website in the planet attempted to maximize the use of Flash, the hyperactive graphics slowed downloading and made them all look commonly noisy and annoying. Rather than standing over the crowd, they all became the crowd.
Today, we have worked our way back into the time-tested method of simplicity. The almost pale looking websites of today are easier to read and navigate. There's a lot to be said about simple and effective messaging.

Yes, time proved that Flash gurus were wrong. This is because time is a ruthless judge. Almost all the must-have marketing trends of yesterday have reverted over time. Even AMC's Pacer was revered by the gurus after its launch. Disgusting indeed. I anticipate that the same reversion to the mean awaits the must-have trends of today. Regression from these extremes is normal.
But how is it possible? Aren't we a society that constantly demands progress? Don't we need marketing to evolves at the same pace as technology? Well, the answer is no. As for the reason, it's a simple one. Humans don't evolve at the same rate as technology. Our bodies have hardly changed for the last million years. While our mental processing has increased, we're doing it with the same old hardware.
Meanwhile, our environment is as noisy as ever. The number of things clamoring for our attention have certainly increased. As a result, it's simple and clear messages that gain our attention.

Think of the fact that tens of thousands of the most brilliant engineers and marketers continue to design ever more complex remote controllers for the many electronics around us. Every extra button promises to open a gate to a new feature. Moreover, consumer electronic manufacturers argued that a dependency on specifications made innovative technology intrinsically male. In other words, a larger number of buttons meant a higher degree of masculinity. Not surprisingly, they were very wrong. Remote control users, male and female, continued to ignore most of such buttons. Average users relied on a few familiar buttons for their operational needs. This meant that, to most people, most evolutionary changes in technology remained unnecessary.
And then something brilliant took place. Apple introduced the iPod. A little electronic gizmo smaller than most remotes. Remarkably, the iPod needed only two buttons to give access to a plethora of features and functions. The rest, as they say, is history. A revolution in consumer acceptance took place. Apple's products, lacking technological superiority over their competitors, became incredibly successful thanks to their simplicity. Contrast this with the fact that NOKIA phones where once the most advanced cell phones in the pre-smartphone era. Still, NOKIA sales in the biggest market in the world, the US, failed against all metrics. Apple's experience demonstrated that a holistic approach to marketing is paramount. It's essential to understand users and their nature. Humans gravitate towards simplicity.
In engineering terms, we're talking about low friction interfaces between the technology and the user. Any engineer will easily understand the idea that low friction is essential when designing a mechanical device. An engine with too many rods, exchangers, transformers and connections will result in excessive friction and a subsequent loss of energy. Aside from being deficient, the engine will inevitably self-destruct.
Generally, low friction is achieved through minimalist designs. In the same way, the conversion from technology to user experience goes through different interfaces that can result in predicted losses and perhaps catastrophic failure. This is what happens when your products and services are rejected by consumers regardless of innovation value.
BOSE makes some of the lowest quality consumer electronics products in the world. Have you ever heard professionals in the industry say "no highs, no lows, must be BOSE?" Still, these guys are masters of low friction selling, marketing and use. As a result, their consumers love BOSE widgets so much that they're willing to certify their affinity by paying the highest price premiums in the industry. Yes, BOSE like Apple know the bottom line value of low friction marketing.
But isn't marketing only about advertising and using social media? Again, no. Opening an Apple device is such an experience that hundreds of people document the process and share it over YouTube for anyone to see. Look it up. This means that properly designed packaging can give so much satisfaction as to create a viral wave. Talk about marketing effectiveness. Two companies create packaging at the same expense. One goes unnoticed while the other increases sales by transforming packaging into a profit center.
The American Marketing Association defines marketing as "creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large." They have clearly adopted the holistic view. Notice that their definition is not limited to just creating demand for a product or service. It is also worth considering the fact that they're not saying anything about social media which is today's buzzword everywhere.
Look at any marketing job description today and you will find that every one of them demands search engine optimization (SEO) and social media excellence. Under such conditions, Steve Jobs would never land a marketing job. Both SEO and social media reflect expertise on database and algorithm design. Neither have anything to do with understanding human nature; something that separated Steve Jobs from the rest.
Before our ubiquitous use of smart phones and tablets as personal assistants, Apple had a product called Newton that require a stylus. There's no doubt that the Newton deployed the latest and technology at that time. Still, Steve Jobs discontinued the product because the need for a stylus meant that consumers couldn't use their fingers to operate it. The stylus was an unwelcomed additional step in the user's experience. Steve Jobs waited until touchscreen technology made the iPad and iPhone possible. To create incredible success, Steve Jobs focused on human nature rather than technology.
But can all job listings demanding SEO and social media expertise be wrong? Is it possible that social media is useless? Unfortunately the answer isn't so simple. Yes, most human resource departments are blinded by the social media fad. The noise is deafening in this zero-sum game.
Yet, social media use doesn't have to be a waste of time. Consider one of the most expensive kitchen utensils available in the market: a Bledtech blender. Yes, even something as basic as the time-tested kitchen blender can become exciting enough to go viral. But simply going viral isn't valuable enough. Real value resides in the tens of thousands of consumers who happily opened their wallets to pay a five-times premium for one of these machines. Blendtec created a series of YouTube videos that highlighted the durable nature of their blenders. Through a simply-produced series of videos, viewers can indulge all their destructive desires as anything from cubic zirconia to iPhone's are pulverized by a Blentec blender. Everything becomes liquefied; literally. Even Costco couldn't ignore the videos'effectiveness. In a world of highly commoditized products with perpetually lower profits, Blendtec found a path to extreme profits and a much wider distribution network than would normally be the case for such a niche product. Throughout, Blendtec's advertising costs remain very low by all marketing standards.
And then there's those who spend just to spend. It's said that Coca-Cola knows that 50% of their marketing budget is wasteful. Their problem is that they don't know which 50%. Don't make the same mistake. Many companies treat marketing expenses as pacifiers. Their leaders are emotionally satisfied only after continuing to spend on the same untested marketing efforts. Department managers are giving their marketing budgets with the expectation that they will spend all the funds. This is detrimental to your bottom line and produces no value to society. Everybody loses.
In a nutshell, understand your users, consumers, partners, distributors, buyers, sponsors and even your own salespeople. Focus on their fundamental nature. Make products and services that they all can resonate with. Communicate such resonating values to all of them in a simple and succinct fashion. Reduce all interface frictions. Measure all performance and don't waste your money. Finally, don't follow the herd and deploy low friction marketing. To be remarkable and effective, it's essential that your marketing stays clear of all trend noise and lands precisely over the fundamental human nature.

