How it Works: Value Creation
Value creation is a corporation’s raison d’être, the ultimate measure by which it is judged. Debate has focused on what is the most appropriate type of value for the corporation to create. Is it:
- the value that the stockmarket gives the company (its market value);
- the value shown in its balance sheet (the accounting or book value of its assets minus its liabilities);
- something based on its expected future performance - profits or cash; or
- none of these?
In the 1990s, the main emphasis of executives was on creating value for shareholders - a value that was reflected in movements of the company’s stock price. But measures based on stockmarket values are subject to the same wild fluctuations as the market itself. In a rising tide, all boats get raised. But when macroeconomic changes force up markets generally, it does not mean that the value of each individual company in that market has changed similarly. Markets are moved by sentiment that has little to do with the underlying value of individual corporations.
The dotcom frenzy at the end of the 1990s was proof of this. Small new internet firms were suddenly lifted into the stratosphere by investors’ enthusiasm for their stocks. But their underlying value throughout the frenzy remained more or less unchanged - for many of them, that value was ultimately measured by a liquidator.
However, any measure based on book value has to get over the fact that accounting measures are not carved in stone. They can (and do) differ from country to country. It is also stymied by the fact that book values fail to take full account of intangible assets - things you cannot kick, like brands, patents or partnerships. These have come to assume a growing proportion of many companies’ value, particularly in the high-tech sector where the most valuable assets walk in and out of the front door every day. At the start of this century, it was estimated that intangible assets could account for as much as half of the value of the entire American economy.
Measures that attempt to value a company based on its future prospects are no easy alternative. They soon run into the difficulty of quantifying what those prospects are. The popular idea that a company is no more than the net present value of its future cash flow depends on guessing first what that cash flow is going to be, and then what future interest rates are going to be. Interest rates are used to discount those cash flows and calculate their present value. However, these measures do have the advantage of being independent of accounting rules, so they can be used to compare companies in different industries and countries.
A measure developed to overcome these problems is called EVA (economic value added). This is the measure of output (taken as operating profit after tax and some other adjustments) less input (taken as the annual rental charge on the total capital employed, both debt and equity). Managers have all the elements of this equation (costs, revenues, debt and capital expenditure) in their hands. So when it increases or decreases they have no one to praise or blame other than themselves. This makes it (in theory) a good benchmark against which to measure their bonuses and other perks.
What Do Strategic Marketers Do?
An entrepreneur I met at an event recently asked me "what do strategic marketers do". Now I realise a deceptively simple question like this deserves an equally straightforward answer, but later on it struck me how much the marketing world has changed over the last 20 years.
Twenty years ago you could credibly get away with saying something like "advertising" or "promotions". But today, organisations require so much more from their marketing departments - using such one-dimensional labels seems completely absurd.
The Textbook Response for a Knowledgeable Audience
The textbook response might have gone something along the lines of "the strategic marketer’s main responsibility is to identify consumers needs and influence the organisations ability to satisfy them". So their main function is to inform the company's mission, objectives and strategy by giving a voice to customers in the annual planning process, and promoting a market (or better, customer) orientation within the business.
But strategic marketers also co-ordinate and communicate the company's brand image, by attempting to develop a constellation of values and associations around their company's brand. They also gather customer, market and competitor intelligence to assist senior management in identifying attractive, profitable market opportunities. And they assess the organisation’s potential to take advantage of those opportunities.
The Strategic Response for Senior Managers
But there is an even more sophisticated view which takes strategic marketing management as its starting point and looks at the choices and decision systems that support senior management teams in realising their business goals. The main elements of these are:
- Precipitating the consideration of strategic choices.
What is happening externally that is creating opportunities and threats to which a timely reaction is necessary ? What strategic issues face the firm ? What options should be considered? - Forcing a long range view.
The pressures to manage with a short-term focus are strong and may lead to errors. - Making resource allocation decisions visible.
It is too dangerous to allow allocation of resources to be dictated by accounting systems, political strengths or inertia. - Aiding strategic analysis and decision making.
Concepts, models and methodologies are available to help the business collect, analyse and address difficult strategic decisions - Providing a strategic management and control system.
The focus on assets and competencies and the development of strategic thrusts provide the basis for managing a business strategically. - Enabling horizontal and vertical communication and co-ordination systems.
Marketing provides a way to communicate problems and proposed strategies within the organisation. Its vocabulary adds precision. - Helping the business cope with change.
Organisations operate in a rapidly changing and increasingly unpredictable environment and need approaches for coping strategically.
If you need any help or advice putting strategic marketing management into action, call us on 07867 543 296 or email us at by clicking here, we'd be happy to talk through the strategic challenges your company faces.
