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Marketing npv how much risk bma webcast may '10

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Presentation by Pat LaPointe of MarketingNPV to Business Marketing Association on how to identify, measure, and manage risk in marketing programs.

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Marketing npv how much risk bma webcast may '10

  1. 1. How Much Risk is in Your Marketing Plans? Pat LaPointe Managing Partner ©2010 MarketingNPV LLC. All Rights Reserved
  2. 2. The Finance Mind… Profit Growth Risk ©2010 MarketingNPV LLC. All Rights Reserved
  3. 3. Who We Are  Exclusive focus on marketing measurement  Objectively bridging marketing/finance gap  Publishers of the MarketingNPV Journal  Advisors to Global 1000 clients including: Qwest ©2010 MarketingNPV LLC. All Rights Reserved
  4. 4. 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. ©2010 MarketingNPV LLC. All Rights Reserved
  5. 5. How Much Risk is in Your Marketing Plans? ©2010 MarketingNPV LLC. All Rights Reserved
  6. 6. Crab buffet leaves Red Lobster all wet By Lauren Weber, Reuters NEW 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? ©2010 MarketingNPV LLC. All Rights Reserved
  7. 7. 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? ©2010 MarketingNPV LLC. All Rights Reserved
  8. 8. 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. ©2010 MarketingNPV LLC. All Rights Reserved
  9. 9. Enter the “Flaw of Averages”  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). In this case: 1. Average “take” rate - WRONG 2. Average # servings per “cover” - WRONG 3. Average wholesale cost/lb. - WRONG Courtesy of Sam Savage ©2010 MarketingNPV LLC. www.Analycorp.com All Rights Reserved
  10. 10. 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. ©2010 MarketingNPV LLC. All Rights Reserved
  11. 11. Two Types of Risk Risk of Uncertainty Risk of Abject Failure ©2010 MarketingNPV LLC. All Rights Reserved
  12. 12. Dealing With Uncertainty  What is the probability of a certain outcome? • Statistical distributions? • Experiential distributions? Simulation helps identify the probability of achieving unacceptable results ©2010 MarketingNPV LLC. All Rights Reserved
  13. 13. Red Lobster Uncertainty Known: - Price per meal $22.99 - Fixed cost per meal $3.00 Uncertainty #1 - Pounds per customer 30% 25% 20% 15% 10% 5% 0% ©2010 MarketingNPV LLC. All Rights Reserved
  14. 14. Red Lobster Uncertainty Uncertainty #2 - Price per pound 30% 25% 20% 15% 10% 5% 0% ©2010 MarketingNPV LLC. All Rights Reserved
  15. 15. Red Lobster Simulation 10,000 scenarios evaluated in 2 minutes Only 45% chance of breaking even! ©2010 MarketingNPV LLC. All Rights Reserved
  16. 16. 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. ©2010 MarketingNPV LLC. All Rights Reserved
  17. 17. Developing a Risk Management Plan – 4 Steps: ©2010 MarketingNPV LLC. All Rights Reserved
  18. 18. Step 1– Identify Potential Risk Factors ©2010 MarketingNPV LLC. All Rights Reserved
  19. 19. 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 ©2010 MarketingNPV LLC. All Rights Reserved
  20. 20. Example: New Product Launch Contributing Factor Diagram Temp labor Yuan spikes Market tightens Sales materials Supplier ships are delayed Via air freight Lead volume Additional is depressed Terrorism threat Cost-of-goods paralyzes markets Dockworkers go On strike Competitor Reduction in Launches channel Incremental promo to respond New Product Sales Launch NPV $1MM ©2010 MarketingNPV LLC. All Rights Reserved
  21. 21. Step 2 – Guesstimate the Economic Impact of Each Factor Risk Factor Expected Cost Range Dockworkers Strike $5,000 to $10,000 Temp Labor Cost Increase $7,500 to $12,500 Competitive Activity $40,000 to $80,000 Sales Materials Delayed $75,000 to $100,000 Yuan spikes $80,000 to $130,000 Terrorism Threat $900,000 to $1,000,000 ©2010 MarketingNPV LLC. All Rights Reserved
  22. 22. Step 3 – Create a Risk Management Matrix Impact scale $1,000,000’s Terrorism threat $100,000’s Yuan Spikes Materials Delayed Competitor Launches promo to respond Temp labor $10,000’s Market tightens Dockworkers go On strike $1000’s 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Probability scale ©2010 MarketingNPV LLC. All Rights Reserved
  23. 23. Example: National Clearance Sale Risk Factor Dockworkers strike Temp labor tightens Yuan spikes Materials are delayed Terrorism threat Competitive response ©2010 MarketingNPV LLC. All Rights Reserved
  24. 24. Step 4 – Action Plan for Each Risk Factor high TRANSFER MITIGATE - Insure against or - STOP! Rethink. Get a negotiate for vendor new plan. Magnitude of Impact acceptance. ACCEPT MANAGE - Ignore it. Focus on - Assign someone to bigger issues. monitor and enact contingency plans. low low high Probability of Occurrence ©2010 MarketingNPV LLC. All Rights Reserved
  25. 25. Step 4 – Action Plan for Each Risk Factor Impact scale Tolerance $1,000,000’s Terrorism threat MITIGATE TRANSFER $100,000’s Yuan spikes Materials Delayed Competitor Launches promo Tolerance to respond Temp labor $10,000’s Market tightens Dockworkers go On strike MANAGE IGNORE $1000’s 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Probability scale ©2010 MarketingNPV LLC. All Rights Reserved
  26. 26. Risk-Managing a Portfolio of Projects Revised Project Forecast NPV Risk Adjustment Forecast Loyalty Program $5,500,000 1 <$2,200,000> $3,300,000 2 Direct Mail Campaign $4,630,000 2 <$800,000> $3,830,000 1 Pricing Promotion $3,150,000 3 <$2,500,000> $650,000 6 Sales Channel Incentive $2,750,000 4 <$1,150,000> $1,600,000 3 Training on New Tools $1,800,000 5 <$900,000> $900,000 5 Customer References $1,650,000 6 <$150,000> $1,500,000 4 Totals $19,480,000 <$7,700,000> $11,780,000 ©2010 MarketingNPV LLC. All Rights Reserved
  27. 27. Risk-Managing a Portfolio of Projects Establish ID Risk Common Factors for Start Begin with Unit of each proposed Measure Initiative ID initiatives conditions for each risk Factor Report Outcomes Risk Managing Assess and a Portfolio of Initiatives Economic Learnings Impacts of Each Factor Measure Assign Risk Probability Realization to Each Factor Risk Managing Develop Individual Initiatives Adjust Expected Mitigation Strategies Value for Initiatives Implement Select Active Initiatives Mgmt. Plan to Pursue Transfer Determine Factors as Risks to be Appropriate Accepted ©2010 MarketingNPV LLC. All Rights Reserved
  28. 28. 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 Bargerhuff VP Marketing ©2010 MarketingNPV LLC. All Rights Reserved
  29. 29. 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. ©2010 MarketingNPV LLC. All Rights Reserved
  30. 30. Recommended Reading: By Sam Savage Adjunct Professor, Stanford University www.Analycorp.com By Glenn Koller Risk COE Leader – BP www.amazon.com ©2010 MarketingNPV LLC. All Rights Reserved
  31. 31. For More Information… E-mail me for a copy of the white paper describing this process thank you. www.MarketingNPV.com pat.lapointe@MarketingNPV.com ©2010 MarketingNPV LLC. All Rights Reserved

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