Dark economic times ahead?

Posted by Christopher S Penn on Jun 7, 2011 in Economy, Money | 5 comments

Are you good at putting together the pieces? There’s a lot going on in the world, and individual pieces may not seem like much, but put together they can create an attention-getting picture. Here are a few pieces you need to put together right now.

1. Europe’s financial system is crumbling. Specifically, the European Union’s interstate monetary system is on the verge of a meltdown the likes of which we have never seen before. Tune into any financial news network for the latest. I prefer Bloomberg, personally.

2. The United States economic recovery is slowing down because the Federal Reserve has stopped pumping trillions of dollars into the economy for free. (incidentally, this is a great article that explains what the banks did with the money)

3. Our biggest export markets include China and Europe. China has already put the brakes on its economy to stem inflation. That’s one of the many reasons why the “recovery” hasn’t really felt like one, and why so many of your friends and colleagues are still looking for work – without a healthy increase in exports, US companies aren’t selling as much, which means we aren’t making as much, which means we aren’t hiring as much.

4. The fractional reserve rate requirements in the US are about 1%; in Europe, about 2%.

The bad news is this: because the world’s economies are so interlinked, because our financial systems are so interdependent on each other, the house of economic cards is extremely vulnerable. Not only that, but between banks leveraging themselves out the wazoo and consumers not experiencing any meaningful wage growth (which means no increased consumer spending), all it takes for a massive financial crisis (bigger than 2008) is one solid system shock.

How solid a shock are we in for? We’ve never seen an entire continent unified under one monetary system like the EU, which means we’ve never seen a system failure of that magnitude in modern times. That appears to be in the cards in the next year or so, unless the EU volunteers to break itself apart, which seems fairly unlikely. How big does the shock need to be? Just enough to overwhelm the fractional reserve requirements.

What should you be doing personally? Whether you’re a citizen of the US, the Americas, the Eurozone, or anywhere else, realize that we are all (for good or ill) in this together, and when things go south with the European financial crisis, the shockwaves will be felt everywhere in the industrialized world.

• Cash is your friend for operational expenses like daily life.
• Reduce the amount of debt you carry if you’re financially able to do so.
• Things like gold for long term capital preservation aren’t bad if you have the ability to buy some.

I’d stay away from investments at this point for a variety of reasons, not the least of which is that high frequency trading makes the market exceptionally vulnerable to system shocks. Consult a financial planner who has their fingers on the pulse of the world economy to get an idea of how you should diversify.

Are you running a business? Get ready for a slowdown. Beef up your database, beef up your lead generation, go full tilt on customer retention and be as flexible as you can with payments because your customers will be suffering as well. Treating them as well as you can (while not endangering your own finances) during rough times will earn loyalty that’s unshakeable.

If you’re thinking of making a career change, don’t you dare leap before you have something lined up. A miserable job that pays the rent is preferable to no job at all, and with the world economy on the edge, a system shock will make everyone go into turtle mode; hiring for anything except essentials is likely to dry up.

Always, always, always be building up your network. Grow it as strong as you can, because it’s the only thing that will save you if things go really badly. Jeff Pulver is fond of saying that we live or die on our databases, and that may literally be true in a very bad case scenario. You owe it to yourself and anyone you have responsibility for to be building like crazy right now.

I’ll take this moment to practice what I preach. Get connected:

• LinkedIn
• Twitter
• Facebook

What if things don’t go as badly as the predictions seem? What if things turn around? All this preparatory work will leave you with…

• a solid network you can rely on
• diversified financial investments
• employment
• cash to operate with

So even if these dire predictions are 100% wrong, you’ll still benefit from most of them. The only place you might lose out on is opportunity cost for not investing in the stock market.

I am not optimistic at all right now about the second half of 2011 and first half of 2012. There are far too many indicators that suggest rough seas ahead. Batten down the hatches.

