To keep pace with the market, businesses frequently opt for the strategic equivalent of cosmetic surgery a nip in the marketing plan, a tuck to the research team.

McElroy Inc., a small family-run advertising agency in Marina del Rey, went in for heart surgery instead, transforming itself into a high-tech computer consulting firm. The operation has taken years, but it appears to have been a success. McElroy’s annual revenues are between $5 million and $10 million, with clients such as Creative Artists Agency, Bumble Bee Foods and 21st Century Insurance Group.

McElroy specializes in database market consulting, a numbers-driven niche where experts work with companies to understand customers and sell more to them. It requires more math skills, rather than the creative juices advertising folks traditionally bank on.

“I’m only 27 and look like I’m 69,” joked McElroy President Vicki Panagiotis, who oversaw the transformation and actually has more than 30 years in the business. “I’ve had moments when I sat on the floor and practically tore my hair out. But it’s been gratifying to see this little group grow into a nice medium-sized agency.”

Panagiotis knows the company well. Founder Edward J. McElroy died in 1954, six months after he took on Panagiotis’ father as a business partner. Her father ran the company until 1983, when his daughter, a former executive at Young & Rubicam and Ogilvy & Mather, assumed control.

For the first 16 years, Panagiotis ran the company as a direct marketing agency. Then in 1999, “after seeing where the future of marketing was going,” she decided the company needed to re-invent itself as an interactive consulting firm.

The switch involved shutting down one revenue stream to open up another. Advertising agencies get most of their money by charging a standard 15 percent commission on media placement. A typical one-page ad in a national magazine worth $100,000, for example, would yield the agency $15,000 in revenue. But consulting firms such as the modern McElroy work on a fee basis.

“Scary” is how Panagiotis describes the decision to change from one business model to a new one.

“But that’s where being independently owned is a positive. We don’t have a board or investors to answer to. It gave us the agility to make these moves, but not without trepidation,” she said.

During the change, the company has grown from four to 45 employees, despite massive disruptions in the Internet economy. Today, McElroy has four consulting divisions: marketing, creative, technology, and data analysis.

A typical project involves the interpretation of database files for a Web site. Visitors at a site often have to register for access, giving the site owner some basic demographics on the audience. Over time the site tracks the online behavior of these visitors. By organizing all that data, McElroy can divide the audience into segments and then develop profiles on each segment’s patterns of purchase decisions and future profit potential.

Alterna Inc., a manufacturer of upscale shampoos and hair conditioners based in Beverly Hills, turned to McElroy for help in repositioning its product line. “McElroy launched our Web site so we could align Alterna’s Web experience with the new luxurious look and feel of our brand,” said Chief Executive Paul Johnson. In the coming year, McElroy will implement e-mail campaigns and a promotion program for stylists and salon owners.

The company’s expertise doesn’t fit into a quick sales pitch, and that remains the biggest impediment to the business makeover. “The obstacles are still there namely, a lack of understanding among clients of the power of what we do,” Panagiotis said.

Resistance to number-based marketing can hinder the company into the future, according to Rex Briggs and Greg Stuart, authors of the book “What Sticks: Why Most Advertising Fails and How to Guarantee Yours Succeeds.”

“The broad mistrust of data and research in advertising agencies and among marketers is borne out of misuse and abuse of data. Many people use research the way a drunkard uses a lamppost: more for support than illumination,” they write in their book, published in September. “And the problem may only get worse. With the rapidly changing media landscape and the increasing speed of business and the expectation for success, marketers need research approaches worthy of their trust and a culture that embraces good quality data.”

To meet that need and to complete its transformation McElroy has moved into publishing its research. This month it will issue the first “SPI Report” which tracks SPIs, or “social persuaders and influencers.” Price: $9,500.

Why SPIs?

SPIs are the 10 percent of the population who influence the other 90 percent to buy certain products. Compared to the average consumer, they are highly social (four times more likely to belong to five or more organizations) and twice as likely to recommend a product they like, often to 11 or more people.

“They gain social currency by endorsing products they think their friends will appreciate,” said Dani Mariano, vice president at McElroy. Also, SPIs thoroughly research a product by talking to store salespeople, reading the fine print on Web sites, and consulting media reviews. “So it is important manufacturers have consistent messages across all touch points,” she said.

After the research phase, SPIs must experience the product, whether that means test-driving a car or trying on a dress. Research shows they are 49 percent more likely to participate in an in-store training class than the average consumer. They also seek out products at trade shows or in-store demonstrations.

Finally comes the recommendation phase. The data show SPIs are 88 percent more likely to share information at a meeting or social event than others, and 81 percent more likely to e-mail information.

Although “word of mouth marketing” has become a code phrase for Web-based campaigns on blogs and bulletin boards, Mariano reports that 70 percent of SPI recommendations happen face to face. “It’s called word of mouth for a reason,” she added. “People are relying on online because it allows you to track the conversations that have always been going on but you couldn’t hear.”

McElroy decided to do the “SPI Report” because “there are a lot of people tracking blogs, but no one looking at how these people operate,” Mariano said. The company will publish the report quarterly in partnership with StartSampling Inc., an online product-sampling firm.

Research on subjects like SPIs will become more valuable, Panagiotis believes, as marketing moves from brand-centric to consumer-centric. With the audience TiVo-ing through commercials and blocking pop-up ads, marketers must find new ways of communicating.

McElroy Inc.



Founded:

1954


Core Business:

Database marketing


Employees in 2005:

45


Employees in 2006:

45


Goal:

To transition from a traditional ad agency into a marketing consulting firm


Driving Force:

The advertising industry’s shift from brand-centric to consumer-centric marketing