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Summer/ June 2010 Newsletter

How to Operate in a Deflationary Future

Sick Consulting tells you why what happens in Greece matters to your business

How to Operate in a Deflationary Future

“The World Is Flat: A Brief History of the Twenty-First Century” became an international bestseller when it was published in 2005.  The book discusses the factors which increased global competition and how to remain competitive in the global marketplace.  Many businesses service customers in a narrow geography and mistakenly believe that they are not impacted by what goes on half way around the world.  If a business or its customers are affected by inflation, energy prices or interest costs, the globally economy is having a larger impact than might be obvious. It is widely believed that the massive deficits being run by the United States government will result in inflation.  Inflation that would cause tax revenues to increase and allow national debt to be paid off with inflated dollars is something that politicians dream of at night.  If one studies the economic history in Japan over the last few decades, you will see that a significant issue for many businesses in the United States is deflation.

 Looking at some key drivers of inflation may be instructive:

Employment:  It’s not likely labor rates in the US will be increasing anytime soon with the current and projected level of unemployment.  Government workers have been laid off in half the states. Twenty-two states have instituted unpaid furloughs.  It appears that consumer demand even from public sector employees may be soft.  How often do you hear about unemployed workers being hired at lower wages than they previously enjoyed?  The celebration of getting a new job is likely to be muted.

Oil:  We’ve seen some softening of oil prices in the late spring driven by the weakening of the Euro.  Europeans are already paying over $7 per gallon and if the Euro weakens further it is likely to reduce demand in Europe which will have a beneficial impact on US imports.  We could see political risks and holiday gouging but the outlook for the next few years is likely to be deflationary for energy costs.  

Social Security COLA:  For the first time, Social Security benefits did not increase due to COLA (Cost of Living Adjustments) leaving that population with no additional income to stimulate the economy.

Interest Rates:  With the Euro down about 12% compared to a year ago, the US Treasury will benefit from a continued flight to safety and capital preservation.  My adjustable mortgage has been less than 3% for the last year and a half and it is not unusual to see mortgages advertised in the 3-4% range.  Businesses will benefit from improved margins as a result of lower interest costs.

Taxes:  Likely to take a bigger bite out of the consumers’ wallet.  The public sector is between a rock and a hard spot - the more governments take out of the economy in the form of taxes, the less money there is to spend on goods and services in the private sector.  Without stimulus spending (which has largely be funded by borrowing) the economy will likely lose some of the feeble momentum it already has.  Between December of 2007 and through April of this year disposable personal income would have been DOWN just over $900 billion without the stimulus money.  Increased property taxes, income taxes, sales taxes and gas taxes will only further reduce the amount of spendable income available to buy products that companies need to hire employees to make.  Will government spending in the 2nd half of 2010 and next year rival the levels of the 2009 stimulus?  Probably not.

Housing:  Anyone think that home values are going to be the piggy bank they were a few years ago?

Factory Utilization:  You don’t hear a lot about companies raises prices because the demand outstrips their capacity to produce.  With a lower Euro, it will become more difficult to compete with European made products.

Over my 25 years in the chain restaurant business with brands like Jack In The Box, Burger King, Arby's, Pizza Hut and others, it was almost standard to increase prices by 2-3% per year.  That would offset increases in minimum wage, supply increases and other costs.  Everyone would feel good about that even if transactions were flat or slightly down.  It's not likely that many brands will have much pricing power in the immediate future so increase sales to existing and new customers will be of critical importance.

25 of 27 European countries are running deficits in excess of 3% of GDP. Ireland has a deficit of 14.3%. Portugal is at almost 10%. Greece is almost 14%.   Greek debt for 5-year bonds is now 15%. There is no way for them to grow their way out of the problem if interest rates are at 15%, up almost fourfold in less than a year. Rates are rising for other European peripheral countries as well.  Europe is likely to buy fewer goods and services and will attempt to utilize a weaker Euro to export its way out of its problems.  So what happens in Greece, really does affect businesses in the US.

With consumers saving more, limiting spending, deal seeking and trading down many businesses are seeing reduced revenues even if customer counts are up.  While some of your costs may be down, less volume may be spread over fixed costs making the need for growth imperative if not urgent.  In an economy like this, businesses fail.  The good news is that new competition may be less likely so there are opportunities to grow share in a declining market.