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Mergers and Acquisitions 101

Posted by Christopher S Penn on Mar 30, 2011 in Money, Strategy | 2 comments

In the wake of big merger news like AT&T and T-Mobile and in the social media world, the acquisition of Radian6 and Salesforce.com, I thought I’d do a short series on the bare basics of mergers and acquisitions (M&A) and what they mean to you. Bear in mind much of this is very basic – there are tons of nuances and variations on every aspect of this post, but this should cover the very basic mechanics.

Why do companies go through M&A?

Companies do M&A for a few basic reasons:

1. Acquire new products. Sometimes buy is cheaper than build, so you as the acquiring company just buy the company outright, rather than mess around with licensing deals. Salesforce and Radian6 would be an example here.

2. Acquire new assets. Some companies will be acquired for non-salesable assets (as opposed to products to be sold). When Southwest bought Airtran, it was speculated that this was because Southwest wanted an Atlanta hub. Sometimes companies are acquired simply for their customer base or market share, as with AT&T and T-Mobile.

3. Acquire new talent. Google is notorious for doing this, such as with Jaiku. They wanted the engineers and grabbed the entire company to get them.

4. Reduce operating costs or increase scale. Sometimes two companies can achieve greater efficiency or greater scale by merging. In the corporate world, this is a synergy merge. For example, Proctor & Gamble acquired Gillette not only for the product line, but also for a greater scale of manufacturing capacity and cost savings.

There is an underlying reason for all of these, however: companies go through mergers and acquisitions for an endgame goal of improved financial performance for shareholders. Remember this fact.

What happens during M&A?

Typically, prior to a merger happening, both companies do their due diligence in examining each others’ operations and financial performance. The value of the target company is negotiated on, and if everything seems like it would work well enough, contracts are signed and the merging process gets underway.

The acquiring company buys out enough ownership in the target company to effectively gain control over it. In publicly traded companies, this is done largely by buying shares of voting stock until the acquiring company owns a majority stake. In privately held companies, this is done by buying out owners of equity in the company from just a single sole proprietor to a team of shareholders.

Once ownership is acquired, shareholders are paid for their stake in the company and then the process of actually merging two companies together begins.

What happens to employees?

If you’re a shareholder of the target company, you get paid a cash sum or get converted shares. For example, if you were an employee of GTE that held stock in GTE back in the day, your GTE stock got converted to Verizon stock when the acquisition completed.

If you’re an employee of either company, you are effectively on notice. Here’s the thing about mergers and acquisitions: in order to achieve greater financial performance (which is the sole reason for M&A as stated above), you have to immediately reduce redundancies and inefficiencies. For every overlapping role in either company, one position will continue on and one or more people will be laid off. Let’s look at the human side of the four examples above.

1. Acquire new products. Everyone not tightly associated with the new products is probably getting laid off in the target company eventually. In the example, Radian6′s product team and probably a few of its service team will be kept in order to sustain development and service agreements, but other folks may not be.

2. Acquire new assets. If the asset requires staffing, such as the Southwest/Airtran example (new routes in and around Atlanta mean staff to operate them), they’ll be kept. If the asset requires no staffing, such as a database, then the target company’s entire team will probably be let go.

3. Acquire new talent. If you are the target pool of talent being acquired, life is good. If you’re not, you’re being let go. In the example, Google wanted Jaiku’s team and bought them out, but likely shed everyone who was not the engineering team.

4. Reduce operating costs or increase scale. This is the messiest of mergers as people in both companies are under the gun to demonstrate why they should be kept. It’s effectively a corporate deathmatch: two employees enter, one employee leaves, and employees in the acquiring company as well as the target company are at risk.

Remember this above all else: mergers and acquisitions happen for improved financial performance. Anything that doesn’t directly contribute to that in either company with regards to mergers and acquisitions is up for grabs. Also, bear in mind that there tend to be as many exceptions as rules when it comes to mergers. For every example and case I’ve cited here, you can easily name 10 cases where the consequences were different, even down to the endgame goal. Time Warner’s acquisition of AOL got them anything but improved financial performance, for example. Don’t take this very basic, very brief look at M&A as a canonical guide to what will happen if your company is going through a merger.

