Conflicts in the marketing system

I do sometimes hear an ad agency people say “we don’t care about creative awards, we are totally dedicated to each client’s business objectives”, especially when in front of clients.  It makes me wonder whether they are lying (that’s bad), or that they are deluding themselves (which may even be worse), or if they are admitting that they simply aren’t good enough to win creative awards (and that’s not good either).

I think it is important to be grown-up, honest and up-front about conflicts of interest.e.g. Martin Sorrell wants to sell marketers stuff, his empire (like his competitors) will sell whatever marketers will buy that he can deliver profitably.  This matters far more to the agency than whether or not it is the best way to build their clients’ brands.

Creatives want to win awards.  And if this doesn’t sell a single extra of your product they aren’t really worried.

Media agencies want to do what they know, what’s easy, and they have to honour sell media they have committed to buy.

Market research agencies want to sell standardised products, ideally that use automated data collection and analysis, or low-level people.  They can’t make big profits from stuff that requires in-depth analysis by expensive people.  They do far more R&D into reducing data collection costs than into better research.

Retailers want to win share from other retailers.  They don’t care if this means selling another box of your product or not.

So partners yes.  But there are conflicts in the system.  This is fine, so long as everyone understands the conflicts then they can be managed – it’s possible for everyone to win.  But pretending these don’t exist is dangerous.

Professor Byron Sharp

July 2014.

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?

The heavy buyer fallacy

It seems obvious, a brand’s currently heaviest buyers generate more sales and profits (per customer) so they should be the primary target for marketing.

This is commonly held misconception. The rise of direct marketing and CRM gave this fallacy a big plug, after all it can be hard to justify sending expensive letters to light customers.

But if our aim is to grow sales then our efforts should be directed at those most likely to increase their buying as a result of our attention. It takes only a moment of thought to realise that customers who already buy our brand frequently are going to be difficult to nudge even higher.

If, instead, our aim is to prevent sales losses then heavier customers would seem more promising – after all they represent a lot of sales we might lose. But then again, they are more loyal, other brands make up less of their repertoire, their habit to buy our brand is more ingrained, our brand has rather good mental and physical availability for them. In short, they aren’t particularly at great risk of defecting nor of downgrading.

So the idea that heavy buyers of your brand (“golden households” or “super consumers”) are your best target is flawed. Dangerously simplistic.

Apple’s mythical price premium

I’ve written previously questioning the marketing orthodoxy to aim for a price premium, and specifically on the myth of Apple’s price premium.

Here is another nice quote from Steve Jobs, interviewed on stage alongside Tim Cook (current CEO). He was asked if Apple’s goal was to win back dominant share of the PC market

“I’ll tell you what our goal is…to make the best personal computers in the world and products we are proud to sell and would recommend to our family and friends. And we want to do that [raises voice] at the lowest prices we can, but I have to tell you there is some stuff out there in our industry that we wouldn’t be proud to ship, that we wouldn’t be proud to recommend to our family and friends…and we just can’t do it, we can’t ship junk”.

Advertising Age votes “How Brands Grow” the best marketing book

Readers of Advertising Age have voted “How Brands Grow” the best read of Summer 2013.

The competition was large, many books, some awful, but also some very worthy research-based books such as:

Thinking Fast & Slow by Daniel Kahneman
The Halo Effect by Phil Rosenzweig
Decoded by Phil Barden
Applying Scientific Thinking to Marketing by Terry Grapentine
Everything is Obvious by Duncan Watts
Viral Marketing: the science of sharing by Karen Nelson-Field

A short critique of “a critique of Double Jeopardy”

Bongers, M. & Hofmeyr, J. 2010. ‘Why modeling averages is not good enough – a critique of Double Jeopardy.’ Journal of Advertising research, 50:3, 323-33.

A longer explanation of the mistakes made in the above article can be read in:
Sharp, B., Wright, M., Dawes, J., Driesener, C., Meyer-Waarden, L., Stocchi, L. & Stern, P. 2012. ‘It’s a Dirichlet World: Modeling individuals’ Loyalties reveals How Brands Compete, Grow, and Decline.’ Journal of Advertising research, 52:2, 203-13.

Here is a short critique:

The title is misleading, this is not a critique of the empirical phenomenon ‘double jeopardy’ but of the theoretical model ‘the Dirichlet’ – a stochastic model of purchase incidence and brand choice, which predicts double jeopardy and several other empirical laws in choice behaviour (see Ehrenberg et al 1994). The critique is naive, and the “test” of the Dirichlet is wrong.

The Dirichlet is used daily within the marketing science units of corporations to benchmark their brand metrics against the model’s predictions for patterns of buying in a stationary and non-partitioned market. It is useful because the market conditions it models are well understood. It is also interesting to marketing theory because these conditions have been shown to be so prevalent.

Bongers & Hofmeyr use the purchasing of non-stationary brands to test an assumption of a stationary model. Even if they had found something real all they’d be saying was that non-stationary behaviour doesn’t look stationary.  Big deal.

It is, however, good and appropriate to question the underlying assumptions of models – even ones that work very well. In this case there has been more than 30 years of serious investigation of the NBD and Dirichet’s underlying assumptions (e.g. Kahn and Morrison 1989), a literature that the authors of this paper should have read. There is also new work seeking to expand such models to non-stationary conditions and to add co-variates (causal variables).

