As we mentioned earlier, we are also looking to analyse the degree to
which opinions from certain influencer categories can be rejected or
sidelined. We have high hopes we can integrate this into our methodology
soon. Receive a press release informing you that a new car is being
launched and it is easy to ignore. Especially if it doesn’t fit with the current
direction of your decision-making. See an advert on TV for it and once
more it’s easy to ignore. Receive a letter from your accountant informing
you that this new car will save you considerable tax and it becomes more
persuasive. The accountant’s view is harder to ignore – at all sorts of levels.
Take this into a business setting.
Imagine evaluating an office refit incorporating new desks and workstations. Colleagues from another
department tell you that they’ve just installed the new desks and they’re
popular with the office workers. Reassuring advice but easy to ignore.
Your building facilities manager recommends three other styles that they
would approve of. More difficult to ignore because they have partial access
to the budget. The CEO’s PA tells you that undoubtedly one option is her
favourite. She’s a forthright lady. She has no official role in your decisionmaking,
she doesn’t have any access to the budget, but seeking her view,
and then choosing something else, will not do you any favours with her.
And she can heavily influence the CEO’s view of you. She brings to your
DME considerable political weight. You wish you’d never involved her.
When making strategic business decisions, the views of an industry
analyst, however expensively acquired, can always be ignored. The
views of your appointed management consultant less easily sidelined
(because of the internal politics that are inevitably involved), but the
opinions of the appointed systems integration firm, brought in to advise on
a new IT business infrastructure, can rarely if ever be declined. In bringing
in such a firm, the end-user company is effectively outsourcing the eventual
decision, even though they retain the ‘rubber-stamping’ duty.
Objecting to the SI firm’s recommendations can be a ‘make or break’ for
the relationship, and relationships at this level can be worth tens of
millions of pounds to both sides. Some advisors, once appointed by a
client, do not then take lightly to their views being questioned.
The difficulty of incorporating this ‘persuasiveness’ factor into our core
criteria is largely because such firms advise at two very different stages: (1)
at the open proposal stage where they have been invited in to competitive
tender, where their views can easily be ignored, and (2) after they have
been appointed where their views are given with the expectation of being
accepted. Depending on which stage we would be measuring affects the
criteria rating significantly. Until we have resolved this we cannot accurately
measure it.
You can clearly add more criteria of your own. But we have to balance
the thoroughness and credibility of our measurement with the reality of
our task. Ours is an imprecise science, and our eventual rankings affect no
one’s life or death. At the time of writing we think that six objective criteria
is an optimum number and we are expanding our research to this. If a
Player would rank at number 32 using one set of criteria, and move to 39
using another then so be it. Far more important is the question of how to
subsequently handle each Player, regardless of their exact position.
Some of you may decide to identify an influencer and then devise a way
to measure their influence, rather than agree how to measure and then see
who rates on that scale. If you choose the former, there’s a real danger that
you’ll select people who you naturally assume are influencers, and then
back-fit your measurement criteria to justify their inclusion. But we’ve also
found that simply applying our criteria in a blanket fashion to a small group
of people and then seeing who rates highest doesn’t seem to reflect reality.
The fact is that charisma, or at least ‘personal magnetism’, is an extremely
strong influencer characteristic within small groups, yet one that’s impossible
to measure from afar.
Wednesday, July 29, 2009
Be realistic :Business Strategy /Financial Advisors
So when evaluating influencers within your business prospects, we’d
suggest you start with the four tried and tested criteria mentioned earlier.
You should also be realistic. Many companies might suggest that George
Bush, Gordon Brown or Bill Gates are the greatest influence on their
customers, because of policies they do or don’t support. This may well
be true at a macro-economic level, but however innovative your marketing
plan, you’re unlikely to be able to measure its effect on the US President.
Your influencers should not be so elevated that they are beyond the reach
of your company. You’ll simply be left disappointed, and you’ll have
established a business objective that you’re destined to fail on. Rather
than the UK Prime Minister, establishing a relationship with say a Minister
within the National Health Service, or a backbench MP, is likely to yield far
better and more measurable returns for your business.
Similarly, we’ve battled many times with the concept of ‘actual’
versus ‘possible’ influencers. Take The Economist magazine. Were The
Economist to write an article let’s say on ‘The Rise of the Shopping Mall
Beauty Clinic’ then it would undoubtedly prove highly influential to anyone
in that sector looking for investment, business partners, employees,
well-to-do clients, etc. But to the best of our knowledge it hasn’t. So the
title has probably had zero effect on that marketplace to date. Should it still
be considered influential? For the sake of practicality, we’ve come to the
conclusion that if we think persuading The Economist to cover the subject
within a year is a realistically achievable goal, then it’s influential. This rule
of thumb can be expanded to cover every influencer category. It’s easy to
set your horizons too low and discard any individual, company or event
because to date they haven’t impacted your sector. They could, and if they
do, it’s probably because a competitor encouraged them to. You would
hate to be the one to realize this.
There is always the possibility of awildcard entry into your market from left
field. In 1998 the smart card industry was dominated by the card manufacturers
like Gemplus (now Gemalto) and Schlumberger. Microsoft entered the
market by offering an operating system and developers’ kit, and became –
overnight – one of the most influential firms in the market. Bill Gates himself
launched the product and the market’s great and good were flown to Seattle
for an audience. In fact, the influence Microsoft wielded was generally negative
on the market, as it caused many end-user organisations to stop any decisionmaking
until Microsoft proved its ability (or rather inability) to deliver.
But there are many examples where the effect of a new entrant is
positive, from a competition viewpoint. The entry of supermarkets into
financial services is an example, where Tesco and others bring their
efficient and detailed customer services approaches to the banking
world, with great impact.
suggest you start with the four tried and tested criteria mentioned earlier.
You should also be realistic. Many companies might suggest that George
Bush, Gordon Brown or Bill Gates are the greatest influence on their
customers, because of policies they do or don’t support. This may well
be true at a macro-economic level, but however innovative your marketing
plan, you’re unlikely to be able to measure its effect on the US President.
Your influencers should not be so elevated that they are beyond the reach
of your company. You’ll simply be left disappointed, and you’ll have
established a business objective that you’re destined to fail on. Rather
than the UK Prime Minister, establishing a relationship with say a Minister
within the National Health Service, or a backbench MP, is likely to yield far
better and more measurable returns for your business.
Similarly, we’ve battled many times with the concept of ‘actual’
versus ‘possible’ influencers. Take The Economist magazine. Were The
Economist to write an article let’s say on ‘The Rise of the Shopping Mall
Beauty Clinic’ then it would undoubtedly prove highly influential to anyone
in that sector looking for investment, business partners, employees,
well-to-do clients, etc. But to the best of our knowledge it hasn’t. So the
title has probably had zero effect on that marketplace to date. Should it still
be considered influential? For the sake of practicality, we’ve come to the
conclusion that if we think persuading The Economist to cover the subject
within a year is a realistically achievable goal, then it’s influential. This rule
of thumb can be expanded to cover every influencer category. It’s easy to
set your horizons too low and discard any individual, company or event
because to date they haven’t impacted your sector. They could, and if they
do, it’s probably because a competitor encouraged them to. You would
hate to be the one to realize this.
There is always the possibility of awildcard entry into your market from left
field. In 1998 the smart card industry was dominated by the card manufacturers
like Gemplus (now Gemalto) and Schlumberger. Microsoft entered the
market by offering an operating system and developers’ kit, and became –
overnight – one of the most influential firms in the market. Bill Gates himself
launched the product and the market’s great and good were flown to Seattle
for an audience. In fact, the influence Microsoft wielded was generally negative
on the market, as it caused many end-user organisations to stop any decisionmaking
until Microsoft proved its ability (or rather inability) to deliver.
But there are many examples where the effect of a new entrant is
positive, from a competition viewpoint. The entry of supermarkets into
financial services is an example, where Tesco and others bring their
efficient and detailed customer services approaches to the banking
world, with great impact.
Marketing to influencers :Business Strategy /Financial Advisors
So you’ve got your shiny new list of influencers. What now? Let’s recap
on what you have in your hands. You have a list of the most important
people in your target market, important not because they buy from you
(they don’t) but because they influence those that might buy. Treat this
list with care and respect.
It’s typical to find that, of the 50 or more influencers you identify that
have real influence over your prospects, you don’t know more than 20.
Which means that at least 60% of your influencers likely don’t know you
either. And let’s distinguish between awareness and knowledge. You
may even be aware of your influencers, and they may even be aware of
you, but awareness is just above consciousness in mental capacity.
Awareness does not infer interest or knowledge, or a desire to acquire
such. Spending time and money on market awareness alone is pointless.
Plenty of firms have high awareness without it necessarily translating
into success. But it’s a good starting point.
If you were in this situation with your prospects, where you had no
knowledge of them, you’d define a programme of go-to-market activities.
You’d research your audience to identify its needs and wants. You’d
determine its motivations, issues and constraints. You might create a file
on a specific customer account, detailing its revenues and profit history,
key personnel and business agenda.
So, take the same approach to influencer marketing, and define a Go-to-
Influencer programme.
Marketing to influencers should be straightforward, as long as you remember the golden rule:
Influencers don’t buy anything from you.
Influencers are not customers. There is no point in pitching your usual
marketing collateral to influencers – they don’t care about your products or
your firm’s success.While the activitiesmay be similar to those inmarketing
to prospects, the inputs are not the same and the end result is quite different.
You must instead treat influencers in the same way as you would any
other segment. You find out what they want, what their interests and
motivations are, and what their interest is (professional or otherwise) in
you. To draw on The Long Tail theory, your top influencers are at the head
of the influential sources market, and you can ignore the tail.
The influencer identification process should have yielded who your
influencers are, and some relative ranking of them. You’ll also have picked
up some insight on how they derived their influence, and how they use it.
That said, many questions will remain unanswered, such as
& Who specifically do they influence? Do they have generic market influence,
or a subset of customer firms? Or do they only influence influencers
from a distance (such as a regulator)?
& What decisions do they influence? (e.g. purchases, market adoption,
awareness, credibility)
& When do they influence in the sales cycle? Are they idea planters, or
recommenders, or validators? Or all three?
& How do you use each of these influencers to best effect?
on what you have in your hands. You have a list of the most important
people in your target market, important not because they buy from you
(they don’t) but because they influence those that might buy. Treat this
list with care and respect.
It’s typical to find that, of the 50 or more influencers you identify that
have real influence over your prospects, you don’t know more than 20.
Which means that at least 60% of your influencers likely don’t know you
either. And let’s distinguish between awareness and knowledge. You
may even be aware of your influencers, and they may even be aware of
you, but awareness is just above consciousness in mental capacity.
Awareness does not infer interest or knowledge, or a desire to acquire
such. Spending time and money on market awareness alone is pointless.
Plenty of firms have high awareness without it necessarily translating
into success. But it’s a good starting point.
If you were in this situation with your prospects, where you had no
knowledge of them, you’d define a programme of go-to-market activities.
You’d research your audience to identify its needs and wants. You’d
determine its motivations, issues and constraints. You might create a file
on a specific customer account, detailing its revenues and profit history,
key personnel and business agenda.
So, take the same approach to influencer marketing, and define a Go-to-
Influencer programme.
Marketing to influencers should be straightforward, as long as you remember the golden rule:
Influencers don’t buy anything from you.
Influencers are not customers. There is no point in pitching your usual
marketing collateral to influencers – they don’t care about your products or
your firm’s success.While the activitiesmay be similar to those inmarketing
to prospects, the inputs are not the same and the end result is quite different.
You must instead treat influencers in the same way as you would any
other segment. You find out what they want, what their interests and
motivations are, and what their interest is (professional or otherwise) in
you. To draw on The Long Tail theory, your top influencers are at the head
of the influential sources market, and you can ignore the tail.
The influencer identification process should have yielded who your
influencers are, and some relative ranking of them. You’ll also have picked
up some insight on how they derived their influence, and how they use it.
That said, many questions will remain unanswered, such as
& Who specifically do they influence? Do they have generic market influence,
or a subset of customer firms? Or do they only influence influencers
from a distance (such as a regulator)?
& What decisions do they influence? (e.g. purchases, market adoption,
awareness, credibility)
& When do they influence in the sales cycle? Are they idea planters, or
recommenders, or validators? Or all three?
& How do you use each of these influencers to best effect?
Segmentation is the place to start :Business Strategy /Financial Advisors
As the saying goes, you don’t eat a whole elephant in one go. You eat it in
small bites. So break your influencer list into segments, to make it manageable.
Most firms take one of two approaches to segmentation:
& Splitting influencers by category, making separate lists of analysts,
journalists, consultants, regulators, etc. Depending on your categories,
and the numbers in each you may want to segment further, for instance,
breaking down consultants into top-tier, second-tier, niche and so on.
& Splitting influencers by importance. You may discover that, of your 50
or so top influencers, a dozen are substantially more important than the
rest, in which case it makes sense to focus on this select group. Again,
influencers are a scarce resource so spend your time with the ones that
will return most value.
Once you have a segmentation you’re happy with, you need to prioritise
your efforts. Clearly, if you have a segment of ‘VIPs’ – very influential
people – then start here. Look for groups of influencers that have relatively
greater influence where you need it. You may find, for example, that you
have as many journalists as channel partners in your list. So which group
has the greatest total influence? Which group will serve your firm’s greatest
need? Are you constrained by channel bottlenecks or are you being
ignored (or misrepresented) by the media?
Another aspect of segment prioritisation is the prior existence of any
relationship you have with influencers or influencer groups. Some firms
embarking on influencer marketing find that they get early and easy returns
just by focusing existing activity on newly-identified influencers. So by determining
the most influential journalists you can focus your PR programme only
on these selected few (and de-emphasising the rest). You can focus your AR
programme on the most influential firms for your target market, rather than
continuing the annual road show of 20 different analyst firms.
The existence of relationships with certain influencers may focus your
attention on these individuals for quick returns. Or you may decide to
leave your activities with these known influencers to current plans, and
invest primarily in those influencers that are new. It’s your choice, driven
by your firm’s greatest needs and opportunities.
small bites. So break your influencer list into segments, to make it manageable.
Most firms take one of two approaches to segmentation:
& Splitting influencers by category, making separate lists of analysts,
journalists, consultants, regulators, etc. Depending on your categories,
and the numbers in each you may want to segment further, for instance,
breaking down consultants into top-tier, second-tier, niche and so on.
& Splitting influencers by importance. You may discover that, of your 50
or so top influencers, a dozen are substantially more important than the
rest, in which case it makes sense to focus on this select group. Again,
influencers are a scarce resource so spend your time with the ones that
will return most value.
Once you have a segmentation you’re happy with, you need to prioritise
your efforts. Clearly, if you have a segment of ‘VIPs’ – very influential
people – then start here. Look for groups of influencers that have relatively
greater influence where you need it. You may find, for example, that you
have as many journalists as channel partners in your list. So which group
has the greatest total influence? Which group will serve your firm’s greatest
need? Are you constrained by channel bottlenecks or are you being
ignored (or misrepresented) by the media?
Another aspect of segment prioritisation is the prior existence of any
relationship you have with influencers or influencer groups. Some firms
embarking on influencer marketing find that they get early and easy returns
just by focusing existing activity on newly-identified influencers. So by determining
the most influential journalists you can focus your PR programme only
on these selected few (and de-emphasising the rest). You can focus your AR
programme on the most influential firms for your target market, rather than
continuing the annual road show of 20 different analyst firms.
The existence of relationships with certain influencers may focus your
attention on these individuals for quick returns. Or you may decide to
leave your activities with these known influencers to current plans, and
invest primarily in those influencers that are new. It’s your choice, driven
by your firm’s greatest needs and opportunities.
Influencer message development :Business Strategy /Financial Advisors
If you were developing a set of messages for your prospects, you’d want to
understand their needs first. Then you’d develop a set of propositions that
mapped onto those needs, demonstrating how your offering delivered
value on those propositions. Marketing to influencers is no different. They
do, however, have different needs. Remember that influencers don’t buy
from you, so they don’t care what you’re selling. What is a very important
detail for a prospect, who’s comparing one competitor with another, is
irrelevant to an influencer. But they do care about their own agendas.
For example, journalists care about creating copy. They have deadlines
and column inches to fill. Their primary goal is to fill those inches. In a
Maslow-like hierarchy of needs, journalists can think about higher orders
of fulfilment, such as imparting insight or opinion, only if the quantity is
present. So give them content, not spoon-fed (most journalists are too
savvy for that) but through 1-to-1 contacts with your senior executives.
Journalists love a scoop, or insider information. Because you know your
journalist influencers you can target them specifically, and build a relationship
between them and your spokespeople. Your message to journalists is:
‘‘We have some great insight on xyz product category, and we’re only
going to brief you and two other influential journalists on this.’’
Note that we said that you should build a relationship between journalists
and your spokespeople, not with your PR operation. A key measurement
of success is the degree to which influencers external to your firm
interact with influential people inside it. You will have, or will need to
create, influential individuals working for you. Get them connected with
the wider influencer community. We’d hope that it goes without saying,
but we often hear of bad examples. So, for the record, don’t send your
most influential journalists standard press releases. Why would they read
them? They don’t care about you, any more than they care about the 200
other firms that also send them releases.
You do need to ensure that you are speaking in the appropriate language
to influencers. Each influencer category has its own vocabulary, and you need
to articulate your messages using the right dictionary. Just as vertical industries
have their own jargon, influencer categories have their preferred terms.
So when you’re talking to channel partners for example, make sure you are
talking bundles, ASPs and attach rates.1 Again, you need to develop a specific
set of messages for channel partners. The message might be something like:
‘‘You’re one of the most influential partners we have and we’re going to give
you special treatment. We want to be a preferred supplier for you.’’
Other messages you might use include:
& To analyst influencers: ‘We’d like to get your thoughts on our newvision’.
& To regulatory influencers: ‘You’re important and we’re listening’.