In tomorrow’s post, I’ll share with you some things you can do to either make yourself ready to be employed elsewhere or defend your position in a merger/acquisition.

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Marketing White Belt: Marketing ROI

Posted by Christopher S Penn on Mar 22, 2011 in Advertising, Marketing, Metrics, Money, White Belt | 14 comments

Pick a term that is bandied about the most but understood the least and chances are it will be ROI, return on investment. Before we go any farther, let’s say a few things about ROI.

ROI is a financial term with an actual financial formula. There is no substitute for it and there are no factual, intelligent ways to weasel around it. Expressions like “return on influence”, “return on engagement”, and “return on conversation” are largely invented terms by people who don’t know how to calculate ROI.

That said, ROI is not the ultimate measure of marketing performance. ROI is an objective metric (an endgame metric that tells you if you’re there yet) only if cost containment is a priority for your marketing. If you are in a growth mode with an objective of capturing significant market share, ROI can actually be a hindrance to your marketing efforts because over-focus on it will prevent you from taking short-term losses in exchange for long-term potential gains.

So what is ROI? Simply put, it is the following formula:

Income Earned from Marketing Efforts – Marketing Expenses / Marketing Expenses = ROI

That is ROI. It’s a deceptively simple formula. The reason why it’s so deceptively simple is that there are a lot of components in each of the two areas.

Determining income earned from marketing efforts requires the use of a good CRM that allows you to track what marketing methods actually result in sales, and what the revenue of those sales is. For example, let’s say you sell chewing gum. To the best of your ability, you need to be able to track exactly how much gum you’ve sold to consumers at what price, by marketing channel. The last part is the catch. It’s easy to figure out how much gum you’ve sold, but much harder to figure out what marketing channel drove those sales. Online is relatively simple – using tools like Google Analytics to track checkouts at a virtual store makes that fairly straightforward. Offline is trickier and requires things like surveying and statistical sampling in order to accurately assess why someone bought a pack of gum.

Income can be even trickier to determine if it’s decoupled from marketing, as is often the case with wholesalers and resellers. If you manufacture alkaline batteries like Duracell or Energizer, there’s a good chance you use a distributor or reseller like a Walmart or Target to resell your goods. As a result, your marketing efforts to build your brand are decoupled from the actual transactions because someone else is handling the sales – and as a result, all of your brand-building effort may be for naught if a reseller fails to display your products effectively. One of the few methods that gets around this problem to some degree is coupon redemption. If a manufacturer issues a coupon, they can get an actual idea of a channel’s income generation potential by tracking how many coupons were issued vs. how many were redeemed from that channel.

The expense side of marketing is also fraught with danger, especially in fields like social media. Almost no one tracks the single largest expense in social media: time. Time is not free. Time has never been free. How much you spend in any marketing channel isn’t just a question of money leaving your bank account or corporate credit card, but time spent as money.

Here’s an example of determining time spent as money. Let’s say you’re in marketing and you earn $50,000 per year. The effective number of working hours you have per year is 52 weeks x 40 hours per week, or 2,080 hours. Your effective hourly pay, then, is $24.04 per hour. For every hour you spend on Twitter, Facebook, Quora, etc., you are effectively investing $24.04 of time as money in that marketing channel. Suddenly, channels like social media get very expensive.

So let’s put the two sides, income and expense, together in an example so that you can see what marketing ROI looks like.

Let’s say you decided to advertise using Google’s Adwords pay per click advertising. Let’s say you spent $500 in cash and 5 hours of your time (at a $50,000/year salary) to get Adwords up and running, and in turn, you earned $1,000 in sales of, let’s say citrus-scented headphones.

