Apple could charge a lot more – but should they?

Most of the things we own are OK, but a few special few are works of great craftsmanship, things of beauty. They give us pleasure in the same way that some houses, some architecture, is beautiful to look at. It’s something about being human that just looking at a building can be pleasurable yet we aren’t benefiting in any way from its function, we don’t own it, and may never even step inside it.

Beautifully crafted things usually cost more, which is understandable. In fact they often cost a great deal more – we have to pay a lot for small increases in quality, especially at the top end.

So luxury watches, handbags, wines (even business schools) cost an awful lot more even though functionally they may be rather similar to much cheaper alternatives. Luxury watches still cost tens of thousands of dollars more than throwaway watches that now are just as accurate at timekeeping.

Apple, under the guidance of chief designer Sir Jonathan Ives, makes beautifully crafted products. No tablet comes close to the build quality and sleek lines of the iPad Air, and the new Mac Pro looks like something developed using futuristic superior alien technology.

If these products came out from a company in the LMVH empire they would be priced many times higher. So why doesn’t Apple charge more? Even just a little bit more would do little to dampen demand and would add dramatically to profits. So why not?

Firstly, because Apple is in the technology business, where product features are very important and where it’s difficult to gain much of a technological advantage, certainly not one that lasts for any time. In handbags it’s taken for granted that they can all hold stuff, so design (both looks and build) matter enormously. In technology, basic functional factors like speed and screen size really matter, and Apple will never be far ahead of competitors.

Secondly, because Apple wants to build penetration and scale. They want lots of customers for their beautiful products who will then buy music, movies, books and apps from Apple – and of course future products. Getting an Apple product into someone’s pocket or bag gives Apple a medium through which to build mental availability for other Apple products. This is the same reason Amazon massively subsidies their Kindle price.

Thirdly, because Steve Jobs hated price premiums. He always wanted a lower price. Not a discount – he understood the need for profits to fund new product development and marketing, but as low a price as possible to still be profitable. He wanted his products to change the world, which meant getting them into as many hands as possible. Like Jonathan Ives he wanted people to see his art.

Anyone can have a price premium, it isn’t necessarily a sign of strength or good strategy.

So there are arguments in both directions, Apple should lower its prices and more aggressively chase share (closer to the Amazon Kindle strategy), or Apple should increase its prices and reap enormous profits. I guess from their perspective that means their prices are where they should be.

Out-take for marketers: a price premium might be nice for profits today but it holds back reach and scale, and that increases the riskiness of future profits.

PS A related interesting question is whether they should launch a cheap, minimal feature smartphone to bring kids and ‘light users’ into their fold? But they already sell the iPod touch and still have the iPhone 4S on the market so maybe this simply wouldn’t do much for them?

Does iPhone enjoy greater loyalty than Samsung Galaxy?

This is a short summary of an earlier more extensive analysis of this issue.

In short, no the iPhone doesn’t enjoy unexpected (magical) loyalty.

Essentially iPhone looks as if it has more loyalty than Android smartphones because we aren’t comparing apples with apples (pardon the pun). There are three reasons for iPhone’s higher loyalty than all android phones.

1) iPhone only plays in the premium end of the smartphone market, an area where users do use apps, and hence tend to be a bit more loyal because their purchases lock them into the platform.
2) People tend to trade up in smartphones, not down, so the premium end of the market has a bit higher loyalty than the lower end.
3) In this premium end of the market Apple is the market share leader, so in accordance with the Double Jeopardy law it gets higher loyalty.

So yes Apple has higher loyalty than all other smartphones, but its loyalty advantage over other premium smartphones (like Galaxy) is largely Double Jeopardy in action.

PS The “lock in” effect of iTunes and App Store is less than might be expected because buyers of premium smartphones are already so loyal.

Is advertising on Facebook better than TV?

This morning I received this interesting question in the mail:

Cadbury’s Social Media Manager claims a 7% sales increase in single Creme Egg sales over Easter after shifting from TV to Facebook (paid for and community management). Knowing that Facebook Fans are heavier buyers, do you know how they achieved such sales success?

My immediate reaction is that this is like medical stories of someone eating something [snake oil, placebo, vitamin C....whatever] and then feeling healthier. If it’s an outcome like cancer going into remission then it might feature on Oprah, but no sane medical practitioner will give the incident any credence because it’s an uncontrolled experiment, just one time, and with a single patient. I recall one claim of someone receiving an electric shock after a snake bite and being ‘cured’. When the story was investigated it was found that the man only thought he might have been bitten by a snake, all studies afterwards showed that electric shocks do NOT cure snake bite poisoning.

