Blog: Ceo Connection 
CEO Connection: Marketing and Economics
For most of us, the levers that control the economy in the USA and the tactics used to create a positive impact on said economy are, for the most part, outside our ability to materially influence. As we have watched the economic turn-around over the last 18 months, I suspect many of us have wondered whether or not the tactics being implemented will in fact produce an optimal outcome. At the risk of becoming an armchair economic quarterback, I would like to talk about marketing and economics, together, suggesting perhaps that a marketer’s microscope on the economy might be an interesting way to look at the problem.
In most areas of life, we are often faced with the dilemma of an uncertain outcome. Due to this fact, marketers have over the years become proficient at using trial and error testing as a way to justify investments when outcomes are difficult to discern ahead of time. Marketers often adhere to a simple philosophy: “Let’s just spend a small percentage of our proposed budget and see if our program actually works.”
Clearly, this strategy couldn’t answer all of our economic doubts, or could it?
As an example, let’s look at last year’s Cash for Clunkers (CFC) program. It’s been reported that $3 billion dollars were allocated to this program, with the goal of stimulating the economy. What might a marketer have done with this program? As step one, a marketer would most likely suggest running a scaled down test program in a single market from which results could be interpreted prior to making the much larger investment.
So, where do we start for this market test? Well, with Albany, New York, of course!
Why Albany? Believe it or not, its demographic makeup very closely matches that of the United States overall. As a result, this makes a great testing ground for marketing programs. In the CFC program, we could have allocated a proportional fraction of the cost of the program -- $300,000, or roughly 1/10,000 of the total $3 billion spent (the population of Albany divided by the population of the USA) -- to fund a trial and error testing program. Additionally, with such a small program, its not hard to imagine that this test could have occurred in as little as a few weeks.
What lessons might we have learned from such a trial and error test? At the end of the Cash for Clunkers program, one study revealed that only about 20% of the total subsidy went towards incremental consumer purchasing. If that was the case, then 80% of the subsidies were given to consumers who intended to buy a car regardless of the program.
Given the similarities between Albany, NY and the USA as a whole, our test program could have determined that only 20% of the $300,000 spent (or $60,000) actually would have been a stimulus to the local community. Though it’s not a precise extrapolation, using that calculation, we could have reported, relative to the $3 billion CFC budget, that as much as $2.4 billion of the program’s funding might not have provided the intended economic boost. If we were marketing this program, would this trial have changed the decision to move forward?
While trial and error testing alone probably can’t provide an answer to all our economic challenges, I do think sometimes we must concede that some problems are just too complicated to model mathematically. Maybe, just maybe, a trial and error approach to economic stimulus provides an alternative way to make economic program funding decisions.
As a company, Inuvo routinely uses testing to determine where to spend investment dollars. Our markets and the channels into those markets are many. Not unlike the US economy, it becomes difficult in the absence of a perfect model, to determine where to place one’s bets. When faced with this problem at Inuvo, we choose to minimize risk and maximize knowledge through program testing that allows us to quickly make ‘go/no go’ decisions based on quantifiable information.
CEO Connection: Data, Analytics and Distribution
In my last blog post, I discussed how data combined with analytics can have a huge impact on markets and industries. I cited several examples of companies who leveraged data and analytics to create differentiation for themselves at a time in their business when markets were very competitive. This is a similar situation to what we see in online advertising today.
Those companies actually did more than just utilize data and analytics; they also created ways to distribute this knowledge—that was the key. The ability to distribute the analytics and put it into operation is how you scale the power of these technologies.
The credit score example provides an interesting analogy here. Imagine I am a banker and every day I have the means to produce a report on my 5 million customers that tells me how their risk profile has changed in the last 3 months. While the report itself is insightful, manually making a decision about credit limits and then trying to manually implement that decision for 5 million customers is really not feasible.
What I really need is a way to automatically adjust credit limits so I can see the benefits of increased profits on interest from increased limits and reduction of loses on reduced limits. The solution to this problem requires that I assemble the data, build models that suggest credit limits, deploy a set of rules around how those limits are applied, then implement all these findings into the consumers transaction flow in as near real-time as systems will allow. Sound complicated? Well it is.
Advertising is no different. Inuvo, through our various businesses, collects a wealth of data—consumer-interest data, marketing-performance data, website-traffic data, website-characteristics data, geographical data and much of it is transactional in nature. Collecting the data itself, let alone building models on it, requires sophisticated technology. However, without the means to put this information into operation, the promise of increased return on investment (ROI) for clients, and for Inuvo, becomes a vision unrealized.
Over the last quarter, Inuvo has been working on the data collection and data analysis phases of this challenge. We are now past the point where we know, based on our data, that advertising effectiveness can be enhanced, so we are focusing now on how to put these learnings into production.
