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”.

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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.

To explain:

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 (contrary to the world portrayed in most marketing textbooks).

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.  Unsurprising.

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 class of 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 therefore the brands obviously don’t change share because 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); their 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 yet that doesn’t mean the casino investors assumptions are wrong.  All B&H show is that runs of purchases exhibit variation (as do gamblers), 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 has 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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True Brand Loyalty – it doesn’t matter

This is a footnote from “How Brands Grow“.

There is a very long (too long!) history of marketing writers debating what ‘true loyalty’ is. This is a perfect example of what the twentieth century’s most famous philosopher of science, Sir Karl Popper, called essentialism: seeking to define the essence of an abstract theoretical concept (Esslemont & Wright, 1994). We can forever debate issues (like, What is true love? What is marketing?), but as these questions are simply about the definitions we decide to use there is no logical way of ever resolving them. To suggest that one approach captures the true meaning of brand loyalty, while another (by implication) does not, is bad philosophy, and bad science. Contrary to popular belief the purpose of science is not to say what things are but rather to say things about things: how they behave, how they relate to other things. Physicists can tell you a great deal about the properties and behaviour of things like gravity and mass while there is no rigid definition of what these things ‘truly’ are. Hence, this book is about what we can say about real world loyalty-type behaviour, both verbal behaviour (expressed attitudes) and overt behaviour (buying).

“Never let yourself be goaded into taking seriously problems about words and their meanings. What must be taken seriously are questions of fact, and assertions about facts; theories and hypotheses; the problems they solve; and the problems they raise” (Popper, 1976).

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

New marketing practice, evidence or fashion?

A new study of 10 years of medical research in one of the very top journals shows that reversals are not uncommon.  This is where later evidence shows that a new medical practice is no better or worse than older practice (or doing nothing).

40% of the studies that examined a current practice found it shouldn’t have been adopted.

The problem is partly that tests of new practice tend to be biased towards being positive. So later, better, studies are going to find that a good number of their findings were wrong.

Also practice tends to adopt invasive practices perhaps due to patient pressure, and doctor desire, to “do something, rather than nothing”. Though there are also reversals to current practices that refuse to take up something new (e.g. vaccinate, take aspirin) because of some (often theory-based) fear, which turns out to be unfounded.

This shows that the advance of (medical) science, and evidence-based practice, is not a straight line. Reversals are common.

Now in marketing practice the tinniest whiff of evidence that something might be useful is enough to send lemmings running for the cliff! Fear of missing out? I’d put both the widespread adoption of banner and search advertising, marketing mix modelling, ROI calculations, and equity monitors in this camp.  We praise doing something new, even if it is harmful.

Then there are things like loyalty programs which were adopted without any evidence at all, just theory.

When evidence finally does emerge that a practice is flawed there can be great reluctance to accept it – especially amongst those who make money from it.  For example, how many market research agencies have changed their practices in presenting segmentation data after we showed comprehensively that brands do not differ from their competitors in the types of customer they attract?  For example, marketers are still launching new loyalty programs with the aim of extracting lots more business out of existing customers.

And not enough marketers worry when “emperor’s new clothes” type questions highlight the astonishing lack of credible evidence and testing of techniques like mix modelling or brand equity based predictions.  People even say things like “but if I stop doing this, what will I do instead”, as if doing something useless is better than doing nothing.  Marketing needs to grow up, because the medical example shows how easy it is to get something wrong even when you are as careful and circumspect as doctors are.