& To standards body influencers: ‘We want to contribute’.
& To venture capitalists and financier influencers: ‘We can direct you to
the next big thing’.
To academia influencers: ‘We want to commission a research project’.
& To competitor influencers: ‘If you join us we can further your career’.
And so on. Ideally, you’ll create not one but a series of messages, a
curriculum that educates (or re-educates) each influencer or influencer
type. As the term curriculum infers, influencer marketing requires a longterm
commitment from you, because that’s what you want from your
influencers.
There are two special cases to be treated even more carefully than
‘normal’ influencers. These are the influencers within customers and
groups or clubs of customers. We’ve said this before, but the most significant
type of influencer is a customer, preferably though not necessarily
one of your own customers. A variant on this type of influencer is the
collective, such as buyers groups, purchasing lists and procurement
authorities.
It’s tempting to create messages for these types of influencer
that are based on, or are copies of, your standard sales pitches. This is a bad
idea: influential customers will respond even less favourably to your
pitches than most prospects. This is because they are influential for a
reason, because they are early adopters or market leaders, or whatever.
The best message to a customer influencer is ‘‘We want to learn from you’’.
Humility is a rare thing in sales and marketing, and if your approach is
genuine you will get their attention.
understand their needs first. Then you’d develop a set of propositions that
mapped onto those needs, demonstrating how your offering delivered
value on those propositions. Marketing to influencers is no different. They
do, however, have different needs. Remember that influencers don’t buy
from you, so they don’t care what you’re selling. What is a very important
detail for a prospect, who’s comparing one competitor with another, is
irrelevant to an influencer. But they do care about their own agendas.
For example, journalists care about creating copy. They have deadlines
and column inches to fill. Their primary goal is to fill those inches. In a
Maslow-like hierarchy of needs, journalists can think about higher orders
of fulfilment, such as imparting insight or opinion, only if the quantity is
present. So give them content, not spoon-fed (most journalists are too
savvy for that) but through 1-to-1 contacts with your senior executives.
Journalists love a scoop, or insider information. Because you know your
journalist influencers you can target them specifically, and build a relationship
between them and your spokespeople. Your message to journalists is:
‘‘We have some great insight on xyz product category, and we’re only
going to brief you and two other influential journalists on this.’’
Note that we said that you should build a relationship between journalists
and your spokespeople, not with your PR operation. A key measurement
of success is the degree to which influencers external to your firm
interact with influential people inside it. You will have, or will need to
create, influential individuals working for you. Get them connected with
the wider influencer community. We’d hope that it goes without saying,
but we often hear of bad examples. So, for the record, don’t send your
most influential journalists standard press releases. Why would they read
them? They don’t care about you, any more than they care about the 200
other firms that also send them releases.
You do need to ensure that you are speaking in the appropriate language
to influencers. Each influencer category has its own vocabulary, and you need
to articulate your messages using the right dictionary. Just as vertical industries
have their own jargon, influencer categories have their preferred terms.
So when you’re talking to channel partners for example, make sure you are
talking bundles, ASPs and attach rates.1 Again, you need to develop a specific
set of messages for channel partners. The message might be something like:
‘‘You’re one of the most influential partners we have and we’re going to give
you special treatment. We want to be a preferred supplier for you.’’
Other messages you might use include:
& To analyst influencers: ‘We’d like to get your thoughts on our newvision’.
& To regulatory influencers: ‘You’re important and we’re listening’.
& To standards body influencers: ‘We want to contribute’.
& To venture capitalists and financier influencers: ‘We can direct you to
the next big thing’.
To academia influencers: ‘We want to commission a research project’.
& To competitor influencers: ‘If you join us we can further your career’.
And so on. Ideally, you’ll create not one but a series of messages, a
curriculum that educates (or re-educates) each influencer or influencer
type. As the term curriculum infers, influencer marketing requires a longterm
commitment from you, because that’s what you want from your
influencers.
There are two special cases to be treated even more carefully than
‘normal’ influencers. These are the influencers within customers and
groups or clubs of customers. We’ve said this before, but the most significant
type of influencer is a customer, preferably though not necessarily
one of your own customers. A variant on this type of influencer is the
collective, such as buyers groups, purchasing lists and procurement
authorities.
It’s tempting to create messages for these types of influencer
that are based on, or are copies of, your standard sales pitches. This is a bad
idea: influential customers will respond even less favourably to your
pitches than most prospects. This is because they are influential for a
reason, because they are early adopters or market leaders, or whatever.
The best message to a customer influencer is ‘‘We want to learn from you’’.
Humility is a rare thing in sales and marketing, and if your approach is
genuine you will get their attention.
Good, bad and ugly influencers :Business Strategy /Financial Advisors
The channel and its importance
The sales channel is arguably the most important category of influencers
after peer customers. After all, your sales channel partners are the ones
that are talking to your customers and (you hope) selling your products.
The reality is that sales channel management is done badly. Although
there are several exemplary instances, typically our experience tell us that
most firms have a hard time in optimising their channel partners. Even
firms like Microsoft, which derives nearly all of its sales through its indirect
channel, have a remarkably patchy delivery record.
A leading European telecoms company was recently complaining to us
about the poor execution it experiencedwithin its channel partners. Across
13 European countries it numbered 700 separate partner firms, ranging
from top-tier consulting firms to one-man-band reseller agents.What struck
us most was not the ridiculously high number of partners but that the telco
seemed surprised that its approach wasn’t working. The assumption had
been that the more partners it had the more services it would sell.
Partnerships are a clear case where ‘less is more’ applies. You cannot
reasonably manage this number of partner organisations and expect
them all to deliver high returns, without serious investment in management.
For one thing, the chance that one partner’s territory conflicts
with another’s was not only likely, it was all but guaranteed. While some
overlap is inevitable, even desirable, this degree of clash proved counterproductive.
We know firms that don’t know how many partner organisations they
have, because the structure of the channel is too complex, with distributors
selling to intermediaries, who then sell on to smaller firms.
They lose track of who is selling to whom, even though they have licence
agreements in place that should stop the practice of selling on. The
channel operates within a law unto itself. In this respect, the sales channel
is not unlike peer consumers, in that suppliers can often lose control of the
market messages, and thus lose visibility of the sales process.
There are some endemic issues with selling through channel partners:
1. Sales channel partnerships are typically non-exclusive. This means that
you are fighting with other suppliers to gain attention from the partner.
You are in competition with your partner’s other suppliers even before
you get to market.
2. Suppliers and partners are rarely evenly matched in size or importance.
You may think it’s great to have Accenture as a partner, but if you are
regarded as a small-time player with a niche offering, they will bring you
into a deal at their convenience only. Conversely, if you are a major
player you can largely dictate the terms of your partnerships, because
you know the partners’ customers want to buy your products or
services. Understanding who holds the dominant status is critical in
making partnerships work.
3. Partners often see you as a tactical solution. Because you are nonexclusive,
and especially if you are the subservient party, you’ll often
be regarded as a nice-to-have. It often makes sense to focus on partnerships
where size and importance (to the market) are close together.
4. When partnerships are unbalanced you’ll find that your target markets
may be out of kilter. We’ve had clients whose solution is aimed at midtier
firms yet proudly proclaim partnerships with top-tier consultants.
They sold very little. The reverse is also true: high-end goods sold
through commodity channels undermines the value perception of the
product. That’s why Calvin Klein doesn’t want its jeans sold in Tesco.
The best partnerships are those where the parties are more-or-less equal
in stature, and that there is a strategic benefit in the relationship for both
players. Neither party wants to be a nice-to-have player.
How to influence the channel
Margin isn’t it! If you have to discount you haven’t demonstrated the value,
or your product isn’t appropriate to be sold via those channels.
Good ways to influence partner organisations are:
& Make sure your partner is aiming at the same market as you are. The
most common mistake we see is the mismatch between suppliers’ core
markets and that of their partners.
& Require your partners to make an investment in you. If partners put skin
in the game they’re more likely to execute on the partnership. Training
is the obvious investment to promote, but it also includes co-marketing
material and joint proposition development.
& Position your partners as influencers – promote their solutions, competencies
and customers in your own marketing collateral.
& Market your partners into your existing clients. This is you putting skin
in the game. If you’re willing to share your customers then the partner
is more likely to reciprocate. Note that if you can’t easily sell your
partner in to your customers then maybe your offerings don’t fit
together so well.
& Get your partners networked with other influencers in your market.
You’ll have to identify the appropriate person within the partner organisation,
someone that has the gravitas to network successfully in the
influencer community.
& Make sure your success is aligned with your partner’s. If they are
successful it should mean that you are. And the converse is also true.
Competitors as influencers One of the biggest sources of influence on your prospects are your
competitors. Many people react to this news with apathy. They think it’s
pointless to know this information, because they can’t see a way to
influence their competitors. We say, think again. There are at least three
ways you can influence your competitors, and probably more, but keep
things ethical. There’s no excuse for underhand tactics.
Talk to your competitors
The first thing you should do to influence competitors is talk to them. This
may seem a strange approach but it makes perfect sense. Talking to
competitors gives you a chance to discuss general market trends, find
out what the competitor culture is like and to network in the industry. You
may find that you are not competitors at all, or at least not on all fronts.
There may be partnership or referral arrangements that are possible.
One subject always on the agenda when talking to competitors is that of
your mutual competitors. My enemy’s enemy is my friend, and all that. You
can share insight and stories, and swap tips on how to deal with others’
strengths and capabilities.
Most of the top CEOs in an industry meet each other at least once a year,
either privately or at an industry event. What we’re suggesting is that this
practice cascades down the organisational structure. There are plenty of
opportunities to make contact with competitors, at trade shows, media
events, or wherever. It’s hopefully unnecessary to say, but just in case, we
would never encourage gloating or bad-mouthing competitors, or any
such nonsense. Always be professional – and legal – no price fixing or
such things.
Be talked about by your competitors
The second thing you can do to influence competitors is to talk about
them, and to get them to talk about you. As Oscar Wilde said, the only thing
worse than being talked about is not being talked about.
How do you ensure that your competitors talk about you? The answer is
that you get them to worry about you. Remember the rule of influence:
influencers don’t care about you or your products. They care about their
own agenda. This is just as true for competitors as for any other type of
influencer. When you carry messages to prospect customers you’ll talk
about what your product can do for them. But when talking to, or about,
competitors you must change the message. Don’t talk about features and
functions of your product, or pricing or subjects that you’d discuss with
prospects.
The things that will worry competitors include (but are in no way
limited to):
& Your percentage growth year-on-year
& Your expanding client list
& The fact you’ve been commissioned to write a book
& Invitations to speaking engagements
& Awards and prizes
& Quotes in influential journals and media
Pick three, but only three, things that you think would worry a
competitor. In fact, anything that gets them talking about you in a
positive sense (and we mean positive for you, negative for the competitor).
Stuck for things to talk about? What would worry you if you
heard them about your competitors? Use these things as a starting
point.
Now, how do you measure how worried your competitors are? A
powerful indicator of your influence in the market is what your competitors
say about you. You can find this information out by asking your
prospects, or by asking influencers. A key question that influencers like
to ask is, who are your primary competitors? Do your competitors mention
you? What do they say about you?
You want your competitors to talk about you, to acknowledge you as a
competitor. Why? Simply, it acknowledges you as a credible player. Don’t
worry that a competitor will rubbish you in front of a prospect or influencer.
It is generally accepted as poor form and reflects badly on the
detractor.
We’ve also noticed that competitors that are worried about one particular
player start to mirror the language that they use. You’ll see this in
marketing literature, where one company introduces a new concept or
terminology. They may even start blogging on the subject that you introduce.
This is a sign that you’ve got them worried.
The sales channel is arguably the most important category of influencers
after peer customers. After all, your sales channel partners are the ones
that are talking to your customers and (you hope) selling your products.
The reality is that sales channel management is done badly. Although
there are several exemplary instances, typically our experience tell us that
most firms have a hard time in optimising their channel partners. Even
firms like Microsoft, which derives nearly all of its sales through its indirect
channel, have a remarkably patchy delivery record.
A leading European telecoms company was recently complaining to us
about the poor execution it experiencedwithin its channel partners. Across
13 European countries it numbered 700 separate partner firms, ranging
from top-tier consulting firms to one-man-band reseller agents.What struck
us most was not the ridiculously high number of partners but that the telco
seemed surprised that its approach wasn’t working. The assumption had
been that the more partners it had the more services it would sell.
Partnerships are a clear case where ‘less is more’ applies. You cannot
reasonably manage this number of partner organisations and expect
them all to deliver high returns, without serious investment in management.
For one thing, the chance that one partner’s territory conflicts
with another’s was not only likely, it was all but guaranteed. While some
overlap is inevitable, even desirable, this degree of clash proved counterproductive.
We know firms that don’t know how many partner organisations they
have, because the structure of the channel is too complex, with distributors
selling to intermediaries, who then sell on to smaller firms.
They lose track of who is selling to whom, even though they have licence
agreements in place that should stop the practice of selling on. The
channel operates within a law unto itself. In this respect, the sales channel
is not unlike peer consumers, in that suppliers can often lose control of the
market messages, and thus lose visibility of the sales process.
There are some endemic issues with selling through channel partners:
1. Sales channel partnerships are typically non-exclusive. This means that
you are fighting with other suppliers to gain attention from the partner.
You are in competition with your partner’s other suppliers even before
you get to market.
2. Suppliers and partners are rarely evenly matched in size or importance.
You may think it’s great to have Accenture as a partner, but if you are
regarded as a small-time player with a niche offering, they will bring you
into a deal at their convenience only. Conversely, if you are a major
player you can largely dictate the terms of your partnerships, because
you know the partners’ customers want to buy your products or
services. Understanding who holds the dominant status is critical in
making partnerships work.
3. Partners often see you as a tactical solution. Because you are nonexclusive,
and especially if you are the subservient party, you’ll often
be regarded as a nice-to-have. It often makes sense to focus on partnerships
where size and importance (to the market) are close together.
4. When partnerships are unbalanced you’ll find that your target markets
may be out of kilter. We’ve had clients whose solution is aimed at midtier
firms yet proudly proclaim partnerships with top-tier consultants.
They sold very little. The reverse is also true: high-end goods sold
through commodity channels undermines the value perception of the
product. That’s why Calvin Klein doesn’t want its jeans sold in Tesco.
The best partnerships are those where the parties are more-or-less equal
in stature, and that there is a strategic benefit in the relationship for both
players. Neither party wants to be a nice-to-have player.
How to influence the channel
Margin isn’t it! If you have to discount you haven’t demonstrated the value,
or your product isn’t appropriate to be sold via those channels.
Good ways to influence partner organisations are:
& Make sure your partner is aiming at the same market as you are. The
most common mistake we see is the mismatch between suppliers’ core
markets and that of their partners.
& Require your partners to make an investment in you. If partners put skin
in the game they’re more likely to execute on the partnership. Training
is the obvious investment to promote, but it also includes co-marketing
material and joint proposition development.
& Position your partners as influencers – promote their solutions, competencies
and customers in your own marketing collateral.
& Market your partners into your existing clients. This is you putting skin
in the game. If you’re willing to share your customers then the partner
is more likely to reciprocate. Note that if you can’t easily sell your
partner in to your customers then maybe your offerings don’t fit
together so well.
& Get your partners networked with other influencers in your market.
You’ll have to identify the appropriate person within the partner organisation,
someone that has the gravitas to network successfully in the
influencer community.
& Make sure your success is aligned with your partner’s. If they are
successful it should mean that you are. And the converse is also true.
Competitors as influencers One of the biggest sources of influence on your prospects are your
competitors. Many people react to this news with apathy. They think it’s
pointless to know this information, because they can’t see a way to
influence their competitors. We say, think again. There are at least three
ways you can influence your competitors, and probably more, but keep
things ethical. There’s no excuse for underhand tactics.
Talk to your competitors
The first thing you should do to influence competitors is talk to them. This
may seem a strange approach but it makes perfect sense. Talking to
competitors gives you a chance to discuss general market trends, find
out what the competitor culture is like and to network in the industry. You
may find that you are not competitors at all, or at least not on all fronts.
There may be partnership or referral arrangements that are possible.
One subject always on the agenda when talking to competitors is that of
your mutual competitors. My enemy’s enemy is my friend, and all that. You
can share insight and stories, and swap tips on how to deal with others’
strengths and capabilities.
Most of the top CEOs in an industry meet each other at least once a year,
either privately or at an industry event. What we’re suggesting is that this
practice cascades down the organisational structure. There are plenty of
opportunities to make contact with competitors, at trade shows, media
events, or wherever. It’s hopefully unnecessary to say, but just in case, we
would never encourage gloating or bad-mouthing competitors, or any
such nonsense. Always be professional – and legal – no price fixing or
such things.
Be talked about by your competitors
The second thing you can do to influence competitors is to talk about
them, and to get them to talk about you. As Oscar Wilde said, the only thing
worse than being talked about is not being talked about.
How do you ensure that your competitors talk about you? The answer is
that you get them to worry about you. Remember the rule of influence:
influencers don’t care about you or your products. They care about their
own agenda. This is just as true for competitors as for any other type of
influencer. When you carry messages to prospect customers you’ll talk
about what your product can do for them. But when talking to, or about,
competitors you must change the message. Don’t talk about features and
functions of your product, or pricing or subjects that you’d discuss with
prospects.
The things that will worry competitors include (but are in no way
limited to):
& Your percentage growth year-on-year
& Your expanding client list
& The fact you’ve been commissioned to write a book
& Invitations to speaking engagements
& Awards and prizes
& Quotes in influential journals and media
Pick three, but only three, things that you think would worry a
competitor. In fact, anything that gets them talking about you in a
positive sense (and we mean positive for you, negative for the competitor).
Stuck for things to talk about? What would worry you if you
heard them about your competitors? Use these things as a starting
point.
