July 10, 2012 Leave a Comment

PEST analysis for marketers: Economic factors

Pest analysis

Have you ever heard of a PEST analysis? It’s not something you do with annoying people on Facebook or around the house. It’s a basic form of business analysis that looks at four key “big picture” factors that might influence your business, factors in the environment around you and your company. These factors are political, economic, social, and technological. Let’s take a look this week at what these might mean for your business and marketing efforts.

Today, we’re going to look at what I think is arguably the largest of the factors in PEST, the Economic factors. Why do economic factors matter so much? Fundamentally, if your customers (and their customers) have less money to spend, your business will have less potential growth. If your customers have more money to spend, your business will have more potential growth. We’ve seen this to be painfully true over the past 10 years as the economy has jumped from boom to bust and entire sectors thought to be “sure bets” turned out to be anything but.

The way to make economic factors work for you as a marketer is to see the warning signs ahead on the road before they become crises. Pay attention to leading economic indicators that have meaning to your business. If you’re a B2C company, you should be very tuned into indicators like consumer confidence or consumer credit, as these tell you in advance how your customers are feeling. Low consumer confidence may mean having to change your pricing strategy or product offering – no matter how loyal consumers are, if they don’t feel safe spending money on you, they won’t.

If you’re a B2B company, be looking at things like the ISM indices, which tell you the state of companies and demand for their services. Businesses that serve small businesses should be paying attention to measures like the NFIB business sentiment index.

No matter what business you’re in, there’s a good chance that there is a leading economic indicator that serves your industry. You can even construct your own economic indicators out of publicly available data. For example, let’s say you were a B2B company. If any of your customers are publicly traded on the various stock exchanges of the world, then you could assemble a portfolio of those stocks and watch them as an aggregate index. When the portfolio drops in value, you know that it won’t be long before you start hearing from those customers.

How often you need to look at your indicators of choice is highly dependent on your business cycle and your customers’ business cycle. Some businesses need only to look at the trends on a quarterly basis. Some businesses need to watch sales receipts daily. It all depends on how agile you need to be in order to keep pace with change in your industry.

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Filed Under: Advertising, Economy, Marketing
April 11, 2012 Leave a Comment

Facebook, Instagram, and the P/E Ratio

For those of you who are not finance nerds, there’s an important term you’ve likely heard in the last few months, especially with regard to acquisitions and mergers. That term is the P/E ratio, or price to earnings ratio. This is a number that indicates a level of belief in a company – the higher the P/E ratio, the greater the confidence that investors believe the company is capable of growing and delivering profits on their investments.

Let’s take a look at an example. Apple, Inc., the most valuable company in the world at the moment of writing, has a stock price of $628 per share. It has an earnings per share of $35.11. If we divide $628/$35.11, we get its P/E ratio, roughly 17.90.

NASDAQ:AAPL: 635.57 1.13 (1.13%) - Apple Inc.

P/E ratios aren’t terribly useful in and of themselves; what they’re really good at is telling us a story about a set of companies. For example, Apple has a P/E of 17.90. Dell Computer at the moment has a P/E of 8.64. HP has a P/E of 8.21. Investors think, therefore, that Apple is roughly about 2x more valuable than its nearest competitors. They think that Dell and HP are about equally valuable.

What does this mean for Facebook? Well, right now various folks are saying its initial valuation is about $100 billion, and its current earnings are $1 billion. Since it hasn’t gone public yet, we don’t have an earnings per share number, but the closest P/E ratio is still 100, based on its current earnings and valuation. Think about that for a second. Investors think Facebook is more than 5x more valuable than Apple based on P/E ratios.

Let’s evaluate Facebook’s nearest competitor, Google. Google’s current P/E is 21.07, so again, investors taking a gamble on Facebook are in effect saying they think it will be 5x as valuable as Google. Now here’s the question: does that match up with reality? Will Facebook truly eclipse the value of Google and Apple? Time will tell.

Now let’s talk about Instagram briefly and Facebook’s acquisition of it. Instagram has no revenue stream. None. Zero. Which means that you get a nice DIV/0 error if you try to do a P/E ratio analysis on it. The closest thing we can come up with is that they raised $57.5 million over two years with the most recent round of funding at $50 million. Now do the math with that as your “earnings” and it places a speculative P/E of 20 on Instagram. Do you think that a company with no revenue model is as valuable as Apple, Inc.?

These are obvious signs of a bubble in the space, something that I spoke to recently in an interview with Marc Snetiker of Entertainment Weekly. What should you be looking for? If you’re in a startup now or a company that wants to ride the bubble train, expect an all-out burn to acquire audience as fast as possible. If you’re looking to make investments, ignore P/E and focus on the fundamentals. If you’re looking for the next big thing, take a look around in the space for whose P/E ratios are out of line with the rest of the market and industry, because that’s probably an indicator that they have enough buzz to temporarily defy the fundamentals of the market – for now.

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Filed Under: Economy, Money, Social media, Social networks
March 28, 2012 1 Comment

Why macroeconomics matters to marketers

Those of you who follow me on social networks and/or read my newsletter know that on any given day, 20-40% of what I share is about economics rather than marketing. That seems strange and very off-topic for someone whose supposed focus is about marketing, don’t you think? Here’s why it’s not: for me, understanding economics helps me to better understand the demands that will be placed on marketing.

Signs of the recession - a psychic ATM?

When times are good and businesses are growing, flush with cash and eager to expand, marketing’s role tends to shift towards the upper end of the funnel. Let’s get more eyeballs, let’s get more people talking about us, let’s build our brand and build some buzz.

When times are lean and money is tight, marketing’s role tends to shift towards the bottom of the funnel. We need qualified leads. We need conversions. We need more customers to be buying immediately or as quickly as possible.

Knowing where the economy is (and where it may be headed) allows you to plan better for what will be asked of you as a marketer in the weeks and months to come. If you can foresee, for example, that gasoline prices will be $4/gallon in about 6 weeks and your audience is a B2C audience, you automatically know that there will just be less cash available.

Here’s an example. I recently tweeted that Saudi Arabia launched a fleet of tankers filled with oil to the US to knock down oil prices closer to $100/barrel, down from $1.25. It’ll take at least 30 days to get to Western refineries and then another 30 days or so to work its way through the refining process and get turned into the stuff you buy at the pump, which means that by late May, the oil will be in the system and hopefully prices should stabilize around $3.50-$4.00 a gallon at the pump. That’s ideally timed for the summer driving season to kick off, which means that hopefully the consumer will be somewhat less strained on cash allocated to gasoline. That in turn means they’ll have slightly more cash available for purchasing.

Economics may be known as the dismal science, but without an eye on it, you’re leaving yourself open to the whims and fancies of the market, unable to foresee the future and plan accordingly for it.

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Filed Under: Advertising, Economy, Marketing, Money
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