The story here looks very similar. Cadbury took a bit of their Creme Egg advertising money out of TV and put it into Facebook, after two years of dud campaigns (20% sales drop in 2011 and a further 19% in 2012) they posted a small improvement (up 7% from this now reduced sales level). So that’s one brand, in an uncontrolled experiment, in a market where there are a million other things going on that affect sales. Personally I’d be much more likely to put the effect down to the new creative than to Facebook.

Over the years I’ve seen many studies that claim that taking a bit of money out of one (large) medium and putting it into another (smaller medium) produces great results. These ‘research studies’ are usually paid for by that smaller medium. John Philip Jones used to explain them by saying that the first dollars you spend in any media are the most effective, so if you reduce your TV budget slightly you are taking out the least effective dollars, so spending them to another medium has a good chance of being effective. Maybe. It makes particular sense for a seasonal campaign like Cadbury Creme Eggs where you can quickly end up buying a lot of (less effective) frequency, hitting the same people on much the same evening, on TV. But just as likely explanation is that the result is a fluke, an untrustworthy piece of evidence.

And, of course, we don’t know what might have been achieved if they had just scheduled their TV better. Most advertisers do a terrible job, blowing money hitting people multiple times in single evenings. They could easily increase the effectiveness of their TV spend.

I couldn’t help but notice this line in the article:

As a result, this ‘Smell like a Crème Egg’ post was one of a number of posts that was promoted using news feed ads. It reached a natural audience of 188,000, but paid media helped it to reach 1.45m people.

Certainly this fits with the research in Karen’s new book ‘Viral Marketing:the science of sharing’. There is no such thing as a free lunch, and nothing drives social media exposure like paid-for advertising in big media like TV, radio and print.

As Cadbury put it “Facebook doesn’t just have to be a deep engagement platform for an audience it can be something that broadcasts an engaging marketing message en masse.” For a fee of course.

Finally it’s hard to trust the ROI research mentioned in the article. Comparing purchase intent among groups who recall exposure in different media is fraught with bias. People who recall both TV and Facebook exposures tend to be far heavier users of the brand so have higher purchase intentions (with or without the advertising).

In short, claims that one medium is more sales effective than another are simplistic. For the simple minded. And a single study shows nothing.

PS The Ehrenberg-Bass Institute is an independent research institute of the University of South Australia. We are financially supported by Mondelez (Cadbury) and a number of its competitors, but we stay very independent, free to critique.

Are iPhone owners more loyal than Android owners? a marketing scientist takes a look

Several studies have recently reported that US iPhone owners are more loyal than owners of Android-based smart phones.  These have been widely reported in the press.  The coverage on blogs and in the press is of patchy quality, with no reference to known patterns of loyalty.

So I thought I had better take a look.

I found this study (reported here) based on 2-purchase (switching) data, and this one based on purely intentions.  It’s slightly concerning that neither of the market research firms involved are well known.  But it is heartening that different methods are saying the same thing.

The general gist of the news coverage is “research shows….Apple wins more of its sales from Android than Android wins from Apple”.  And this set off alarm bells for me, because it’s a common mistake to see asymmetric switching and assume that one brand has less loyalty.

If you don’t know about the Duplication of Purchase law then it is very easy to make this mistake. That is, to see that Brand A shares a greater percentage of its customers with Brand B, than B does with it, and to conclude that A must be declining, has a weakness, and so on – when the real story is simply that B has much larger share than A.  For much more on this see chapter 6 “Who Do You Really Compete With”.  Otherwise explain quickly now.

Imagine if Android had 90% share and iPhone 10% in a total market of 100 customers.  And that this market was perfectly stable, neither brand moving in share.  Say each period they each lost 2 customers to each other, leaving them both with the same share (lose 2, win 2).  For iPhone this would mean they lose and win 20% of their customers from Android.  For Android it would mean only 2% lost/won.  So we could write a story that said “iPhone wins 20% of its customers from Android, while Android wins only one tenth of that much from iPhone”.  Which is exactly the sort of story that was run (e.g. Forbes).  We could also write a story that said “iPhone loses 20% of its customers to Android, whereas it loses only 2% of its customers to iPhone”.

To try to understand the potentially confusing percentages that the studies report I looked up the market shares of iPhone and Android.  There are two sorts of share commonly reported, and often mixed up.  There is the share of the installed base (i.e. users of each) and then there are share of recent sales (i.e. in the last month or year).  Fortunately for us currently these two sorts of market share are fairly similar in the US – iPhone has about 40% share and Android 50%, with the rest going to Blackberry and Windows.

So Android is 20% (10 percentage points) larger than IPhone.  That means that Apple should get a greater percentage of its sales from Android, than Android does from Apple.