Do the preparation math:

• Income: $1,000
• Expense (cash): $500
• Expense (non-cash): $24.04 x 5 = $120.20
• Total Expense: $620.20

The ROI formula is Income – Expense / Expense, so $1,000 – $620.20 / $620.20 = 61.24%.

This is an excellent ROI. It states that for every dollar spent, you earned the dollar back plus 61.24 cents. Any business would be very pleased with that ROI and would likely ask you to invest a little more time and a lot more money if that result remains consistent.

Let’s try another example for the same person at the same company. Let’s say you’ve decided that Facebook is the hottest thing since sliced bread and you’re going to avoid outlaying cash on your Facebook efforts. You set up a Fan Page for your citrus-scented headphones, take 80 hours to set it up, administer it, manage the community, do outreach, etc. but you spend no money on it and you manage to sell $1,000 worth of those strange headphones. You’re feeling good about yourself – this social media stuff works, right?

Do the preparation math:

• Income: $1,000
• Expense (cash): $0
• Expense (non-cash): $24.04 x 80 = $1,923.20
• Total Expense: $1,923.20

The ROI formula shows $1,000 – $1,923.20 / $1,923.20 = -48% ROI. Uh oh. When you account for time spent as money, Facebook (in this example) is a money-loser. For every dollar of time you invest in it, you’re losing 48 cents.

This is where it’s decision time for you as a marketer.

Remember, if cost containment isn’t a primary goal, ROI isn’t the correct metric to be focusing on. If you’ve made the conscious and strategic decision to take a financial loss (in cash and time spent as money) in order to grow a long term opportunity, then this ROI of Facebook for citrus-scented headphones may be acceptable. However, if cost containment is a primary goal for your marketing department, you have to make the decision whether to adjust your Facebook strategy or cut it out and stop your losses.

Ultimately, ROI is just one way to measure marketing’s performance, but it’s one of the least well-understood ways of doing so. By walking through this calculation, you’ll realize just how difficult it is to calculate with great precision and how meticulous you must be in your tracking methods in order to capture even moderately good quality data. If you can do that effectively, ROI is yours to analyze, but if you can’t because of organizational structure or operational issues, then you’ll need to forego the use of ROI as a marketing metric.

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Marketing White Belt: Basic Methods of Making Money

Posted by Christopher S Penn on Mar 17, 2011 in Advertising, Marketing, Money, White Belt | 1 comment

At the end of the day, you have to make money in order to pay the bills and stay in business. There’s no avoiding that reality: somewhere, resources must be provided in order for you to do what you do, whether you’re a Little League baseball team or a Fortune 50 mega-brand.

In order to make money, you have to provide something in exchange. As marketers, it’s incumbent on us to understand how our businesses work so that we can understand where and how we provide value, then help share that value proposition with our customers.

While there are nearly limitless ways to provide value, most business strategies fall into four big categories:

1. Product. You make something and sell it. This could be your bestselling social media book, clay pottery, aged cheese, whatever. It can be polished goods or raw commodities, but whatever it is, it’s a thing you sell. In exchange for the goods, you receive money. For most of human history, people made stuff and sold it, and their business fit into this category.
2. Reseller. Someone else makes something and you buy it from them, then resell it. You’re not actually making anything, but chances are you package up the product or provide additional value-added services for it. For example, Walmart buys stuff from manufacturers and resells it to you. Their value-add is ubiquitous locations from which to buy stuff. Amazon does the same online.
3. Service Provider. You do something for someone. Maybe you’re a virtual assistant, a life coach, an email service provider, a stripper, a hotel, a stock broker, or an enterprise CRM in the cloud. You do something for someone, but don’t make any tangible good that you can hand over. In exchange for the service you provide, you receive a fee.
4. Media. While this could be considered a service, what makes the media model different is that the person you’re providing a service to isn’t necessarily the person who is paying you, and you’re not reselling something else. The word media is derived from Latin and literally means in between. In the media model, you aggregate the attention of an audience and then sell access to that audience, standing between buyers and sellers. Broadcast media, affiliate marketers, bloggers, and social media outlets all fit in this category.

