Laws of Advertising – Wharton Conference

Next week I’m co-hosting a special conference with Professor Jerry Wind.  Held at the Wharton School, University of Pennsylvania, Dec 4-5, 2008, the conference will bring together some of the world’s best minds in advertising, from industry and academia.

The conference is part of the SEI Center at Wharton‘s “Future of Advertising” project which Jerry is heading.  The conference theme is empirical generalisations in advertising and media.  The aim is to take stock of what we do, and don’t, know about advertising, and use this as a base to try to understand how advertising might work in the future.  This is important because advertising landscape is being altered radically by the digital revolution.

For more information on the conference theme click here.  And now the conference has a blog which will be updated live during the conference.

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Do smart marketers avoid price premiums ?

When questioned about Apple’s plans for the future in face of increasing iPhone competition, CEO Steve Jobs suggested that they would continue to aggressively price the iPhone and make ongoing improvements:

“Well, I think we have to be the best and I think we have to not leave a price umbrella underneath us, and we are working very hard to fulfil both of those goals.”

At Oct 21 conference call for financial analysts where Apple announced US1.18 billion profit for Q4.

Cadbury Gorilla Advertising Gets It Right – at last.

Cadbury’s TV Commercial featuring the drum playing gorilla is a wonderful, and now much awarded piece of creative.  But it’s not perfect advertising by a long shot.

1) It grabs attention. Tick.

2) It’s worth watching, over and over. Tick.

3) People do realise it is for Cadbury. Tick.  The brand is far from being the star but the commercial creates tension “what’s this all about ?” which makes people look for the brand, and fortunately Cadbury do own a distinctive asset in the colour purple (shown in the background behind the Gorilla).  So the branding does work, at least in Cadbury dominant countries like the UK, Australia and New Zealand.  It would be far less effective elsewhere.

4) It refreshes and/or builds appropriate memory structures that make the brand easier to come to mind of be noticed in buying situations.  Ahh, no.  This is the commercial’s BIG weakness.  It builds a link between Cadbury and the Gorilla, and few of us think of gorillas when in potential chocolate buying situations.  Perhaps today when people think of gorillas (e.g. at the zoo) they are more likely to think of eating a Cadbury chocolate bar but that’s going to make a trivial effect on sales.

That’s why the TV commercial has not been a roaring sales success.  It’s played its little part in helping Cadbury recover from the lows of its salmonella contamination but the brand was already bouncing back before ‘the Gorilla Ad’.

So what Cadbury needs to do is get its gorilla, a distinctive asset they now own, close to purchase situations.  And I now see that they are – see below for a photo from my local supermarket.  The competition is just an excuse to get the gorilla into a prominent position close to the chocolate display (or at least I hope the marketers realise this is the important objective).

PS If anyone tells you that the Gorilla ad works for the brand because it taps the brand’s core essence of joy run from the psychobabble.

How to nudge

When a brand is successful in gaining market share it shows up as small changes in buying propensity across many consumers.  Based on this empirical fact Professor Andrew Ehrenberg described successful advertising as ‘nudging’ (in contrast to persuading or converting).

Given this is what happens when advertising works, it’s odd when campaigns try to hit consumers with a sledgehammer approach – by this I mean some advertising campaigns ask for a leap not a nudge.  The whole idea of a USP is about hitting consumers with a super compelling argument why they should radically change their buying behaviour to favour that brand.  Trying to achieve a sort of religious conversion (there is even a market research product, the Conversion Model, based on religious conversion).

I suppose that some advertisers feel that a sledgehammer gives best chance of achieving a nudge, given that lots of other things may go wrong with the campaign (e.g. the media strategy).  But as most consumers aren’t going to make a huge change in their behaviour, and they know it, how do they react to claims telling them they should ?  For example, if you overtly tell people they are doing the wrong thing and should change.  The risk is that many people simply reject the message – they conclude that the message is wrong, not them.  Cognitive dissonance in action.

So it’s not true that USP sledgehammers necessarily produce bigger nudges.

If you want to nudge maybe you should ask for something small – ‘please consider trying our brand, it’s nice’.  Sounds wimpy but it fits with the behavioural evidence.  And explains why many soft image ads with no persuasion attempt can be highly sales effective.

Book Review: “The 22 Immutable Laws of Marketing – Violate Them At Your Own Risk!” by Al Ries and Jack Trout

It’s easy to criticise this book and yet there are still a few interesting hypotheses here.