Despite, the preceding, I am highly optimistic about the future although operating in a deflationary environment is likely to be a much different paradigm.   The challenge is to figure out not only how to survive but thrive.  It’s survival of the fittest. How fit is your business?

Here are a couple of best practices to consider

Costs:  Keep a strong watch on your costs, deferring adding head count, invest in automation and productivity improving technology.  Look at some cost categories that have gone down in recent years - VoIP, cell phone minutes, commercial real estate rent rollbacks and even wages at many companies.

Technology:  Invest in technology and automation to minimize competitive disadvantage from lower wage rates around the world - labor is only one component of costs and if you can engineer it out of your product and processes, you improve the competitiveness of your business.

Customers:  Do you have a customer base in which no single client accounts for more than 10 percent of total sales?  If you find the majority of your customer base comprising of only one or two good customers, it is important to consider reinvesting your profits into additional capacity and/or marketing to acquire a broader customer base. 

Growth:  You need to have a realistic growth strategy.  You can’t save yourself to prosperity and it is likely that you’ve already cut costs where you could over the past few years.  It makes sense to have a written plan describing future growth and how that growth will be achieved based on industry dynamics, increased demand for the company’s products, new product lines, market plans, growth through acquisition, and expansion through augmenting territory, product lines, manufacturing capacity, etc.

Spring/ March 2010 Newsletter

Grow Sales with Sick Consulting
The Path to Establishing a Marketing Budget

tree.jpgGrow Sales with Sick Consulting

At Sick Consulting we're focused on helping clients grow their businesses.  We do this in a number of ways and help position, brand and launch new products and services.

The bittersweet taste of success.  I'm in the process of winding down a five year client relationship.  Over that time, the client's business has doubled, he moved from a 5000 square foot rented facility to a 31,000 square foot owned building and business has been so strong that he has been in a back order position for the last three months.  As ecommerce is a major channel and web traffic has recently been up over 60% compared to prior year, the near term need for growth initiatives are not pressing.  This client has decided to take a breather from the pace of growth we have enjoyed over the past five years and take some time to consolidate operations and spend more time with his family.  As a result, we will be looking for some additional client relationships to redeploy our consulting resources.

The services we provide to clients are found on our website although the following are a list of common tasks that clients may feel that our experience and ongoing exposure to working with multiple clients can add some value to their efforts:

1. Email Marketing & Newsletters: We write a number of them and keep them on strategy.  We also design them and provide list management services.

2. Social Network Marketing (Blogs, FaceBook Fan Pages, etc):  We write copy, create, manage, and execute a calendar of communications to leverage your followers.

3. Trade Shows: From organization, booth graphics and handouts, to follow up communications and lead nurturing.

4. Key Account Services: We work with a number of clients and help them manage their relationships and marketing programs with resellers like Amazon, CostCo, PetCo, Target and others.

5. Project Management:  A marketing plan and calendar is no good if it is not executed.  We "turn key" many of the programs with limited investments of your time at key milestones.

While we do work with clients on a project basis, most of our business is with clients who we have multi year relationships with.  We either serve as their virtual, part time CMO, or we augment their internal resources.  When a client has a maternity leave, vacation or temporary bandwidth need, turning to a scalable resource that is up to speed on your business allows you to keep moving forward without missing a beat.

Does this sound like the type of resource and relationship that would benefit you or someone you know?  We would welcome an opportunity to explore how we might work together in the future.


The Path to Establishing a Marketing Budget
A common question among business owners is how much should they be spending on marketing.  The correct answer is...it depends.  There are many factors that can be considered in establishing the right amount to spend on marketing and advertising.  Here are a few items to consider:

Industry Norms -  Most industries have a spending range that generally encompasses most of the companies in that industry.  Understanding this range is an important first step.  Previous experience, feedback from other firms in the industry or searches on the internet or trade publications is all good sources of this information.

According to a report in Ad Age, ad spending in the United States as a percent of GDP was 2.2%.  That number is probably low for what most organizations spend as it is just advertising and marketing services (trade shows, research, consulting, design, production, staff, etc.) can often comprise 25-50% of the total spending.