Why are these basic archetypes important? Understanding where you’re starting from will lend insight as to where your business can go next and how you as a marketer can help illuminate your value. Businesses have ways to transform the value they provide, including customization and service. Understanding where you’re starting from can guide you where you need to go.

Customization is the act of taking something and giving customers the ability to add or remove things from it based on their needs. How would this look with these archetypes?

1. Product: You can order an iPad with a variety of different features, then add or remove apps to suit your needs.
2. Reseller: Customization is really hard for resellers because you’re not making the products. About the best you can do is package and bundle products together, offering different combinations of other people’s stuff.
3. Service Provider: Add or remove services you need or don’t need. Mobile phone companies have menus of different services that match the size and scope of fast food restaurants these days.
4. Media: As an audience member, you can customize the content and delivery you want, and as an advertiser, you can customize which audience you want to interact with.

Service is the act of taking something and providing helpful interaction with your business. Customer service is most often the basic service use case, but other services like education and training equally apply. How would service apply to the different archetypes?

1. Product: Obviously, customer service applies to fix broken products, but you can also provide education and training. Apple does this especially well with classes, the Genius Bar, and 1-to-1 training.
2. Reseller: Here’s where resellers can make their money – teaching people how to use and get the most out of other people’s products. Stores like Lowes do this especially well, with clinics on how to garden, paint, etc.
3. Service Provider: Service can exist on top of service. Blue Sky Factory, as an example, provides software as a service but adds a ton of customer service, strategy, and training on top of its software service.
4. Media: Most often, media doesn’t do much at all in the way of service, which is a critical mistake. Help your audience understand better what is available and how to make the most of the content you create, and help your advertisers be more strategic and effective in leveraging the audience you aggregate. As part of standing in between two parties, you can help both communicate more effectively with each other.

Finally, it’s important to note that few companies are pure plays in any one archetype. You can make your own products and resell others, or you can make a product and sell a service alongside it. You can be a media outlet and have product to sell directly to your audience. You can be a service provider and resell other services with yours.

The important part isn’t trying to pigeonhole your business into one category alone, but to try and understand which archetypes and models drive the most value for your business. Once you understand your core value propositions, you can be a much more effective marketer for your business.

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The incredible danger of third-party payee systems

Posted by Christopher S Penn on Mar 9, 2011 in Awakening, Economy, Education, Money | 8 comments

USA Today and Get Rich Slowly both featured an absolutely amazing statistic recently that blew me away:

The amount of student loan debt outstanding in the US now exceeds the amount of credit card debt outstanding.

Rattle that around in your brain. The legions of people buying crap they don’t need with money they don’t have are now second to kids accruing massive amounts of debt for an education of questionable value. College tuition has gone up to astonishing highs, in which students are graduating with a bachelor’s degree at price tags of a quarter million dollars.

How did this happen? Why did this happen? The answer lies in third-party payee systems. Here’s what that means. You generally don’t pay cash for college. You take out loans, you get scholarships, etc. Uncle Sam pitches in with loans, too. What happens then is that the price becomes decoupled from the people who pay it. Colleges effectively are getting their money from banks, not consumers, and banks in turn get their money from consumers. The problem with decoupling cost from buyers is that it changes how market forces work.

In a normal market, prices change demand. If you raise your price to be too high, people will stop buying your stuff. They’ll find cheaper alternatives or simply do without. As a result, you have a soft cap on how high your prices can rise before your business becomes unprofitable and you have to bring prices down, or competitors step in to take profits at slightly lower margins, forcing you to reduce prices.