This is where the Inuvo Platform comes into play. One way to look at the Inuvo Platform is to see it as a giant database of marketing transactions between an advertiser and any entity that has the means to drive leads to that advertiser. If as soon as a lead came in we had the means to adapt the advertising offer to suit, one might be able to improve the number of times each of those leads actually purchases a product. It’s the difference between being interested in a product (a lead) and actually buying that product (a sale).
Small changes in performance between a lead and sale can have huge impacts on performance. One million leads for a $30 dollar product where this kind of analytic improvement changes the sales rate from 1% (10,000 sales) to 3% (30,000 sales) takes sales from $300K to $900K. Do it for a company like Apple, and you are talking billions of dollars!
So how will our data and analytics be applied or distributed? How will our analytics reach the market and create value for Inuvo and our clients? Well, as suggested above, through the Inuvo Platform. The Platform is an environment where our data and analytics can have an impact on the performance of merchant campaigns. When you think about it, the Inuvo Platform is really a highly intelligent ad serving platform that could distribute and track advertising across a variety of media sources. Online websites, wireless devices, email—perhaps even book readers or direct response television!
Today the primary source of media inventory for our merchants is our affiliates or online publishers. Tomorrow the source of media inventory could be any of those mentioned above. Integrating these additional sources of media inventory into the Inuvo Platform provides a conduit for the distribution of our intelligence, which in turn, provides a means to make more money for our clients and media suppliers. This is what the scientists and developers of Inuvo are working on.
Marketers want to find an audience for their products; publishers and media access providers want to align products to their audience. When the right offer is served to the right audience, both marketer and publisher benefit. The Inuvo Platform brings together data, analytics and distribution to deliver the perfect storm for performance (i.e. based on an action) marketing. A place where the right offer gets delivered to the right consumer through the right channel at the right time.
Bringing together data and analytics reveals some very interesting and predictive patterns. Combining data and analytics with distribution provides the means to make money from the intelligence.
CEO Connection: The Power of Analytics
It has been my distinct pleasure to work for three companies who have, arguably more than any others in the world, applied the theories of statistics towards solving real-life business problems. Today I thought I would discuss one example of applied science from each of these companies, and then explain how that knowledge is similarly being used to advance our technology vision at Inuvo.
In the mid 1990s, a little known San Diego company, HNC Software, was struggling to find its place in California’s tech boom. CEO Bob North, a former TRW executive, along with what can only be described as a collection of the smartest people I have ever been associated with, came across a unique observation while working on a project for one of their bank customers. They noticed a set of patterns in the credit card transaction purchase data. These patterns where not random – when someone typically buys gas, then groceries, then something at Target®, and all of a sudden the next transaction is an expensive diamond, it just might be fraud. HNC Software went on to commercialize a Neural Network based analytical-fraud technology within a software solution, which is now universally used around the world and known as Falcon. Next time you get that call from your credit card company, you’ll know what prompted their action.
The parallels are strikingly similar within Inuvo’s business. In our pay-per-click (PPC) business for example, the ability for individuals to perpetrate fraud by manually or technologically clicking on links without any intent to buy is, unfortunately, quite common. Since advertisers are all too willing to pay for clicks, this business model demands that the service provider (like Inuvo) protect the advertiser from this potential fraud threat.
Much in the same way HNC Software predicts fraud on credit card transactions, Inuvo predicts fraud on click transactions. On the cost-per-action (CPA) side of our businesses, where advertisers are willing to pay based on the creation of a lead, fraud is also a potential problem. Here again, Inuvo is applying the same proven principles that protect hundreds of millions of credit-cards. By opening the kimono for the advertiser on every single transaction, the Inuvo Platform has the ability to assign each transaction a fraud score, which can help those advertisers improve return on investment (ROI) by eliminating this potential fraud threat.
The power of analytics goes well beyond fraud in terms of its application. In the early 70s, two clever engineers, Bill Fair and Earl Isaac revolutionized the credit systems of the United States and even the World. They, like HNC, developed an algorithm that was based on an individual’s credit history and predicted with great accuracy the relative risk of lending to the consumer. The FICO™ score went on to become the standard mechanism for assessing risk in the U.S. Here again, the parallels to Inuvo are striking. In the FICO score case, the historical actions of consumers—how they paid off their historical loans—was a powerful predictor of their ability to service their current loans.
This is also true in marketing online. How an individual has historically responded to advertisements, supplemented by various information about their current interests, lifestage or geographic location, can be used very effectively to predict what advertisement to present today. The same is true in the FICO example—replace the outcome decision from “what loan to offer” to “what product to offer”, and you have an analytical match.
