Tuesday, March 2, 2010

Sales, Marketing, Relationships and Investor Relations

There is an old saying that goes, “When the only tool you have is a hammer, everything looks like a nail”. So those of us who went to Kellogg Graduate School of Management are often accused of seeing everything as a marketing problem, because that’s what Kellogg is best known for. But in getting ready for this year’s investor relations class at Rice, I pulled out Philip Kotler’s “Marketing Management” and was quite surprised by how many of the principles of marketing apply to investor relations, so maybe there is some truth in the old saying.

For example: Boiled down to its essence, investor relations is consultative selling. You want the right type of customers (investors) to buy a piece of your company (stock) and to have a good ownership experience (own the stock for a long period of time). The purchase and sale decisions regarding your product (stock) are, for institutional investors, done in a complex, multiparty transaction involving sell side analysts, salesmen, buy side analysts, portfolio managers and traders, with information about your company being judged against a competing universe of offerings.

Marketing fundamentals tell us that any time you have complexity in the way a purchase decision is made with lots of competing choices, the process takes a longer period of time to analyze the pertinent data and come to a decision. Rivel Research has stated in one of their studies on the buy side that it can take 3 – 5 “touches” with management before a purchase decision is made. I have personally known investors who took 4 – 5 years of following a company before they made a significant investment decision. Yes, there have also been occasions where investors make a purchase after a single visit, but usually there has been significant research done before the visit.

Marketing also tells us that complex purchase decisions require more upfront effort by all parties involved. This is why it is important to realize that investor relations is a relationship business. It is much harder to sell a product if you do not have rapport with the customer. On the IR side of the fence, this means treating analysts fairly and consistently, helping them understand your company and industry, chasing down the details that help fill in the picture for the customer and eliminating some of the informational uncertainties that go with buying stocks.

Often managements have an “us or them” mentality when it comes to investors. You are either in the boat pulling on the oars and helping the stock price go up, or you are out in the water circling the boat awaiting an opportunity. It doesn’t have to be that way. As a partner at Goldman Sachs once said to me, “There are good companies and there are good stocks – they’re not always the same.” Stock prices fluctuate, and not always because the firm’s underlying intrinsic value has changed. This is where relationships come in. Patient, long-term investors may follow you for a long time before they find the right entry point. If you have built a relationship with them, they may be more likely to pull the trigger when the opportunity presents itself. Similarly, in times of market turmoil, investors are much more likely to stick with your company if they know you, believe that you are telling a straight story, respect your work and have been treated fairly by you in the past.

Of course, if you are completely owned by index funds, quants, quick buck hedge funds and day traders all this goes right out the window…

3 comments:

Dave Hogan said...

You make a very valid point that is often overlooked by CFOs and IROs who are purely finance-driven. NIRI's definition of investor relations includes the words "marketing" and "communication" along with "finance" and "securities law compliance." IROs and their bosses will do a better job if they remember this. The numbers are hugely important, but it's not ALL about the numbers.

Kelly Berick said...
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