PJ SOLOMON Presents

EP 03: Executing on Digital Strategy in Uncertain Times

May 04, 2020 PJ SOLOMON Season 1 Episode 3
PJ SOLOMON Presents
EP 03: Executing on Digital Strategy in Uncertain Times
Chapters
0:00
Sneak peek
1:47
The changing consumer behavior
4:03
The need for malleable user funnels
7:04
Retailer opportunities and pitfalls
14:23
Securing existing and new customers
17:25
Adapting to the post-COVID new normal
PJ SOLOMON Presents
EP 03: Executing on Digital Strategy in Uncertain Times
May 04, 2020 Season 1 Episode 3
PJ SOLOMON

Cathy Leonhardt, Co-Head of Consumer Retail at PJ SOLOMON, and Zack Werner, CEO of The Maze Group, discuss digital marketing pitfalls and opportunities facing consumer and retail companies given the uncertain market environment brought on by the COVID-19 pandemic. 

Show Notes Transcript Chapter Markers

Cathy Leonhardt, Co-Head of Consumer Retail at PJ SOLOMON, and Zack Werner, CEO of The Maze Group, discuss digital marketing pitfalls and opportunities facing consumer and retail companies given the uncertain market environment brought on by the COVID-19 pandemic. 

Zack Werner:   0:03
The goal here is to create processes that can react and adapt dynamically to the current situation, not choosing what the future will be and hoping that you're right.  

Cathy Leonhardt:   0:14
This is about building flexible models that are not only relevant for today's disrupted environment, but that will hold for the future. I'm Cathy Leonhardt, co-head of the Global Consumer Retail practice at PJ SOLOMON. We're recording from our homes as most people are during this difficult environment. For those of you who don't know, PJ SOLOMON is an investment banking practice. We provide strategic and financial advisory to our clients, and we have a 30 year history doing that across consumer companies, big retailers, direct to consumer businesses and really providing that independent strategic and financial advice. I'm joined by Zack Werner, CEO of The Maze Group.  The Maze Group is a consultancy and investment group that works with leading consumer companies to drive growth and efficiency of their digital channels and and other channels frankly.  Zack, could you give a little brief intro of your background?

Zack Werner:   1:19
Thanks Cathy. I'm Zack, CEO of  The Maze Group. The Maze Group works with public and private equity owned businesses to increase valuation through the use of data architecture and really pragmatic digital marketing tactics. So rather than just delivering a strategy, we will actually come in and work with private equity groups on diligence followed by value creation and come in and execute on tactics across acquisition, conversion rate, optimization, retention and a lot of software development.

Cathy Leonhardt:   1:47
We're here today to talk about the digital commerce market and this unprecedented period with a global pandemic. And the retail backdrop is unlike any we've ever seen. Deteriorating retail sales across nearly all categories. You know, we've seen clothing and accessories, a category which is near and dear to our heart, down 50 plus percent in March. The impact to the retailing industry comes from store closures, but also from dramatically altered consumer behaviors and that something Zack I'd like to get into with you today is how do you market to consumers whose minds are distracted and their purchasing behavior is significantly altered. I think we all agree that e-commerce DTC businesses are better positioned than pure play retail or even some of the omni channel counter parties, but again, they still have to contend with this broader impact of Covid on consumer demand. Zach, can you talk about some of the unique characteristics of digital commerce today? We understand over the past four weeks that, you know, marketing and consumer behavior are both dramatically altered, but put that in context for us.

Zack Werner:   3:07
So I think the important thing to think about is that, yes, everything has changed very, very quickly. But what we need to focus on is the fact that things will continue to change at a much faster rate than we are used to. Most funnels, whether digital or not, and most businesses have been designed around fairly predictable user behavior that we believe will last for a significant period of time and then usually either businesses adapt when a large external change occurs or they evolve. A good example, being Blockbuster, an amazing business for a while. But then the DVD was invented. Netflix started mailing DVDs. But then, when bandwidth increased and streaming started increasing, they got very heavy into that game and were able to maintain their market share. So those, though, happened over pretty significant periods of time, during which businesses were able to create funnels that allow them to efficiently acquire users. What we're seeing now is that this particular change-a pandemic- has not just created one very large change, but has kicked off a series of changes that will continue to be more rapid than what we have experienced before. And so the goal isn't to react to exactly what has just happened and adjust to a new normal immediately. It's to create funnels that are able to adapt and react dynamically to changes. What we're seeing now, for example, is..six weeks ago, we had fairly predictable user funnels. Your tackle TV model was probably working. And then what you transition into is pandemic happens, quarantine happens. You have a ton of people spending more time at home. And then all of a sudden you see a massive increase in the number of available impressions through networks like Facebook, YouTube, etc.  At the same time, you have a lot fewer advertisers. And so Amazon and Walmart don't need any more traffic, so they pulled out. Sporting and events companies have completely pulled out, and there are a lot of other companies that simply can't operate, so they're not advertising either. So now you have an increase in impressions and a decrease in advertisers so you have a ton of cheap clicks. But that doesn't necessarily mean that the upstream performance will actually translate to downstream metrics.