How it Works: The Five Competitive Forces That Shape Strategy
In essence, the job of the strategist is to understand and cope with competition. Often, however, managers define competition too narrowly, as if it occurred only among today’s direct competitors. Yet competition for profits goes beyond established industry rivals to include four other competitive forces as well: customers, suppliers, potential entrants, and substitute products. The extended rivalry that results from all five forces defines an industry’s structure and shapes the nature of competitive interaction within an industry.
As different from one another as industries might appear on the surface, the underlying drivers of profitability are the same. The global auto industry, for instance, appears to have nothing in common with the worldwide market for art masterpieces or the heavily regulated health-care delivery industry in Europe. But to understand industry competition and profitability in each of those three cases, one must analyze the industry’s underlying structure in terms of the five forces. (See the exhibit “The Five Forces That Shape Industry Competition.”)
If the forces are intense, as they are in such industries as airlines, textiles, and hotels, almost no company earns attractive returns on investment. If the forces are benign, as they are in industries such as software, soft drinks, and toiletries, many companies are profitable. Industry structure drives competition and profitability, not whether an industry produces a product or service, is emerging or mature, high tech or low tech, regulated or unregulated. While a myriad of factors can affect industry profitability in the short run - including the weather and the business cycle - industry structure, manifested in the competitive forces, sets industry profitability in the medium and long run.
Differences in Industry Profitability
Understanding the competitive forces, and their underlying causes, reveals the roots of an industry’s current profitability while providing a framework for anticipating and influencing competition (and profitability) over time. A healthy industry structure should be as much a competitive concern to strategists as their company’s own position. Understanding industry structure is also essential to effective strategic positioning. As we will see, defending against the competitive forces and shaping them in a company’s favor are crucial to strategy.
Forces That Shape Competition
The configuration of the five forces differs by industry. In the market for commercial aircraft, fierce rivalry between dominant producers Airbus and Boeing and the bargaining power of the airlines that place huge orders for aircraft are strong, while the threat of entry, the threat of substitutes, and the power of suppliers are more benign. In the movie theater industry, the proliferation of substitute forms of entertainment and the power of the movie producers and distributors who supply movies, the critical input, are important.
The strongest competitive force or forces determine the profitability of an industry and become the most important to strategy formulation. The most salient force, however, is not always obvious.
For example, even though rivalry is often fierce in commodity industries, it may not be the factor limiting profitability. Low returns in the photographic film industry, for instance, are the result of a superior substitute product—as Kodak and Fuji, the world’s leading producers of photographic film, learned with the advent of digital photography. In such a situation, coping with the substitute product becomes the number one strategic priority.
Industry structure grows out of a set of economic and technical characteristics that determine the strength of each competitive force.
As different from one another as industries might appear on the surface, the underlying drivers of profitability are the same. The global auto industry, for instance, appears to have nothing in common with the worldwide market for art masterpieces or the heavily regulated health-care delivery industry in Europe. But to understand industry competition and profitability in each of those three cases, one must analyze the industry’s underlying structure in terms of the five forces. (See the exhibit “The Five Forces That Shape Industry Competition.”)
If the forces are intense, as they are in such industries as airlines, textiles, and hotels, almost no company earns attractive returns on investment. If the forces are benign, as they are in industries such as software, soft drinks, and toiletries, many companies are profitable. Industry structure drives competition and profitability, not whether an industry produces a product or service, is emerging or mature, high tech or low tech, regulated or unregulated. While a myriad of factors can affect industry profitability in the short run - including the weather and the business cycle - industry structure, manifested in the competitive forces, sets industry profitability in the medium and long run.
Differences in Industry Profitability
Understanding the competitive forces, and their underlying causes, reveals the roots of an industry’s current profitability while providing a framework for anticipating and influencing competition (and profitability) over time. A healthy industry structure should be as much a competitive concern to strategists as their company’s own position. Understanding industry structure is also essential to effective strategic positioning. As we will see, defending against the competitive forces and shaping them in a company’s favor are crucial to strategy.
Forces That Shape Competition
The configuration of the five forces differs by industry. In the market for commercial aircraft, fierce rivalry between dominant producers Airbus and Boeing and the bargaining power of the airlines that place huge orders for aircraft are strong, while the threat of entry, the threat of substitutes, and the power of suppliers are more benign. In the movie theater industry, the proliferation of substitute forms of entertainment and the power of the movie producers and distributors who supply movies, the critical input, are important.
The strongest competitive force or forces determine the profitability of an industry and become the most important to strategy formulation. The most salient force, however, is not always obvious.