And that’s what happens, 20% of iPhone’s new customers came from Android, whereas only 7% of Android’s new customers came from iPhone.  This was reported as a huge win for Apple.  Also look at the chart, Android wins much more of its new sales (which are slightly bigger than Apple’s remember) from people buying their first smartphone.  Now percentages add up to 100, so if it has a greater % coming from “basic” and “first” then all its other percentages are likely to be lower.  Put simply this data doesn’t tell us if Apple has greater loyalty, or if people tend to upgrade from Android to iPhone.

iOS wins more of its sales from Android, but that’s because Android is bigger and it wins more of customers buying their 1st smartphone

We have to look at different data.  Fortunately I found this table on a website reporting on the same study.  This gives retention data.

iPhone (iOS) retained 78% of its customers when they bought a new phone, while Android only retained 67%.  Interestingly this behaviour isn’t far off what other people report they intend to do on their next purchase.  Now this is very significant because of the Double Jeopardy law we’d expect Android to be the loyalty leader not iPhone, simply because it has larger share.  So something is interesting about Apple, let’s examine further…

Both brands are winning customers who upgrade from basic mobile phones to smartphones roughly in line with their respective shares – and this is where most new customers come from.  Apple is doing a much better job at winning Blackberry users when they switch – in fact both Android and Apple are doing better at winning Blackberry customers than Blackberry is.

iPhone retained 78% of its customers, Android 67%

Now when we see deviations from laws like Double Jeopardy the causes are usually structural factors in the market place, and that’s the explanation here too.  iPhones compete at the top end of the smartphone market, they are on average smarter (and more expensive) smart phones.  I don’t want to get into a debate about the merits of particular models, all I’m pointing out is that Apple has yet to release a cheaper, low-end model.  Whereas there are plenty of low end Android models and they are clearly successful, particularly in giving Android that  large advantage in winning people who are upgrading from a basic phone (50% cf 39%) – if you can get a new smartphone for the same price or cheaper as your old basic phone, that’s an attractive upgrade.

When a smartphone buyer buys a new phone they practically never go back to a basic phone.  Mostly they stay with the operating system they currently have, but not all: 27% of Android owners moved to iPhone, whereas only 14% of iPhone users moved to Android.  That makes sense if we consider that many switches are driven by a desire to upgrade to better features and iPhone has a larger share than Android at the top end of the market.

So are iPhone customers much more loyal, or is this really a function that iPhone has larger share at the top end of the market?  To tell we’d really have to compare the switching between the iPhone and Android models like Samsung’s Galaxy S4 or HTC One.  I expect the figures would align much more closely with the Duplication of Purchase law, yes iPhone would look strongest but that’s because it has the higher market share.

In summary, it looks to me that Apple is doing extremely well at winning market share, it’s not “buying” false smartphone share selling cheap phones to people not seeking smartphone features (apps and internet).  When people do want these features it’s a much bigger brand than overall “smartphone market share” figures suggest – and that’s what drives these loyalty figures.  This is supported by internet browsing figures that show iOS with a substantially higher share of web traffic than Android.

Likewise, Samsung is doing very well too as the standout Android brand.  Everyone else is struggling for share but then this is a very large and growing market, even small brands (which will have lower loyalty) may still be able to prosper.  But Android needs to not only sell smartphones but also get people to use them as smartphones – and/or to win greater share amongst people who really do use their smartphone.

Should Android marketers worry about Apple launching a low(er)-cost iPhone?  Absolutely.

Should Apple worry that Android is recruiting more of the new consumers entering the category, who will largely then stick with Android?  Absolutely.


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The rise and rise of retail chains and brands

I was telling a colleague about Hema, a dutch chain of stores that sell everyday staples, “everything from a needle to an anchor” my grandfather would say.  Well they don’t sell anchors but they do sell needles and all sorts of other useful things you need, regularly, for round the house.  And everything is their own brand.

It started me wondering about the rise of manufacturer-retailers or retailer-manufacturers, and single brand stores.  So I wandered around the shops and took note of which were multi-brand stores, like (most) supermarkets and department stores, and which were single brand chains.  It’s fascinating how the world looks different when you look at it systematically, out of “everyday mode”.  I expected to find lots of retailers who stocked multiple brands but they are a tiny minority – and look to be disappearing.  My list is at the end of this post, I could have gone on walking and made it five times as long but you can see most stores are singe brand.

Indeed I’m sitting in an Apple store writing this post.  An LA-based computer manufacturer that once had no stores, now it operates this store here in France and quite a few more like it around the globe.  When I was a student at university I remember quite a few case studies of manufacturers that had tried to get into retail to ensure distribution (e.g. brewers who bought pubs) and how it had often back-fired; manufacturing and retailing are different businesses was the lesson.  Well it seems that management has improved and many firms can do it (see list below), and many retailers find that they can have a central office buying (and branding and marketing) and that makes life more simple than having to stock their stores by choosing stock from many sellers.  The retail staff can just concentrate on retailing, whereas a purely retail store has to buy and sell.  This is perhaps why we see chains replacing owner-operated stores, even (sadly) in restaurants (though thankfully not in France).