Cathy Leonhardt:   5:23
So you're saying the number of impressions is up, but it's not necessarily sticking. What do you seeing on the advertising spend side, just in totality?

Zack Werner:   5:34
We're seeing a lot of people reacting very, very differently. So on one side there's a lot of companies that aren't spending and there again so many more impressions that advertising is incredibly cheap. We see some companies that have been able to adapt very, very quickly and are spending to make sure that they can take advantage of these cheaper markets. But we're also seeing a lot of companies that haven't adjusted their expectation of what will happen once they get a click. And so you're seeing a lot of companies that are experiencing a lot of digital window shopping rather than actually getting conversions. On the flip side, especially when the stimulus package was released, you saw a massive increase in conversions partially because there were sales. But there's a lot of reasons that that could happen. But you have some companies that sell stock-able items like toilet paper or supplements and those conversion rates are way up. But they may experience a cliff in the next few weeks because people had actually just hoarded. 

Cathy Leonhardt:   7:04
How, specifically should retailers adapt to this market and what are some of the pitfalls and opportunities and how would you advise retailers to behave opportunistically?

Zack Werner:   7:15
Primarily, your job is to adapt as quickly as possible and make sure you're looking realistically at what is happening. And so on the pitfall side, most of the pitfalls that we are seeing would fall under false positives. The two major pitfalls that we're seeing are, on one side, we see a lot of companies who had to close their stores that are now turning off their spend to conserve cash very quickly, but would actually be cash generative if they started leaning into digital even without making large technological changes. The rest of the pitfalls fall into the category of what I would call false positives for the people that are spending, which is again there are a ton of cheap impressions and clicks available, but positive upstream metrics aren't necessarily translating into downstream performance. So if you're acquiring a bunch of users very, very cheaply or getting them to your website cheaply, make sure that you know that they are actually converting before you start scaling up your budgets. Similarly, do you know that the customers that you predicted would stay with you are actually staying there? Focusing on retention and making sure that your most loyal customers are actually going to stay that way is something that is really important to watch out for. Also are the customers that you have just acquired going to behave the way that your previous customers did behave, and the answer is maybe, it'll probably depend on what type of business you're in. Paying really close attention to more newly acquired users is important. Most activity is front loaded to the first few months after a transaction. And so your newly acquired cohorts can be a great leading indicator of how your newly acquired customers moving forward will behave, and so not getting caught in - hey, we acquired a user, therefore they're probably going to behave the way they used to.  And so I'll  give some really specific examples. Again, businesses have been built on identifying product market fit and then finding as many people that look like your current customers as possible. But since everyone's lives have just changed, the customers that you thought were your best customers for targeting over the last 12 months may no longer be the people that can use, afford or even want your product. So again, most people create a look alike audience, just getting very tactical for a moment. Most people will create look alike audiences of between 12 and six months looking backwards for really loyal and high value customers. What we would recommend doing right now is not taking for granted that the customers you used to acquire are the same people that you need to acquire now. And so if you can take a look alike audience based off of your last six weeks of acquired customers and test that against your previous lookalike audiences, you're in a place where now you can start targeting people based on - these are customers that are capable of, and want to purchase my product right now in these market conditions -  rather than assuming that you have exactly the same customer that you did for the last 12 months. And a way to continuously adapt that is to have that update on a rolling basis, right? So rather than take a list and upload it, you can actually either use a Facebook pixel or your CRM system to say customers acquired in the last five weeks and test those against the performance of cohorts for specific time bands. And when those start to move away from each other, it's a good indication that consumer behavior is starting to shift, and that's super important. The other thing to remember and that's very, very important is that just because you have acquired a customer now doesn't mean they're going to behave the way customers you used to acquire will behave and good example there is say, Peloton, where they've experienced a meteoric rise in the number of customers that have entered their funnel. What used to be a customer entered Peloton's funnel it was because they were finally coming around to the idea of doing  it at home. They'd be spending that much on it. They heard they really liked the instructors. It was pretty clear set of value propositions in a reason that somebody might be there and so you can start to treat these people very homogeneously.  Now there's probably a larger number of types of groups inside of their funnel that they behave very, very differently. And so on one side you have people that are only doing it because they literally cannot go to the gym anymore. And they cannot go to SoulCycle. And so some of those customers will probably realize how awesome Peloton is and stick around. Some of them will say, I just paid for this really expensive bike, so I'm gonna just stick it out, even though I would have preferred to go back to SoulCycle.  But you also, on a positive note, you also can't assume that just because that's why somebody was acquired doesn't mean that they wouldn't otherwise fall in love with the product and be retained. And similarly, there were probably people that were going to enter the funnel anyway that were your previous customer that will now enter. You've gone from having one group of people within the funnel to three different groups of people and making sure that you're tracking when somebody was acquired and if their behavior is tracking differently to how your previously acquired customers are, is a great way to make sure that you can hold on to them. So again, looping back around to what the pitfalls are - assuming that customers are behaving the same way as they used to is not a pitfall that you want. And maybe it's true, and it's great that your funnel is still working. I personally don't believe that 100% of people that are now using HelloFresh and in Imperfect Foods and Instacart are going to stop going to restaurants once everything is reopened. On the flip side, I do believe that many of them will realize how amazingly convenient  these products are and probably start using them moving forward. But don't take for granted that either of those will happen because that's really dangerous and can lead to overspend and quite frankly a loss of really important customers. On the opportunity side, it comes back to really understanding - How does your value proposition fit into the current market, right? Leaning into those things and not being afraid to test and spend. But starting at the bottom of the funnel and making sure that again you're focusing on lookalikes of people that have been acquired recently is a huge opportunity because you literally have a group of people that have indicated to you that they can afford and still want to engage with your products and find more people like those. And just turning off spend depending on the company doesn't make a lot of sense, especially because impressions are so cheap, right? Like the ability to reach the audience that you need to reach at scale now is significantly cheaper than it has been, and you have an audience of people that have been telling you that they are interested that you can start to base this off of, and this is an opportunity that you don't want to miss. Other interesting opportunities is that television is also following that pattern. Direct mail is following that pattern. There will be a period in between when things are fully reopened and the impression market has started to creep up in price again. And when there are stores that are open and being able to capitalize on cheap impressions when you can actually convert those customers to walking into a store. Another opportunity is actually to really create loyalty through engaging with customers while they have more time to engage with you.  

