Economic Headwinds Are Great For Business Innovations

Foreign [Applause] [Music] Welcome! This is a session on how economic headwinds fuel creativity. I'm sure many of you in the audience, no matter where you work—agency side, client side, you run a business, you're an entrepreneur—you're probably wondering what's happening in the world.

We're hearing about economic headwinds. We're hearing about increases in inflation. And then, at the same time, we're also hearing about the job market being stable. It's a confusing picture. But I'm joined by two incredible guests who can actually help us navigate some of those questions. Two people that have driven both entrepreneurship, innovation, and creativity from leading marketing communications all the way through to funding businesses and big ideas. As many of you will be aware, so please join me in welcoming my two guests: entrepreneur and Mr. Wonderful, Kevin O'Leary. Thank you! And the EVP of marketing and communications from MasterCard, Rustin Disturbed. Please welcome!

All right, okay, so we're going to jump straight in. You can see on the screen here that it's a confusing picture. The story is mixed. For the last six months plus, we're hearing this is the world's worst economy ever. As I said, in the U.S. the job market seems stable. If you're in marketing, you're on the P&L at cost center; you're probably the first thing that's being cut. If you're in an agency, your clients are telling you, "How can you optimize?" Performance marketing has never been more important. Data drives every decision. What are you going to do about it?

The most important thing to remember is that innovation is at the heart of every crisis, and what comes out of a crisis and what comes through innovation are some of the best ideas. But let's kick it over to Kevin first to tell us about what's happening in the world and how you see this. How would you advise everyone in the room on how to think about this economic whirlwind that we're in?

Kevin O'Leary: Well, I agree with the idea that it's perplexing because each recession—and I've lived through and I've seen this movie many times before—has its own personality. This one's unique. It's very hard to contemplate a recession at full employment, yet that's what we have. In my portfolio of companies, private all of them, about 56 of them, they're across all 11 sectors of the S&P and almost every geography in the U.S. We see the tear sheets for revenue and cash flow on a very orderly basis, often once a week.

Here's the challenge for any small business right now: so full employment, we haven't seen a slowdown in consumer demand. I don't care what it is: is it insecticide? Is it grading cards? Is it commercial kitchens? Cupcakes? Gym equipment? Wireless chargers? We have all that stuff. We haven't seen a slowdown yet. At the same time, you're watching all this doom and gloom, and I see it too, and so do the CEOs of these companies. Their decision? The hard part of all this is what to do about inventory going into holiday and Q1. Do you pull back because you think this recession is going to hit us in Q4, which we're basically in right now, and holidays coming up in a few weeks?

Extended holiday this year by over three days, which if you're doing 200 million, 150 million sales, means a lot of inventory. So you're trying to gauge the pessimism out there as the stock market tries to forecast the future in 2023. Meanwhile, your sales are humming. Do you want to leave anything on the table? More perplexing is the situation coming out of the pandemic; most of these companies have gone past 50 percent direct to consumer models, big succulent margins, direct to consumer, bypassing retail, advertising, digitally acquiring customers economically. They know their CAC. They know their subscription services. They know the attrition rates. They're making money.

And if they sell a product online that they don't have to ship: well, you should burn in hell in perpetuity for that. That's basically the challenge that most small businesses have. There is no evidence of a recession yet, yet clearly the market is telling you it's coming. You just don't know when. The last speculation I'll make: the reason this is happening is we printed 6.7 trillion dollars basically for free in 30 months, and then we say, "Oh, there's inflation." Well, no. There's inflation because extra cash chasing fewer goods creates higher prices, which is what's happened. But all that cash is still sloshing around, which is why the consumer is not dead yet. That's my two cents on it.

Rustin Disturbed: Awesome. Well, Rustam, you're looking at consumer spend data every day. This guy should know! Yeah, tell us what you're seeing.