Less In, Less Out - Today's International Trade

Would you say business is booming when both inventory purchases and sales are down? Of course not. The same dire reality applies to nations like ours.

US International Trade
2013-07-03

Today, Haver Analytics reported their monthly data on US international trade. On a year to year basis, both exports and imports are at best near zero.
Most worrisome is the fact that the three and a half years trend is stubbornly down. If the US was a business, its business would be shrinking. If the President was the CEO, he would be fired.
Industrial companies, like Caterpillar, and the agricultural complex were completely oblivious to our economic problems of the last five years because international demand for their products continued to be robust as middle classes expanded everywhere. These new groups demanded better roads and more beef, which is much less efficient as a nutrient than say corn.
The fact that the US dollar fell below historic lows meant that everybody could better afford our products. But the trend is no longer robust. In fact, the risk is that the Dixie, the name given to the dollar by Futures traders, may increase now.
An increase in the value of the dollar is one of the key indicators of deflation. This and lower US international trade could signal  the beginning of a period when assets lose value. Just like last year's cell phone is now worthless, your inventories could face a net loss in value if deflation takes hold.

Dollar Futures (2001 to 2013)

Deflation is generally recognized as an important problem during the Great Depression. It is not clear, though, whether deflation was the cause of the Depression or just a symptom. The argument persists.
What is clear is that deflationary periods pose different challenges to businesses. Computer manufacturers like Dell for example, know well that they must create manufacturing models that reduce the need to inventory any more parts than absolutely necessary. In their segment, extra parts lose all value in just a few months after purchase. Most businesses, on the other hand, sit on inventory for longer. There are plenty of small local retailers who struggle to turn their stock more than once per year. This even happens to apparel retailers. In apparel, manufacturers rotate product lines at least four times per year, something that their retailers can't even dream of doing. As a result, these retailers are forced to discount their older models or else risk losing them all together.
The need to discount something to try to find the price where new buyers are trading is deflation; which is at the core of what I want you to get from this post. If the macro indicators are truly giving us a view into what the near future will bring, then you need to be concern with the effects of deflation.