Spending ratios are obviously influenced by the business model for the industry.  High margin businesses like beverages and software can afford to spend a greater amount of their revenue on advertising than lower margin business like electronics or banking.

"Fixed" Program - Some business will find that their business requires a "minimum" level of marketing expenditures to be competitive.  For example, if a business finds that they need to attend a certain number of industry trade shows or advertise regularly in certain publications, they will find that their budget is driven by a "fixed" set of expenditures which will set the budget.

Competitive Position - If Company "A" is in an industry in which the norm is 5%, consideration needs to be given to the size of the competitors the company is faced with.  If the company does one million in revenue, fixing the budget at 5% would result in a $50,000 advertising budget.  If all the companies in direct competition have five million in revenue and if they also spend 5%, they will have five times the budget as Company "A".  Some consideration should be given to increasing the spending percent, focusing the budget on a specific vertical customer segment and/or limiting the geographic reach of the marketing plan.

Growth Goals - A company that has aggressive goals for increasing revenues should consider how much marketing budget would be generated by the higher revenue goal.  Establishing the marketing budget as a ratio of the revenue goal is another approach.  Reducing marketing spending is likely to reduce the acquisition of new customers or even jeopardize the company's current market share.   Growing quickly also requires increased working capital for inventory, staffing and accounts receivable so the prospect of increasing marketing spending can often times be challenging for high growth companies.  Companies that have plans to growth rapidly generally need to spend a higher percent of sales to achieve that goal.

Budgets in Recessions - Some companies find themselves losing customers and revenues during recessions.  One natural tendency is to reduce marketing budgets to keep them "in line".   Does it seem logical that if business is down 10% that marketing budgets should also be reduced by 10%?  What seems more logical is that if you reduce your budget by 10%, you should probably also reduce your revenue expectations by a like amount.  Resist reducing budgets as it gives you less exposure to prospects in your pipeline.  Focus instead on improving the media mix, the creative or relevancy of your message.

Marketing spending is often perplexing for business owners as the security of immediate results if often elusive.  Prospects generally need to be exposed to a brand multiple times before they are likely to change providers or make a purchase.  Nurturing tomorrow's customers is a process that the savvy marketer has been investing in for months or years.  Each business has a slightly different situation that needs to be considered in establishing a marketing budget.  Reviewing the approaches discussed in this article is a good first step.  Optimizing the marketing spending through benchmarking and tracking metrics specific to the company's situation on an ongoing basis is a requirement for businesses to thrive and have above average results.

Outlook for 2010 from Sick Consulting - Expansion cliff.jpg

As 2009 winds down, there are a number of thoughts that come to mind.  The past year has been stimulating despite its roller coast ride in the news.  As is often the case, things aren’t as bad as they are made out to be by the press and there are winners and losers in many industries.   If you were in real estate or construction, much of the bad news came in 2007 or 2008.  If you were on Main Street, you needed to figure out how to gain share in a down economy or how to create and exploit a competitive advantage.  Companies like CostCo, Amazon, Wal-Mart, McDonald’s, PetSmart and a few of my clients have been able to enjoy growth over the past year.   The winners have done so by offering customers a compelling value proposition – not necessarily the lowest price.  Combine that with aggressive marketing and by actively seeking to acquire new business from failing or shell shocked competitors, the path for continued success in 2010 has become increasingly clear. Wall Street and banks have figured out how to prosper by borrowing money at low rates from the Fed and buying Treasury Bills.  Doesn’t take a lot of intelligence or acumen to see how that can be a low risk proposition but it also doesn’t appear to be sustainable long term.  My recommendations are generally focused on differentiating your brand from the competition. 

Upcoming Speaking Engagement

Michael Sick will be a speaker on January 27th at 7am at an Executive Briefing entitled Strategies for Growing Your Business in a New Economy. Learn more about the program and how you can attend on the San Diego Business Resources Event Page.

International Man of Marketing

yemenmarket.jpgI recently had the opportunity to travel to Dubai and Yemen where I spoke at a conference.  Viewing firsthand the economic development of a country ruled by a promotion obsessed monarchy (Dubai) and Yemen, an oil poor Arabic Republic, couldn’t have been more of a contrast.  In Dubai, I wondered if much of the development was profitable and in Yemen I saw a country that is among the poorest in the region but the people were resourceful and dynamic as they couldn’t count on handouts from an oil flush King for their next meal.