Rustin Disturbed: Look, as a payments company, this is our lifeblood. So we look at consumer spend data very closely. For the month of September, we're still seeing data look very strong for consumers and consumer spend, retail data, online and traditional. It's not just strong relative to this year; it's strong relative to two years ago, pre-pandemic. So there's a lot of pent-up demand that is bursting through into retail spend.

The question is how long that pent-up demand lasts. Now, one of the things we hypothesize is that some of that is just because household savings was so high during the pandemic, and there's that sort of burst to get out to spend, to consume again. And as Kevin said, there's all this extra money floating around in the economy. But what we've got to be sort of a little bit conscious of is that that phenomenon may be coming to an end, where especially at the lower end of the spectrum, that incremental household cash that existed might start drying up.

As we start going into the holidays and into next year, with lending also tightening and no physical help coming from the FED for borrowers into next year, you might see some of this demand contract and level of prices. Prices might cool things down a little bit. So there is some sort of belief that as we go into the fourth quarter and early next year, we might get a truer picture than what we're seeing today.

It's really interesting. We were just talking in the back about what we're seeing at Meta, and for small businesses in particular, we just released our 10th State of Small Business Report globally. Similar trends: businesses are not reopening at the rate that we would have expected. About 19 percent still remain closed in the United States and 20 percent globally. But what we are seeing in terms of positive trends are hiring—74 percent of businesses told us that they have hired a lot more in the last six months than ever before—and also the use of digital tools continues to increase.

I was just saying to Kevin in the back that the trend we're seeing is women-owned businesses are actually leading the way in terms of their sales through digital versus men, which, you know, big it up for the women in the room! I think that's a really fantastic way to lead. But, you know, if you're walking into the C-suite and you're a marketer or a small business and you're looking for investment, what are you saying to CEOs and CFOs to convince them that this is a good place to spend money?

Kevin O'Leary: There has been a change in investor sentiment regarding investing in small business, and here's what it is: because of what occurred during the pandemic, this remarkable digital pivot—what I call America 2.0—where companies that pre-pandemic, if you looked at the pie chart of revenue, it would have been 50 percent through retail, 40 percent through Amazon (just another retailer, except you don't get the data from them), and 10 percent from your own website. That's completely changed!

The successful companies that went through the pandemic—even Amazon went to essential goods only, if you remember—in February, March, April, and May of 2020. Those companies had to build out their own platforms and start acquiring customers. So if you look for an A round, B round, or C round in a small business now, and you go to the investor community and say, "Look, I'm looking for money," the first question every investor's analyst asks you—and we're no different—is, "Do you know your CAC, your customer acquisition costs? Do you know your attrition rate of customers? Do you know the lifetime value of that customer? And are you now past 50 percent direct to consumer?"

Because when you get past 50 percent direct to consumer, you get something more valuable than anything: you get data—your own data. Size, preference, flavor, frequency of purchase, price point, regional disparities on flavors, and all kinds of sizes and differences in people's preferences. Just like the wine business, for example—what people drink in Florida is completely different than what they drink in Ohio. And if you're selling direct, which you can do to 42 states now, you have that data, and that data is priceless!

Data is the new oil. So if your company can't analyze data, you're not collecting data, you don't even understand what I'm talking about—no chance in hell you're getting an investment. You're just going to go out of business because your competitors are so much better than you. That's what's different in the last two years: data companies that know how to mine data and understand it because that's the first thing we ask. If you understand your CAC, I can pour four, five, six million dollars onto it and grow the business dramatically, because we already know I'm just pouring gasoline on the fire. If you don't know, we don't even read the deck.

Rustin Disturbed: That's so interesting. It's about knowing your consumer. Tell us more; you're in a marketing position, and data obviously is critical to how you think about it.

Rustin Disturbed: I mean, just building on the theme Kevin led off with is that a small business today has to be a digital business. There is no option. We see that in our data: large digital businesses grow about three times as fast as small businesses online simply because they're better set up to do so. This is a societal problem; this is not just a small business problem. We cannot have small businesses fail because they're not digital businesses.