There are a few exceptions like shoe stores, opticians, and cosmetic stores but even here there are single brand stores (e.g. L’Occitane, Julique), where the manufacturer (or designer or at least buyer) is also the retailer.  Department stores, supermarkets and wine stores are among the last, it seems, where the norm is for them to stock themselves with many brands from competing manufacturers – though even here they usually have their own private label brand along with the others.

So what does this mean for marketing?  In some ways it’s an indictment on the quality (and quantity) of marketing by manufacturers.  They were poor at building their brands, and retailers found that their retail presence was as good at building mental availability as the (little bit) of advertising that the manufacturers were doing.  Of course, it also shows that some manufacturers worked out how to be retailers, and very good retailers.  So it’s also an indictment on retailers who operated largely as shelf stockers, renting space to competing brands.

Will dedicated manufacturer-marketers and retailer-marketers survive?  Meaning stores that stock multiple brands?  I think we have the answer, the future is largely already here.  Yes there will be a few, a few dept stores, supermarkets, and some specialist stores.  But the majority will be single brand chain stores, where one head office designs and/or buys/manufactures its own brand’s product range which it sells through its own stores.

OK, what if you own your own shop, stocking manufacturer brands?  Hmm, the tide seems to be flowing against you.  I can’t think of any new chains that have emerged along these lines.

OK what if you are a manufacturer brand marketer without your own retail channel?  Again it looks like the tide of history is not flowing your way.  But can a company like Unilever operate its own stores?  It’s an interesting question; L’Oreal already owns The Body Shop.  Procter & Gamble and others have their “toe in the water” with their own online stores but that’s a long way from having a Hema type store stocked entirely by P&G.

Will we see wine stores dedicated to a single company? We already see some stores that stock many brands that are in effect commissioned by them, they own or control the marketing of these brands.  But might we see a large luxury wine brand like Penfolds open its own stores.  Nespresso did it – if only to use stores as a way of showcasing/advertising the brand.

Hmmm, predicting the future is difficult, but while 10 years ago the idea of manufacturers who depended on many different retailers, like Apple and Levi, opening their own stores and surviving seemed unlikely. And it has happenned.

PS Retail marketing scientist Herb Sorensen points out that “own brand stores” are a strike back by manufacturers at “private label”.

 

List single brand retail chains I made walking around Bordeaux:

H&M
Levi’s
Mango
Paul
Pimkie

Pull&Bear
Jules
Etam
Bocage
Heyraud
Minelli
Apple
Guess
Oliver Grant
MaxMara
Minelli
Atelson
Aigle
Somewhere
IKKS
BCNGMaxazria
Diesel
Zapa
Gant
JB Martin
Faconnable
Eden Park
Hugo Boss
L’epetto
Lancel
Father. & son
Devernois
Orange
Baillardran
Alain Figaret
Louis Vuitton
Nespresso
Hermes
Weill
Laingo
Ballon
Florence Kooijman
Mangas
Pain de sucre
Eric Bompard
Olivers & co (olive oil !!)
Petrusse
Rosa Bagh
Alienor chocolatier
Osaka
and so on…..

Exceptions I noted:

Pharmacies
Galleries Lafayette
Bijoutiers but only some
Opticiens
Cosmetics but only some
Manfield – shoes
Outdoor and sports clothing
Kitchenware/design
Wine shops

Brand Equity twaddle

I occasionally send some friends interesting (both good and bad) articles from marketing academia.  This is an interesting reply.  I won’t name the academic paper.

Dear Byron,

Thank you for sending this paper. I think the correct response, using the scientific vernacular, is ‘utter twaddle’.

The framework below is very neat. It’s very sequential. But it’s also very wrong.

When marketing academics observe what really happens in the real world, they can make powerful discoveries that help further the discourse around how people behave and make choices. But when marketing academics start with a hunch (disguised as a testable hypothesis) and then find data to back it up, they are, at best, worthless, and at worst, damaging.

I wouldn’t waste my time critiquing each component in this model. What I will do is give you an example of a very real ‘real world’ observation about how people behave, despite what one might think they have in their heads regarding Brand Associations and so called Brand Equity.

I am lucky to live in a very nice suburb of southwest London called St.Margarets. It’s what one might call leafy and affluent. Its residents are, on the whole, fortunate to be significantly better off than the average UK population in socio-economic terms. Lots of doctors and lawyers and bankers and media types.

 The overwhelming majority of my St. Margaretian friends and acquaintances are well-educated and, again on the whole, politically liberal. Generally left of centre, having evolved from the armchair socialism of their more zealous, youthful days. I should put an important caveat in place here; I was never an armchair socialist, nor indeed a socialist of any kind really. Anyway, I digress.