For example, even though rivalry is often fierce in commodity industries, it may not be the factor limiting profitability. Low returns in the photographic film industry, for instance, are the result of a superior substitute product—as Kodak and Fuji, the world’s leading producers of photographic film, learned with the advent of digital photography. In such a situation, coping with the substitute product becomes the number one strategic priority.
Industry structure grows out of a set of economic and technical characteristics that determine the strength of each competitive force.
7 Signs Your Strategy Lacks Clarity
Strategic clarity is essential if an organisation is to use its resources wisely to drive superior performance, with higher revenues and profits and a happier workforce the principal beneficiaries.
Below are 7 indicators which suggest a strategy is lacking a clear sense of purpose. How many of these affect you, or the people around you?
- Priorities and goals seem to jump around at a moment’s notice
- Urgency wins over importance
- Many cannot confidently articulate their top priorities, let alone those of the company
- The tail is wagging the dog; new ideas and events derail current plans
- Cynicism and resignation are more common than enthusiasm
- There are too many priorities (which means there really are no priorities)
- The organisation invests significant time and money in projects that produce little in the way of tangible results
If you see any of these signs, either your company’s strategic direction is too fuzzy, fleeting, unstable or broad. Or your organisation has not translated it sufficiently to obtain useful guidance from it. Either way, the organisation is under-prepared to make wise investment decisions.
If you need any help clarifying your strategic priorities, or support in communicating your strategy to customers and employees, give us a call on 07867 543 296 or email us by clicking here.
Realistically, you can only initially sell a meeting on first contact
In the professional services industry, no matter what sort of sales and marketing strategy you’re employing, chances are none of your individual activities will result in a direct sell. In fact, making a sale shouldn’t actually be your objective. In my experience, it just doesn’t work like that.
The aim of your marketing activities i.e. having an optimised website, running a targeted advertising campaign, implementing a direct marketing programme, curating a conference, making ‘cold calls’ etc. should simply be to get you in front of your prospects.
Lucidity London sees marketing initiatives as a means to an end - not the end in itself. You should be employing them solely for the purpose of getting you to that all-important first meeting. Yes, advertising can be sexy, design can be gorgeous, PR fabulous but the purpose that you must keep at the forefront of your mind is simply “I want to meet that person!”
Your aim should be to meet the person (or people even) before your competitors do and it will undoubtedly help if a meeting takes place against a background where your marketing messages have already entered their brain! Your marketing, therefore, is preparatory. It sets the scene. It softens up your prospects so you can begin the process of turning strangers into friends!
Make sense? If you need any help with your marketing, call us on 07867 543 296 or send us an email at info@luciditylondon.com and we’ll get back to you as soon as possible.
Sometimes Managers Just Need a Little Outside Help
Outside the organization? Why would the MD of a company with strong capabilities need to look elsewhere for assistance? If outside help is truly needed, doesn’t that say something pretty negative about the MD’s own staff and existing supply chain?</ p>
The reality today is that businesses, governments, and non-profits are so complex and often must move so quickly that in many cases, finding answers to difficult questions requires tapping experts, service providers, and innovators scattered all over the world.</ p>
As Bill Joy, founder of Sun Microsystems, pointed out years ago, “No matter who you are, most of the smartest people don’t work for you.”</ p>
Malaysian authorities’ initial failure to track and recover Flight 370 shows how a lack of outside help can impede solutions during a crisis. National and airline leaders weren’t able to adjust to the fluid and complex situation by engaging external resources in the critical first hours and days after the plane’s disappearance. Collaboration and co-ordination eventually improved, but still faltered at times.</ p>
By contrast, consider the 2010 Chilean mining disaster, which resulted in the triumphant rescue of 33 miners trapped underground. Chilean president Sebastian Piñera immediately and effectively mobilized not just the critical government ministries and industry executives but also a variety of outside experts across the globe - from an Australian mapping software company to UPS. At the mine site, project leader André Sougarret sought assistance while managing the boundaries of the rescue effort to screen out contributors who lacked expertise or workable proposals. Together the officials and engineers overcame unprecedented technical challenges and brought about a rescue that most observers hardly thought possible.</ p>
A growing number of organizations now routinely draw on timely assistance beyond their own boundaries to pursue innovation, solve business or social problems, or expand ventures.</ p>