Now, how do you measure how worried your competitors are? A
powerful indicator of your influence in the market is what your competitors
say about you. You can find this information out by asking your
prospects, or by asking influencers. A key question that influencers like
to ask is, who are your primary competitors? Do your competitors mention
you? What do they say about you?
You want your competitors to talk about you, to acknowledge you as a
competitor. Why? Simply, it acknowledges you as a credible player. Don’t
worry that a competitor will rubbish you in front of a prospect or influencer.
It is generally accepted as poor form and reflects badly on the
detractor.
We’ve also noticed that competitors that are worried about one particular
player start to mirror the language that they use. You’ll see this in
marketing literature, where one company introduces a new concept or
terminology. They may even start blogging on the subject that you introduce.
This is a sign that you’ve got them worried.
How do analysts influence a decision? :Business Strategy /Financial Advisors
Analyst influence increases with engagement with decision-makers
Influencer Marketing
& Assessment and selection: pure consulting, and a project may take
several months to complete. Usually offered by dedicated consulting
arms of analyst firms.
& Decision validation: may be conducted over days, rather than months,
leveraging the knowledge of a single analyst.
& Price comparison/negotiation. The hardest advice to give, but
arguably the most valuable. Suppliers rarely provide pricing
information (unless required to by regulation), but commodity
prices are available. Analysts are able to aggregate prices from
multiple sources and calculate averages, which can help in
negotiation.
Why analyst influence can be overstated
There is, frankly, a lot of nonsense talked about the influence of analysts.
In some markets they hold near god-like status, with the ability to make
or break deals. This may have been widely true a decade ago. But today
information, expertise and influence is dissipated across a much wider
array of individuals.
We have read that analysts are influential in between 60 per cent and
80 per cent of large sales, especially in the tech sector. The inference is
that analysts are the most important influencers, and/or hold some
position of exclusive influence on decisions. But this high degree of
involvement doesn’t translate into analysts then enjoying 60 per cent
to 80 per cent of the available influence. We can’t think of a major sale
where the winning supplier didn’t influence the decision. Or where a
reference client wasn’t used. Indeed it’s arguable that the greatest
influencers on a decision are the preferred suppliers and the reference
customer.
It’s meaningless to quote percentages of involvement. The range of
involvement in decisions might range from zero to 100 per cent depending
on the market. We know that a big four consulting and integration firm
estimates that 0.5 per cent of its sales are influenced by analysts. No, that’s
not a typo. It’s one half of one per cent. It even uses the figure in its
calculations for ROI on AR. And it’s a figure that’s accepted by the firm’s
senior sales management team.
The important factor is not involvement but share of influence. Our
own data, drawn from more than a dozen studies of influencers, shows
that the average share of influence for analysts is 16 per cent. But it is
highly variable, ranging from 4 per cent to 22 per cent, depending on the
market segment and maturity.
Influencer Marketing
& Assessment and selection: pure consulting, and a project may take
several months to complete. Usually offered by dedicated consulting
arms of analyst firms.
& Decision validation: may be conducted over days, rather than months,
leveraging the knowledge of a single analyst.
& Price comparison/negotiation. The hardest advice to give, but
arguably the most valuable. Suppliers rarely provide pricing
information (unless required to by regulation), but commodity
prices are available. Analysts are able to aggregate prices from
multiple sources and calculate averages, which can help in
negotiation.
Why analyst influence can be overstated
There is, frankly, a lot of nonsense talked about the influence of analysts.
In some markets they hold near god-like status, with the ability to make
or break deals. This may have been widely true a decade ago. But today
information, expertise and influence is dissipated across a much wider
array of individuals.
We have read that analysts are influential in between 60 per cent and
80 per cent of large sales, especially in the tech sector. The inference is
that analysts are the most important influencers, and/or hold some
position of exclusive influence on decisions. But this high degree of
involvement doesn’t translate into analysts then enjoying 60 per cent
to 80 per cent of the available influence. We can’t think of a major sale
where the winning supplier didn’t influence the decision. Or where a
reference client wasn’t used. Indeed it’s arguable that the greatest
influencers on a decision are the preferred suppliers and the reference
customer.
It’s meaningless to quote percentages of involvement. The range of
involvement in decisions might range from zero to 100 per cent depending
on the market. We know that a big four consulting and integration firm
estimates that 0.5 per cent of its sales are influenced by analysts. No, that’s
not a typo. It’s one half of one per cent. It even uses the figure in its
calculations for ROI on AR. And it’s a figure that’s accepted by the firm’s
senior sales management team.
The important factor is not involvement but share of influence. Our
own data, drawn from more than a dozen studies of influencers, shows
that the average share of influence for analysts is 16 per cent. But it is
highly variable, ranging from 4 per cent to 22 per cent, depending on the
market segment and maturity.
Eliciting sales objections :Business Strategy /Financial Advisors
Sales should be pretty straightforward, identifying prospects and leading
them down a logical path that results in a cheque. Why then is it so often
hard to do? It’s because prospects, awkward as they are, raise objections to
block a sale. Despite your best efforts, the prospect has thought of a reason
not to buy from you. If you haven’t armed your salespeople with counterarguments
to these objections, then the sale cannot complete.
Sales objections differ for each firm and prospect. Examples include:
& ‘I’ve never heard of your firm’.
& ‘I don’t know what your firm can do’.
& ‘You don’t know my business’.
& ‘I don’t believe your product works’.
& ‘I don’t believe your product will make/save me money’.
& ‘Your proposal exceeds my budget’.
& ‘Your solution is non-standard’.
& ‘You can’t provide the support service I need’.
& ‘This is new technology and I’m not sure it will last’.
And so on.
Such sales objections are an integral part of the selling process: in fact, many
have described sales as the process of overcoming objections. So, if objections
are an everyday occurrence to salespeople, why do they hate them?
The reasons are twofold: objections are numerous and they are varied.
This means that a prospect can declare any one of a dozen possible
objections at multiple points in the deal discussions. The result is that
salespeople must spend time addressing a prospect’s concerns, which
slows the sales cycle. The failure to successfully counter an objection ends
in a loss, which reduces lead conversion rates. Inevitably the finger then
points to marketing and its inability to deliver credible counter-arguments.
Firms across many industries tell us that they have three key issues
surrounding sales objections:
1. ‘We don’t know what the sales objections are’.
2. ‘We don’t know how to counter those objections’.
3. ‘Even if we can counter objections, the prospect wouldn’t believe us’.
Let’s examine these issues. Firstly, there are three proven ways to identify
sales objections. They are, in declining order of effectiveness: conduct a
win/loss analysis; hold a sales objection elicitation workshop; just ask your
salespeople.
A win/loss analysis project involves someone other than your firm
calling decision-makers that didn’t buy from you. You can’t do the calling
because it’s extremely unlikely that a decision-maker will tell you the real
reason why you were not chosen. They’re too polite, they don’t really care
and they feel rather awkward in telling you that your pitch leader had bad
breath (or whatever the real reason was). (You can call the decision-maker
that did choose you.) Win/loss is probably the most interesting project a
third party agency can conduct, as they can get some great insight into the
industry, as well as delivering juicy feedback to their clients. It is essential
to gain the sales director’s support for the process, as the results will affect
his operation. You should also treat win/loss analysis as a learning exercise,
not a blame game.
them down a logical path that results in a cheque. Why then is it so often
hard to do? It’s because prospects, awkward as they are, raise objections to
block a sale. Despite your best efforts, the prospect has thought of a reason
not to buy from you. If you haven’t armed your salespeople with counterarguments
to these objections, then the sale cannot complete.
Sales objections differ for each firm and prospect. Examples include:
& ‘I’ve never heard of your firm’.
& ‘I don’t know what your firm can do’.
& ‘You don’t know my business’.
& ‘I don’t believe your product works’.
& ‘I don’t believe your product will make/save me money’.
& ‘Your proposal exceeds my budget’.
& ‘Your solution is non-standard’.
& ‘You can’t provide the support service I need’.
& ‘This is new technology and I’m not sure it will last’.
And so on.
Such sales objections are an integral part of the selling process: in fact, many
have described sales as the process of overcoming objections. So, if objections
are an everyday occurrence to salespeople, why do they hate them?
The reasons are twofold: objections are numerous and they are varied.
This means that a prospect can declare any one of a dozen possible
objections at multiple points in the deal discussions. The result is that
salespeople must spend time addressing a prospect’s concerns, which
slows the sales cycle. The failure to successfully counter an objection ends
in a loss, which reduces lead conversion rates. Inevitably the finger then
points to marketing and its inability to deliver credible counter-arguments.
Firms across many industries tell us that they have three key issues
surrounding sales objections:
1. ‘We don’t know what the sales objections are’.
2. ‘We don’t know how to counter those objections’.
3. ‘Even if we can counter objections, the prospect wouldn’t believe us’.
Let’s examine these issues. Firstly, there are three proven ways to identify
sales objections. They are, in declining order of effectiveness: conduct a
win/loss analysis; hold a sales objection elicitation workshop; just ask your
salespeople.
A win/loss analysis project involves someone other than your firm
calling decision-makers that didn’t buy from you. You can’t do the calling
because it’s extremely unlikely that a decision-maker will tell you the real
reason why you were not chosen. They’re too polite, they don’t really care
and they feel rather awkward in telling you that your pitch leader had bad
breath (or whatever the real reason was). (You can call the decision-maker
that did choose you.) Win/loss is probably the most interesting project a
third party agency can conduct, as they can get some great insight into the
industry, as well as delivering juicy feedback to their clients. It is essential
to gain the sales director’s support for the process, as the results will affect
his operation. You should also treat win/loss analysis as a learning exercise,
not a blame game.
a top three mobile handset manufacturer :Business Strategy /Financial Advisors
De-risking a product launch
The mobile handset market is fiercely competitive, nowhere more so
than in the business sector. Phenomenally successful in the consumer
marketplace, a top three mobile handset manufacturer is fighting hard to
displace a competitor as the enterprise market leader. The firm had
developed an innovative device capable of defeating its rival in a features
battle. But perception is everything, and the firm had relatively weak
awareness amongst its target business customers.
Influencer50 was commissioned to identify those individuals most
influencing the enterprise sector in Germany, in readiness for the
firm’s forthcoming new product line. Influencer50 worked together
with the firm’s global marketing agency, which was responsible for all
aspects of the company’s WOM go-to-market strategy.
The research uncovered the huge influence and buying power
exerted by Germany’s government-housed Ministry for Economy
and Technology and the Fraunhofer Gesellschaft research facility.
Corporates were shown to follow the buying advice of such groups
to a far higher degree than in the UK or US.With the growing trend for
large organisations to outsource their IT infrastructure, the systems
integrators were seen to be increasingly influencing the bulk purchasing
of smartphones and personal digital assistants (PDAs). And not just the
major SIs, but many niche or ‘boutique’ firms. In contrast, infrastructure
giants such as IBM and HP, trade magazines and industry analysts
exerted less than expected influence.
Using this insight, the firm targeted the top 100 influencers on
business-orientated handsets in Germany. It sent each influencer a
pre-launch handset and supporting material. It also created an online
forum to gather influencers’ views on the product’s feature-set, pricepoints,
launch strategy and choice of resellers. Using the forum, influencers
could contribute their own experiences and suggestions, and see
the opinions and comments from other influencers.
The feedback was used to make last stage modifications to the device,
to the user documentation and to the launch strategy. Importantly, high
visibility of the handset was established within the influencer community.
Influencers had trialled the product, fed back on its capabilities and each
had read the inputs of the wider influencer group.
The firm was able to launch the new handset into a market whose
influencers were already aware of it and its features. These influencers
started influencing the market, and the handset sold quickly and in
volume.
As the firm’s spokesperson commented, ‘The addition of influencer
identification and marketing into our WOM rollout campaign for the
new handset has been invaluable. We could already target our expected
consumer-base through our ongoing marketing, but identifying and
working with the top-tier of market influencers was beyond our reach –
and we knew it’.
Importantly, identifying and targeting influencers had substantially
lowered the risk in launching the handset. Mobile devices are expensive
to develop and market launch is a critical point in the commercial
success, or otherwise, of each product. Pre-influencing a market prior
to launch minimised the risk to the firm and underpinned a successful
product release.
The mobile handset market is fiercely competitive, nowhere more so
than in the business sector. Phenomenally successful in the consumer
marketplace, a top three mobile handset manufacturer is fighting hard to
displace a competitor as the enterprise market leader. The firm had
developed an innovative device capable of defeating its rival in a features
battle. But perception is everything, and the firm had relatively weak
awareness amongst its target business customers.
Influencer50 was commissioned to identify those individuals most
influencing the enterprise sector in Germany, in readiness for the
firm’s forthcoming new product line. Influencer50 worked together
with the firm’s global marketing agency, which was responsible for all
aspects of the company’s WOM go-to-market strategy.
The research uncovered the huge influence and buying power
exerted by Germany’s government-housed Ministry for Economy
and Technology and the Fraunhofer Gesellschaft research facility.
Corporates were shown to follow the buying advice of such groups
to a far higher degree than in the UK or US.With the growing trend for
large organisations to outsource their IT infrastructure, the systems
integrators were seen to be increasingly influencing the bulk purchasing
of smartphones and personal digital assistants (PDAs). And not just the
major SIs, but many niche or ‘boutique’ firms. In contrast, infrastructure
giants such as IBM and HP, trade magazines and industry analysts
exerted less than expected influence.
Using this insight, the firm targeted the top 100 influencers on
business-orientated handsets in Germany. It sent each influencer a
pre-launch handset and supporting material. It also created an online
forum to gather influencers’ views on the product’s feature-set, pricepoints,
launch strategy and choice of resellers. Using the forum, influencers
could contribute their own experiences and suggestions, and see
the opinions and comments from other influencers.
The feedback was used to make last stage modifications to the device,
to the user documentation and to the launch strategy. Importantly, high
visibility of the handset was established within the influencer community.
Influencers had trialled the product, fed back on its capabilities and each
had read the inputs of the wider influencer group.
The firm was able to launch the new handset into a market whose
influencers were already aware of it and its features. These influencers
started influencing the market, and the handset sold quickly and in
volume.
As the firm’s spokesperson commented, ‘The addition of influencer
identification and marketing into our WOM rollout campaign for the
new handset has been invaluable. We could already target our expected
consumer-base through our ongoing marketing, but identifying and
working with the top-tier of market influencers was beyond our reach –
and we knew it’.
Importantly, identifying and targeting influencers had substantially
lowered the risk in launching the handset. Mobile devices are expensive
to develop and market launch is a critical point in the commercial
success, or otherwise, of each product. Pre-influencing a market prior
to launch minimised the risk to the firm and underpinned a successful
product release.
Creating new routes to market :Business Strategy /Financial Advisors
Influencer marketing provides new routes to market. Or it provides
routes into new markets, whichever is most constraining your sales.
A great example of this is Case Study H, in which the firm has begun to
pre-launch its handsets with influencers before public release. If you are
moving into a new geography or vertical market it makes sense to find out
who the primary influencers are before spending too much time and effort
in the wrong areas.
Influencer marketing also helps with repositioning your firm in your
marketplace. Firms often start selling their products to middle managers
and operational executives. Sooner or later they outgrow this market and
want to gain access to C-level management. There they can sell a broader
value proposition and increase sales per customer organisation. The trouble
is that having spent time in the middle management layer, that’s where
the C-levels assume you should be. How do you get your new target
audience out of this mindset?
Similarly, selling business solutions to business people rather than
products to support staff is an oft-cited shift in strategy, yet in practice it
is extraordinarily hard. This is because you have to shift perceptions. ‘I’m a
business person: why are you talking to me? My technical people are over
there . . .’. An approach that works is to identify influencers in the new
target audience, and then get them to carry your message. And you use
influencer-led collateral to support your legitimacy in the market. The ROI
from this activity is easy to measure: do you successfully penetrate the
market or not?
Success is not always down to having a great plan though, so make sure
you invest in the implementation and execution elements. Influencer
marketing may tell you the most influential people in the market, but
your salespeople may not be trained talking to C-level executives or business
managers, or whatever your new target audience is. One of our early
mistakes was to assume that client firms knew how to engage with their
market, and just needed us to point them in the right direction. Not so, and
we had to develop sales training courses to bridge the gap in skills.
routes into new markets, whichever is most constraining your sales.
A great example of this is Case Study H, in which the firm has begun to
pre-launch its handsets with influencers before public release. If you are
moving into a new geography or vertical market it makes sense to find out
who the primary influencers are before spending too much time and effort
in the wrong areas.
Influencer marketing also helps with repositioning your firm in your
marketplace. Firms often start selling their products to middle managers
and operational executives. Sooner or later they outgrow this market and
want to gain access to C-level management. There they can sell a broader
value proposition and increase sales per customer organisation. The trouble
is that having spent time in the middle management layer, that’s where
the C-levels assume you should be. How do you get your new target
audience out of this mindset?
Similarly, selling business solutions to business people rather than
products to support staff is an oft-cited shift in strategy, yet in practice it
is extraordinarily hard. This is because you have to shift perceptions. ‘I’m a
business person: why are you talking to me? My technical people are over
there . . .’. An approach that works is to identify influencers in the new
target audience, and then get them to carry your message. And you use
influencer-led collateral to support your legitimacy in the market. The ROI
from this activity is easy to measure: do you successfully penetrate the
market or not?
Success is not always down to having a great plan though, so make sure
you invest in the implementation and execution elements. Influencer
marketing may tell you the most influential people in the market, but
your salespeople may not be trained talking to C-level executives or business
managers, or whatever your new target audience is. One of our early
mistakes was to assume that client firms knew how to engage with their
market, and just needed us to point them in the right direction. Not so, and
we had to develop sales training courses to bridge the gap in skills.
Selling more :Business Strategy /Financial Advisors
RoI in influencer marketing is measurable in cash terms. If you orientate
your marketing programmes around influencers, then align those influencers
with your sales objections, you can create a set of marketing
messages that directly influence sales. The disclaimer that it’s all in the
execution still applies, but your salespeople will have fewer excuses and
less cause to blame marketing! In fact, a predictor for RoI we offen use it to
measure the perception uplift of marketing’s usefulness by the sales force.