There is a nice sense of community in St. Margarets and I have made many good friends here over the years. And in addition to these friends, there are plenty of others with whom I can enjoyably engage in pleasant and cordial passing conversations. As you can imagine, it’s fertile ground for many dinner parties and for gatherings in local hostelries.

Once the wine has started flowing, and the initial greetings and polite exchanges (such as how the kids are getting on) have been completed, conversations inevitably move on to the more ‘serious’ topics du jour. House prices, gossip about who Sally was seen with last week, standards of schooling, what Charles said to his accountant, how moral standards are becoming polarised between the haves and the have nots, what Carol was caught doing with Bob down by the river. You know the sort of thing, I’m sure.

Commerce will often have it’s place in this cauldron of righteousness as well. I distinctly recall more than a few conversations about business ethics. And a number of these have centred around a well-known retailer which has had the temerity to open one of its smaller store formats slap bang in the middle of St. Margarets. Right next door to the railway station. Outrage abounds.

“Tesco Express … they’re crucifying all our little local traders,” opines Gareth. “They bully farmers into bulk deals with derisory margins … Tesco is ruining our agriculture,” shrieks Camilla. “The way they treat their shop workers … it’s slave labour … they should be taken to the International Court of Human Rights,” booms Barry.

I listen with interest. Sometimes, I must admit, the odd fair point can be heard from time to time amongst the remonstrations and general distaste for having such a purportedly disreputable behemoth impose itself on our little suburban ‘village’ (as the Estate Agents like to describe it). But the over-riding theme is one of deep-seated antipathy. A theme with which, I must say for the record, I disagree. I think Tesco is a great business and great for our economy.

The dinner parties end, the hostelries close, and we all go home to our beds. Watered, fed and safe in the knowledge that the world would be a better place … if only ‘they’ just listened to our wisdom.

When I travel home from work during the week, I frequently do so by train. Most of my friends and acquaintances do the same. We come in to St. Margarets station, wearied by the day’s travails, ready to put our feet up and watch the telly. We trudge up the station stairs to the street. As I start to walk down the street  I remember that Cathy called me to remind me to pick up a pint of milk and some chicken breasts for dinner. Ooh, and I can pick up a half decent bottle of wine too … why not!

I turn in to a shop which is already teeming with St. Margaretian commuters.

Before I can even reach down to pick up the chicken breasts I’m tapped on the shoulder. I turn around to see a smiling friend; it’s Camilla. “How lovely to see you”, she says, “(mwah mwah) feels like I saw you just two days ago at Barry’s for dinner.” We both laugh. “Oh, look, speak of the devil, Barry’s over there with Gareth at the check-out.”

“Anyway, see you soon I hope, Camilla,” I say, “We’re going round to the Greensmith’s next Saturday, probably see you there.”

As I leave Tesco, which is slap bang in the middle of St.Margarets, right next to the railway station (to where thousands of well-heeled St. Margaretians return every evening), I give a little wave to Sally, Charles, Carol and Bob. They have arrived back on the next train. They’re just popping in to Tesco to pick up some things before they go home.

As I open my front door, a question comes to mind; can the need to get a pint of milk, as easily as possible, really trump the most heartfelt attitudes expressed around a dinner table in St. Margarets only a day or so earlier! It would appear so.

‘There’s nowt as queer as folk,’ as the old Yorkshire saying goes.

People may claim to hold firm perspectives about brands. The truth is that there is a world of difference between what someone consciously says and what they actually decide (primarily subconsciously) to do.

So, yes, that paper is truly dreadful.

Cheers,

Seamus

 
On 4 May 2013, at 01:25, Byron Sharp wrote:

A poster-child for everything that is wrong with brand equity research.  If you can’t be bothered reading the article just look at the struggle they had to come up with any findings or implications.

Predicting the decline in Apple’s brand equity

Back in 2011 I mocked the brand equity industry for playing catch-up in valuing Apple.  Everywhere I look the evidence is that these brand equity valuations rise long after the stock price rises, and decline long after it declines.

It’s the same story for predictions of sales success.

In short they predict nothing.  They just tell us things we already knew.

By 2012 Apple was entrenched as the most valuable brand in the world, not surprising given that much earlier it had achieved the highest market capitalisation.  Brandz gushed that Apple’s brand equity had risen a further 19% in their estimation.

Since then I’ve not heard any reports from the brand equity industry predicting a decline in Apple’s value.  Meanwhile its stock price has almost halved since September 2012 (see graph below).

Here’s my prediction – soon (ie late 2013) the brand equity firms will announce a  decline in Apple’s brand equity.  Even though Apple’s sale revenue has continued to climb (see chart 2 below and this link).  Even in traditional markets like the US it has increased its market share in phones and computers.

