September 27, 2018

  by Nigel Hollis

Clearing out our bookshelves I came across a book called “The Granularity of Growth”. It reminded me that one of the most important things that marketing does is to help keep up a brand’s momentum. Sales today are often earned in the past and today’s marketing actions have consequences next year.

Of course, the performance marketers reading this (if any) will be making rude noises and saying, ‘Typical brand marketer. Always sales tomorrow, never today’. And yet, many of the sales that performance marketing appears to stimulate today would either have happened anyway, and even when activation makes a difference it is often because it triggers predisposition based on pre-existing positive feelings about the brand.

Anyway, back to the book. “The Granularity of Growth” was written a decade ago by Patrick Viguerie, Sven Smit – partners in McKinsey’s Strategy Practice – and Mehrad Baghai of Alchemy Growth Partners. They reference several data sets related to the growth of large U.S. corporations, but the analysis that caught my attention was based on 416 companies and looked at average compound annual growth rate for revenue between 1999 and 2006 split by growth origin.

What that analysis finds is that for all the money spent on fighting for market share, total revenue growth is much more likely to originate from portfolio momentum and mergers and acquisitions. Portfolio momentum is the organic revenue growth achieved from the countries, categories and segments in which the company competes. Portfolio momentum accounted for 65 per cent of the average company’s growth, mergers and acquisitions accounted for 31 per cent, leaving share gain to account for only four per cent.

The authors state,

“This means when a company reports its results, much of its growth performance has been determined by decisions taken by the previous management.”

Now, what struck me about this analysis was that the proportion of revenue growth attributed to portfolio momentum is remarkably similar to the base sales component identified for a specific brand from market mix modelling. Base sales are the proportion of sales that cannot be explained by current marketing and trade activities or changes in brand equity, and often make up 60 per cent or more of a brand’s overall sales. What if base sales are the brand-specific equivalent of portfolio momentum? Could they be the sales that were earned from actions taken before the modelling period in question?

If that is the case, it implies a lot of marketing actions taken today will actually pay of much later in time and that part of marketing’s job is to keep that brand momentum going. It also implies that marketers need to encourage people to stick with a brand (even if that does not show up as incremental sales) otherwise momentum will become churn.

Now, before I close, I would just like to point out that this analysis does not suggest fighting for share is a waste of time. Given that every company tries to gain share, the growth analysis simply suggests that if you don’t compete, you lose and someone else wins. Equally, just because the majority of sales cannot be traced back to a specific marketing action does not mean you can afford to stop funding them. If those sales are ‘in play’ someone else will benefit if your brand does not.

 

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