Influencers increase the velocity of sales because sales objections can
now be predicted and counter-arguments prepared. And because influencers
are more likely to be believed you are more likely to get past these
objections faster – certainly faster than your competitors! Sales cycles will
reduce, close rates will increase and you can tangibly measure the impact
on sales from your marketing programmes.
Lead generation
Our views on lead generation are very closely tied to those on marketing in
general. Leads are difficult to generate when marketing doesn’t work very
well. Particularly if no one is listening to your message, all messages sound
the same and prospects don’t believe what you tell them.
It makes all the difference if you can get influencers to break down some
of these barriers. For example, plenty of firms set up seminars or webinars
in which their senior management just give a pitch. Why would a prospect
turn up to listen to this? Instead, why not get an influencer to speak?
You could invite a customer or analyst or regulator or academic: someone
to draw in a crowd, get people thinking and engage them in discussion.
Many firms use hospitality as a means of breaking the ice. So salespeople
can call a prospect on Monday and ask whether they enjoyed the match on
Saturday. Why not invite them to dinner with an influencer instead? The
prospect might actually learn something, and the conversation is businessrelated
so the prospect stays focused.
It might not be so much fun, but let’s stay in touch with the core purpose of marketing. The example we provide
in Case Study A is illustrative. It constructed an innovative format for its
seminar (a debate), hired an influential chairperson and two engaging and
outspoken protagonists. In fact, the event was fun, as the debate wasn’t
too serious, and lots of interesting points were covered. Importantly, the
issues raised by the audience reflected their reservations – objections, if
you like – to homeworking, which proved useful in building successful
sales campaigns to prospects.
You can use influencer-led collateral in your direct mail pieces, webcasts
and podcasts, PR, research and (if you must) advertising. If you are
using influencers appropriately you should get better returns from your
lead generation activities.
We have noticed that, for some firms, the number of leads goes down
over the course of an influencer marketing programme. This is because
more time and effort is being taken on the type and quality of leads, rather
than quantity. So returning from an event with the glass bowl filled with
business cards (delegates only wanted to enter the prize draw) is replaced
by a smaller number of engaged and informed prospects. It’s not the
number of leads you generate that’s important, but the number you
eventually close.
Price increases
It’s easier to increase profits by raising prices than by cutting costs. In fact,
according to McKinsey, a 1 per cent rise in price can lead to an 8 per cent
profit increase. Nobody buys solely on price. If you need proof of this, take
a look at the cars being driven on the road. They are all functionally the
same, yet some people (or companies) pay five or ten times more than
others, based on their perceptions of value.
Influencers increase the perception of value. Why? Because they are
influencers! They are the most important, most respected, most listened to
individuals in your market. Weaving them into your marketing strategy
appropriately means that they implicitly are aligned with your firm. They
confirm the value of what you are selling, and convey confidence in your
solution. So you should be able to sell for more.
your marketing programmes around influencers, then align those influencers
with your sales objections, you can create a set of marketing
messages that directly influence sales. The disclaimer that it’s all in the
execution still applies, but your salespeople will have fewer excuses and
less cause to blame marketing! In fact, a predictor for RoI we offen use it to
measure the perception uplift of marketing’s usefulness by the sales force.
Influencers increase the velocity of sales because sales objections can
now be predicted and counter-arguments prepared. And because influencers
are more likely to be believed you are more likely to get past these
objections faster – certainly faster than your competitors! Sales cycles will
reduce, close rates will increase and you can tangibly measure the impact
on sales from your marketing programmes.
Lead generation
Our views on lead generation are very closely tied to those on marketing in
general. Leads are difficult to generate when marketing doesn’t work very
well. Particularly if no one is listening to your message, all messages sound
the same and prospects don’t believe what you tell them.
It makes all the difference if you can get influencers to break down some
of these barriers. For example, plenty of firms set up seminars or webinars
in which their senior management just give a pitch. Why would a prospect
turn up to listen to this? Instead, why not get an influencer to speak?
You could invite a customer or analyst or regulator or academic: someone
to draw in a crowd, get people thinking and engage them in discussion.
Many firms use hospitality as a means of breaking the ice. So salespeople
can call a prospect on Monday and ask whether they enjoyed the match on
Saturday. Why not invite them to dinner with an influencer instead? The
prospect might actually learn something, and the conversation is businessrelated
so the prospect stays focused.
It might not be so much fun, but let’s stay in touch with the core purpose of marketing. The example we provide
in Case Study A is illustrative. It constructed an innovative format for its
seminar (a debate), hired an influential chairperson and two engaging and
outspoken protagonists. In fact, the event was fun, as the debate wasn’t
too serious, and lots of interesting points were covered. Importantly, the
issues raised by the audience reflected their reservations – objections, if
you like – to homeworking, which proved useful in building successful
sales campaigns to prospects.
You can use influencer-led collateral in your direct mail pieces, webcasts
and podcasts, PR, research and (if you must) advertising. If you are
using influencers appropriately you should get better returns from your
lead generation activities.
We have noticed that, for some firms, the number of leads goes down
over the course of an influencer marketing programme. This is because
more time and effort is being taken on the type and quality of leads, rather
than quantity. So returning from an event with the glass bowl filled with
business cards (delegates only wanted to enter the prize draw) is replaced
by a smaller number of engaged and informed prospects. It’s not the
number of leads you generate that’s important, but the number you
eventually close.
Price increases
It’s easier to increase profits by raising prices than by cutting costs. In fact,
according to McKinsey, a 1 per cent rise in price can lead to an 8 per cent
profit increase. Nobody buys solely on price. If you need proof of this, take
a look at the cars being driven on the road. They are all functionally the
same, yet some people (or companies) pay five or ten times more than
others, based on their perceptions of value.
Influencers increase the perception of value. Why? Because they are
influencers! They are the most important, most respected, most listened to
individuals in your market. Weaving them into your marketing strategy
appropriately means that they implicitly are aligned with your firm. They
confirm the value of what you are selling, and convey confidence in your
solution. So you should be able to sell for more.
What to do with detractors :Business Strategy /Financial Advisors
Inevitably, some people are more predisposed to your firm than others. It
is this difference that allows us to detect an NPS amongst customers.
Similarly, the idea of an Influencer Promoter Score depends on the spread
of disposition across a market’s influencers. It begs the question: if we
have detractors how do we turn them into promoters for (or at least
neutral towards) the firm?
Some firms we know label influencers as detractors or sceptics: influencers
that are fixed in their hostility towards their firm. Nonsense.
Influencers start out neutral. Always. They don’t care whether you are
better or worse than your rivals. This is because influencers don’t buy from
you. Even those influencers that have commercial relationships with you
(e.g. systems integrators, resellers) only do so because it serves their selfinterest.
If you fail to deliver suitable margin they’ll drop you without a
second thought. It is further supported by the efficacy of the Delphi
approach to forecasting.
Delphi uses a panel of experts to reach a consensus
forecast, proven to be a reliable indicator of future outcomes
The first step is to determine whether your perception of detractors is
accurate. Some influencers appear sceptical in an interview situation, then
actively promote you once they’ve digested your news and discussed it
with others. For those influencers that publish their thoughts it’s fairly easy
to determine their favourability, but for other types of influencer it’s much
harder. You have to dig deeper into the DME to find out more.
So why would an influencer become a detractor? Are they naturally
sceptical about any new initiative? Have you given them cause to doubt
your sincerity? Have you offended (or, worse, ignored) them in the past?
The biggest reason for an influencer becoming a detractor is that they
haven’t been marketed to appropriately. This means that they’ve probably
been sent press releases (about you) rather than been consulted on
relevant issues (about them).
Occasionally, an influencer will have an allegiance to, or be, a competitor.
In fact, it’s rare for a competitor to be an active and outspoken
detractor these days, but it does happen. It’s always worthwhile marketing
to a competitor or a channel partner: if they have to insult someone let it
not be your firm. And channel players are notoriously promiscuous,
frequently changing their allegiances. With independent influencers you
will sometime encounter an intellectual disagreement, where they just
don’t agree with your strategy or viewpoint. These can be the most
difficult situations to deal with because influencers can be intransigent
in their views. And then there are the petty reasons such as professional
jealousy and envy.
There are three strategies for dealing with detractors. You can convert
them, surround them with other influencers, thereby neutralising them, or
you can ignore them.
Converting influencers is all about practising influencer marketing. If
you follow the steps that we have outlined throughout this book we’re
confident thatmost detractors will come around. They want some TLC, and
influencermarketing is an idealway to deliver it. Aswe said, themost likely
reason for thembeing detractors in the first place is that youweremarketing
to them badly or not at all. Change this, and you’ll change the influencer.
You’ll remember that influencers cluster together and that they get a lot
of their influence from each other.
Influencers love to influence, and they’ll try to influence each other. Surrounding detractors with neutral
and positive influencers means that some of the positive influence should
rub off onto the detractors. So creating environments (forums, influencer
meetings, even blogs) in which influencers can interact are very effective.
This only works if you have more promoters than detractors, otherwise the
opposite effect may occur. You also have to make sure that you follow up
any group interaction with 1-to-1 marketing, to reinforce the positive
messages relayed from the promoting influencers.
Ignoring influencers is a risky strategy, but it can be effective in some
cases. What we’re actually recommending is that you pretend to ignore the
influencer, by excluding them from your overt attention. But you keep
very close to the influencer to assess their actions and responses. Again,
what you’re trying to do is to create opportunities for influencers to meet
each other, and if your detractor is excluded from these occasions it can
soften their stance towards you.
It could, of course, have the opposite effect, which is why we say it’s a risky approach. This technique works best with influencers further down the order of priority – don’t try it with
your top 20 influencers. Once you detect some movement in their attitude,
swiftly welcome them into the community again. Influencers hate to be
isolated.
is this difference that allows us to detect an NPS amongst customers.
Similarly, the idea of an Influencer Promoter Score depends on the spread
of disposition across a market’s influencers. It begs the question: if we
have detractors how do we turn them into promoters for (or at least
neutral towards) the firm?
Some firms we know label influencers as detractors or sceptics: influencers
that are fixed in their hostility towards their firm. Nonsense.
Influencers start out neutral. Always. They don’t care whether you are
better or worse than your rivals. This is because influencers don’t buy from
you. Even those influencers that have commercial relationships with you
(e.g. systems integrators, resellers) only do so because it serves their selfinterest.
If you fail to deliver suitable margin they’ll drop you without a
second thought. It is further supported by the efficacy of the Delphi
approach to forecasting.
Delphi uses a panel of experts to reach a consensus
forecast, proven to be a reliable indicator of future outcomes
The first step is to determine whether your perception of detractors is
accurate. Some influencers appear sceptical in an interview situation, then
actively promote you once they’ve digested your news and discussed it
with others. For those influencers that publish their thoughts it’s fairly easy
to determine their favourability, but for other types of influencer it’s much
harder. You have to dig deeper into the DME to find out more.
So why would an influencer become a detractor? Are they naturally
sceptical about any new initiative? Have you given them cause to doubt
your sincerity? Have you offended (or, worse, ignored) them in the past?
The biggest reason for an influencer becoming a detractor is that they
haven’t been marketed to appropriately. This means that they’ve probably
been sent press releases (about you) rather than been consulted on
relevant issues (about them).
Occasionally, an influencer will have an allegiance to, or be, a competitor.
In fact, it’s rare for a competitor to be an active and outspoken
detractor these days, but it does happen. It’s always worthwhile marketing
to a competitor or a channel partner: if they have to insult someone let it
not be your firm. And channel players are notoriously promiscuous,
frequently changing their allegiances. With independent influencers you
will sometime encounter an intellectual disagreement, where they just
don’t agree with your strategy or viewpoint. These can be the most
difficult situations to deal with because influencers can be intransigent
in their views. And then there are the petty reasons such as professional
jealousy and envy.
There are three strategies for dealing with detractors. You can convert
them, surround them with other influencers, thereby neutralising them, or
you can ignore them.
Converting influencers is all about practising influencer marketing. If
you follow the steps that we have outlined throughout this book we’re
confident thatmost detractors will come around. They want some TLC, and
influencermarketing is an idealway to deliver it. Aswe said, themost likely
reason for thembeing detractors in the first place is that youweremarketing
to them badly or not at all. Change this, and you’ll change the influencer.
You’ll remember that influencers cluster together and that they get a lot
of their influence from each other.
Influencers love to influence, and they’ll try to influence each other. Surrounding detractors with neutral
and positive influencers means that some of the positive influence should
rub off onto the detractors. So creating environments (forums, influencer
meetings, even blogs) in which influencers can interact are very effective.
This only works if you have more promoters than detractors, otherwise the
opposite effect may occur. You also have to make sure that you follow up
any group interaction with 1-to-1 marketing, to reinforce the positive
messages relayed from the promoting influencers.
Ignoring influencers is a risky strategy, but it can be effective in some
cases. What we’re actually recommending is that you pretend to ignore the
influencer, by excluding them from your overt attention. But you keep
very close to the influencer to assess their actions and responses. Again,
what you’re trying to do is to create opportunities for influencers to meet
each other, and if your detractor is excluded from these occasions it can
soften their stance towards you.
It could, of course, have the opposite effect, which is why we say it’s a risky approach. This technique works best with influencers further down the order of priority – don’t try it with
your top 20 influencers. Once you detect some movement in their attitude,
swiftly welcome them into the community again. Influencers hate to be
isolated.
Why is influencer marketing different from WOM? :Business Strategy /Financial Advisors
WOM is an extraordinary mechanism that communicates marketing messages
throughout a community. To paraphrase a popular slogan from the
1970s, WOM reaches the parts other marketing tactics cannot reach.
There are few marketing approaches that can have had as much discussion
in the twenty-first century as WOM. The ideas that underpin word of
mouth are communicated best byWOM tactics, so that WOM is an instance
of itself. This has been aided by numerous books on the subject. The Tipping
Point features connectors, people that know a lot of other people and
communicate ideas.
Seth Godin’s Unleashing the Ideavirus explores how
and why ideas spread. The Anatomy of Buzz by Emanuel Rosen charted
the mechanics of how to create and sustain WOM. Justin Kirby and
Paul Marsden edited Connected Marketing, a collection of solutions and
approaches based on practitioner experience. And Naked Conversations by
Robert Scoble and Shel Israel noted the migration of WOM from the real
world to the internet through blogs. The definitive guide to implementing
WOM is Andy Sernovitz’s Word of Mouth Marketing.1
WOMis immensely powerful. Arguably it has created the most powerful
brands of today, that of Google. Starbucks, Ikea, Nokia, Prada, Skype and
Tamagotchi were all built predominantly or exclusively on WOM. In many
ways it sits next door to, but is different from, influencer marketing.
Some problems with WOM
Much of the common perception of WOM is that it is spread evenly. The
question that marketers usually ask is, how to get their ideas or messages to
spread to their targetmarket. Emphasis in the answer focuses on the substance
of the message. The perceived wisdom is: create a viral message and watch it
spread.Themajority of activity, therefore, inWOMis inthecreation ofmessages
that are intentionally viral in nature. The big problem here is that it is difficult to
predict which messages eventually do become viral.Whowould have thought
that Linerider would spread like wildfire? Or a yeti clubbing a penguin across a
snowy landscape? (If you have to ask, you should be more connected . . . .)
There is another aspect toWOMthat is regarded universally as a positive
attribute – that it’s good for messages to spread. Spread like what? Oil
spreads on water until the layer of oil is a molecule thick (given enough
space). WD40 spreads everywhere, into every nook and cranny, but that
includes places you don’t want it. Why do you want your message everywhere?
This is traditional marketing mindset. Surely it’s better to target
your WOM efforts at an appropriate audience.
It strikes us that today’s marketers want to useWOMin the next 50 years
like traditional marketers used advertising in the previous 50.WOM, they
think, hits the mass market and is the ideal replacement medium to combat
the diminishing impact of TV and print ads. Those that think this way have
missed the point of WOM.
Consider spam e-mail – you receive something irrelevant from someone
you don’t know. Whoosh – it’s deleted without you even reading it.
We even use automated tools to filter the spam out before we see it.
Much of the generated WOM is the same as spam. It goes from the wrong
people to the wrong people. Most marketers don’t mind this, because
WOMis free at the point of distribution, just like spam and advertising. So
just keep sending it out and some of it will stick.
What most marketers actually want is a message that spreads like
crunchy peanut butter – it spreads, just, but it stays within a defined
boundary (the slice of bread). You don’t want it running down your arm.
Importantly, there are small areas with more impact (the crunchy bits) that
influence the surrounding larger smooth parts. It’s the crunchy bits that
give the whole experience texture and flavour. Smooth peanut butter is
bland, suitable only for the youngest of kids.
It matters whose mouth the words come from
This chapter is all about the inter-relationship between WOM and influencer
marketing. It is influenced by a single idea that appeared in Seth Godin’s
Purple Cow. Seth’s idea was that it is useless to advertise to anyone except
interested sneezers (connectors) with influence. As we say in Chapter 2,
advertising doesn’t work anymore. Actually, that’s not quite true: it does
work on interested people, those that happen to be (a) interested in what
you’re selling, and (b) likely to spread your message to others in their WOM
community. Unfortunately, the likelihood that you find someone with both of
these attributes is tiny, which is why advertising on the whole doesn’t work.
But imagine if you targeted only those people that were both listening
and interested. More, that they would sneeze the message to tell other
people, their friends or work colleagues or associates. This group doesn’t
listen to you, but they listen to the person that’s initially interested.
Most marketing messages are blocked by a wall of indifference
They receive too many messages, they all sound the same,
and even if they were heard and different, they wouldn’t be believed. People
rarely buy just because they are marketed to. The marketing message is
carried, corroborated, enhanced and personalised through influential WOM.