So if the brand equity firms do downgrade Apple’s brand equity it will have to be based on its stock price.  What value do these equity values give then, when anyone can look up the stock price of any public company and be many months ahead of the brand equity valuation?

Chart 1 – APPL Stock price

Chart 2 – APPL Sales revenues

APPL

Applesales$

Manager’s Knowledge of Marketing Principles: The Case of New Product Development

Citation
Cierpicki, S, Wright, M, and Sharp, B (2000) “Managers’ Knowledge of Marketing Principles: The Case of New Product Development”, Journal of Empirical Generalisations in Marketing Science, Vol 5, No.3

Abstract
Do marketing managers have well-established marketing principles to guide decision making? We addressed this question by examining 15 principles of new product development obtained from an expert panel of Australian senior marketing practitioners. Of these 15, three turned out to be tautologies, six had at least some empirical support, and six were partly or fully contradicted by empirical studies. In examining the literature for evidence, we were also able to identify five well established ‘empirical generalisations’ about new product development. These results indicate that while principles of new product development do exist, there are fewer of them than we might have thought, and Australian practitioners appear unable to distinguish between good and bad principles.

Download the complete article in PDF

Making marketing science easier to read & understand – suggested format for articles

I sometimes read academic articles in very different disciplines, like medicine and biology. They have some different formats than we have in marketing. Often their articles are much shorter, yet just as detailed when it comes to describing the research, how it was done and what were the results.

Why are marketing journal articles so long? And so obscure?

Do they need to be?

Now that publishing has gone online we don’t need to be subject to the same constraints as in the past. I wonder if the best format would be for articles to be about 800 words long, a clear exposition of what was done and what was found and what it might mean. After the article there could be a moderated/refereed Question & Answer section. This would be enormously useful, and take the pressure off authors to write perfectly, fully anticipating the needs of all readers on the first go.

Extensive details, like the whole questionnaire or data coding frame could be made available by links.

Brand Equity Consultants Fail Again

Back in mid 2011 I noted that Starbucks had been performing strongly.

I also noted the lack of consultants predicting this rebound. People who pitch these brand equity metrics claim they can predict future consumer behaviour and brand performance (even sharemarket performance). But evidence shows their predictions are lousy. I chuckled when BrandZ at long last caught up with the stock market and ranked Apple as the most valuable brand.

Back to Starbucks… when would the brand equity firms catch up?

Then mid 2012 BrandZ announced that Starbucks had made its list of top increases in brand value with a staggering 43% increase over their 2011 valuation.

Hardly much of a prediction when Starbucks had just announced their 11th consecutive record breaking quarter!

A few months later and BrandKeys listed Starbucks among their top improvers for 2012 up a massive 55 places in rank (but still far below Dunkin Donuts)!

Why would anyone pay for these brand equity metrics when they can read the news months (even years) earlier by just buying a newspaper?

Loyalty/Engagement scores don’t predict the future

I took the full list of Brand Keys 2011 Engagement Award ranks and correlated them again sales gains. What a surprise! A correlation of 0.4 but it’s round the other way…..

i.e. the better the Band Keys rank the less the sales gain !

Brand Keys, who sell these surveys, claim that these award scores will predict a brand’s future. Seems like you’ve absolutely got to know which numbers to use and which to ignore, which can only be done after the event. That’s not prediction, it’s weaving a story afterwards (to sell a product).

Pearson’s correlation 0.39 (or 0.11 for just the 5 top ranked brands)

Data sources:
Brand Keys Loyalty Awards 2011 – http://www.brandkeys.com/awards/index.cfm
Business Week Car Sales – http://online.wsj.com/mdc/public/page/2_3022-autosales.html

Professor Byron Sharp

PS it isn’t quite technically correct to use Pearson’s correlation for a continuous variable against a rank order variable, but in this case converting both to ranks and using a Spearman’s correlation produces essentially the same result.

Brand Revitalisation

Many marketers will look forward to this new year with some trepidation. They face a situation where:

- The brand plan is going to call for substantial growth (in sales and profit contribution), even if last year this wasn’t achieved.
- Yet the advertising budget won’t be larger. The amount of time ‘on air’ has shrunk over the years as more money has gone to in-store activity (largely price promotions), and the media budget has been spread more thinly across more media options as various digital ‘new media’ were added to the mix.
- More than half of sales occur on-deal, hardly anyone pays the normal price anymore for this brand.
- There is the suspicion that the normal price is too high and so sometimes encourages consumers to pause and break habits to look at other brands.
- The brand has more variants (flavours, sizes) than ever before. This was justified on the basis of appealing to new different consumers, and winning shelf space (but the brand has no more shelf space than it had some years ago, probably less – not that this is carefully measured/tracked). Handling and production costs are consequently higher, and it’s suspected there are more stock-outs of the main formulation.

