Volume 131: Return to You-Know-What Mountain.

1. Return To Bullshit Mountain.

tl;dr: McKinsey at it again.

I have an odd relationship with McKinsey. When I did my MBA, I twice applied twice for a job there because I viewed it as the world’s most prestigious management consultancy. The kind of resume endorsement from which you could write your own ticket. They never replied to the first, and the rejection letter to the second arrived a full two years after I sent it. (I must admit to having giggled upon receipt).

However, I still viewed it as elite, inhaling its thought leadership content, and finding the partners I met to be a universally savvy and sophisticated bunch.

However, as scandal after scandal tarnished the luster (notably, McKinsey’s culpability in the opioid crisis, which is nothing less than evil, and the lightest of slaps on the wrist it received pathetic), I also find myself increasingly looking in askance at the sales support brochures disguised as thought leadership it now peddles in areas where I have expertise. In the past, describing the firm as having put the “Cherry Atop Bullshit Mountain” with this ridiculous piece on “Performance Branding.”

So, with bullshit mountain in mind, I thought I might take a moment to debunk their latest flirtation with the utterly nonsensical, which is the statement that the “Community Flywheel” is a “Better Way to Build A Brand.”

First, I must first note that I originally saw the community flywheel a couple of years ago from Zoe Scaman. And while McKinsey has carefully included references throughout its article, the person it appears to have blatantly ripped off is notable by her absence. So I figured I might at least rectify that here.

I don’t have enough room to walk through the entire article line by line, so I’m going to limit myself to this primary Godawful monstrosity of a framework:

Let’s start with the most obvious stuff first. The term era explicitly suggests that mass media was replaced by personalization, which is about to be replaced by community. This is bullshit.

Mass media still exists; personalization did not replace it, and what’s actually happening is that marketers have started to realize they need more of it alongside personalization to fill both the top and bottom of the marketing funnel (I know the funnel concept is an abstraction, but it’s a handy one).

Second, if all that mass media solved for was reach, then brands like Disney, Nike, Coke, Apple, Guinness, or, well, gee, any brand older than the internet, couldn’t have been very effective. But, again, this is bullshit because, clearly, they were effective. Very.

In fact, I’d argue that the idea the biggest problem in advertising is ineffectiveness, captured so neatly by the so-called Wanamaker problem that “50% of my advertising is wasted, I just don’t know which half” has proven to be one of the most value destructive ideas in marketing.

Anyway, mass media was and remains effective. What challenged it wasn’t being mass but that audiences fragmented, rendering it less mass as a result. This is why the few remaining mass audience events - the Super Bowl, The World Cup, etc - remain so expensive. They aren’t just expanding reach; they’re moving the merch too.

So, the idea that we moved wholesale from mass media via data and targeting to personalized marketing to solve for effectiveness is yet more bullshit.

What actually happened is that the fragmentation of audiences and the rise of the internet led to the emergence of surveillance capitalism, where data and targeting were used to identify high-value prospects from within large, fragmented audiences, with an intent to reach the people most likely to be in the market to purchase at that moment. This didn’t solve for effectiveness at all, as many econometricians will tell you. Instead, it solved for attribution, which we accepted as a proxy for effectiveness. Only now we know it wasn’t a very good proxy.

Worse and quite telling is that no brand was ever built through personalization. Ever. And if McKinsey really is the smartest cat in the room, they should know this basic fact. And the fact that they don’t seem to know it should taint everything else they have to say on the subject.

The truth is that brands are and have always been social objects. The efficiency of creating shared mental and physical availability and a shared set of memory structures is what builds brands. At a minimum, building a brand one person at a time would be prohibitively complex, slow, and expensive. And even if it wasn’t, social signaling cues must be shared to be meaningful. For example, if you drive a car nobody has heard of, it says nothing. However, a Porsche 911 signals something very different compared to a Toyota Camry. These social cues, so critical to how and why we buy, don’t happen via personalization; they occur in spite of it.

And this brings me neatly to the community flywheel thing. First, I'll leave what “solving for influence” means to you because I’m damn sure I have no clue. But if it’s as nonsensical as solving for reach and solving for effectiveness, then it doesn’t matter because it’ll be bullshit.

Second, the term “context” should give us a major clue as to McKinsey’s real agenda here. Probably the most significant change impacting marketers over the next few years will be the patchwork of new privacy legislation they face, which along with the shift to a cookieless web and Apple’s introduction of consumer consent to tracking, risks upending the targeting-driven approach they’ve invested so heavily in, and become so addicted to. As a result, there’s a good chance marketers will be forced to rip and replace significant portions of their advertising ecosystems. And who should be there to tell them what to invest in next…why McKinsey, of course.

That’s right; this is much less about there being a better way to build a brand via community and much more about McKinsey sensing major fees ahead because tracking is only getting harder.