WOM needs sneezers with influence. WOM carried by people other than
influencers is just noise.
People that try to carry WOM inappropriately,
because they don’t have sufficient influence, end up shouting at or boring
their audience. In other words, it matters whose mouth the words come from.
Blogs are an archetype of this sort of WOM. Most blogs are just background
noise. Others try to gain attention by shouting, making controversial,
aggressive or offensive remarks just to get noticed. Only a few blogs carry
influence in any market, and in some markets there are zero influential blogs.
Influencer marketing takes Seth Godin’s idea of advertising to influential
sneezers, and extends it to all forms of marketing. Influencer marketing
is about changing a scatter-shot approach into a rifle-shot one. You
target specific influencers, not generic prospect customers.
WOM, by its nature is difficult to control. Once the message is out there,
there is no stopping it. It can die quickly, pervade the market or go where it
shouldn’t.
Dangers of WOM – the talker can get it wrong
Sometime WOM gets it wrong. Often these end up as harmless urban
myths. But not always, with serious consequences. 3Com is a case in point.
In 2000, suffering from fierce competition with Cisco, 3Com exited its
high-end router business, leaving many of its larger corporate customers
high and dry. Seven years later, 3Com is a different company. There are
new people in charge, the product set is strong and focused, and few
within the company remember the bad old days of 2000. Unfortunately,
negative WOM still exists. 3Com’s biggest sales objection today is: ‘You
screwed us in 2000 and we won’t let you do it again!’
The problem with WOM is that the combination of it being wrong and
out of control is explosive. You have a ton of clearing up to do, with the
prospect that you’ll never quite scrub the whole market clean. Unless you
use influencers. Because influencers have the inside track to decisionmakers
they can carry a corrective message. ‘It’s okay to buy 3Com’.
If you are using WOM as a marketing tactic you must identify the
relevant influencers. There are two main reasons for this:
& Influencers optimise the message. Influencers talk to decision-makers –
that’s what our definition of influencers means. So, again by definition,
influencers take messages to decision-makers. You therefore have an
optimised route to your target market.
& Influencers amplify the message. A message carried by an influencer is
reinforced just by the fact that it’s an influencer doing the communicating.
If the influencer says so, it must be true. So any WOM that
traces its origins back to an influencer carries more weight and impact
than one that can’t be traced (or is traced to someone with little
influence).
WOM is ideally suited to the world of influence. This is because WOM
is a primary mechanism for exerting influence. Recommendations,
experiences, gossip and stories from the field are all types of WOM,
and all related by various influencer types. Some of this communication
is formal and overt, published in books, analyst reports, journalistic
articles and blogs. But much of it, up to 80 per cent we estimate, happens
in closed circles. These can be private meetings, invitation-only events,
on the golf course, in lifts, over lunch and so on. Much of the influence of
consultants and third party advisors to decision-makers comes not in the
form of specific strategic or project recommendations, but by WOM,
whispered in the ear of the decision-maker. It is never published but
sways the decision totally. The WOM mantra ‘Nobody ever got fired for
buying IBM’ is the classic example of this, however out-of-date. It’s
informal, unprovable and possibly never even accurate. But it carried
enormous weight in the 1970s and 1980s.
throughout a community. To paraphrase a popular slogan from the
1970s, WOM reaches the parts other marketing tactics cannot reach.
There are few marketing approaches that can have had as much discussion
in the twenty-first century as WOM. The ideas that underpin word of
mouth are communicated best byWOM tactics, so that WOM is an instance
of itself. This has been aided by numerous books on the subject. The Tipping
Point features connectors, people that know a lot of other people and
communicate ideas.
Seth Godin’s Unleashing the Ideavirus explores how
and why ideas spread. The Anatomy of Buzz by Emanuel Rosen charted
the mechanics of how to create and sustain WOM. Justin Kirby and
Paul Marsden edited Connected Marketing, a collection of solutions and
approaches based on practitioner experience. And Naked Conversations by
Robert Scoble and Shel Israel noted the migration of WOM from the real
world to the internet through blogs. The definitive guide to implementing
WOM is Andy Sernovitz’s Word of Mouth Marketing.1
WOMis immensely powerful. Arguably it has created the most powerful
brands of today, that of Google. Starbucks, Ikea, Nokia, Prada, Skype and
Tamagotchi were all built predominantly or exclusively on WOM. In many
ways it sits next door to, but is different from, influencer marketing.
Some problems with WOM
Much of the common perception of WOM is that it is spread evenly. The
question that marketers usually ask is, how to get their ideas or messages to
spread to their targetmarket. Emphasis in the answer focuses on the substance
of the message. The perceived wisdom is: create a viral message and watch it
spread.Themajority of activity, therefore, inWOMis inthecreation ofmessages
that are intentionally viral in nature. The big problem here is that it is difficult to
predict which messages eventually do become viral.Whowould have thought
that Linerider would spread like wildfire? Or a yeti clubbing a penguin across a
snowy landscape? (If you have to ask, you should be more connected . . . .)
There is another aspect toWOMthat is regarded universally as a positive
attribute – that it’s good for messages to spread. Spread like what? Oil
spreads on water until the layer of oil is a molecule thick (given enough
space). WD40 spreads everywhere, into every nook and cranny, but that
includes places you don’t want it. Why do you want your message everywhere?
This is traditional marketing mindset. Surely it’s better to target
your WOM efforts at an appropriate audience.
It strikes us that today’s marketers want to useWOMin the next 50 years
like traditional marketers used advertising in the previous 50.WOM, they
think, hits the mass market and is the ideal replacement medium to combat
the diminishing impact of TV and print ads. Those that think this way have
missed the point of WOM.
Consider spam e-mail – you receive something irrelevant from someone
you don’t know. Whoosh – it’s deleted without you even reading it.
We even use automated tools to filter the spam out before we see it.
Much of the generated WOM is the same as spam. It goes from the wrong
people to the wrong people. Most marketers don’t mind this, because
WOMis free at the point of distribution, just like spam and advertising. So
just keep sending it out and some of it will stick.
What most marketers actually want is a message that spreads like
crunchy peanut butter – it spreads, just, but it stays within a defined
boundary (the slice of bread). You don’t want it running down your arm.
Importantly, there are small areas with more impact (the crunchy bits) that
influence the surrounding larger smooth parts. It’s the crunchy bits that
give the whole experience texture and flavour. Smooth peanut butter is
bland, suitable only for the youngest of kids.
It matters whose mouth the words come from
This chapter is all about the inter-relationship between WOM and influencer
marketing. It is influenced by a single idea that appeared in Seth Godin’s
Purple Cow. Seth’s idea was that it is useless to advertise to anyone except
interested sneezers (connectors) with influence. As we say in Chapter 2,
advertising doesn’t work anymore. Actually, that’s not quite true: it does
work on interested people, those that happen to be (a) interested in what
you’re selling, and (b) likely to spread your message to others in their WOM
community. Unfortunately, the likelihood that you find someone with both of
these attributes is tiny, which is why advertising on the whole doesn’t work.
But imagine if you targeted only those people that were both listening
and interested. More, that they would sneeze the message to tell other
people, their friends or work colleagues or associates. This group doesn’t
listen to you, but they listen to the person that’s initially interested.
Most marketing messages are blocked by a wall of indifference
They receive too many messages, they all sound the same,
and even if they were heard and different, they wouldn’t be believed. People
rarely buy just because they are marketed to. The marketing message is
carried, corroborated, enhanced and personalised through influential WOM.
WOM needs sneezers with influence. WOM carried by people other than
influencers is just noise.
People that try to carry WOM inappropriately,
because they don’t have sufficient influence, end up shouting at or boring
their audience. In other words, it matters whose mouth the words come from.
Blogs are an archetype of this sort of WOM. Most blogs are just background
noise. Others try to gain attention by shouting, making controversial,
aggressive or offensive remarks just to get noticed. Only a few blogs carry
influence in any market, and in some markets there are zero influential blogs.
Influencer marketing takes Seth Godin’s idea of advertising to influential
sneezers, and extends it to all forms of marketing. Influencer marketing
is about changing a scatter-shot approach into a rifle-shot one. You
target specific influencers, not generic prospect customers.
WOM, by its nature is difficult to control. Once the message is out there,
there is no stopping it. It can die quickly, pervade the market or go where it
shouldn’t.
Dangers of WOM – the talker can get it wrong
Sometime WOM gets it wrong. Often these end up as harmless urban
myths. But not always, with serious consequences. 3Com is a case in point.
In 2000, suffering from fierce competition with Cisco, 3Com exited its
high-end router business, leaving many of its larger corporate customers
high and dry. Seven years later, 3Com is a different company. There are
new people in charge, the product set is strong and focused, and few
within the company remember the bad old days of 2000. Unfortunately,
negative WOM still exists. 3Com’s biggest sales objection today is: ‘You
screwed us in 2000 and we won’t let you do it again!’
The problem with WOM is that the combination of it being wrong and
out of control is explosive. You have a ton of clearing up to do, with the
prospect that you’ll never quite scrub the whole market clean. Unless you
use influencers. Because influencers have the inside track to decisionmakers
they can carry a corrective message. ‘It’s okay to buy 3Com’.
If you are using WOM as a marketing tactic you must identify the
relevant influencers. There are two main reasons for this:
& Influencers optimise the message. Influencers talk to decision-makers –
that’s what our definition of influencers means. So, again by definition,
influencers take messages to decision-makers. You therefore have an
optimised route to your target market.
& Influencers amplify the message. A message carried by an influencer is
reinforced just by the fact that it’s an influencer doing the communicating.
If the influencer says so, it must be true. So any WOM that
traces its origins back to an influencer carries more weight and impact
than one that can’t be traced (or is traced to someone with little
influence).
WOM is ideally suited to the world of influence. This is because WOM
is a primary mechanism for exerting influence. Recommendations,
experiences, gossip and stories from the field are all types of WOM,
and all related by various influencer types. Some of this communication
is formal and overt, published in books, analyst reports, journalistic
articles and blogs. But much of it, up to 80 per cent we estimate, happens
in closed circles. These can be private meetings, invitation-only events,
on the golf course, in lifts, over lunch and so on. Much of the influence of
consultants and third party advisors to decision-makers comes not in the
form of specific strategic or project recommendations, but by WOM,
whispered in the ear of the decision-maker. It is never published but
sways the decision totally. The WOM mantra ‘Nobody ever got fired for
buying IBM’ is the classic example of this, however out-of-date. It’s
informal, unprovable and possibly never even accurate. But it carried
enormous weight in the 1970s and 1980s.
Low-cost vertical industry marketing :Business Strategy /Financial Advisors
Adobe, a developer, distributor and seller of software for business and
creative use, hired California-based Rubicon Consulting to leverage a
vertical market through an influencer marketing programme designed to
select, recruit and develop an advisory group of influential users.
Adobe wanted to find low-cost ways to market one of its flagship
products, photoshop, to vertical markets. The company knew there was
a substantial revenue opportunity. Traditional vertical marketing is costly,
requiring an in-house marketing team of three to four (frequently more)
for each vertical. Influencer marketing leveraged enthusiastic customers
and electronic communications to get the benefits at a fraction of the cost.
Influencers were defined as early adopters who make purchase recommendations
and channel comments and ideas from a market to the vendor.
The desired goal was interaction at decisive moments of trust. By making
influencers into informal, extended members of the marketing team, the
firm would reach its target consumers as those moments occurred.
There were four phases to the resulting project:
Target determination: Rubicon documented goals and expectations.
An internal audit and data analysis were performed.
The market segment to be pursued was determined. The deliverable
was a written report recommending which vertical to pursue and
success metrics with 90-day, 6-month and 1-year benchmarks.
Pilot plan creation: Rubicon determined programme steps and
resources required. The programme was designed to educate
influencers about Adobe’s products and services, and to provide
tools for ease of information sharing with influencers. The project
would determine how, where and when opinions were being
shared in the market, identify targeted key influencers and then
create engagement programmes to leverage influencers.
Approaches included:
& Develop tools to make ‘telling a friend’ easier.
& Create forums, feedback tools and an influencer advisory group.
& Create blogs and other tools to share information.
& Participate openly on non-Adobe online blogs and discussions.
& Work with social networks. Host discussions/message boards about
products.
Support independent, grassroots groups that form around a product.
& Provide recognition and tools to active advocates.
& Track/respond to conversations by supporters, detractors and
neutrals.
& Metrics and ROI measures.
Pilot plan execution: Rubicon deployed the pilot (using proprietary
methods and tools), identified groups and individuals, then tested
the tools, programmes and resources for 3 months. Influencers
were recruited. A critical factor was selecting people likely to share
their opinions and create a multiplier effect.
Recommendations for next steps and documentation of best practices:
The firm received documentation on what worked, what
didn’t and recommendations for the future. A key employee was
debriefed, after which they took on programme management inhouse.
Rubicon concluded that influencer programmes must adapt to the
unique needs of the market and that communication must be calibrated
to methods preferred by the influencer group. Recruiting of influencers
should be performed in two phases to ensure the proper mix of
productive advisory group members. Insights gleaned from the first
round of recruiting should be leveraged during the second round to
achieve a mix of influencers that reflect all product subgroups. It is
important to ensure that influencer group members are active, not
silent.
It also found that influencers want companies to provide leadership in
setting standards. Firms employing influencer marketing techniques must
identify an in-house individual who will maintain relationships and
momentum, and to measure responses and effectiveness to make sure
that goals are achieved.
creative use, hired California-based Rubicon Consulting to leverage a
vertical market through an influencer marketing programme designed to
select, recruit and develop an advisory group of influential users.
Adobe wanted to find low-cost ways to market one of its flagship
products, photoshop, to vertical markets. The company knew there was
a substantial revenue opportunity. Traditional vertical marketing is costly,
requiring an in-house marketing team of three to four (frequently more)
for each vertical. Influencer marketing leveraged enthusiastic customers
and electronic communications to get the benefits at a fraction of the cost.
Influencers were defined as early adopters who make purchase recommendations
and channel comments and ideas from a market to the vendor.
The desired goal was interaction at decisive moments of trust. By making
influencers into informal, extended members of the marketing team, the
firm would reach its target consumers as those moments occurred.
There were four phases to the resulting project:
Target determination: Rubicon documented goals and expectations.
An internal audit and data analysis were performed.
The market segment to be pursued was determined. The deliverable
was a written report recommending which vertical to pursue and
success metrics with 90-day, 6-month and 1-year benchmarks.
Pilot plan creation: Rubicon determined programme steps and
resources required. The programme was designed to educate
influencers about Adobe’s products and services, and to provide
tools for ease of information sharing with influencers. The project
would determine how, where and when opinions were being
shared in the market, identify targeted key influencers and then
create engagement programmes to leverage influencers.
Approaches included:
& Develop tools to make ‘telling a friend’ easier.
& Create forums, feedback tools and an influencer advisory group.
& Create blogs and other tools to share information.
& Participate openly on non-Adobe online blogs and discussions.
& Work with social networks. Host discussions/message boards about
products.
Support independent, grassroots groups that form around a product.
& Provide recognition and tools to active advocates.
& Track/respond to conversations by supporters, detractors and
neutrals.
& Metrics and ROI measures.
Pilot plan execution: Rubicon deployed the pilot (using proprietary
methods and tools), identified groups and individuals, then tested
the tools, programmes and resources for 3 months. Influencers
were recruited. A critical factor was selecting people likely to share
their opinions and create a multiplier effect.
Recommendations for next steps and documentation of best practices:
The firm received documentation on what worked, what
didn’t and recommendations for the future. A key employee was
debriefed, after which they took on programme management inhouse.
Rubicon concluded that influencer programmes must adapt to the
unique needs of the market and that communication must be calibrated
to methods preferred by the influencer group. Recruiting of influencers
should be performed in two phases to ensure the proper mix of
productive advisory group members. Insights gleaned from the first
round of recruiting should be leveraged during the second round to
achieve a mix of influencers that reflect all product subgroups. It is
important to ensure that influencer group members are active, not
silent.
It also found that influencers want companies to provide leadership in
setting standards. Firms employing influencer marketing techniques must
identify an in-house individual who will maintain relationships and
momentum, and to measure responses and effectiveness to make sure
that goals are achieved.
DEEP ANALYSIS CAN GET YOU IN DEEP TROUBLE :Business Strategy /Financial Advisors
All our analysis was for naught. We misjudged demand, failed to anticipate
the intensity of the hurricane season and political developments,
and were less respectful than we should have been of market psychology
and its effect on price momentum.We first sold oil short in May at
around 40, and we squirmed as it promptly rallied to over 42.Then on
the last day of June, it fell to 36.That afternoon, we actually considered
covering some, but we didn’t. Our analysis indicated oil was still materially
overpriced.Why lose our position?
We were just plain wrong. Oil prices proceeded to climb and began
a virtually vertical ascent as terrorism and sabotage in Iraq, a tax dispute
in Russia, a strike in Nigeria, and a presidential recall vote in Venezuela
roiled the market for crude. Convinced that these were temporary disruptions,
and reassured by announcements of increases in OPEC production,
we increased the size of our short position. Our fundamental
analysis and our model continued to say that the equilibrium price of
oil was somewhere between 28 and 32 a barrel. Inventories were building,
OPEC was pumping, and the world economy was slowing.We reasoned
that if oil could overshoot its equilibrium price, it could also
undershoot.We still loved our short.
Furthermore,we were confident that the huge rise in the price that
had already occurred would eventually cause conservation and the substitution
of alternative sources of energy.
From the beginning, our practice had been to write a detailed
monthly letter to our investor partners to keep them fully informed of
our thinking and performance. Unfortunately, despite our pleas for confidentiality,
the letter got passed around via e-mail, so our performance
and positions became known. In our July letter, we stressed that we
were value, not momentum, investors. In our process, when the price of
an investment goes against bias by more than 15% in the case of a commodity,
it triggers an automatic review of the fundamentals. Following
that review we either have to add to the position or close it.As value investors,
if the fundamentals have not changed, our inclination is to add
to the position in question, not close it, because the price change has
actually made it more attractive, not less. Investing on the basis of value,
not price momentum, is our religion.
