Weekly Client Update #3 During COVID Crisis

I hope everyone has had a peaceful Easter, Passover, and Ramadan season in the midst of continued upheaval to most aspects of our lives.

I’m sharing (with permission) some interesting data from one of our clients to demonstrate what we’re seeing, overall, in the realm of search: a) search is decidedly down for “luxury” purchases, but b) people are still making those purchases or planning to do so soon. This is one of our granite countertop clients. Their impressions (how often their ad is shown on the Google search engine results page following someone searching for a keyword such as “granite countertop contractor in Baltimore”) significantly declined from February to March by 33%. In their case, their ads were shown 9,457 fewer times in March compared to February. Not surprisingly, their clicks also went down proportionately by 32%. While this actually caused their click-through-rate (CTR) to increase (because clicks went down slightly less than did impressions), the most important news is that even with a much smaller pool of prospects, their number of conversion (leads) increased.

Why? How can this be? I think there are a couple of explanations. One is simply technical: Terri & Zach and the team have built a great system that is well optimized: note the massive increase from last February and March to this year. But the second reason is applicable to the whole market. This client is making themselves available to those who are searching for their product/service. Yes, there are far fewer searches. But there are also fewer competitors as some companies have reduced their ads in response to the economic shock.

On the topic of car insurance rebates, in case you haven’t already heard, many of the largest auto insurers are giving discounts because the traffic volume has decreased so significantly, resulting in a correspondingly dramatic reduction in auto accidents and loss claims. Some are applying the discount automatically while others had stated earlier in the week that their customers could request a reduction. But I suspect that they will all quickly move to across-the-board rebates/credits. Check your carrier’s website.

You should also know that they way Congress wrote the CARES law left some ambiguity regarding the taxation of proceeds from the PPP loans that are eventually forgiven. At present, it appears that forgiven loan proceeds would be taxed as income, essentially negating the benefits of that forgiveness. Analysts believe that Congress did not actually intend that, but it has not weighed in to clarify that yet. I will keep you posted.

To clarify further, and to quote the linked article:

“The new law clearly states—contrary to typical tax law—that forgiven debt won’t be counted as taxable income. But the law says nothing about whether those ordinary expenses for salaries and other costs still trigger deductions like they normally do.

If they don’t yield deductions, then the program is basically a wash from a tax perspective, which limits the potential value of the program. Tax-free income comes in, nondeductible expenses go out, and businesses pay taxes only on the revenues and expenses outside the loan forgiveness program. The forgiveness would still give a significant boost to struggling firms and help them survive.”

The question is not whether the loan proceeds would be taxable (they would not), it’s whether you can still take deductions for salaries and other expenses as you normally would.

I belong to an organization called Digital Mastermind Group, which consists of owners of digital marketing agencies from through the U.S. One of the group members shared not only this interesting article/study from the Harvard Business Review, but he also shared all of his notes on it so you don’t have to read the whole thing! Here is a link to the article and below are the notes.

Harvard Business Review Article: Roaring out of Recession

The study is from 2010 following the Great Recession, and looked at 4,700 businesses during three recessionary times.

To identify strategy shifts, we calculated how companies’ resource allocations had changed between the prerecession and the recession years, using six balance-sheet items:

  • number of employees;
  • cost of goods sold normalized by sales;
  • R&D expenditures;
  • sales, general, and administrative expenditures;
  • capital expenditures;
  • and plant, property, and equipment stock.

4 Types of Companies:

  • Prevention-focused companies, which had cut back further, relative to their competitors, on one or more of the six items, and hadn’t increased expenditures on any of them more than their competitors had.
  • Promotion-focused companies,which had increased expenditure on at least one of the six and also not decreased expenditure on any of them by more than their rivals had.
  • Pragmatic companies, which had adopted both a prevention focus, by reducing COGS or employees more than their peers had, and a promotion focus, by increasing SG&A, R&D, CAPX, or PP&E more than their peers had.
  • Progressive companies, which had reduced COGS but hadn’t cut employees more than their peers and had also allocated more resources, relative to their competitors, to market-related items such as SG&A and R&D and to asset-related items such as CAPX and PP&E.

Our findings are stark and startling. Seventeen percent of the companies in our study didn’t survive a recession: They went bankrupt, were acquired, or became private. The survivors were painfully slow to recover from the battering. About 80% of them had not yet regained their prerecession growth rates for sales and profits three years after a recession; in fact, 40% of them hadn’t even returned to their absolute prerecession sales and profits levels by the end of that time period. Only a small number of companies—approximately 9% of our sample— flourished after a slowdown, doing better on key financial parameters than they had before it and outperforming rivals in their industry by at least 10% in terms of sales and profits growth.