Jaclyn Sick joins Sick Consulting Practice

After my daughter Jaclyn graduated from college at Cal Poly, San Luis Obispo in 2008, we formed a company to launch the Surf-Grip, a body surfing accessory.   Over the past year, I have called on her repeatedly to assist me with my consulting clients.  She has officially joined the consulting firm and is providing research, presentations, email marketing, social network marketing, project management, trade show coordination and other services to clients.  One of our clients had us take over the Facebook Fan page and largely due to Jaclyn’s efforts, the number of fans has tripled in less than 60 days and an increasing portion of website traffic is now originating from Facebook. Having Jaclyn involved in consulting enables us to provide clients with a team in which blended rates can offer an attractive alternative to adding full time staff or other resources.

Outsourcing Marketing: “How to Get More for your Money—The Benefits of Consultants vs. Employees”

Most people who work in an office can relate in part to NBC’s show The Office. The show is a mockumentary about the daily lives of office employees and takes place at the office of Dunder Mifflin, a paper distributor in Scranton. We can laugh at the quirky employees, office pranks and relationships, constant meetings about new policies, and office parties, but after all these distractions, but how much work do these people actually do in an 8 hour work day? And besides salary or hourly pay, how much is Dunder Mifflin paying for these unproductive employees? Granted The Office example takes these situations to the extreme, but there is much truth in it.  

We’ve looked at some analysis and found that you could be paying 81% more than the “hourly rate” when you calculate all the overhead costs and actual productive hours of work.  Another way to look at it is the employee who you thought you were paying $20 per hour (about $42,000 annually) is really costing you $36.47 per hour.  You can do the math for higher paid and more experienced employees. We’ve summarized some of the costs associated with employees and how you may be able to avoid some of these costs by hiring a consultant.office.jpg

Employee Overhead In addition to compensating employees for doing their job, there are other “optional” costs to you. Benefits (medical, dental, vision), domestic partner coverage, life insurance, travel insurance, sick days, vacation, holiday pay, bonuses, gym membership, tuition assistance, and 401(k) with company match.  

Although these are not required by law, many companies offer most or all of these to attract and retain employees.  Add to this the costs for the office space, furniture, computer, supplies and equipment.
Consultants pay for their own insurance and benefit packages. All you have to do is write a check for their services performed based on the terms decided at the beginning of the project.  

Unproductive Time As seen in The Office and real businesses, there is a lot of unproductive time that employees are paid for.  Coffee breaks, birthday celebrations, meetings about new policies, meetings about health plans, meetings about safety procedures, sick time, holidays, vacation, checking their personal emails, personal calls, employee chit chat and drama. Some of these are under your control but on the other hand, you wouldn’t get anything done if you spent all your time looking over your employees’ shoulders to make sure they were on task.  

Consultants only work on site as long as you want them or need them and many do most of their work remotely.  They bill their hours worked or are paid by the project. If they are not productive, you don’t need to keep them beyond their contract and you don’t need to worry about terminating them.  Consultants generally have longer and broader experience and are more motivated to provide value than employees as they are looking to get additional contracts or referrals. 

Hiring Costs When hiring new employees there are costs associated with advertising the position, recruiting costs, time spent reviewing resumes, interviews, and reference checks. After they’ve become a part of your team, there is initial paperwork and training costs. To keep ahead of the game you also need to continue educating your employees with conferences, training courses, and certifications.  

When hiring a consultant there are still some costs associated with the hiring process but they come trained and an expert in the area you are hiring them for. They usually have decades of experience in various industries in the corporate world and have a lot to offer. They are self motivated to continue learning and growing their depth of expertise so they will be more valuable and obtain more clients. Their flexibility works to your advantage because you can give them more projects during your busy times and less work during slow times.  

In tight times marketing is often one of the first things to get cut because companies think they can survive without it. It will be very difficult for your company to get out of this survival mode and grow if you cut one of key main drivers of revenue and growth. Marketing is actually the key to grow your business and get you back on your feet. Whether your business is in survival mode or not, a great way to boost your business is to outsource and hire a consultant instead of another full time employee.  

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