Warren Buffett articulated this philosophy best with his manicpartner
analogy. At a talk I attended, in one of his musings, he expressed
it something like this:
Suppose you are an equal partner in a good business with a manicdepressive
partner named Mr. Market. From time to time,Mr. Market
will only see the favorable factors affecting your business and will then
become so euphoric about the prospects of the business that he will come
to you and offer to buy your half at a ridiculously high price. So, of
course, you should sell it to him.
At other times, seeing only trouble ahead for your firm, he becomes
deeply depressed and in his despair offers to sell you his share
at an outrageous discount to its intrinsic value.Then, you should buy
it from him.
Buffett went on to say that it was irrational, the height of foolishness,
to sell an asset you were confident was undervalued just because its
price was falling. In other words, Mr. Market can be an old fool (or
maybe a young fool) who, from time to time, becomes hysterical.
Sometimes, in his madness, he sees ghosts. At others, he imagines the
good fairy touching him with her long golden fingers.
You are perfectly free to ignore Mr.Market or to take advantage of him,
but it will be disastrous if you fall under his influence. Suppose the
price you could sell your home at was quoted every day. For several
months the quotation steadily declined.Would you then sell your home,
the home you were comfortable in and satisfied with, just because its
price was declining? Of course not! In this sense, an attractive investment
is similar to a home you are happy to inhabit.
Mr. Buffett’s value philosophizing sounds eminently sensible, but it
doesn’t work when you are trafficking in commodities and you have
short-term-performance sensitive clients. On August 19, the price of
oil hit 48, equity markets were reeling, and we were down 7% for the
year.The next day the New York Times ran a story, complete with a picture
of me looking bedraggled, that reported Traxis was suffering substantial
losses from its oil short. Furthermore, the tone of the piece was
that I was a loser, which, because everybody I know reads the Times, did
not exactly lift my spirits.That weekend when I went out to dinner at
the country club, I sensed people watching me, but when I tried to
meet their eyes, they looked away.
the intensity of the hurricane season and political developments,
and were less respectful than we should have been of market psychology
and its effect on price momentum.We first sold oil short in May at
around 40, and we squirmed as it promptly rallied to over 42.Then on
the last day of June, it fell to 36.That afternoon, we actually considered
covering some, but we didn’t. Our analysis indicated oil was still materially
overpriced.Why lose our position?
We were just plain wrong. Oil prices proceeded to climb and began
a virtually vertical ascent as terrorism and sabotage in Iraq, a tax dispute
in Russia, a strike in Nigeria, and a presidential recall vote in Venezuela
roiled the market for crude. Convinced that these were temporary disruptions,
and reassured by announcements of increases in OPEC production,
we increased the size of our short position. Our fundamental
analysis and our model continued to say that the equilibrium price of
oil was somewhere between 28 and 32 a barrel. Inventories were building,
OPEC was pumping, and the world economy was slowing.We reasoned
that if oil could overshoot its equilibrium price, it could also
undershoot.We still loved our short.
Furthermore,we were confident that the huge rise in the price that
had already occurred would eventually cause conservation and the substitution
of alternative sources of energy.
From the beginning, our practice had been to write a detailed
monthly letter to our investor partners to keep them fully informed of
our thinking and performance. Unfortunately, despite our pleas for confidentiality,
the letter got passed around via e-mail, so our performance
and positions became known. In our July letter, we stressed that we
were value, not momentum, investors. In our process, when the price of
an investment goes against bias by more than 15% in the case of a commodity,
it triggers an automatic review of the fundamentals. Following
that review we either have to add to the position or close it.As value investors,
if the fundamentals have not changed, our inclination is to add
to the position in question, not close it, because the price change has
actually made it more attractive, not less. Investing on the basis of value,
not price momentum, is our religion.
Warren Buffett articulated this philosophy best with his manicpartner
analogy. At a talk I attended, in one of his musings, he expressed
it something like this:
Suppose you are an equal partner in a good business with a manicdepressive
partner named Mr. Market. From time to time,Mr. Market
will only see the favorable factors affecting your business and will then
become so euphoric about the prospects of the business that he will come
to you and offer to buy your half at a ridiculously high price. So, of
course, you should sell it to him.
At other times, seeing only trouble ahead for your firm, he becomes
deeply depressed and in his despair offers to sell you his share
at an outrageous discount to its intrinsic value.Then, you should buy
it from him.
Buffett went on to say that it was irrational, the height of foolishness,
to sell an asset you were confident was undervalued just because its
price was falling. In other words, Mr. Market can be an old fool (or
maybe a young fool) who, from time to time, becomes hysterical.
Sometimes, in his madness, he sees ghosts. At others, he imagines the
good fairy touching him with her long golden fingers.
You are perfectly free to ignore Mr.Market or to take advantage of him,
but it will be disastrous if you fall under his influence. Suppose the
price you could sell your home at was quoted every day. For several
months the quotation steadily declined.Would you then sell your home,
the home you were comfortable in and satisfied with, just because its
price was declining? Of course not! In this sense, an attractive investment
is similar to a home you are happy to inhabit.
Mr. Buffett’s value philosophizing sounds eminently sensible, but it
doesn’t work when you are trafficking in commodities and you have
short-term-performance sensitive clients. On August 19, the price of
oil hit 48, equity markets were reeling, and we were down 7% for the
year.The next day the New York Times ran a story, complete with a picture
of me looking bedraggled, that reported Traxis was suffering substantial
losses from its oil short. Furthermore, the tone of the piece was
that I was a loser, which, because everybody I know reads the Times, did
not exactly lift my spirits.That weekend when I went out to dinner at
the country club, I sensed people watching me, but when I tried to
meet their eyes, they looked away.
WHAT I LEARNED FROM THE EARLY 1900S: THE MARKET HASN’T CHANGED THAT MUCH :Business Strategy /Financial Advisors
While we were being tortured by our crude short, various people attempted
to give me succor of one type or another. Guys I know who are
professional commodity traders effusively offered advice, most of which
was to buy strength and sell weakness, in other words to go with the
flow.They unabashedly told me their short-selling trading tactic invariably
was “Don’t fight a losing position. If it doesn’t show you a profit,
cover it.” Not very helpful, because we were and are value investors.
In my agony, I took out and reread passages from my trading bible,
Reminiscences of a Stock Operator by Edwin Lefevre. The book was first
published in 1923 and is long out of print, but it can be bought from
time to time on the Internet.There is little doubt that the stock operator
who is the narrator in the book was the legendary Jesse Livermore.
The late Gerald Loeb, who wrote The Battle for Investment Survival (“Put
all your eggs in one basket and then watch the basket”), and who often
acted as Livermore’s broker, told me that Livermore had used Lefevre as
his scribe for Reminiscences. Regardless of who actually wrote it, the
book is the distilled trading wisdom and market anecdotes of a professional
trader operating in the frantic milieu of pools, tips, manipulation,
and tape reading of the first third of the past century. Markets haven’t
changed that much a century later. It is, by far, the best trading book
ever written.
Livermore was a fascinating character. He was a boardroom tape
watcher and trader in the style of the times, but he was also very sensitive
to market sentiment and value. He stressed how crucial was a deep
understanding of human psychology and the interplay of greed and
fear. Trading was much more about human nature than tips and
hunches. In the early 1900s, he came out of nowhere to make his first
big killing trading grain from a Chicago bucket shop. He sidestepped
the panic of 1907 and came to Wall Street in 1908 with $3 million,
which was a decent fortune in those days. Handsome, dapper, and articulate,
Livermore bought a seat on the New York Stock Exchange and
proceeded to challenge the Wall Street tycoon establishment.The great
financiers like J.P. Morgan disdained stock-market operators, but a man
like Livermore could rattle their cages.
Livermore was a bear by disposition, and in 1915 he went short
stocks and suffered heavy losses. However, realizing he was wrong, he
reversed his position and made big gains in the 1916 to 1919 bull market,
but so did a lot of other people. However, he really distinguished
himself by anticipating the sudden and brutal postwar depression and
crash that wiped out so many businessmen and speculators. In 1919, he
sold everything, went short, and although he was early, eventually made
a fortune in the bust that followed. In 1922, Livermore had a big hit in
grain, and in the early 1920s he managed the infamous Piggly-Wiggly
pool that ignited speculation and ignited the bull market. However, his
inherent bearish bias and his sense that greed was in total ascendancy
kept him from fully participating in the madness of the late 1920s. Loeb
once told me that Livermore was a great admirer of Walter Bagehot, the
first editor of The Economist, and often cited this stupid-money paragraph
from Bagehot’s essay on Edward Gibbon:
Much has been written about panics and manias,much more than with
the most outstretched intellect we are able to follow or conceive, but one
thing is certain, that at particular times a great deal of stupid people
have a great deal of stupid money. . . . At intervals, from causes which
are not to the present purpose, the money of these people—the blind
capital, as we call it, of the country—is particularly large and craving; it
seeks for someone to devour it, and there is a “plethora”; it finds someone,
and there is “speculation”; it is devoured, and there is a “panic.”
Livermore wanted to be there, short of stocks, when the “stupid
money” was “devoured,” as he was convinced it always would be—
eventually. I am fascinated with his credo of being an investor/trader. In
the book, the protagonist for Livermore, the Old Turkey, sounds like
Buffett’s spiritual father as he repeatedly preaches “sitting tight” with a
position you really believe in.“Don’t over-think it and don’t over-trade.
Men who can be both right and sit tight are uncommon,” says the Old
Turkey. “I found it [this principle] one of the hardest things to learn.
But it is only after a stock operator has grasped this that he can make
the big money.”
The Old Turkey, like Livermore, is essentially a professional trader in
commodities and stocks. However, again like Livermore and unlike the
plungers and the peacocks of that speculative era that was coming to an
end, he understood that, without the cover of a pool or inside information,
trading was essentially a zero-sum game but that investing could be
a winner’s game.
Without faith in his own judgment no man can go very far in this
game.That is about all I have learned—to study general conditions, to
take a position and stick to it. I can wait without a twinge of impatience.
I can see a setback without being shaken, knowing that it is only
temporary. I have been short one hundred thousand shares and I have
seen a big rally coming. I knew it would make a difference of one million
dollars in my paper profits. And I nevertheless have stood pat and
seen half my profit wiped out without once considering the advisability
of covering my shorts to put them out again in the rally. I knew that if
I did I might lose my position and with it the certainty of a big killing.
It is the big swings that make the big money for you.
Of course none of this “sitting tight” means that if the fundamentals
of your investment deteriorate, you don’t sell your long or cover your
short. As John Maynard Keynes famously said, “If the facts change, I
change my mind, sir.What would you do, sir?”
We have an investor who has been a commodity trader all his business
life. I read him the Old Turkey’s quotation. “Yeah,” he said, “and
you know how Jesse Livermore ended up?” I said no. He told me.“After
being bearish in the late 1920s, Livermore finally capitulated in mid-
1929, went heavily long, and was virtually wiped out in the Crash.
Some years later he committed suicide in the men’s room of The Biltmore.”
I don’t know if that is true or not.
Meanwhile oil continued to work higher.
to give me succor of one type or another. Guys I know who are
professional commodity traders effusively offered advice, most of which
was to buy strength and sell weakness, in other words to go with the
flow.They unabashedly told me their short-selling trading tactic invariably
was “Don’t fight a losing position. If it doesn’t show you a profit,
cover it.” Not very helpful, because we were and are value investors.
In my agony, I took out and reread passages from my trading bible,
Reminiscences of a Stock Operator by Edwin Lefevre. The book was first
published in 1923 and is long out of print, but it can be bought from
time to time on the Internet.There is little doubt that the stock operator
who is the narrator in the book was the legendary Jesse Livermore.
The late Gerald Loeb, who wrote The Battle for Investment Survival (“Put
all your eggs in one basket and then watch the basket”), and who often
acted as Livermore’s broker, told me that Livermore had used Lefevre as
his scribe for Reminiscences. Regardless of who actually wrote it, the
book is the distilled trading wisdom and market anecdotes of a professional
trader operating in the frantic milieu of pools, tips, manipulation,
and tape reading of the first third of the past century. Markets haven’t
changed that much a century later. It is, by far, the best trading book
ever written.
Livermore was a fascinating character. He was a boardroom tape
watcher and trader in the style of the times, but he was also very sensitive
to market sentiment and value. He stressed how crucial was a deep
understanding of human psychology and the interplay of greed and
fear. Trading was much more about human nature than tips and
hunches. In the early 1900s, he came out of nowhere to make his first
big killing trading grain from a Chicago bucket shop. He sidestepped
the panic of 1907 and came to Wall Street in 1908 with $3 million,
which was a decent fortune in those days. Handsome, dapper, and articulate,
Livermore bought a seat on the New York Stock Exchange and
proceeded to challenge the Wall Street tycoon establishment.The great
financiers like J.P. Morgan disdained stock-market operators, but a man
like Livermore could rattle their cages.
Livermore was a bear by disposition, and in 1915 he went short
stocks and suffered heavy losses. However, realizing he was wrong, he
reversed his position and made big gains in the 1916 to 1919 bull market,
but so did a lot of other people. However, he really distinguished
himself by anticipating the sudden and brutal postwar depression and
crash that wiped out so many businessmen and speculators. In 1919, he
sold everything, went short, and although he was early, eventually made
a fortune in the bust that followed. In 1922, Livermore had a big hit in
grain, and in the early 1920s he managed the infamous Piggly-Wiggly
pool that ignited speculation and ignited the bull market. However, his
inherent bearish bias and his sense that greed was in total ascendancy
kept him from fully participating in the madness of the late 1920s. Loeb
once told me that Livermore was a great admirer of Walter Bagehot, the
first editor of The Economist, and often cited this stupid-money paragraph
from Bagehot’s essay on Edward Gibbon:
Much has been written about panics and manias,much more than with
the most outstretched intellect we are able to follow or conceive, but one
thing is certain, that at particular times a great deal of stupid people
have a great deal of stupid money. . . . At intervals, from causes which
are not to the present purpose, the money of these people—the blind
capital, as we call it, of the country—is particularly large and craving; it
seeks for someone to devour it, and there is a “plethora”; it finds someone,
and there is “speculation”; it is devoured, and there is a “panic.”
Livermore wanted to be there, short of stocks, when the “stupid
money” was “devoured,” as he was convinced it always would be—
eventually. I am fascinated with his credo of being an investor/trader. In
the book, the protagonist for Livermore, the Old Turkey, sounds like
Buffett’s spiritual father as he repeatedly preaches “sitting tight” with a
position you really believe in.“Don’t over-think it and don’t over-trade.
Men who can be both right and sit tight are uncommon,” says the Old
Turkey. “I found it [this principle] one of the hardest things to learn.
But it is only after a stock operator has grasped this that he can make
the big money.”
The Old Turkey, like Livermore, is essentially a professional trader in
commodities and stocks. However, again like Livermore and unlike the
plungers and the peacocks of that speculative era that was coming to an
end, he understood that, without the cover of a pool or inside information,
trading was essentially a zero-sum game but that investing could be
a winner’s game.
Without faith in his own judgment no man can go very far in this
game.That is about all I have learned—to study general conditions, to
take a position and stick to it. I can wait without a twinge of impatience.
I can see a setback without being shaken, knowing that it is only
temporary. I have been short one hundred thousand shares and I have
seen a big rally coming. I knew it would make a difference of one million
dollars in my paper profits. And I nevertheless have stood pat and
seen half my profit wiped out without once considering the advisability
of covering my shorts to put them out again in the rally. I knew that if
I did I might lose my position and with it the certainty of a big killing.
It is the big swings that make the big money for you.
Of course none of this “sitting tight” means that if the fundamentals
of your investment deteriorate, you don’t sell your long or cover your
short. As John Maynard Keynes famously said, “If the facts change, I
change my mind, sir.What would you do, sir?”
We have an investor who has been a commodity trader all his business
life. I read him the Old Turkey’s quotation. “Yeah,” he said, “and
you know how Jesse Livermore ended up?” I said no. He told me.“After
being bearish in the late 1920s, Livermore finally capitulated in mid-
1929, went heavily long, and was virtually wiped out in the Crash.
Some years later he committed suicide in the men’s room of The Biltmore.”
I don’t know if that is true or not.
Meanwhile oil continued to work higher.
BIG-TIME MONEY RAISING AT THE BREAKERS :Business Strategy /Financial Advisors
the odyssey of raising money begins. Madhav, my
partner in illusion, and I flew to Palm Beach for Morgan Stanley’s fabled
hedge-fund conference at The Breakers.This conference is widely
considered the prime event at which to raise money because it attracts
the biggest, richest collection of hedge-fund buyers in the world. I had
never attended before. It is an amazing event.There must have been at
least 500 people in attendance, overflowing the richly appointed meeting
rooms and lawns of the great hotel by the ocean.
After an elaborate opening dinner and a couple of investor panels
with various hedge-fund managers trying to talk smart and appear brilliant,
there were two long days of nonstop group presentations and oneon-
one pitches with another fancy dinner the second night. The
intensity and the hustle level were incredibly high. Everybody was on
the make.The conference is organized and paid for by Morgan Stanley’s
Prime Brokerage division, and its sole purpose is to bring together
prospective investors in hedge funds with the funds that either clear
through or (like us) are going to clear through Morgan Stanley. Morgan
Stanley’s prime brokerage guys made a big deal of my being on an investment
panel and of our being given a major slot to present at the
conference.
Morgan Stanley is the biggest factor in the very lucrative prime
brokerage business.The firm’s prime brokerage business is an extremely
well managed, big fat gold mine.Why is it so attractive? Because it is a
direct beneficiary of the growth of the hedge-fund industry, which has
been, by far, the most dynamic segment of the asset management space.