These initiatives are quite different from MD's typical outreach to various stakeholders, people who are already invested in or connected with the company. Sometimes the experts are freelancers or employees in other businesses; sometimes they’re in governments, NGOs, or academia. If the challenge at hand is industry-wide, they might even be competitors. As a result, today’s leaders need to be good at building connections with a variety of outsiders beyond the usual value chains.</ p>
But making contacts is just the first, and often the least important, step in tapping experts. In my observations over the past several years, I’ve seen that effective MD's don’t just sign up contractors; they lead in a way that mobilizes a network. They create energy, a sense of purpose, and even something of a community among people over whom they have no control. These groups of experts blur the distinctions between insiders and outsiders. How do they do it?</ p>
Greater humility</ p>
It often starts with greater humility. Compared with internally focused leaders, mobilizers simply have to be more humble. Even paid outsiders usually have plenty of other projects to work on, so mobilizers can’t just issue demands. They need to show much more respect and at times even deference toward these outsiders. But they can’t be shrinking violets either; they must have a confident, positive outlook and provide a strong sense of purpose and direction. Take NASA’s Mike Ryschkewitsch, who headed NASA’s Flight Readiness Review for Space Shuttle missions. He had the critical but delicate leadership role of facilitating networks of internal and external technicians, specialists, and managers to address final technical problems and approve launches in the wake of the Columbia disaster in 2003. An accomplished NASA leader, he gained the respect of all constituencies by deferring to superior expertise in the room (but he also moved decisively to close off debate when he sensed the collective was ready for a decision).</ p>
More Imaginative </ p>
This humility often leads mobilizers to be more imaginative about what’s possible, and who can help. During the Chilean mine rescue, a key breakthrough came from a 24-year-old field engineer who showed up at the site on his own. To take a corporate example, Alan Mulally’s pioneering transformation of the fortress-like Ford organization was fuelled in part collaborating with outsiders, seeking insights from regulators, investment bankers, and consumer automotive researchers, as well as major customers and car dealers. The overhaul even benefited from occasional conversations with Mulally’s counterpart at General Motors.</ p>
Networks of networks</ p>
Finally, they tend to have an eye for networks of networks. Like good chess players, mobilizers think a few moves ahead. That means not just identifying network contributors who might help a project, but also looking to see what networks each network might bring along.</ p>
The importance of these skills in recruiting outsiders and keeping them engaged will become increasingly critical in organizations as advancing technology makes business ever more complex, global, and interdependent.</ p>
If you could do with some outside help, just click this link here and get in contact with us at Lucidity London.</ p>
8 Characteristics of Successful Brands
Of course life is never that simple. Take, for example, Apple’s false start with its corporate identity. The company’s first logo, designed in 1976, showed Isaac Newton sitting under a tree with an apple dangling above his head, waiting for gravity to happen. And the strapline that accompanied it was ”Newton… A Mind Forever Voyaging Through Strange Seas of Thought … Alone.” Would they really have become one of the most successful businesses on the planet if Steve Jobs hadn’t decided on a bit of a creative re-think?
If you’re looking for a slogan that people will remember, you might want to keep it short. All the best tag lines or slogans have three words. Apple might not agree, and Budweiser’s “Wassup?” or Clairol’s “Does she… or doesn’t she?” are among a number of exceptions, but there are plenty of examples to make the case. Nike’s “Just Do It”, KFC’s “Finger lickin’ good”, and McDonalds’ “I’m lovin’it” (albeit technically four words) all spring to mind.
But what are the real pointers and pitfalls in finding a company name or a slogan that will work?
Frank Goedertier, a scholar at the Kellogg School of Management, suggests there are eight keys to successful branding:
Memorable. Is your slogan (or other brand element) easy to recognize, and easy to recall? Does it have ‘sticking power’? A striking image or a word carrying some emotion such as courage or bravery might help.
Meaningful. This can be achieved in a descriptive way, such as a clear link with what you do – a product category, the business you are in. Or it can be done in a persuasive way – emphasizing your unique selling proposition, or a key point of difference, such as a special benefit you offer. In either case, credibility is essential, as a slogan must link with customer expectations.
Likeable. Does it look good, and does it sound right? Try using linguistic devices like alliteration (Coca-Cola), unusual or incorrect spelling (Kwik-Fit, Vodafone), abbreviations (7UP), acronyms (Amoco), compounds (Cup-a-Soup), metaphors (Aquafresh), association with a particular quality (Midas), or what branding experts refer to as paranomasia, a play on words (half the restaurants in London).
Transferability. Is the slogan universal enough to cover new categories, new business ventures and international markets? Make sure the words are easily pronounceable in as many countries as possible and look out for possible misinterpretation. Particularly if you’d like to avoid following Pepsi whose ‘Pepsi brings you back to life’ turned into ‘Pepsi brings you ancestors back from the grave’ in Chinese, or Coors whose ‘Turn it loose’ became ‘Suffer from diarrhea’ in Spanish.