How to join as a Corporate Sponsor of the Ehrenberg-Bass Institute

Readers of this blog have reminded me that I’ve never mentioned how to join as a member.

Sponsors pay an annual contribution which is pooled into a serious R&D budget.  For this sponsorship you gain immediate access to all the Institute’s reports and in-house briefings (plus gain direct access to the researchers).  We normally provide one live in-house briefing per year, but more can be arranged.

This web page has more details.

Here is a list of the Ehrenberg-Bass Institute’s sponsors from around the world.

Net Promoter Score (NPS) Does Not Predict Growth – it’s fake science

“Managers have adopted the Net Promoter Score on the basis that solid science underpins the technique and that it is superior to other metrics.

We find no support that for the claim that Net Promoter is the “single most reliable indicator of a company’s ability to grow.”

The above quote is from a Journal of Marketing article and winner of the Marketing Science Institute /H.Paul Root Award “A Longitudinal Examination of Net Promoter and Firm Revenue Growth”, Journal of Marketing (2007), Vol.71, by Tim Keiningham et al.

The Net Promoter Score was developed by Frederick Reichheld a consultant now well known for making headline grabbing conclusions based on sloppy research and thinking.

I previously pointed out what was wrong with his claim that small reductions in customer defection cause massive profit increases.

Then in 2004 he is said to have had an epiphany describing his prevous work on loyalty as “powerful but useless”. Keeping customers didn’t matter so much, having customers who would recommend you was everything.

So the latest myth he peddles is that asking customers their likelihood of recommending the company predicts company growth. He claims it does so much better than traditional metrics such as customer satisfaction.

Actually, if you read Reichheld’s Harvard Business Review article carefully you can see he employs the same sort of sleight of hand he did in his customer defection work. Pay careful attention to the dates, Reichheld in 2003 writes that starting in the first quarter of 2001 consultancy firm Satmetrix began collecting customer likelihood-to-recommend responses via email survey. Each quarter collected 10-15,000 responses gradually building a small dataset covering 400 companies in a dozen industries. Reichheld then calculated a Net Promoter score for each company and compared this to the company’s growth rate over 3 years (1999 to 2002). Yes, that’s the previous 3 years.

Yes, so the correlation he reports says that firms that score higher now have previously been growing.

Reicheld admits on his website that the statistical analysis in his book was sloppy but says that since then the consultany company he worked for (Bain & co) has done more extensive analysis showing no correlations between satisfaction scores and company growth, but excellent correlation for the NPS. However, Keiningham et al’s Journal of Marketing article perfectly repeated Reicheld’s analysis and they found the same or better correlation between old-fashion satisfaction and growth (hence the quote above).

Such correlations say little about causality (especially when they are backwards in time), as Reichheld tries to use in his defence, but then why on earth did he select these cases to ‘prove’ his case ? He even admitted he’d selected amongst the very best examples!

In sum, this is snake oil, fake science. It’s scary how many CEOs fell for this.  But then lots of people fell for the (completely wrong) zero defection idea too.

Marketing Guide: marketing in a recession

Are you wondering if you should change your marketing plans? Is there pressure to cut budgets (again)? How should you react to the recession?

Here is a report from the Ehrenberg-Bass Institute on marketing in a recession.

I wrote this with guidance from my colleagues as an “informed opinion piece”, i.e. different from usual Institute reports for our corporate sponsors that are about discoveries. It covers questions such as:

Can I get away with lowering my advertising spend?
Will premium brands suffer more?
Should I lower my price?
Is a recession a good time to launch a new product?
Will private labels gain further share?

To download the article “Marketing Guide: what to do in a recession” click here.

Loyalty Program Misleading Effects

The Journal of Marketing last year (2007) published an article titled “The Long-Term Impact of Loyalty Programs on Consumer Purchase Behavior and Loyalty” by Yuping Liu. It purports to show the impact of a loyalty program on the buying rates and loyalty of those who join the program. The key finding is that very large changes are observed for the lighter and moderate buyers in the loyalty program while the heaviest buyers exhibited no change.

However, this finding, and the consequently very large sales effects that the program seemed to generate, are actually artifacts of the analysis method.

The loyalty patterns of repertoire and subscription markets

In 2002 I published with Malcolm Wright and Gerald Goodhardt on an empirical discovery. Repeat-purchase markets are polarized into those that show repertoire patterns and those that show subscription patterns of loyalty. With no markets showing ‘in between’ patterns.