The money managed by hedge funds has grown from $36 billion in
1990 to more than $1 trillion by the end of 2004, and no business that
the world’s investment banks are involved with has anywhere near those
growth and profitability characteristics. However, there are so many
new entrants trying to buy their way into the business by poaching
people that the bloom is beginning to come off the rose. Some large
hedge funds, in an effort to spread the wealth around, have more than
one prime broker.
What do prime brokers do? They provide securities to cover short
sales, make margin loans, clear trades, provide reporting services and
custody assets, provide research, and help with money raising. A fund’s
prime broker executes roughly 25% to 30% of its hedge-fund clients’
transactions, and most provide a daily net asset value (NAV) and a rudimentary
risk management system. The prime broker will find a new
hedge-fund office space, an operations officer, and traders, and it will
also provide basic accounting systems. How do prime brokers make
money? First, they earn from commissions and order flow, and hedge
funds now account for about one-third of total trading volume. Second
and most important, hedge funds are a captive source of demand for the
lucrative securities and margin lending activities from which a prime
broker locks in a fat spread. Morgan Stanley has the biggest prime brokerage
book, and its volume and profits have been growing at around
20% per annum. It’s now a major and cherished profit contributor to
the firm, with revenues currently well over $1 billion.
The competition for clients among the prime brokers is about service
and back-office infrastructure, but it is also about so-called capital
introductions. Prime brokers legally can only introduce hedge funds to
prospective investors; they can’t actually make pitches or solicit clients.
Only the hedge funds themselves can do that. Morgan Stanley has been
helpful in critiquing our presentation and advising us on office infrastructure.
In the months to come, the prime brokerage will organize
lunches or dinners for us with prospective investors across the United
States and in London, Geneva, and Hong Kong. At these functions, we
will tell our story. After that, about all Morgan Stanley can do is call the
prospective investor and ask if they would like to hear more. In addition
to the Breakers conference, Morgan Stanley and the other prime bro-
kers have various conferences for new managers throughout the year in
the United States, Europe, and Asia, but the meeting at The Breakers is
the big one!
I viewed the conference with trepidation.While at Morgan Stanley,
I had certainly peddled to plenty of blasé, semiskeptical audiences, but I
had also accumulated my allocation of hubris, and I was a little disconcerted
to be in Palm Beach grubbing for money with all the other
twerps. I envied the superstar hedge-fund guys who have a surfeit of
capital and don’t deign to appear at conferences. It is only we struggling
mortals who want money who come hat in hand. The superstars have
marketing managers who organize their own annual meetings with
their investors, complete with elaborate presentations by the messiah
himself and his entourage. In the glory days of Tiger, Julian Robertson
took this venue to new heights, with glittering formal dinner dances
following annual business sessions in wonderful settings like the Temple
of Dendur at the Metropolitan Museum of Art, the Duke of Wellington’s
house in London, and a chateau outside Paris. However, hedgefund
investors are not fools, and parties are not substitutes for
performance. Julian’s investors liked the parties, but they loved his performance
even more.
The group presentations are grindingly repetitious. The day is divided
into 45-minute segments with 10-minute intervals, and the
crowd circulates from one room to another. Madhav and I made the
same basic presentation over and over to groups of 10 to 30 people.The
skeptical faces gaze up at you, and by the fourth or fifth rendition you
are varying the routine to keep yourself from going batty, but by then
you can’t remember what you have or haven’t said.
On the second evening at The Breakers, there is a cocktail reception
on the terrace.The night was clear with stars and a moon, but cold
for Florida. Moët et Chandon champagne and the best California
chardonnay flowed under a cold, pale moon with a vast crowd of beautifully
dressed people milling about, gossiping in many tongues about
the rise and fall of hedge funds and their managers. In this milieu, a
Swiss accent is worth an automatic 50 IQ points, and an Oxbridge
tongue is worth 25. Plain old American is definitely déclassé.
partner in illusion, and I flew to Palm Beach for Morgan Stanley’s fabled
hedge-fund conference at The Breakers.This conference is widely
considered the prime event at which to raise money because it attracts
the biggest, richest collection of hedge-fund buyers in the world. I had
never attended before. It is an amazing event.There must have been at
least 500 people in attendance, overflowing the richly appointed meeting
rooms and lawns of the great hotel by the ocean.
After an elaborate opening dinner and a couple of investor panels
with various hedge-fund managers trying to talk smart and appear brilliant,
there were two long days of nonstop group presentations and oneon-
one pitches with another fancy dinner the second night. The
intensity and the hustle level were incredibly high. Everybody was on
the make.The conference is organized and paid for by Morgan Stanley’s
Prime Brokerage division, and its sole purpose is to bring together
prospective investors in hedge funds with the funds that either clear
through or (like us) are going to clear through Morgan Stanley. Morgan
Stanley’s prime brokerage guys made a big deal of my being on an investment
panel and of our being given a major slot to present at the
conference.
Morgan Stanley is the biggest factor in the very lucrative prime
brokerage business.The firm’s prime brokerage business is an extremely
well managed, big fat gold mine.Why is it so attractive? Because it is a
direct beneficiary of the growth of the hedge-fund industry, which has
been, by far, the most dynamic segment of the asset management space.
The money managed by hedge funds has grown from $36 billion in
1990 to more than $1 trillion by the end of 2004, and no business that
the world’s investment banks are involved with has anywhere near those
growth and profitability characteristics. However, there are so many
new entrants trying to buy their way into the business by poaching
people that the bloom is beginning to come off the rose. Some large
hedge funds, in an effort to spread the wealth around, have more than
one prime broker.
What do prime brokers do? They provide securities to cover short
sales, make margin loans, clear trades, provide reporting services and
custody assets, provide research, and help with money raising. A fund’s
prime broker executes roughly 25% to 30% of its hedge-fund clients’
transactions, and most provide a daily net asset value (NAV) and a rudimentary
risk management system. The prime broker will find a new
hedge-fund office space, an operations officer, and traders, and it will
also provide basic accounting systems. How do prime brokers make
money? First, they earn from commissions and order flow, and hedge
funds now account for about one-third of total trading volume. Second
and most important, hedge funds are a captive source of demand for the
lucrative securities and margin lending activities from which a prime
broker locks in a fat spread. Morgan Stanley has the biggest prime brokerage
book, and its volume and profits have been growing at around
20% per annum. It’s now a major and cherished profit contributor to
the firm, with revenues currently well over $1 billion.
The competition for clients among the prime brokers is about service
and back-office infrastructure, but it is also about so-called capital
introductions. Prime brokers legally can only introduce hedge funds to
prospective investors; they can’t actually make pitches or solicit clients.
Only the hedge funds themselves can do that. Morgan Stanley has been
helpful in critiquing our presentation and advising us on office infrastructure.
In the months to come, the prime brokerage will organize
lunches or dinners for us with prospective investors across the United
States and in London, Geneva, and Hong Kong. At these functions, we
will tell our story. After that, about all Morgan Stanley can do is call the
prospective investor and ask if they would like to hear more. In addition
to the Breakers conference, Morgan Stanley and the other prime bro-
kers have various conferences for new managers throughout the year in
the United States, Europe, and Asia, but the meeting at The Breakers is
the big one!
I viewed the conference with trepidation.While at Morgan Stanley,
I had certainly peddled to plenty of blasé, semiskeptical audiences, but I
had also accumulated my allocation of hubris, and I was a little disconcerted
to be in Palm Beach grubbing for money with all the other
twerps. I envied the superstar hedge-fund guys who have a surfeit of
capital and don’t deign to appear at conferences. It is only we struggling
mortals who want money who come hat in hand. The superstars have
marketing managers who organize their own annual meetings with
their investors, complete with elaborate presentations by the messiah
himself and his entourage. In the glory days of Tiger, Julian Robertson
took this venue to new heights, with glittering formal dinner dances
following annual business sessions in wonderful settings like the Temple
of Dendur at the Metropolitan Museum of Art, the Duke of Wellington’s
house in London, and a chateau outside Paris. However, hedgefund
investors are not fools, and parties are not substitutes for
performance. Julian’s investors liked the parties, but they loved his performance
even more.
The group presentations are grindingly repetitious. The day is divided
into 45-minute segments with 10-minute intervals, and the
crowd circulates from one room to another. Madhav and I made the
same basic presentation over and over to groups of 10 to 30 people.The
skeptical faces gaze up at you, and by the fourth or fifth rendition you
are varying the routine to keep yourself from going batty, but by then
you can’t remember what you have or haven’t said.
On the second evening at The Breakers, there is a cocktail reception
on the terrace.The night was clear with stars and a moon, but cold
for Florida. Moët et Chandon champagne and the best California
chardonnay flowed under a cold, pale moon with a vast crowd of beautifully
dressed people milling about, gossiping in many tongues about
the rise and fall of hedge funds and their managers. In this milieu, a
Swiss accent is worth an automatic 50 IQ points, and an Oxbridge
tongue is worth 25. Plain old American is definitely déclassé.
INVEST FIRST AND ASK QUESTIONS LATER
Suddenly a familiar face loomed up out of the cocktail party mist. It was
Jim, a guy I knew from the past, a guy a lot of people refer to as Jim the
Trigger. When he is working, Jim is an investment manager like me.
People in the business call him the Trigger, as in hair trigger, because, as a
portfolio manager, he reacts so quickly to a story.This sobriquet is not
necessarily flattering; invest first and ask questions later is what is implied.“
Ready! Fire! Aim!” is the Trigger’s modus vivendi. In a bull market,
when the mongrels are running, it works great. In tougher times
like now, it’s not so effective.
The Trigger is a handsome guy in a sleek, sculptured, California sort
of way.The top three buttons of his fitted shirt are unbuttoned, and his
sports jacket clings to his shoulders. Our eyes meet. Jim’s are haunted
and a little mad, but who is not a little deranged on the terrace of The
The Trigger’s career has experienced a few undulations. He is always
into what is hot, but sometimes gets there a little late or just before
it gets cold.The Trigger is and always has been a momentum investor, a
player in the parlance, and his strength (and his weakness) is that he has
no memory for pain. He unfailingly gravitates to where the fast money
is, and he is capable of putting up enormous numbers in a hot, trending
market. However, in the past he has often followed the lemmings over
the proverbial cliff. I like him, though, because, in the heat of each moment,
he truly believes his own bullshit and doesn’t pretend to be anything
other than what he is—a stock jockey.
I first knew the Trigger in the early 1980s when his aggressive
growth-stock fund was loaded with whisper stocks like the small oil exploration
companies and drillers with names like Three Guys and a
Rig. He was up 40% in 1979 and 65% in 1980, and the money came
pouring in. But then in 1981, when oil overnight went from being
black gold to just another commodity, the Trigger’s fund was down
55%. He almost lost his job, as I remember it, but in 1982 and 1983, he
came back and shot the lights out with the small tech and emerging
growth stocks, his “beloved athletes” as he called them. In those days he
would go to a company presentation, meet the adolescent storyteller,
listen to the pitch, come out saying,“The kid’s a gifted natural athlete, a
winner,” and then buy a couple of hundred thousand shares without
ever seeing a number.
Subsequently, when his beloved athletes died horrible deaths and
the moon balls crashed in the mid-1980s, the Trigger actually did get
fired, but he has a great sense of the game and he always gravitates relentlessly
toward relative strength.Value was in and growth was out, and
he knew he had to change and find new faces to fall in love with. He
caught on with a value investing firm called U3—for Undervalued,
Underowned, and Unloved—which also did risk arbitrage. However,
value was too slow for his blood; the Trigger needed emotion and momentum
in his life. It was hard for him to truly fall in love with a dirty
industrial dog just because it was cheap.
I remember at the time his telling me, “Value sucks and Ben Graham
was a loser. Buying cheap stocks on book value analysis is for
small-minded accountants. I miss the adrenaline rush from an up stock
or running in the shorts with a tail.”This was sacrilege, because (just in
case you don’t know) Benjamin Graham is the god of value investing
and wrote the bible, a book called Security Analysis. So the Trigger left
U3 for an emerging markets boutique, and for a while he actually lived
and operated out of Hong Kong and Eastern Europe. Then came the
Thai baht and Russian debt busts, and the emerging markets became
the submerging markets.
Almost as if it were foreordained, he migrated back to tech in the
late 1990s.Tech was the perfect milieu for the Trigger. Before tonight, I
had last seen him in late 1999 when he ran a tech fund for a big, very
aggressive mutual fund company in Denver.Those were the days when
the new-issue market was on fire, and the Trigger was giving spellbinding
speeches around the country about tech, Internet productivity, and a
new era.The public was pouring money into his fund, and the Trigger
was riding high on the hog. That day he had come for lunch with a
young, statuesque woman on his arm who drank Stolichnaya straightup.
I wondered why he had brought her because she was obviously
bored with the stock talk, although occasionally she shot him languid,
but amorous glances.
The Denver mutual fund company stocked smart, quick, fast-talking,
momentum guys and gals who had heard every story long before I did.
I remember going to visit them once during those days, sitting in a conference
room with half a dozen kid portfolio managers who looked so
young and fresh and innocent that you expected them to still have
braces on their teeth, and realizing that I had nothing to say that interested
them.They thought I was a useless, old fuddy-duddy, and that afternoon
I felt like one. They didn’t care a P/E ratio about valuation,
fundamental change at the margin, or the economy.They wanted stories
about up stocks.They wanted action, stocks on steroids. As the meeting
went on, I realized they weren’t at all innocent.They were baby-faced
killers and it was I who was the innocent. The Trigger’s fund, stuffed
with new issues,was up 85% that year.
Jim, a guy I knew from the past, a guy a lot of people refer to as Jim the
Trigger. When he is working, Jim is an investment manager like me.
People in the business call him the Trigger, as in hair trigger, because, as a
portfolio manager, he reacts so quickly to a story.This sobriquet is not
necessarily flattering; invest first and ask questions later is what is implied.“
Ready! Fire! Aim!” is the Trigger’s modus vivendi. In a bull market,
when the mongrels are running, it works great. In tougher times
like now, it’s not so effective.
The Trigger is a handsome guy in a sleek, sculptured, California sort
of way.The top three buttons of his fitted shirt are unbuttoned, and his
sports jacket clings to his shoulders. Our eyes meet. Jim’s are haunted
and a little mad, but who is not a little deranged on the terrace of The
The Trigger’s career has experienced a few undulations. He is always
into what is hot, but sometimes gets there a little late or just before
it gets cold.The Trigger is and always has been a momentum investor, a
player in the parlance, and his strength (and his weakness) is that he has
no memory for pain. He unfailingly gravitates to where the fast money
is, and he is capable of putting up enormous numbers in a hot, trending
market. However, in the past he has often followed the lemmings over
the proverbial cliff. I like him, though, because, in the heat of each moment,
he truly believes his own bullshit and doesn’t pretend to be anything
other than what he is—a stock jockey.
I first knew the Trigger in the early 1980s when his aggressive
growth-stock fund was loaded with whisper stocks like the small oil exploration
companies and drillers with names like Three Guys and a
Rig. He was up 40% in 1979 and 65% in 1980, and the money came
pouring in. But then in 1981, when oil overnight went from being
black gold to just another commodity, the Trigger’s fund was down
55%. He almost lost his job, as I remember it, but in 1982 and 1983, he
came back and shot the lights out with the small tech and emerging
growth stocks, his “beloved athletes” as he called them. In those days he
would go to a company presentation, meet the adolescent storyteller,
listen to the pitch, come out saying,“The kid’s a gifted natural athlete, a
winner,” and then buy a couple of hundred thousand shares without
ever seeing a number.
Subsequently, when his beloved athletes died horrible deaths and
the moon balls crashed in the mid-1980s, the Trigger actually did get
fired, but he has a great sense of the game and he always gravitates relentlessly
toward relative strength.Value was in and growth was out, and
he knew he had to change and find new faces to fall in love with. He
caught on with a value investing firm called U3—for Undervalued,
Underowned, and Unloved—which also did risk arbitrage. However,
value was too slow for his blood; the Trigger needed emotion and momentum
in his life. It was hard for him to truly fall in love with a dirty
industrial dog just because it was cheap.
I remember at the time his telling me, “Value sucks and Ben Graham
was a loser. Buying cheap stocks on book value analysis is for
small-minded accountants. I miss the adrenaline rush from an up stock
or running in the shorts with a tail.”This was sacrilege, because (just in
case you don’t know) Benjamin Graham is the god of value investing
and wrote the bible, a book called Security Analysis. So the Trigger left
U3 for an emerging markets boutique, and for a while he actually lived
and operated out of Hong Kong and Eastern Europe. Then came the
Thai baht and Russian debt busts, and the emerging markets became
the submerging markets.
Almost as if it were foreordained, he migrated back to tech in the
late 1990s.Tech was the perfect milieu for the Trigger. Before tonight, I
had last seen him in late 1999 when he ran a tech fund for a big, very
aggressive mutual fund company in Denver.Those were the days when
the new-issue market was on fire, and the Trigger was giving spellbinding
speeches around the country about tech, Internet productivity, and a
new era.The public was pouring money into his fund, and the Trigger
was riding high on the hog. That day he had come for lunch with a
young, statuesque woman on his arm who drank Stolichnaya straightup.
I wondered why he had brought her because she was obviously
bored with the stock talk, although occasionally she shot him languid,
but amorous glances.
The Denver mutual fund company stocked smart, quick, fast-talking,
momentum guys and gals who had heard every story long before I did.
I remember going to visit them once during those days, sitting in a conference
room with half a dozen kid portfolio managers who looked so
young and fresh and innocent that you expected them to still have
braces on their teeth, and realizing that I had nothing to say that interested
them.They thought I was a useless, old fuddy-duddy, and that afternoon
I felt like one. They didn’t care a P/E ratio about valuation,
fundamental change at the margin, or the economy.They wanted stories
about up stocks.They wanted action, stocks on steroids. As the meeting
went on, I realized they weren’t at all innocent.They were baby-faced
killers and it was I who was the innocent. The Trigger’s fund, stuffed
with new issues,was up 85% that year.