In a third party market, if someone is paying the bills and passing the costs on, neither party has an incentive to control prices. Neither party benefits from regular market forces – in fact, quite the opposite. Both parties acting on behalf of the consumer have strong incentives to make things as expensive as possible as quickly as possible. A good example is real estate – if you had to pay cash for a house instead of borrowing, there’s a good chance that:

• many people wouldn’t own homes
• those who owned homes would have bought them for materials cost plus labor

Once you introduce a third party into the system that pays on behalf of the customer, prices and reality begin to dine at separate tables. It takes much, much longer for a price increase to change the consumer’s behavior when a third party is paying on behalf of the consumer, and as a result, prices rise at amazing rates.

The only way to get prices back down to earth on any third party system – healthcare, college, housing, etc. – is to remove the intermediate party and recouple prices back to the consumer. The consequences of doing so are drastic, possibly economy-breaking. Colleges would lose 80% of their students overnight until they adjusted pricing. Houses would sit empty for years, or possibly never be bought at all. Healthcare would be denied to everyone but the wealthiest at first. It’s this nuclear scenario that prevents us from making substantive changes that in the long term would benefit us, but in the short term would be incredibly painful.

There is one other option, one which holds more promise, and that’s revolution. Online marketing has made life very hard for direct mail marketers and other channels. Online forums have been the death knell for newspaper classifieds. Once the way of doing business is shattered by a completely new model, the old model becomes affordable as the market leaves for greener pastures or is rendered irrelevant. Education is headed this way rapidly: why pay $250,000 for information and skill you can acquire with Google, iTunes, and online learning? Eventually, colleges and education groups may realize their role isn’t the dispensing of knowledge, but the certification that you have it and can wield it. Certification comes at a much lower price tag than today’s current model.

What do you think? Is college worth it? What about home ownership or other third-party payee systems?

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All borrowing is gambling

Posted by Christopher S Penn on Feb 14, 2011 in Awakening, Money | 1 comment

I once overheard my wife’s co-worker complain that her credit card was shut down because she had failed to pay any of the bills. When she found out about this, she shouted, “They can’t take away my money!”

What’s wrong with this picture? To the financially literate, it’s immediately obvious that the line of credit is the bank’s money, not hers, but she didn’t understand that at all, which is why she was in default on pretty much everything she had.

The ability to borrow is not wealth. The availability of credit is not wealth. This seems like such an obvious thing to say, but it’s so frequently misunderstood. When you pull out plastic at the shopping mall or grocery store, you are paying with someone else’s money. You must in turn pay back that money, or suffer the financial consequences.

In a way, all borrowing is gambling.

When you use a credit card, you are gambling on having the money at the end of the month to repay to the credit card company. As long as you have exactly the amount of cash (plus fees, if applicable) in your bank account as you do on your credit card, that’s a safe bet. If you have less cash than you borrow, it’s no longer a safe bet.

When you take out a loan for college, you are funding your education on a bet: you are borrowing against future earnings. You are gambling that that someday you’ll earn more than you owe and can make good on the bet. Sometimes that’s a good bet. More frequently than you might guess, it’s not a good bet at all. There are plenty of graduates out there with an art degree, $200,000 of debt, and a job at Starbucks.

When you sign the dotted line on a mortgage for a house for the purposes of investment, you are gambling that the price of the house when you sell it will be higher than the price of the house when you buy it. Obviously, if you live in the house during that period, you gain the use of it and the value of sleeping in that house versus, say, a cardboard box, but if you buy the house for the purpose of investing in real estate, you are gambling.

Every debt is gambling on your ability to repay. How much risk you take – how unsafe your bets are – is highly dependent on your ability to repay. If you borrow more than you are able to repay, you lose 100% of the time. If you live on the edge of being able to sometimes make your monthly payments and sometimes not, that’s a pretty awful state to live in, full of stress and worry.

Place your bets carefully. Know what you’re capable of earning. To paraphrase the famous quote from Top Gun, don’t let your ego (or attraction to status, shiny objects, etc.) write checks that your body can’t cash.

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