Inuvo is implementing numerous data-driven analytical techniques to help advertisers and publishers on the PPC and CPA sides of our business improve the response rates for their advertising offers. While many consumers might say that these techniques make them nervous, as a marketer, I have always felt that a well-targeted offer meeting a current consumer need is really a win-win.
The third example applicable to our Inuvo business is innovation that occurred at Acxiom®. Out of the small town of Conway, Arkansas, a marketing services powerhouse emerged. Charles Morgan built Acxiom from nothing into a $1.3 billion annual revenue business and Acxiom, like FICO and HNC, leveraged data and analytics to give them a competitive advantage. At its core, applied analytics is really the science of codifying the meanings hidden within vast quantities of data. In the 1990s, Acxiom innovated on two fronts that have parallels for us at Inuvo.
First, Acxiom invented a universal way to identify consumers. Many organizations today have consumer relationships that span many years and many departments. A car loan, a credit card and perhaps a mortgage, along with the history of those relationships, probably resides in multiple databases across the enterprise. So in a typical organization, there is a high probability the company has a record of many individual relationships with, say, John Smith. To the organization, all these John Smiths are different people, but are they? An analytic approach to understanding the underlying data is more likely to reveal that a John Smith from Arkansas is the same as a John W Smith, who used to live in Florida, and Jonathan Smith, who went to school in Texas. Acxiom created a way to make these associations, for everyone in the U.S.
Second, Acxiom created a consumer segmentation system that grouped various demographic characteristics at the household level so products and services could be better targeted based on lifestyle and lifestage. Essentially, they took all the demographic information they had and applied it at the household level so marketers could understand the differences between lifestage and income, along with many other characteristics. For example, on my street, like many of you I'm sure, we have individuals who recently had children, a couple who are grandparents, others who recently retired, and ourselves, who have two kids in college. Clearly, each of us on this street is at a different lifestage and, as a result, will likely respond very differently to various marketing offers – the Howes no longer need diapers.
The combination of these two innovations in science allowed advertisers to 1) ensure they grouped all the relationships they had with a consumer together and 2) ensure they properly understood that consumer so advertisements could be targeted appropriately. Inuvo is approaching online advertising in much the same way Acxiom and others had approached offline advertising.
The online problem has many of the same challenges addressed in the 70s and 80s. An individual visits a web site but never identifies himself/herself. How do we know whether or not they are an individual Inuvo has interacted with in the past? Further, suppose we could, at a minimum, realize that we had a former relationship with this consumer—how do we know what they might be interested in? Inuvo is implementing technology today within the Inuvo Platform, within our PPC market and in our owned and operated websites that will for online marketing, assure analytically, that every consumer interaction aligns the offer with the highest probability of response.
The thing that made Acxiom, HNC and FICO successful were their innovations in data and analytics. Inuvo similarly recognizes that true differentiation online will likely come not from the software platforms themselves, but rather the intelligence built into those platforms. To succeed, one needs both, and Inuvo is and will continue to make investments that are aligned with this philosophy of data and analytics driven advertising decisions—we’ve even hired some of our friends from HNC, FICO and Acxiom to help us.
Introducing the CEO Connection with Richard K. Howe
Inuvo: Hey Rich! Thanks for taking time to talk with us today. We are interested to learn more about the new CEO Connection. We understand going forward this will be a monthly blog post directly from you, discussing your experiences here at Inuvo, or any thoughts you may have on the online advertising industry overall. Can you tell us a bit more about why this has been created and your plans for it?
Rich: Absolutely. Over the past year, Inuvo has made many changes. Since change was occurring on many levels, it just wasn’t practical or responsible to communicate details of the change as often as our clients and shareholders may have wished. Now that our leadership team is in place and we have eliminated a number of obstacles to growth, we thought this blog would be a good way to keep people informed and correct any inaccuracies that may be out there about our company.
Inuvo: What exactly do you mean by inaccuracies?
Rich: In the absence of detailed information, each of us fills in the gaps with our own assumptions. In a time of economic turmoil, like we have experienced over the last 18 months, there is a higher probability than not that the assumptions will be negative. A point of example for Inuvo has been our banking relationship with Wachovia. An incorrect assumption here would have been that our banking relationship was strained. This of course was proven false, as we recently announced a restructure of our loans in concert with our equity raise. My hope is that through this CEO Connection, we can help clarify various facts about the business and its markets.
Inuvo: Since most of us already know a lot about your professional background, would you mind telling us a bit more about yourself and your family?
Rich: Certainly. I grew up in a very small town outside Montreal, Canada. I played lots of ice hockey starting at age 5 for school, city and travel teams, and switched over to roller hockey when I lived in San Diego. My dad introduced me to golf at a very young age and now that’s become the sport I wish I had more time for.