Deflation Risk

Keep an eye on your inventory levels. Extra inventory should be converted to cash ahead of deflation. Remember that during deflation all assets go down in value while dollars goes up. Having extra dollars will actually be the smart thing to do since their purchasing power will go up during the deflation.
Recall that after oil and commodities skyrocketed in 2008, we experienced a short deflation. The dollar went up while oil, copper and even gold dropped.
This time, gold may not fall as it did before. Gold is both an asset and a currency. It is highly possible that as the Europe drops, gold's currency value may compensate for asset value loss.
But this article is not about gold but about your business and your business holds assets in the form of inventory. keep an eye on the price of the dollar and the size of our national and international economic activity. More expensive dollars or less economic trade will continue to point towards deflation risk.
Don't count on the Fed's money printing as a solution. The so called Liquidity Trap has rendered all the added liquidity from Japan, Europe and US useless. Inflation from too much liquidity is taking place not within the real economy but with bonds and dividend paying stocks. Bonds are tanking as we speak.
If you see deflation in the horizon, plan to eliminate low velocity inventory, those that do not sell all of the time. Use that cash to take advantage of the opportunities that will come soon after.

Time: Costly Growth-Currency

A manager growing a business at the same rate as that of the industry is not growing anything. Credit can't be given for industry growth. Industries grow due to macro factors, like demographics, and not due to any single person. Paraphrasing President Kennedy: when the tide rises, even terrible ships go up. Yes, I butchered it. But it sends the right message. To measure real performance, take the company's growth rate and deduct the industry's rate. A positive number will mean expansion at the expense of competitors; which is a great thing.
As the residential boom gained steam after the turn of the century, many undeserving businesses thrived. Anyone could get a truck and a small crew to begin installing any of the many products going into the new mac-mansions. Success was almost guaranteed. Bad business models grew, leaving their managers with the impression that they had the magic touch. It is well known that success makes people think to be smarter than they really are. Growth accelerated and the party went on. Then, all of a sudden, the bottom fell off in April of 2006. The crews were fired and the trucks repossessed. Small business owners all over the nation were left wondering who took their success away.
What success? They just rode the wave until the wave crashed.
As a manager, you should always have a degree of skepticism about success. Take credit for what you have achieved but give credit where credit is due. If, for example, price inflation makes revenue go up, acknowledge that sales are up because of unit price increases. A quick count of units sold will usually reveal the truth. Likewise, mistakenly buying too much inventory right before the competition runs out of theirs is plain luck. I don't know about you, but I would rather be lucky than good. If the market gives me a freebie, I will take it and credit the market without a second thought.

Now that we have taken these extrinsic factors out of our growth chart, it would seem that there is not much left. Such is the impression that many small businesses have. While claiming to have a culture of aggressively driving growth, many companies really just sit still. Their managers are blinded to this fact. They thus feel no need to push for growth alternatives.
So, assuming that they would open their mind, how could they buy growth? Put simply: with resources. It costs time or money. Sometimes business intelligence helps get a discount; but for the most part growth must be payed with time, money or both.
A business that grows organically is paying for growth with time. In America, there are about a million companies with sales between one and four million dollars. A large portion of these has been in business for over 20 years. Often, their owners started with not much and grew their investment through lots of personal effort. No doubt that these owners have made a descent living as their business grew. But anyone who thinks that organic growth came at no cost should think twice.
To find the real value of time, just ask one of these business owners if she would do it again. Would she start from scratch again today? Would they spend another 20 years to duplicate what they have achieved? Chances are that they wouldn't. You see, time is viewed as free by young people who are just starting and seem to have a surplus of it. But as they grow older, time seems scarce and thus much more valuable. Building a business organically, it turns out, is a very expensive alternative.