Even for large, successful, profitable brands this situation looks a little bleak. It seems very hard to see where substantial growth is going to come from. This makes marketers susceptible to consultants selling “miracle cures”. In marketing these cures usually speak about restoring brand equity and differentiation, getting consumers to fall in love with the brand again. All sorts of things are put forward as candidates to do this…from loyalty schemes to new advertising pre-testing approaches. Many grasp at these straws, hoping for at least a temporary win that they can put on their CV.

So how can a marketing manager get their brand out of this situation? How can they realistically put a plan in place that has a reasonable chance of delivering growth?

An important place to start is to get a few crucial metrics in place that reveal:
- what mental structures make is easier (more likely) for a consumer to buy our brands? FInd out then make sure your advertising reinforces these.
- how many people did we reach today with ‘advertising’? everyday.
- how many people physically came within close distance of our brand today?
- what things made it a little harder (less likely) for someone to buy our brand?

The Invention of the MBA

I read recently in a history book about the invention of the MBA at Harvard. Business had been taught previously but after the stock market panic of 1907 it was felt there was a need for “better trained businessmen” so Harvard established a Graduate School and the MBA admitting 59 candidates in 1908.

Harvard developed their own definition of business: ‘making things to sell, at a profit, decently’.

“Two basic activities were identified by this definition: manufacturing, the act of production; and merchandising or marketing, the act of distribution”
- (The Modern Mind by Peter Watson, page 79).

How sensible.

And what a great success the MBA was. So successful that all sorts of institutions now offer MBAs. And in many cases they bear little resemblance to the original. There are shoddy institutions with low academic standards offering MBAs but also old prestigious Universities have jumped on the bandwagon sometimes without the appropriate staff – old economics courses get rebranded as “MBA” and much teaching is done by part-time consultants.

The MBA has been such a marketplace success that product quality, and academic standards have not held up strongly.

It’s a pity because that original idea was clearly a winner.

I wonder if the emphasis on case studies was part of the problem. Case studies are fine for teaching analysis and consensus building, but they can distract from real knowledge. They tend to reinforce old myths and group-think. The teaching of engineers and doctors placing more emphasis on fundamental principles. Also the case study approach requires good moderators, rather than researchers at the top of their game. So MBA schools are staffed by many non researchers, or the research and the classroom become separated from one another.

As I said, it’s a pity because the original idea of the MBA was clearly a winner. “Making things to sell, at a profit, decently”.

What’s wrong in the house of academia, and a suggestion how to fix it

Presented to the Australia & NZ Marketing Academy Conference December 2012.

Marketing has a small ‘crisis literature’ where academics themselves bemoan the lack of real-world importance of academic research into marketing. For example, “Is Marketing Academia Losing Its Way”, Journal of Marketing, 2009.

Back in 1989 John Rossiter documented the growing gap between marketing scientists and consumer researchers even though they were supposed to be studying similar things. He warned the consumer researchers in particular that they were in danger of retreating into an Ivory Tower detached from the empirical findings regarding mass buying behaviour. Yet the trend continued unabated.

I myself, and colleagues, have had articles rejected from good journals when they chiefly documented a substantive finding about the world. My ‘favourite’ was when the editor of Marketing Science wrote to Jenni Romaniuk and myself about our work documenting the 60/20 law (ie it’s not 80/20). Effectively he said, “great stuff, I’m going to use this in my teaching, but we can’t publish it in Marketing Science because the journal tries to feature leading edge analysis whereas what you did was simple and transparent”. An open admission that Marketing Science is really a journal about engineering above science.

Yet around the same time the Nobel Prize for Physics was awarded to two Russian scientists who found a way of producing graphene, a single atom thick layer of carbon, this potentially extremely useful material had once been thought unlikely to exist in the real-world. They isolated graphene with a simple technique using common household sticky tape. Placing bulk graphite between two sheets of Scotch Tape they simply repeatedly pulled the tape apart removing layers of atoms until they achieved graphene. A colleague remarked that it showed you could still win a Nobel Prize “for mucking around in the lab”. In physics there is still respect for substantive discoveries.

The defence or excuse from marketing academia is that we have been placing our emphasis on rigour over relevance. But recent shocking findings in marketing academia, other social sciences, and even medical research have exposed the myth of improved quality. There have been been some high profile examples of scientists disgraced for falsifying results (including in marketing), while 10% of psychologists admit to falsifying data (but they presumably evaded discovery), and most admitted to sometimes practicing dubious practices like selectively reporting the studies “that worked” (and hiding those that did not support their hypotheses. Relatively higher rates of dubious practice were found among neuroscientists and cognitive & social psychologists. What do you think the rates would be in marketing?

