Marketing npv how much risk bma webcast may '10

How Much Risk is in Your
Marketing Plans?

Pat LaPointe
Managing Partner

©2010 MarketingNPV LLC.
All Rights Reserved

The Finance Mind…

Profit

Growth Risk

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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

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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.

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How Much Risk is in Your
Marketing Plans?

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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?

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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?

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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.

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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
www.Analycorp.com
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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.

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Two Types of Risk

Risk of Uncertainty Risk of Abject Failure

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Dealing With Uncertainty

 What is the probability of a certain
outcome?
• Statistical distributions?
• Experiential distributions?

Simulation helps identify the probability
of achieving unacceptable results

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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%

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Red Lobster Uncertainty

Uncertainty #2 - Price per pound

30%
25%
20%
15%
10%
5%
0%

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Red Lobster Simulation

10,000 scenarios evaluated in 2 minutes

Only 45% chance of breaking even!

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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.

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Developing a Risk Management Plan – 4 Steps:

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Step 1–
Identify
Potential
Risk
Factors

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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

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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

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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

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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

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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
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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

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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

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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

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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

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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.

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Marketing npv how much risk bma webcast may '10

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