20 years ago, an entrepreneur without any idea of the cost of time started a business. Now, with the benefit of hindsight and experience, the same entrepreneur would not start the business again today. This point, I think, highlights why business owners who reach yearly sales between one and ten million dollars run out of steam. Companies everywhere struggle past this point in their life. I call this difficult time: corporate puberty, as it is a time when corporate identity comes into question. Intuitively, businesses just don't want to grow in the same way as they had, despite consciously claiming to be seeking growth.
The dichotomy of wanting-growth but really not-wanting-growth therefore originates from a lack of perspective. It simply has not occurred to these managers that they can buy growth with other currencies. Large businesses know this well. Small businesses are mostly blind.
Large businesses and their professionally trained managers know that acquiring other businesses is a good alternative to growing organically. It is well understood that, in general, it takes about five years for a business to expand into a new category and reach an adequate level of know-how. Sometimes, five years is simply too much to pay.
For example, a small businesses selling installation parts to small automotive repair shops may want to improve efficiency and gain additional business by adding delivery trucks. The problem is that efficiently and effectively running delivery trucks is not the same as just owning a company vehicle. There are correct and terrible ways to manage maintenance and routing concerns. There are also best practices on things like how to handle the associated changes to the balance sheet. Why not eliminate the risks and just buy a small delivery company? Even if the company presently serves a different industry, delivering cakes for example, the ideal acquisition target must have developed great expertise on operational efficiency.
From the outside, it would seem foolish for an installation parts business to buy a cake delivery business. But from the inside, it is a simple math calculation. At a low enough price, the cake delivery business could be acquired in lieu of having to pay years for the know how. If the acquiring company is large enough, the proportional cost of time increases while the proportional cost of money decreases. This means that money is discounted the larger the acquiring company is. This is because rapid deployment of the new service will give the acquiring company years of advantage over its competition; creating benefits that will be multiplied by the large number of customers. The gains could even offset the costs associated with shutting down the cake delivery business.
In this case, the right growth alternative was just a matter of thinking laterally and applying simple math. Likewise, sales growth could be acquired when hiring key industry people or by buying shelf space. Large retailers often sell the right to key locations to vendors willing to take the risk. For those who understand the benefits, there isn't even a question about the value of the space. But for companies without the experience, the idea of paying tens of thousands of dollars per moth for a single hook on a wall may be overwhelming. Unfortunately. many small businesses fall under this category. Their owners, as we described above, know no other way of growing but organically. To buy space as a way to buy business seems as high risk.
I know that there are plenty of businesses that fail to properly incorporate acquisitions. But if you think that growing organically comes on a straight line, you are mistaken. Both ways of growing have equally large pitfalls. There is a reason why it takes so much time for organic growth to take place.
Many will argue that acquisitions are more prone to internal silos and political infighting. But businesses that grew organically also display silos. The difference is that, because acquisitions don't cost much time, silos pop up quickly after each acquisition. On the other hand, silos take much more time to develop within organically grown companies because of the slow pace of growth. As a result, business anomalies like silos have nothing to do with the way a company grows but with management competence.
Most small businesses think that they have some sort of special culture and that bringing in a new group of employees will sicken their culture. To me, this is nonsense. A company that grows organically will also have to add just as many new employees from outside of the company. The problem is not the number of new employees. The problem is managing the rate of change. Organic growth grants more time for adjustments.
Some say that a new employee will not hold as much political power as a dozen new employees. This is true, although it again is a management competence concern. It is a matter of management rising to the challenge.
Unfortunately, management competence is where small companies fall short. Their management is generally not up to par when trying to properly handle these constraints. As a result, acquisitions don't create cultural breaks; poor managers do.

With capital at hand, I would chose to acquire another business by paying with money rather than paying for it with time. At least I can get to look for the right business features immediately rather than to have to wait a long time to find out. Who knows; things could change before we get to have success with the new organic venture.
Moreover, I see paying with time as being similar to writing a blank check. I much prefer to know that, even when things go off course, the cost will stay within a manageable range.
I suggest that you see growth as something than can be bought with time or money. I also wish for you to see that both time and money have a value. Specifically, don't discount time. Value it and preserve it.