In many cases, it is that education; it is those tools; it is empowerment; it is mentorship; it is enabling them to mine data the way Kevin's talking about, so they have a legitimate competitive proposition in the digital space. Now, what we also see is that when you are a service business, your digital proposition is a little stronger as a small business than as a large business. So, for example, tax accounting or any small business that offers a service tends to do larger than a commoditized large business in the online space.

So while data is important, taking that data and applying a service proposition around it is also incredibly important.

Kevin O'Leary: I actually think that's super interesting. You think about the businesses that have built their business on Facebook or Instagram. When you think about Instagram, you often sort of quickly go to retail and fashion and cosmetics and, you know, things that you like to see in your feed. But it's actually the service industries—the accountants, the hairstylists, the legal advisors—that are actually doing phenomenally well by creating community and talking directly to their customers through our platforms.

So, let's talk a little bit about risk. How would you advise people in this room to think about it? In this world where everybody's feeling a little bit risk-averse and buttoning down the hatches, what would you say is a reasonable risk to take? We'll start with you; from a marketing perspective, it would be great to hear.

Rustin Disturbed: Sure! You know, I always cringe a little bit when we tie marketing with budgets. I always get that conversation, that question: "How do you go and talk to your CFO about money?" I don't want to talk to my CFO about money; I want to talk to him about opportunity.

Marketing is a competitive advantage for a business. More important than money is ingenuity. And when the money tightens, the ingenuity has to grow even more. So what I'm looking for from my teams for the next year is not to worry all day and night about what the budget is, but what are you going to do with the money you have? How are you going to make it work harder? Because I think that's where the real magic happens—not just in the budget on its own.

So when it comes to risk-taking, there are many things we will do differently next year than this year. If the ability to spend contracts—which we expect it might—then we'll do more targeted work, we'll get better on segmentation, we'll talk less to fewer people but more effectively, and we'll find loyalty and retention as a bigger objective than acquisition. So there’s a lot you can do to manage these moments, but you've got to show ingenuity and not just depend on a budget check.

Kevin O'Leary: I love that; that's really helpful! What do you think about that, Kevin? Any advice?

Kevin O'Leary: Well, I take a slightly different approach because if I look at a company and they're spending 12 to 18 percent of their income statement on marketing, essentially I want to know what the return on that is. To me, that is measured by customer acquisition costs because I don't care who you are, what you sell—it’s as you said. It's about digital.

Every business is successful. Even Nike, a giant behemoth, during the pandemic they claimed it was going to take them six years to get to fifty percent direct consumer in all geographies; they did it in five months. As a result, they survived the pandemic at much higher margins and free cash flow because the only cost you have if you're direct to consumer is manufacturing, logistics of shipping, and customer acquisition costs. That's it!

Now, if you have that situation, you're bypassing traditional distribution—saving 40 percent—and that goes right back into the business. For me, it's: if you're spending money on marketing, are you constantly experimenting with new ideas? So I’ve always said to my companies: I want a third of marketing to be experimental every quarter.

Because if you're just sitting on your laurels doing the same old crap, you're missing out, and your competitors are going to do something else. So start experimenting! Because the value of something that works—that you find through just creative chaos—is extremely higher than what you've already been doing because you start losing yields right away. Whatever your strategy is, and let’s say you’re getting a two percent response on it, watch six months from now; it’ll be 1.7 or 1.5.

What's the next thing? What's the next idea? What's the next drop? What's new? Because it's so noisy out there, as you all know. You've got to keep creating. And everybody has the tools to do that. Obviously, yields are way down from two years ago because of what Apple did on privacy. But that doesn't mean you can't fix it by smashing data together. If you're using Meta, you can buy other services to target your customers in various geographies, and we do that a lot.