We also found that the Dirichlet model of repeat-purchase fitted both sorts of markets, predicting brands’ loyalty metrics rather well. This was a surprise. It highlights what an achievement this scientific theory is.

Here is the paper for download.

Sharp, Byron, Malcolm Wright, and Gerald Goodhardt (2002), “Purchase loyalty is polarised into either repertoire or subscription patterns” Australasian Marketing Journal, 10 (3), 7-20.

There is also a related test of the boundaries of repertoire markets:

Sharp, Byron (2007) “Loyalty Limits for Repertoire Markets”, Journal of Empirical Generalisations in Marketing Science, Vol. 11.

Portfolio Management – do you need to worry about brands treading on each others’ toes ?

Should you worry if you have several brands that are rather similar ? Should you collapse them together, sell some, or strive to position them differently ?

In general, the answer is don’t worry.

Companies often find themselves with similar brands, that sell to similar, or the same, populations. Mars have Milky Way (Mars Bar) and Snickers. P&G has Tampax and Always. General Motors has Saturn Astra and Chevy Aveo. Coke has Diet Coke and Coke Zero (and Regular Coke for that matter).

This in itself isn’t something to worry about. It’s normal for brands in a category to compete against one another and sell to near identical customer bases. Even brands that are obviously quite different (e.g. KFC and McDonalds, Visa and AmEX) still compete pretty much head on.

McDonalds doesn’t worry that it sells coffee as well as burgers, Heinz doesn’t worry that it offers Tomato soup as well as Vegetable. Similarly you shouldn’t worry about having similar brands. If a fantasy soft-drink company were started up and it could choose to own/market any two brands should it choose Coke and something like Fanta ? No it should choose Coke and Pepsi, these are the biggest brands globally.

What you should worry about is whether or not your brands are distinctive.  Are they easy to recognise and distinguish from others ? Without this your advertising can’t work for your brand. And consumers won’t see you on shelf. So your brands should look different (this is what branding is about) even if they don’t really compete as differentiated brands.

And you should be aware of (and calculate) the total portfolio effects of price promotions. When you put one of your brands on special you aren’t only giving away some full priced sales that would have happened anyway, you are also stealing full-priced sales from your other brands.

If brands grow they will always steal from all the other brands in the same product category. The exact amount of cannibalisation you should get between your own brands can be predicted by the Duplication of Purchase law. What you need to watch out for is excessive cannibalisation, firms tend to be good at stealing sales from themselves because their brands go through the same sales force, same distributors etc. You need to acknowledge and accept this, but then be on the look-out for excessive cannibalisation.

Finally, the decision to drop, phase out or sell brands should be largely made on viability, cost and operating issues. Not on how similar you think the brand is to another of your brands.

Professor Byron Sharp, 2008.

Reicheld’s loyalty myth

A 5% reduction in customer defections does not result in amazing profit increases.

I exposed this myth some years ago in this article. Here is a video presentation covering the same loyalty myth content.

Double Jeopardy law – Ehrenberg Video

Hear Professor Andrew Ehrenberg describe the Double Jeopardy law in his own words.

This video was recorded in the late 1990s at London South Bank University, at what was to become the Ehrenberg Centre.

Review of “How Customers Think” by Gerald Zaltman: This book talks a lot about insight but doesn’t deliver much.

Disappointing.  If you have read some bestsellers touching on recent findings in neuroscience (e.g. Antonio Damasio) and memory (e.g. Daniel Schacter) then what’s left of this book for you is largely an advertisement for Zaltman’s commercial and patented (!!) market research technique called ‘Zaltman’s metaphor elicitation’.

Yes there are good reasons to doubt focus groups

Does advertising only work via driving intentions and preference ? No!

Apart from a very small amount of direct response advertising, advertising works (to generate sales) through memories.  This is an uncontroversial statement, yet it’s common for marketers and academics to forget the essential role of memory and instead think advertising works largely through persuasive, rational or emotional, arguments that shift brand evaluations.

The dominant way that advertising works is by refreshing, and occasionally building, memory structures that improve the chance of the brand being recalled and/or noticed in buying situations and hence bought.  Memory structures such as what the brand does, what it looks like, where it’s available, when it’s consumed, where it is consumed, by who, with whom and so on.  Associations with cues that can bring the brand to mind.

Some advertising creates a purchase intention, gaining a reaction like “I should buy that” or “that’s interesting, I must check that out”.  It’s commonly assumed that such advertising must be more sales effective, but this does not follow.