Bank loans not for start-ups

Starting up? Do you have a great idea that could be launched and transformed into a successful business? Let me guess. You need funding.
For many entrepreneurs a bank is the first place where they think to look. Unfortunately my experience has shown that even in normal times, which we are far from experiencing now, banks are quite risk adverse. Therefore, I would definitely not suggest for you to waste your time with one. Don't take me wrong. You could try as a way to learn from the experience. But doing the search with the hope of actually getting money will, in my opinion, be wasteful; especially when there are many other things that you need to get done to make your dream a reality. To understand why I am being so direct, think of loan opportunities in terms of what will you use to repay the loan.

• Past sales - You can pay a loan with the money that you already have earned. The collateral is the money already in a bank. This carries the lowest risk for banks. As a result, they love them so long as the company has a good credit record. In reality, these loans are for businesses that have already succeeded and somehow found a need for cash. No, it is not impossible. Apple and its massive balance sheet in foreign accounts needed to borrow to pay dividends in the US without incurring taxes from importing its foreign cash, for example. But since you are starting up, you have no sales and have yet to earn any money yet. You must therefore be excluded from this type. 
• Present sales - You can pay the loan when you get paid for sales that you are making right now. These could usually be Purchase Order (PO) loans or Factored orders. The collateral is the invoices being raised. In many cases, banks seek other collateral. The risk is now higher since invoices may not get paid for many reasons. Buyers could complain about the invoiced amount, the product quality, the method of delivery and many other things. Thus, many retail banks will not take on these loans, leaving you with having to seek commercial banks. Be ready, at this level, interests are not what make loans expensive. Fees can turn seemingly low interest loans into expensive monsters that will end up costing you an equivalent to 20% more in annualized interest. Here again, this may not for the typical start up. You do not even have the the inventory needed to attract the kind of buyers or the volume in business that would allow you to explore these loans.
• Future sales - In this case, you would pay the loan after monetizing or selling the inventory that you have at hand. In other words, there are no sales yet and you are trying to use the inventory as the collateral. You are now far from most bank's risk profile. The answer you will most likely hear from bankers if you ask for these loans is: "if you can't sell you inventory, what makes you think that we can?" Obviously if you had prior success selling the inventory already, you would have no need for a loan, have the cash to back up a different loan or at least have the invoices from present sales. Start up or not, you are out of luck. 
• Way-in-the-future sales - As in after I build a team and get a place to work from and get my idea turned into a great success and get CNBC to talk about it during Squawk Box. In other words, the idea and your enthusiasm, become the collateral. Good luck. The only banks that would touch these are those that issue unsecured loans: credit cards.

Now that you do not have to take my word for it. I found a great article titled How Entrepreneurs Qualify for Funding from Banks by Martin Zwilling that will surely prove helpful to you if you happen to the in the 0.1% of entrepreneurs. If nothing else, he does a great job describing the characteristics that will help you with all other sources of funds.

To me, the fact that banks are risk adverse means that they are a poor match for risk seeking entrepreneurs. Neither side is wrong; they are both just seeking different things. Banks are happy picking up pennies in front of a slow moving steam roller. Entrepreneurs want to swing for the fences even if it means striking time and time again. 

Financing is always risky; the difference lies in how risky it is. At the core of this distinction resides the separation between the patient capital that builds infrastructure and the risk-intolerant capital that rushes out of a country's financial markets at the first sign of trouble. These differences help explain why bank financing is far from normal today. The economy is flush with risk-adverse capital and lacks equity-underwriting patient capital. As a result, consumers and small businesses will have to pay large premiums for loans, if they can get loans at all. We should also expect to see many more flash crashes, where capital rushes out of the US towards other markets as was the case during the hacked AP Twitter account crash. To compound the issue, banks borrow money short-term and lend long-term. So the pervasive uncertainty about the nation's future does not help banking models. Perhaps one day in the future, when the country can find White House leadership that promotes a normal business environment while supporting entrepreneurship as opposed to punishing success, will banks begin offering real opportunities for new businesses. Until then, don't hold your breath and find other ways to fund your great ideas.