Just who are the postrecession winners? What strategies do they deploy? Can other corporations emulate them? According to our research, companies that master the delicate balance between cutting costs to survive today and investing to grow tomorrow do well after a recession. Within this group, a subset that deploys a specific combination of defensive and offensive moves has the highest probability—37%—of breaking away from the pack. These companies reduce costs selectively by focusing more on operational efficiency than their rivals do, even as they invest relatively comprehensively in the future by spending on marketing, R&D, and new assets. Their multipronged strategy, which we will discuss in the following pages, is the best antidote to a recession.

According to Tory Higgins, a Columbia University psychologist, human beings are hedonistic—we avoid pain and seek pleasure—but they differ in how they try to achieve those aims. There are two basic modes of self-regulation. Some people are driven most by goals, such as achievement, advancement, and growth. These promotion-focused individuals are motivated by ideals and aspirations that provide pleasure if realized and disappointment if not. Other people are prevention-focused—concerned mainly with safety, security, and responsibility. They strive to avoid bad outcomes, experiencing relief if they succeed and pain if they fail. Situations have a potent influence on cognitive orientation: A recession, for example, can trigger a response that overrides a person’s usual orientation.

  • A focus solely on cost cutting causes several problems. One, executives and employees start approaching every decision through a loss-minimizing lens. A siege mentality leads the organization to aim low and keep both innovation and cost cutting incremental. Two, instead of learning to operate more efficiently, the organization tries to do more of the same with less. That often results in lower quality and therefore a drop in customer satisfaction. Three, cost-cutting decisions become centralized: The finance department makes across-the-board cuts, paying little attention to initiatives that may be the nuclei of post recession growth. Four, pessimism permeates the organization. Centralization, strict controls, and the constant threat of more cuts build a feeling of disempowerment. The focus becomes survival—both personal and organizational.
  • Organizations that focus purely on promotion develop a culture of optimism that leads them to deny the gravity of a crisis for a long time. They ignore early warning signs, such as customers’ budget cuts, and are steadfast in the belief that as long as they innovate, their sales and profits will continue to rise. Even as customers clamor for lower prices and greater value for money, these companies add bells and whistles to their products. They simply don’t notice that because the pie is shrinking, they must capture an even larger share from rivals to keep growing. Optimistic leaders attract employees who thrive in a forward-looking, growth oriented environment. When positive groupthink permeates an organization, naysayers are marginalized and realities are overlooked. That’s why promotion-focused organizations are often blindsided by poor financial results.

BASICALLY: The Stockdale Paradox. Both the pessimists and optimists die. You must confront the brutal facts of your reality.

One combination has the greatest likelihood of producing postrecession winners: the one pursued by progressive enterprises. These companies’ defensive moves are selective. They cut costs mainly by improving operational efficiency rather than by slashing the number of employees relative to peers. However, their offensive moves are comprehensive. They develop new business opportunities by making significantly greater investments than their rivals do in R&D and marketing, and they invest in assets such as plants and machinery.

Only 23% of progressive enterprises cut staff—whereas 56% of prevention-focused companies do—and they lay off far fewer people.

Although layoffs may reduce costs quickly, they make recovery more difficult. Companies run the risk of scaling up too late, especially if hiring is more difficult than they anticipated. People are loath to work for organizations that reduce head count in difficult times. Moreover, as these companies rehire, costs shoot up. In contrast, companies that respond to a slowdown by reexamining every aspect of their business models—from how they have configured supply chains to how they are organized and structured—reduce their operating costs on a permanent basis. When demand returns, costs will stay low, allowing their profits to grow faster than those of competitors.

During recessions, progressive companies develop new markets and invest to enlarge their asset bases. They take advantage of depressed prices to buy property, plants, and equipment. This helps them both during the recession and afterward, when they can respond faster than rivals to a rise in demand. Because their asset costs are lower than their noninvesting competitors’, their earnings can be relatively higher. These companies also judiciously increase spending on R&D and marketing, which may produce only modest benefits during the recession, but adds substantially to sales and profits afterward. The resources freed up by improving operational efficiency finance much of this expenditure. In turbulent times, it’s tough for companies to know where to place their bets for both the immediate term and the long run. Progressive companies stay closely connected to customer needs—a powerful filter through which to make investment decisions.

Many CEOs find investing in bargain-basement assets a tempting offensive move in a downturn. But the revenues and profits from opportunistic investments can take a long time to materialize, leaving a company saddled with an asset base that doesn’t significantly boost returns

Few progressive business leaders have a master plan when they enter a recession. They encourage their organizations to discover what works and combine those findings in a portfolio of initiatives that improve efficiency along with market and asset development. This agility, even as leaders hold the course toward long-term growth and profitability, serves organizations well during a recession. An analysis of the stock market performance of companies that use progressive strategies reveals that they can also ride the momentum after a recession is over. Their approach doesn’t just combat a downturn; it can lay the foundation for continued success once the downturn ends.

As always, on behalf of the entire team here at IMPACT, thank you very much for your faith in us and for allowing us to be your marketing partners!

Stay safe, and keep your head up!

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