Cathy Leonhardt:   14:23
We're advisers in the retail and consumer sector. We recognize there is risk. There are pitfalls, but we also think there's real opportunity for these agile marketers and operators. How do you advise businesses to go after both existing customers and new customers in this environment, you know, it's it's an open ended question, but I think there's a lot of different answers here, so I'll turn that one over to you.

Zack Werner:   14:56
Yeah, a lot of the people that you and I both work with have stores that have been closed, and we had a lot of customers that we're just in store purchasers. But pretty much all data has showed that across categories omni channel shoppers are worth significantly more. Well, obviously, there's a large hit that's being taken not having the stores open. There are a lot of customers that we are now migrating from in store shoppers to online shoppers and entering them into loyalty programs, retaining them. Um, you know, there's a lot of opportunity to really create a deeper relationship with your customer and acquire a lot of that data. We're seeing a huge number of people that just still want products moving from their in store habits to online and keeping them that way through loyalty programs, great email programs, etcetera is a really big opportunity. The other thing here is that when you continue to drive transactions from existing customers or from new customers, right now that's an audience of people that is incredibly valuable to base your prospecting off and again, media markets are super cheap right now, so the same tests will cost about half as much to be able to target lookalikes off of the more newly acquired group of customers, and I don't think you need to be blowing the roof off in terms of media spend, because that probably won't work. But if you can carefully start increasing the amount of budget you have based on lookalikes off of recently acquired customers and also audiences that now need your value proposition more than ever, depending on what type of company you are, there's a whole lot of growth and a lot of money to be made and a lot of loyalty to be created with their customers.

Cathy Leonhardt:   16:43
As companies adapt to this current environment with their funnels, you know, how do you think about that Zack, both now and longer term?

Zack Werner:   16:53
The important thing to remember is that right now it's a pandemic. Next, it's going to be your recession. There will always be large shifts in customer behavior, and what we're seeing right now is that those shifts are just happening more quickly. The fastest growing companies and the most effective ones generally are able to react quickly and dynamically, and these frameworks aren't just designed for Covid or just a recession. It's as things evolve, which they will continue to do and continue to increase in the rate at which they do.

Cathy Leonhardt:   17:25
Last question for you, Zack, you talk about the concept of anti fragile funnels and I've seen you write about this - can you talk about how important that is in today's environment?

Cathy Leonhardt:   17:37
The onset of this pandemic and the current state of quarantine will represent a relatively small amount of time compared to the period of uncertainty and change that it's kicked off. Volatility is certain, so the goal for merchants must be to create funnels that quickly and effectively react to shifting customer behavior. We call these anti fragile funnels.

Cathy Leonhardt:   17:54
Thank you Zack. We're seeing that retail is changing, and in fact it may never be the same. But it will continue to be dynamic and exciting, and we believe there's huge opportunity for the better operators  

Zack Werner:   18:07
For sure. Now, more than ever is the time for retailers to start having these conversations and really reframing business evaluations with a customer first and digital first lens. As we turn the corner on this epidemic, the retailers that move now and that move quickly are gonna be positioned to win, no matter what the new normal looks like.  

Cathy Leonhardt:   18:24
Thank you everyone for listening. If you'd like to learn more visit us at www.pjsolomon.com and Zack, where can people find more out about you?    

Cathy Leonhardt:   18:38
www.themazegroup.com. Thanks so much.

Sneak peek
The changing consumer behavior
The need for malleable user funnels
Retailer opportunities and pitfalls
Securing existing and new customers
Adapting to the post-COVID new normal