As to the community flywheel itself, like all the best lies, there’s a nugget of truth in there. Here’s my take FWIW. It isn’t replacing mass media or personalization any time soon, but it will augment it for some. Some brands will focus heavily on community because it makes sense; for others, it won’t. This isn’t an era-level shift; it’s a set of tools and techniques that will work for some brands some of the time but not all brands all of the time.

Zoe Scaman, who I think came up with the idea, and whom McKinsey appears to have ripped off, primarily seems to work in “entertainment and fandom.” In other words, categories where a community approach to marketing makes sense because vibrant and vocal communities already exist. In fact, I’d go so far as to say you’d be crazy not to.

But many, perhaps most, categories don’t lend themselves to this kind of participation. I have no interest in being a part of a clean dishes community to spark my purchase of Dawn dish soap. Nor have I any interest in joining an insurance community where Geico car insurance can wow me with its participation. Just taking a simple step back for a second tells you this can’t be a revolution of a similar scale to mass media or even a personalization-level shift because not enough of us care enough about the bulk of the products and brands we buy to participate in communities dedicated to them. And it’s stunningly arrogant for brands to think we will.

The more I think about it, the more I think this is mostly just old wine in new bottles. Back in the day, there wasn’t any tracking data, so we used context to guide media choices. For example, when advertising on TV, marketers relied on the show to tell them about the likely audience. When we started tracking consumers, we no longer cared about the show because we could target the audience directly. So, as tracking becomes harder, context, by definition, must re-emerge. Only this time, for some brands, online communities will serve the same purpose that a TV show or a magazine used to.

2. Inflation, Premiumization, Differentiation, Costs.

tl;dr: Connecting a few economic dots.

One of the fascinating artifacts of the supply chain issues many businesses have faced isn’t just the inflation it caused but the air cover it gave businesses to raise prices in ways they probably couldn’t before. Entire categories raising prices together, almost like an informal cartel (I’m not suggesting they’re illegally colluding to fix prices; just that we’re in an opportunistic moment relative to society-wide economic expectations).

We see this on earnings calls, with CEOs bragging about their ability to increase margins by lifting prices more than costs—a side-effect highlighted by the NYTimes being that premiumization is gentrifying the economy.

Premiumization can have many causes, but in this case, it started with simple economic value maximization in the face of supply chain shortages. If you’re a car manufacturer with a limited supply of computer chips, where do you put them? Into your cheapest, lowest margin models? Or into high-margin, fully optioned, and more expensive vehicles? Clearly, if you believe you can sell them, you’ll release the latter to your dealers before the former. From there, the monkey see-monkey do of business kicked in, and other industries that haven’t necessarily faced the same supply pressures realized they might be able to get away with the higher margin premium trick too, and now we are where we are.

And where we are is a weird place. Interest rate rises have made some industries, like mortgages, grind to a standstill while others continue unabated. Perhaps most worrying for our economic future is that we’re seeing record levels of credit card and buy now, pay later debt. This suggests that a potentially significant percentage of the economic resilience we see might be illusory. Funded, as it seems to be, on credit.

So, what happens when the fat lady sings, and the piper eventually has to be paid? Will all of these businesses that have been so happy to raise prices be as adept at lowering them as demand softens?

Probably not.

Now, I could dive into the usual recession marketing playbook stuff, but I won’t because this recent article by Roger Martin is much more interesting.

In it, he discusses the need for differentiators in any category (which is what premiumization aims to be) to also be conscious of their costs because a superior cost position allied to a differentiated and more desirable product is what provides maximum strategic flexibility. A simple example might be the iPhone, the differentiation leader in smartphones. Here, Apple has vastly more price flexibility than others it competes against, not only because its prices are higher but because its margins are higher because it’s been good at keeping costs under control, even as it raised prices over the past few years.

This means that if the economy turns South and demand softens, Apple has more capacity to lower prices to sustain demand than competitors because competitors lack the margin flexibility to do so.

It’s a fascinating reminder of the importance of cost management, even if your strategy isn’t to be the price leader in a category. Combining the undoubted value of a differentiated and desirable proposition with a low cost of doing business to provide maximum flexibility.

One of the most interesting observations in the article is that being well-branded does not in and of itself mean a differentiated position. This is so bang-on. If all your brand achieves is to be narrowly preferred relative to unknown and/or similarly priced competitors, it isn’t all that differentiated. As a result, you will be exposed the moment a brand in your category that commands a price premium chooses to drop prices to match yours.

I can’t tell you how often I’ve seen this play out in practice. In any industry, there’s usually room for one price leader and no more than a handful of premium differentiators. These businesses garner all of the strategic flexibility and, as a result, dictate the playing field for everyone else.

So, what does all this mean for us? Simple. If the economy turns downward, cost leaders will do well. The premium differentiators with the best cost position will have the flexibility to drop prices while retaining margin. And everyone else that seems to be doing great today because of a rising tide of prices across categories will be squeezed. And those with the weakest balance sheets won’t be around to see the inevitable upturn.