A recent analysis (Wilhite and Fong 2012) of the dubious practice of journals encouraging (or bullying) authors to cite other articles from the same journal reported that the Journal of Retailing, Journal of Business Research, and Marketing Science were stand-outs at the very top of the suspect list – and that’s not a list of only marketing journals. Indeed marketing journals stood out from other disciplines as being into coercive citation to try to manipulate their citation impact scores.

In medical research standards are undoubtably higher. Yet when pharmaceutical companies seek to replicate findings reported in medical journals in most cases it can’t be done – even though they try hard, after all they are hoping to make money from the discovery. Many of the findings for cancer drugs are highly specific to particular circumstances (e.g. patients with particular genetic profiles) but the researchers didn’t explore these conditions, they just got lucky with their so far unrepeatable finding.

In marketing Hubbard & Armstrong (1994) documented that academics hardly ever try to replicate findings. We simply assume they are true (or perhaps not worth bothering with). Not surprising perhaps, when replications are done they usually are unable to repeat the original result. The same sort of scandal has hit a number of famous psychology experiments. “The conduct of subtle experiments has much in common with the direction of a theatre performance,” says Daniel Kahneman, a Nobel-prizewinning psychologist at Princeton University. Trivial details such as the day of the week or the colour of a room could affect the results, and these subtleties never make it into methods sections of research articles. Hmm, what’s the difference between a result that is so sensitive to many trivial, unknown and unpredictable details and no result at all? Why should we care about a finding that only occurs in high particular circumstances?

This is a bigger problem than fraud and dubious research practice. We need to stop publishing one-off flukes and explore the generalizability of findings – where and when does a result hold? How does it vary across product categories, brand size, brand age, different types of consumers, at different times, and so on.

Even large and varied data sets are being wasted in marketing when results presented as an average across many different conditions eg “marketing orientation is associated with higher financial performance r=0.28″. This tells us little about the real world; the average may even not actually apply in any of the major conditions.

We need to explore generalizability or otherwise our ‘discoveries’ tell us very little about the marketing world that we are supposed to be studying.

And we need to stop prematurely building shaky prescriptive theoretical edifices upon these doubtful, poorly documented findings.

If we don’t carefully and thoughtfully (call it ‘theory driven’ if you wish) examine a finding and how it varies (or not) across conditions then we are stuck with findings that probably were one-off events – with no way of telling. Currently we have to treat our findings as either applying to one historic data set covering one particular set of conditions that may never be seen again OR a result that generalises to all product categories, all countries, all seasons. Both views are preposterous, something in between is far more likely but there is a lot of land “in between”, it needs to be explored.

The dubious research practices discussed above come partly from ‘confirmation bias’, the fact that (marketing) scientists want to find evidence to support their hypotheses – and they want “a positive result” otherwise they lack the motivation to publish, or the belief that they will be accepted by any decent journal. Brodie and Armstrong (2001) suggested researchers adopt multiple competing hypotheses as a way of overcoming this bias. A worthy suggestion, but those implementing it tend to simply have their favoured hypothesis and the opposite – and they still obviously want to see their favoured hypothesis supported. So I would like to make a different suggestion. Let’s use research questions with the words “when”, “where” and “under what conditions”. Rather than black and white “does X cause Y” type hypotheses let’s ask “when does X cause Y?”, “does X cause Y in highly advertised categories?”, “is X more a cause of Y in developing economies?”. This is the basic work of science, documenting patterns in the real world. When do things vary and when to they not.

If researchers use “when”, “where” and “under what conditions” research questions they are aren’t trying to prove a proposition, so they don’t have to worry about failure, so they should hopefully be less likely to tweak data and pick findings. Also, very importantly, researchers will be documenting something useful about the world because they will be exploring generalizability.

PS The Nobel Prizes for Physics are awarded in line with Alfred Nobel’s criteria “to those who, during the preceding year, shall have conferred the greatest benefit on mankind” which explains the worthy emphasis on substantive fundings. Alexander Fleming’s accidental discovery of penicillin is another example of the Nobel prize committee valuing important discovery over display of academic prowess.

REFERENCES

ARMSTRONG, J. S., BRODIE, R. J. & PARSONS, A. G. “Hypotheses in marketing science: Literature review and publication audit.” Marketing Letters 12, 2 (2001): 171-187.

HUBBARD, R. & ARMSTRONG, J. S. “Replications and Extensions in Marketing: Rarely Published but Quite Contrary.” International Journal of Research in Marketing 11, (1994): 233-248.

REIBSTEIN, D. J., DAY, G. & WIND, J. “Guest editorial: is marketing academia losing its way?” Journal of Marketing 73, 4 (2009): 1-3.

ROSSITER, J. R. “Consumer Research and Marketing Science.” Advances in Consumer Research 16, (1989): 407-413.

WILHITE, A.W & FONG, E.A. “Coercive citation in academic publishing”. Science 335, (Feb 2012): 542-543.