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Friday, June 21, 2013

Closet Media Plans?


In the financial world, there has long been a debate about whether actively managed funds are better for an investor than index funds. An index fund is not managed. Rather it is a fund that tracks a designated market index like the S&P 500. There is no thought that goes in to it. In essence, you buy the whole market. Over time, index funds often outperform most actively managed funds. How is that possible if a professional money manager is choosing stocks and a computer allocates the index fund?  Jack Bogle, founder of the Vanguard Group, attributes it to the large fees that actively managed funds charge versus the rock bottom costs that an index fund charges. Over a period of 20-30 years, the fees that an actively managed fund have eat away at your gains while the index fund with its modest costs invariably churns ahead. (for a detailed explanation of the case for index funds, you might want to consider my two favorite books by Jack Bogle--”The Little Book of Common Sense Investing” and the heavier “The Battle for the Soul of Capitalism.”)

As more people moved to index funds, the industry, some say shamefully, came up with what have become known as “Closet Index Funds.” Here a fund manager purchased most of the stocks in the market index that he is supposed to beat. So, fund managers sometimes charge twice what an index fund does to a small retail customer yet there is little difference in the composition of the actively managed fund and the index fund. Over a lifetime, the differences in fees cause the index funds to outperform most of the managed funds by a wide margin. Many billlion dollar funds are actually “closet indexers.”

This may seem like a bit of a stretch but in my career, I have seen some closet indexers in the media planning world. Years ago, an earnest young man burst in to my office a few days after I had presented a rather exhaustive (read boring) competitive spending analysis to his major client. He wanted me and my team to clone the media plan of the largest and most successful competitor in the category. I smiled. “Are we incompetent?” The young man reddened and said, “Of course not! But these guys are doing great!” I had to agree. However, I countered that they outspent our client 11 to 1 and even had a spot in the recent Super Bowl (in those days about $2 million for 30 seconds vs. $3.8 million today). He said, “We should be in the Super Bowl, too.” I told him what that two million did for us across an array of key markets. And, I added that their product had better distribution while ours was national in that it could be found in all 50 states but if we advertised too much on network tv we would commit the cardinal sin of advertising to empty shelves.

The young guy was sincere and I liked him but he went to the client without clearing it with me or his management rep. It took months and too many meetings to turn both away from his foolish idea.

Was this an isolated example? Over my career, I saw many second and third tier players often aping the media plans of the market leader. And, I don’t mean that they both used TV. When we took over new accounts and did careful competitive analyses, it  showed up all the time. Also, I sent this blog post in draft form to some other long time media planning pros who said they observed the same thing. One guy had the chutzpah to tell me that he often did a closet plan as it shut up difficult clients when they saw that the big guy was doing roughly the same thing.

Well, something is wrong. Every product has unique attributes, distribution, pricing, branding development, market share, and let’s face it, quality of creative. A customized plan is always the right tact even though you need to see what the opposition is doing and if it is working. This is no time to be a lazy media strategist. You need to keep thinking and keep testing. A few people have written to me and stated that  “closet media plans” may total up to a billion dollars a year in the U.S. How much of that is being misspent?

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

2 comments:

  1. This is a great article because it shows how we can create illusions for ourselves.

    It was a good read Don! Thank you for sharing.

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    Replies
    1. thanks, Austin. You are spot on about creating illusions. Thanks for reading,

      Don

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