THE FUND OF FUNDS IS A TOUGH CUSTOMER :Business Strategy /Financial Advisors
The conference itself was hard, grinding work. No afternoon golf or
tennis. I bugged out on parts of our investor meetings because Madhav
is much better at selling Traxis and himself than I am.The representatives
of the funds of funds are the most rigorous examiners. It’s
estimated that there are now almost 1,000 funds of funds, and as a
group they are the biggest buyers of hedge funds but also the most
fickle.After they have intensely probed and poked you, some will stick
with you even if you falter; others will dump you at the first sign of a
drawdown (a decline in your net asset value). As I said before, the Eu-
ropeans supposedly are the worst but the truth is everyone in this
business is performance happy. Considering the fees they are paying,
why shouldn’t they be?
A fund of funds typically selects and manages a diversified portfolio
of hedge funds that it sells to individuals or institutions that don’t feel
capable of making the choices and then monitoring the funds themselves.
They run all kinds of analytics on the individual hedge funds and
on their overall portfolio to monitor risk and exposures.A couple of years
ago, LTCM, a big hedge fund run by a bunch of pointy-headed Nobel
Prize economists, blew up when a series of three standard-deviation
events occurred simultaneously. The media loved it and published the
names of all the supposedly smart, sophisticated individuals and institutions
who had lost their money. Everybody was deeply embarrassed,
and ever since the big institutions have been obsessed with risk analytics
and throw around terms like stress-testing portfolios, value at risk (VAR),
and Sharpe ratios.
The funds of funds employ sophisticated quantitative analytics to
add value by strategically allocating among the different hedge-fund
classes.The hedge-fund universe is usually broken down into seven broad
investment style classifications.These are event driven, fixed-income arbitrage,
global convertible bond arbitrage, equity market-neutral,
long/short equity, global macro, and commodity trading funds. Each has
its own, unique performance cycle. One year a fund of funds will be
heavy in macro and long/short equity funds and be out of or have very
little in equity market neutral and convertible arbitrage. The next year
the allocation will be completely different. Getting these style shifts
right can make a substantial difference in the performance of an individual
fund of funds.
The funds of funds also claim they have developed programs that
combine sociological and statistical data to give early warning signals so
they can time switches from one manager to another.There is no question
that hedge-fund managers can run out of emotional gas.They are
prone to performance bursts when they are hot, often followed by cold
spells, but these swings are not easy to time. However, as one veteran
fund of funds manager said to me,“Actually, that quantitative stuff is all
window dressing BS.What we do is similar to being the manager of a
major league baseball team. The trick is to have the intuition to take
your pitcher out of the game just before, not after, he’s been hit hard.”
tennis. I bugged out on parts of our investor meetings because Madhav
is much better at selling Traxis and himself than I am.The representatives
of the funds of funds are the most rigorous examiners. It’s
estimated that there are now almost 1,000 funds of funds, and as a
group they are the biggest buyers of hedge funds but also the most
fickle.After they have intensely probed and poked you, some will stick
with you even if you falter; others will dump you at the first sign of a
drawdown (a decline in your net asset value). As I said before, the Eu-
ropeans supposedly are the worst but the truth is everyone in this
business is performance happy. Considering the fees they are paying,
why shouldn’t they be?
A fund of funds typically selects and manages a diversified portfolio
of hedge funds that it sells to individuals or institutions that don’t feel
capable of making the choices and then monitoring the funds themselves.
They run all kinds of analytics on the individual hedge funds and
on their overall portfolio to monitor risk and exposures.A couple of years
ago, LTCM, a big hedge fund run by a bunch of pointy-headed Nobel
Prize economists, blew up when a series of three standard-deviation
events occurred simultaneously. The media loved it and published the
names of all the supposedly smart, sophisticated individuals and institutions
who had lost their money. Everybody was deeply embarrassed,
and ever since the big institutions have been obsessed with risk analytics
and throw around terms like stress-testing portfolios, value at risk (VAR),
and Sharpe ratios.
The funds of funds employ sophisticated quantitative analytics to
add value by strategically allocating among the different hedge-fund
classes.The hedge-fund universe is usually broken down into seven broad
investment style classifications.These are event driven, fixed-income arbitrage,
global convertible bond arbitrage, equity market-neutral,
long/short equity, global macro, and commodity trading funds. Each has
its own, unique performance cycle. One year a fund of funds will be
heavy in macro and long/short equity funds and be out of or have very
little in equity market neutral and convertible arbitrage. The next year
the allocation will be completely different. Getting these style shifts
right can make a substantial difference in the performance of an individual
fund of funds.
The funds of funds also claim they have developed programs that
combine sociological and statistical data to give early warning signals so
they can time switches from one manager to another.There is no question
that hedge-fund managers can run out of emotional gas.They are
prone to performance bursts when they are hot, often followed by cold
spells, but these swings are not easy to time. However, as one veteran
fund of funds manager said to me,“Actually, that quantitative stuff is all
window dressing BS.What we do is similar to being the manager of a
major league baseball team. The trick is to have the intuition to take
your pitcher out of the game just before, not after, he’s been hit hard.”
DINNER WITH A TRULY GREAT INVESTOR :Business Strategy /Financial Advisors
April 10 we were invited to Fayez Sarofim’s house for dinner. Fayez is
my age, and we have been friends for years. His investment management
firm, Fayez Sarofim & Company, has had a superb record, and Fayez is a
truly great investor. He runs his firm with an iron but benevolent hand
and is quite conservative.The firm has grown to be a large business. On
the other hand, he loves to speculate in his personal portfolio. He makes
giant macro bets and uses big leverage. I have always thought he would
be great running a hedge fund. I was very skeptical that he would have
any interest in Traxis, and I suspected the salesman was just using us to
get face time.
“Absolutely not,” said the guy.“Fayez told me he was definitely interested.”
I am amazed. He doesn’t need us, but I knew dinner with
Fayez would be a treat, both gastronomically and intellectually.
Fayez’s spacious house is loaded with fine impressionist paintings,
young children from his most recent marriage, and piles of research reports.
In his elegant, paneled library there are stacks of reports on the
floor, on the sofa, and on the coffee table. Despite a bevy of servants,
charming disorder envelops the house and grounds. Bicycles, basketballs,
and roller skates are piled on the porch, and here was this rotund,
slightly rumpled, elderly Egyptian pharaoh in a dark suit and wearing a
vest presiding serenely over the carnage. The clan and the entourage
seemed completely happy and utterly at ease.
We had a wonderful, elaborate dinner with Fayez and his oldest
son, who is in the firm. Fayez is a baroque character. He has always had
impeccable taste in restaurants, wine, food, cigars, art, and stocks. He has
both an ample waistline and a lot of money to show for it. He has invested
his clients’ money in high-quality consumer growth stocks that
have world-class franchises and that don’t have to reinvent themselves
every five years the way tech stocks do. His criteria require that they
also generate free cash flow so they can buy back their stock and
raise the dividend. He argues that in a slow-growth, low-inflation,
low-interest-rate world, stocks with these characteristics will have
great scarcity value and will sell at very high P/Es, just as they did in
the late 1950s and early 1960s.
This has always been his investment style. Buy and hold great
growth stocks. “My favorite holding period is forever,” he says with a
wry smile.The only difficulty is that companies with these characteristics
are hard to find and usually are very expensive.We talked about
Pepsico. Fayez thinks its earnings can grow 12% per annum even
though its revenue growth is more like 6% to 7% and it is in very competitive
businesses. He is convinced that management is exceptional.
Fayez is also very enthusiastic about the shares of the large U.S. drug
companies. Relative to the rest of the market, these stocks are currently
as cheap as they have ever been. He argues that while they face more
regulation, are suffering through a new-product slump, and probably
won’t grow as fast as they have in the past, the drug companies remain
great growth franchises.With their legal problems, he views them as being
in a similar sold-out position as Phillip Morris was a decade ago.
Growth, says Fayez, is about earnings and dividends growing faster than
inflation, so the shareholder increases the purchasing power of his or her
income stream from the investment. He mentions Merck shares he
bought 30 years ago for an elderly cousin.The current dividend is now
twice her cost. I calculate that over that period, Merck’s dividends have
risen three times as fast as inflation.What a marvelous way for a taxpaying
individual to compound purchasing power!
That said, identifying which of the current crop of growth stocks
are going to be the long-run winners is a far more difficult, nay, almost
impossible, task. Bernstein, the New York research firm, did a study of
the likelihood of a company maintaining growth status years into the
future.The frightening results are in Table 6.1. Over the past half century,
your odds of identifying a growth stock you can hold for 20 years
are 4% and only 15% for 10 years. Even for 3 years, they are just a little
more than 50%. Healthcare (in other words, big pharma) and consumer
staples have somewhat higher success ratios. And what the study
doesn’t say is that when a growth stock falls from grace, the landing is
not just hard, it’s usually a crash. However, Fayez has his own magic.
His portfolios for wealthy individuals have very low turnover, and his
5-year growth stock persistency record must be around 60%, which is
spectacular.
It was a marvelous, stimulating evening swapping ideas. My partners
were charmed by Fayez. The food and wine were magnificent. However,
once again I question whether we had raised any money, as I know
how Fayez loves to speculate with his own portfolio. He didn’t ask us
anything about our macro process, besides.
Addendum: At any rate, I was wrong: Fayez invested with us.We
were honored.
my age, and we have been friends for years. His investment management
firm, Fayez Sarofim & Company, has had a superb record, and Fayez is a
truly great investor. He runs his firm with an iron but benevolent hand
and is quite conservative.The firm has grown to be a large business. On
the other hand, he loves to speculate in his personal portfolio. He makes
giant macro bets and uses big leverage. I have always thought he would
be great running a hedge fund. I was very skeptical that he would have
any interest in Traxis, and I suspected the salesman was just using us to
get face time.
“Absolutely not,” said the guy.“Fayez told me he was definitely interested.”
I am amazed. He doesn’t need us, but I knew dinner with
Fayez would be a treat, both gastronomically and intellectually.
Fayez’s spacious house is loaded with fine impressionist paintings,
young children from his most recent marriage, and piles of research reports.
In his elegant, paneled library there are stacks of reports on the
floor, on the sofa, and on the coffee table. Despite a bevy of servants,
charming disorder envelops the house and grounds. Bicycles, basketballs,
and roller skates are piled on the porch, and here was this rotund,
slightly rumpled, elderly Egyptian pharaoh in a dark suit and wearing a
vest presiding serenely over the carnage. The clan and the entourage
seemed completely happy and utterly at ease.
We had a wonderful, elaborate dinner with Fayez and his oldest
son, who is in the firm. Fayez is a baroque character. He has always had
impeccable taste in restaurants, wine, food, cigars, art, and stocks. He has
both an ample waistline and a lot of money to show for it. He has invested
his clients’ money in high-quality consumer growth stocks that
have world-class franchises and that don’t have to reinvent themselves
every five years the way tech stocks do. His criteria require that they
also generate free cash flow so they can buy back their stock and
raise the dividend. He argues that in a slow-growth, low-inflation,
low-interest-rate world, stocks with these characteristics will have
great scarcity value and will sell at very high P/Es, just as they did in
the late 1950s and early 1960s.
This has always been his investment style. Buy and hold great
growth stocks. “My favorite holding period is forever,” he says with a
wry smile.The only difficulty is that companies with these characteristics
are hard to find and usually are very expensive.We talked about
Pepsico. Fayez thinks its earnings can grow 12% per annum even
though its revenue growth is more like 6% to 7% and it is in very competitive
businesses. He is convinced that management is exceptional.
Fayez is also very enthusiastic about the shares of the large U.S. drug
companies. Relative to the rest of the market, these stocks are currently
as cheap as they have ever been. He argues that while they face more
regulation, are suffering through a new-product slump, and probably
won’t grow as fast as they have in the past, the drug companies remain
great growth franchises.With their legal problems, he views them as being
in a similar sold-out position as Phillip Morris was a decade ago.
Growth, says Fayez, is about earnings and dividends growing faster than
inflation, so the shareholder increases the purchasing power of his or her
income stream from the investment. He mentions Merck shares he
bought 30 years ago for an elderly cousin.The current dividend is now
twice her cost. I calculate that over that period, Merck’s dividends have
risen three times as fast as inflation.What a marvelous way for a taxpaying
individual to compound purchasing power!
That said, identifying which of the current crop of growth stocks
are going to be the long-run winners is a far more difficult, nay, almost
impossible, task. Bernstein, the New York research firm, did a study of
the likelihood of a company maintaining growth status years into the
future.The frightening results are in Table 6.1. Over the past half century,
your odds of identifying a growth stock you can hold for 20 years
are 4% and only 15% for 10 years. Even for 3 years, they are just a little
more than 50%. Healthcare (in other words, big pharma) and consumer
staples have somewhat higher success ratios. And what the study
doesn’t say is that when a growth stock falls from grace, the landing is
not just hard, it’s usually a crash. However, Fayez has his own magic.
His portfolios for wealthy individuals have very low turnover, and his
5-year growth stock persistency record must be around 60%, which is
spectacular.
It was a marvelous, stimulating evening swapping ideas. My partners
were charmed by Fayez. The food and wine were magnificent. However,
once again I question whether we had raised any money, as I know
how Fayez loves to speculate with his own portfolio. He didn’t ask us
anything about our macro process, besides.
Addendum: At any rate, I was wrong: Fayez invested with us.We
were honored.
THE CROWD IS ALWAYS WRONG DURING MARKET EXTREMES :Business Strategy /Financial Advisors
Here, in the summer of 2005, my sense is that many hedge-fund investors
believe that the equity markets have rallied a bridge too far,
are scared, and have done some selling. The complacency everyone
was talking about seems to have been only skin deep.They all recite
the same mantra that almost all of the sentiment indicators show a
dangerously high level of bullishness. Therefore, they are contrary to
the consensus and are bearish. Being a contrarian is very chic. The
only trouble is that now everyone is a contrarian. Even Wall Street
economists are now contrarians. Goldman Sachs recently published a
paper on inflation that began, “Our new forecast for inflation is out
of consensus.” In other words, the writer thought the most important
aspect of his forecast was not his economic analysis but rather that it
was out of consensus.Therefore, instead of being contrarians, perhaps
we should be contracontrarians.
The sentiment indicators are not easy to decipher. Ned Davis of
Ned Davis Research has studied them for years, and he points out
that the crowd is always wrong at market turning points and that they
are always wrong at extremes in sentiment. He says: “If one knew for
certain the peak or trough in sentiment, then one could go contrary
and be correct nearly all the time.” However, because one cannot
know exact extremes for certain except in hindsight, one can be
weeks or months early, which can be very painful. The Ned Davis
Sentiment Composite began showing extreme optimism in January
1999, then really extreme optimism in December, but the bubble
didn’t burst until the late spring 2000.That was an eternity for those
who sold in January 1999 and very painful for people like me who
reduced allocations to technology in December 1999. However, in
1987, the Ned Davis Composite spiked to an all-time high just a
month before the Crash. It’s the same with bottoms. In August 1990
the Composite reached extreme pessimism, but that was 47 days and
12% on the S&P 500 before the low.
Ned’s advice is to use stop losses. Easier said than done. Most stoploss
orders are put in at 10% limits. Admittedly in the bubble run-up,
speculators who went short or sold too early would have been stopped
out or gone back as prices soared, but when would they have known to
sell again? And in the 1990 example, they would have bought in August,
and then, when the market fell more than 10%, they would have had
their stop-loss order activated just as the turn was finally about to occur.
The timing of the execution is crucial. Often when you leave a stoploss
order with a dealer or when it is on the specialist’s books, you get
picked off by the market maker. In other words, you get an execution
just before the asset in question rallies.
believe that the equity markets have rallied a bridge too far,
are scared, and have done some selling. The complacency everyone
was talking about seems to have been only skin deep.They all recite
the same mantra that almost all of the sentiment indicators show a
dangerously high level of bullishness. Therefore, they are contrary to
the consensus and are bearish. Being a contrarian is very chic. The
only trouble is that now everyone is a contrarian. Even Wall Street
economists are now contrarians. Goldman Sachs recently published a
paper on inflation that began, “Our new forecast for inflation is out
of consensus.” In other words, the writer thought the most important
aspect of his forecast was not his economic analysis but rather that it
was out of consensus.Therefore, instead of being contrarians, perhaps
we should be contracontrarians.
The sentiment indicators are not easy to decipher. Ned Davis of
Ned Davis Research has studied them for years, and he points out
that the crowd is always wrong at market turning points and that they
are always wrong at extremes in sentiment. He says: “If one knew for
certain the peak or trough in sentiment, then one could go contrary
and be correct nearly all the time.” However, because one cannot
know exact extremes for certain except in hindsight, one can be
weeks or months early, which can be very painful. The Ned Davis
Sentiment Composite began showing extreme optimism in January
1999, then really extreme optimism in December, but the bubble
didn’t burst until the late spring 2000.That was an eternity for those
who sold in January 1999 and very painful for people like me who
reduced allocations to technology in December 1999. However, in
1987, the Ned Davis Composite spiked to an all-time high just a
month before the Crash. It’s the same with bottoms. In August 1990
the Composite reached extreme pessimism, but that was 47 days and
12% on the S&P 500 before the low.
Ned’s advice is to use stop losses. Easier said than done. Most stoploss
orders are put in at 10% limits. Admittedly in the bubble run-up,
speculators who went short or sold too early would have been stopped
out or gone back as prices soared, but when would they have known to
sell again? And in the 1990 example, they would have bought in August,
and then, when the market fell more than 10%, they would have had
their stop-loss order activated just as the turn was finally about to occur.
The timing of the execution is crucial. Often when you leave a stoploss
order with a dealer or when it is on the specialist’s books, you get
picked off by the market maker. In other words, you get an execution
just before the asset in question rallies.
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