I'm shamelessly promoting them, but I'm using C-squared social in a lot of my companies now because they're small, they're entrepreneurs, and I'm a paid spokesperson—that’s true. But it’s because I eat my own cooking. I spend money on them to get my yields up on Meta.

Rustin Disturbed: And let’s say you’ve lost 28 percent of your yield because of Apple, which is approximately what you lost; you can get back half of that when you start smashing data from other sources, including yours. I mean, there’s data out there! The credit card companies and banks have that help you do this.

Now, if you don’t know what I’m talking about, you’re screwed anyways. So this is a standard procedure right now in terms of putting together good campaigns.

Rustin Disturbed: I love that! Well, I really agree with the experimenting points you're making. You know, we have a pop-up around the corner here for Meta. You should go and check it out! But we’re showcasing a sunglasses company called Desi, which is founder and creator-owned. They have beautiful products; the whole line has been built through Instagram and Facebook, and they sold three thousand pairs of sunglasses in 48 hours through a campaign that they, you know, tried through different formats on reels and Instagram stories and so on. So, I totally agree with the sentiment: you’ve got to keep experimenting to be one step ahead.

It's a little bit about what we talk about with our new company name, Meta, and the metaverse. You know, that is a longer road out, but there are certainly ways that brands and businesses can start to experiment with AR filters and using 3D ads and starting to understand how consumers of the future are going to connect with brands in these new platforms and areas.

I’m going to put up a slide now, and I'm going to have some audience participation. So, what you can see here is about 14 different companies, and the question for all of you is that, you know, it's hard to imagine getting back to growth in a time like this, in a time of economic downturn. So the question for everyone is: how many of these companies do you think started in a recession?

I'll do a show of hands. Five? About five of them start in a recession? Eight? This is a tough crowd! Ten? Is it 14? Ten? Okay, 14. Okay, there’s only 14 on the slide. One? All right, well, the answer is we can do the reveal—all of them! The point here is, you know, Rustan said it really well: continue to innovate, continue to be experimental. Marketing should be ingenious, and you should be taking these ideas through to the C-suite as much as you can.

If we go to our next question, you know, we talked a little bit about creativity. How can you—? You know, we talk about performance and CAC and data, but how can brands continue to be creative in this environment? I’ll ask you, Rustin, when you think about big ideas and everything that MasterCard has stood for over the years, what’s the right balance there between brand versus performance?

Rustin Disturbed: Sure! Look, as a payments company, our ambition or goal is to make payments as safe as possible and as frictionless as possible, and we’re constantly innovating to do that. It starts with the consumer: how do we make that consumer experience at the point of payment just that much better? No one wakes up in the morning thinking, "Gee, how am I going to pay today?" No, what you want to do is enjoy your life. You want to book that vacation. You want to buy a new pair of clothes. You want to buy a car. You want to make the payment moment as frictionless as possible.

So, everything we do with innovation is to try and make that happen. Now, as devices exponentially become connected devices, the opportunity to build payment mechanisms into these devices just grows. So, I see Kevin wearing a watch or a ring that, if it's a connected device, can become a payments device. You can simply embed the payments technology in there, and you can tap it on an NFC code, and you can go from there.

So, that makes the payment moment frictionless. Now, what we saw during COVID is that a couple of things we were trying—like getting contactless cards more prevalent, getting e-commerce with card on file more prevalent. I mean, just the best first that we got out of COVID, because that became such an important consumer moment and such an important hygiene moment for consumers—not to have to touch devices, etc.—revealed that our innovation of the last 10 years just blossomed in that environment.

So, we’re already starting to think about how do we continue to make payments frictionless so, no matter what the environment, the consumer will gravitate towards safer, easier, faster ways to pay.

Kevin O'Leary: That’s so interesting! What are you seeing on the payment side of some of the businesses that you’ve supported?

Kevin O'Leary: I am using a use case. I teach a lot of graduating cohorts of engineers, and I always go to the graduating cohort because a third of the class is very entrepreneurial, and they do deals. I get to see them before the VCs do them. So, I’m doing this on a selfish basis, but it really works.