My wife and I met in high school and have known each other now for 32 years. As kids, we would routinely bounce back and forth across the border, as my wife’s family also had property in Vermont, and thus we have traveled the northeast states extensively. We moved permanently to the U.S. in the 90s. Although we have made big moves quite a few times, we have three great boys that have adapted to the changes extremely well and it has been our good fortune to live in some of the world’s most spectacular cities.
Inuvo: After living in so many great places, how does your family like Florida?
Rich: Well, they will probably enjoy it a lot more once we can get better settled here. Like many others right now, our home outside of Florida still needs a buyer and it’s taking longer than we expected. In the interim, I continue to live out of my apartment here and we juggle travel so sometimes I’m out of state on weekends, and sometimes my wife is in state. The big attractions are the beaches. Somehow, no matter the age of the kids, there is never any arguing when we hit the beach!
Inuvo: Well, it has been right around a year since you first joined Inuvo. What would you say the biggest challenge has been for you this past year, along with your proudest accomplishment?
Rich: I came to Inuvo because I saw underleveraged potential in this company. Unleashing that potential involves people, process, technology, passion and a vision. Our biggest challenge this year was transitioning the business while fighting off market and credit environments outside of our control. I’m most proud of the new team, both management and board that we have assembled. Despite the market challenges, they made Inuvo stronger this past year.
Inuvo: What are your immediate goals for Inuvo in Q1 2010?
Rich: As a public company we are unfortunately driven by quarterly performance expectations, so the short term vs. long term dilemma is a common CEO balancing act. At Inuvo, we are focused on creating shareholder value. We do that by building products and services that deliver value for clients through the utilization of technology, data and analytics that serve online marketers. We will continue to execute on those plans in 2010.
Inuvo: As you know, we receive a lot of questions about Inuvo’s banking relationship and access to capital in general. Could you comment on this for our readers?
Rich: Sure. We have a great banking relationship with Wachovia that goes back many years now. The loan we have with the bank gets used to fund our working capital needs. Growth capital, in the past, has been funded by the cash flow of the business. With the recent announcement of our equity raise, that has now been significantly enhanced.
Inuvo: Which aspect of your role do you enjoy the most?
Rich: I most enjoy the technology, sales and marketing aspects of running a business. As an engineer, I remain enamored with technological solutions that alleviate inefficiencies and incorporate artificial intelligence. The offer – response dynamics of marketing are inherently inefficient and lend themselves well to complex decision science technologies.
Inuvo: The Inuvo Platform was launched in August and is still in beta. Can you comment on the meaning of beta and the company’s plans for the Platform?
Rich: I read a quote recently that went something like, “If you wait for all the features to be incorporated in your product, then you’ve likely missed the market window for the introduction of that product.” The Inuvo Platform was designed to address inefficiencies within affiliate marketing. As a technology enthusiast myself, I’ve learned that great products and services continue to evolve based on customer feedback and technological advancements, so in this regard, I guess you could say we will always be in beta. Formally, we expect to exit beta in early 2010.
Inuvo: You came to Inuvo from Acxiom Corporation, a world leader in the use of data in marketing services and while there, you worked for Acxiom Chairman and now Inuvo board member and shareholder Charles Morgan. Can you comment on the relevance of this experience for Inuvo?
Rich: About a year ago I received a call from Charles Morgan on a Sunday afternoon. He had been accumulating Inuvo stock, and in typical Charles Morgan fashion, was only too happy to remind me that as an Inuvo shareholder, I now worked for him again! It has been really great to reconnect with Charles, building off of the experience we had at Acxiom. Ironically, the techniques in use for offline direct marketing better utilize data and analytics than do current online techniques. Analytics for marketing boils down to predicting what product best addresses a current consumer need. There’s real-time information that can be used to understand that need (such as when a user searches for “cars”) and there is historical information that can be used to understand that need (such as when you have a history that suggests an interest in “motorsports”). There is demographic and geographic information that can refine the prediction. The key to solving the problem of what offer to give what consumer begins with this kind of data, and in this regard, Inuvo currently has access to lots of anonymous behavioral interest data. Our data and analytics team has this as a focus for 2010.
Inuvo: With all the long hours and traveling, I know this might be hard to answer but we thought we would give it a shot. When you are not at work, what would we be most likely to find Rich Howe doing?
Rich: My wife and I try to find activities that bring the family together. We love to ski, we all enjoy motocross and have a garage full of bikes and the boys and I get together for some very competitive golf. Each of these things we do together as a family. When the kids are off doing their thing, my wife and I grab our jackets and head out for a couple hours at a time on my Harley, attend the theatre and concerts or watch old SNL skits – love that Cow Bell!
Inuvo: Well thanks again Rich for talking with us. We will look forward to reading your first post for the CEO Connection in just a few weeks!