The Dirichlet belongs is a stochastic models, which is a technical way of saying that it assumes a particular distribution of purchase probabilities (concerning the probability to buy from the category, and the probability to buy particular brands within the category). These purchase probabilities (loyalties) for each buyer in the population are fixed in the model, that’s why we say it’s stationary – and the brands obviously don’t change share – if people aren’t changing their loyalties then brand shares stay stable (which in reality they often do, at least over normal planning periods).  These stationary benchmarks are useful to compare change, when it happens, against.

Bongers & Hofmeyr tackle the Dirichlet model’s assumption that consumers have steady-purchase probabilities (steady loyalties), the paper attempts to refute this by showing a selection of purchases of individual panellists of non-stationary brands. They see what looks like lots of variation, natural wobble in purchase runs, and mistakenly interpret this as changes in loyalties.  The Dirichlet correctly incorporates a degree of random variation in purchasing even for stable loyalties.  Now if I gambled regularly I’d have a steady on-going propensity to lose money at the casino – but some nights I would actually make money but that doesn’t mean the casino investors assumptions are wrong.  All B&H show is that runs of purchases exhibit variation, rather than nice neat identical purchase weights in each quarter period. Similarly, if we had a panel of coin tossers we would see that only a few panel members made nice neat runs of tosses HTHTHTHT. If we looked at small runs of tosses we would see very many where ‘Heads” was far from 50% of the tosses. However, it would be foolish to send off a paper to a statistical journal critiquing the long-standing assumption of coins being weighted 50:50.

Now the Dirichlet models something much more complex than coin tossing. We have the probability to buy from the category mixed with the probability to buy particular brands.

The Dirichlet assumes steady-state probabilities with substantial stochastic wobble (around each individual’s steady-state mean). The multinomial assumption of choices amongst available brands means that a buyer with a 10% probability of buying the brand will buy it in the long run on 10% of their category purchase occasions but this buying will be in an as-if random fashion independently of the brand they bought on last occasion. Put simply when you look at any individual’s brand purchasing for short periods you see a lot of stochastic variation (which the model accounts for – hence its very accurate predictions).

It’s quite reasonable that even though I didn’t buy chocolate last quarter that I still have a on-going probability of buying it 4 times a year on average – that doesn’t mean I buy it exactly 4 times every year, some years I only once or twice, some years 8 times (and how I distribute my purchases amongst brands adds further (predictable stochastic) variation).

The authors don’t understand this stochastic variation and it’s tripped them up. If it is any consolation it’s not uncommon for analysts to misunderstand stochastic variation in purchase data. Common mistakes include taking a group of heavy buyers (e.g. the top 20%) then noticing that in a subsequent period their purchasing is lighter and assuming that real changes in propensity have occurred (rather than regression to the mean). Or simply noticing that a person who bought in one period did not in a subsequent period and inferring that they have defected from the brand. I recommend reading Schmittlein, Cooper and Morrison (1993) for their discussion on true underlying propensities.

References:

Ehrenberg, Andrew S C, Mark D Uncles, and Gerald G Goodhardt (2004), “Understanding brand performance measures: using Dirichlet benchmarks,” Journal of Business Research, 57 (12), 1307-25.

Kahn, Barbara E. and Donald G. Morrison (1989), “A Note on ‘Random’ Purchasing: Additional Insights from Dunn, Reader and Wrigley,” Applied Statistician, 38 (1), 111-14.

Schmittlein, David C., Lee G. Cooper, and Donald G. Morrison (1993), “Truth in Concentration in the Land of (80/20) Laws,” Marketing Science, 12 (2), 167-83.

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Bad service habits

One of the most important functions of marketing is cultural, to prevent the organisation from slipping into a production orientation, to keep it focussed on the customer and the market.

Recently I was told off in the Bordeaux Apple Store, but rather that take it I told the employee off. You see I had taken a space on a large desk that had lots of spare space, to sit and write on the new version of How Brands Grow. So I’m sitting there with my new MacBook Pro and new iPhone (clearly I’m a good customer) and an Apple Store employee interupts me and tries to say that this table is only for one-on-one demonstrations. But the table is largely empty I said, if I’m in the way I’ll move. No you aren’t in the way he said, but the table is just for demonstrations. Now this struck me as absurd and I told him so. He said it was store policy. No it isn’t I said. I asked him to reflect how this incident would look to him if he were observing as a third party, or if he were watching it on a customer service training video!

I knew there was no silly policy like this. I’d even previously be summoned into the store to work by an employee who saw me sitting on the ledge outside the store using their wifi) “Come into work anytime he said”. Another employee had told my wife how children were always welcome to play in the Apple Store because they were future customers – to which my wife noted “our daughter is already a paying customer”.

Anyway the Apple Store employee went away, presumably to talk to their manager, came back and said I could continue to work. Then later he interrupted me again, “what now” I thought. And then he not only apologized but thanked me, explaining how easy it is to get into a bad habit, where you start to make rules of how the store should be without thinking why the store is here, to serve customers.

I said that I understood, that as a young university student I’d worked in a service industry and I now reflect how over-the-top, officious even, we often became in bossing customers around. In that instance our excuse (it was an amusement park, with a large rollercoaster) was safety – but that was an excuse for slipping out of a customer service orientation into a production orientation.

We are all human. It takes training, and reminders, to stop us slipping into bad service habits.

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