There’s a use case I want to show you, and this is a shout-out for Rustam. Payment systems are so brutally competitive in fintech—it’s impossible! Let’s take a use case of a credit card: the chance that you could launch a credit card in this market—in my mind as an investor, zero probability of success because you’ll never acquire customers. Here’s one built—this is a MasterCard!

What this guy did—first time I ever invested—I own a piece of this company. He came to me and said, "I’m going to use community. I’m going to go to every renter in America and let them pay their rent on a credit card." How crazy is that idea? Because I said, "It’ll never happen; you can’t shave three percent out of a landlord." He said, "No, the landlords pay nothing. We’re going to make this work for the landlords and make our money on all the other things people do with this card." Very had a plan to go to a community and use social media, say you pay rent—you want to increase your credit score?

He built this thing; it’s the fastest-growing card in America. His CAC is low because if you rent, you want this! I knew it was going to work when my daughter and son called me and said, "There’s a waiting list. You got to call the guy up; you’re an owner! I need the card." They were screaming to get their rent paid on it because it’s two, three, four thousand a month that they’re getting credit for. Brilliant, brilliant idea!

That’s using community. That’s using social media. That’s a payment system. But the key there is he figured out CAC. Everybody else trying to launch credit cards goes to zero almost immediately; they can’t compete with MasterCard, American Express, Visa. It’s impossible to gain share against those guys unless you’re in bed with them.

And you have a different approach, which is what Built did. That’s innovation. That’s entrepreneurship, and boy, does that guy spend on social media? He’s insane because he knows his CAC; he can pour gasoline on it. When I invested in it, it was a $5 million valuation. We just did another round of $1.5 billion that was 18 months ago. That’s what I’m talking about here—that's innovation in payments.

Does everyone know? Kevin’s whole wallet is here, so if you’ve got an idea, I just noticed that to meet us in the green room! Let’s talk a little bit about community and then I’ll wrap it up. But, again, MasterCard does some tremendous work across the community, and I love hearing these stories where business ideas are sort of born out of what—like, we're a brander company.

Rustin Disturbed: Tell us more about MasterCard and what you’re doing there.

Rustin Disturbed: Yeah, I’ll give you a small example. You know, one of the things—so this is the 25th anniversary of our Priceless campaign. 25 years ago, we came up with this idea that there are some things in life money can’t buy—for everything else, there’s MasterCard! It’s kind of been the philosophy on which the company has been built over the last 25 years.

We saw a community idea that came from actually one of our employees that has been a huge success; it’s called the True Name card. It’s a card that allows you to put your chosen name on the card. Now, if you are a person who is going through a transgender transition and are transgender, the worst thing possible is to put your credit card down at a shop or a restaurant and have the stigma of someone looking at the name and questioning whether that’s really you.

Now the reality is we don’t need the name to process a transaction; we just need the 16-digit code and the security code. We don’t need the name! So why is the name so important for the card at a point of payment? So we give people the option to put whatever name they want—whether it’s because they’re going through a gender transition, or whether it’s because they want to use a maiden name, or a professional name, or any name that they might want.

This has just opened up such a host of possibilities for people that were otherwise stigmatized by a product feature that wasn’t needed. So it’s not technology innovation, but it is tactile, simple life innovation that has just made life that much better for a consumer.

Kevin O'Leary: No example is similar to what—you know, we think about avatars and, you know, we’ve been talking a lot about D2C, but think about D to A, which is going to be direct to avatar, and what identities people can create in the future world, where you can be whoever you want to be and move across different platforms and express yourself in ways that matter most to you in that environment.

I just think this is—we’re just at the start of this as marketers who really have to understand what the future of segmentation looks like in a world where, you know, you describe that we can be whoever we want to be. I’m super excited to see where we go with that.

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