Protectability. Think about the aspect of copyrights, and make sure you can legally protect your brand elements internationally. Also, make sure you don’t invest in building up awareness of brand elements that can be easily and legally copied by others. When Molson launched their Ice beer they thought they were onto a winner. Unfortunately for them, however, you can’t copyright the word ‘ice’ and they quickly found themselves facing competition from Miller Ice, and then Bud Ice.
Authenticity. The best slogans reflect the essence of a company, its very soul. And the best way to achieve authenticity is to work from the inside out, by understanding what your people believe the business is about because every single one of them will need to be an ambassador for the brand in the outside world.
Simplicity. In an age of information overload less is most definitely more. Keep it short, keep it simple, keep it clear.
Adaptability. In a rapidly changing world you need to future-proof your brand as much as possible, which means making it as adaptable as possible. Look at how other companies such as Google and MTV play with their logos through the use of different colours and backgrounds to create new messages while retaining the essence of the brand. Brand consistency and brand relevance are not mutually exclusive. With courage and inventiveness they can be made to work hand-in-hand.
And remember this. At the end of the day you need to own the identity or slogan you’ve created, so always make sure you can deliver on the promise you’ve chosen.
Marketing Tips for Entrepreneurs and Business Owners for 2019
Whatever programmes you put in place, we'd recommend you consider the following:
1. Consistency
Consistency is the most important concept when marketing a small and medium sized enterprise (SME), mainly because it is ignored by so many businesses. I’ve worked with clients, big and small, that are extremely inconsistent in all areas of marketing. Consistency helps lower the cost of marketing and increases the effectiveness of branding.
2. Planning
Once SME’s have committed to consistency in their marketing, the next major concept is planning. Planning is the most vital part of marketing, and many SME owners and marketing managers plan poorly. Put the time into planning your marketing strategy, budget, and other concepts presented here to ensure success.
3. Strategy
Strategy immediately follows planning because your strategy is the foundation for the rest of your marketing activities. Marketing strategy is the process by which SME’s concentrate their resources on the greatest opportunities to increase sales and achieve a sustainable competitive advantage. In the planning process, you must develop your strategy: who you will target, how you will target them, and how will you keep them as a customer.
4. Target Market
Target market is also another key concept for SME’s. Defining exactly who you are targeting allows owners and managers to focus scarce resources on specific customer groups and reduce marketing waste. A well-defined target market will make every other marketing concept much easier to implement successfully.
5. Budget
Although listed at number 5, budgeting is important throughout the entire process. Creating a marketing budget is often the hardest and most inaccurate part of marketing for an SME. Most lack experience in marketing, so their budgets often end up skewed. The most important part of this concept is to actually establish a marketing budget - then you can worry about how to distribute your funds. A useful rule of thumb for established businesses is to dedicate between 3-5% of revenues to marketing, however this depends to a large extent on your marketing objectives.
6. Marketing Mix
The marketing mix (also known as the 4 P’s) is defined as product, price, place, and promotion. As an owner or marketer of an SME, you must specifically decide on the products (or services) you will be offering to the market, the appropriate pricing, where and how you will distribute your products, and how will you let everyone know about you and your products.
7. Website
Today, all businesses must have a website which is also accessible on mobile devices regardless of size. Not just a one page website with out-of-date information. Customers, be they business or consumer, frequently search the web for information before making purchasing decisions. This concept contains a myriad of additional components but, at the very least, you must develop a web presence of some kind and keep it updated.
8. Branding
Many SME’s neglect this concept. People responsible for marketing must focus on this concept just as much as large organisations do. Branding consists of the pictures, logo, visual design, layout, make up, and image of your company and its product/service range. Branding is how your customers perceive (‘perception is reality’) your products and company. Make sure to pay special attention to what kind of brand you are building through each step in planning and implementation.
9. Promotion and Advertising
Promotion and advertising can be a complex marketing concept, but must be considered for any type of business and its products and services. Once you’ve engaged the previous 8 marketing concepts, you must let your target market know about your business and your products. Proper promotion and advertising will result in effective brand recognition, and, ultimately, increased sales.
10. Customer Relationship Management
The concept of customer relationship management has become a huge industry in the marketing world. There are many types of software and services offered to help businesses of any size handle their customer relationship management. Since there is so much available, usually for a large sum of money, SME’s usually look at this concept as something they are not big enough for or have enough money to implement. Don’t be fooled by the massive industry that has evolved from this concept. Maintaining proper customer relationships is essential to creating loyal customers.
If you need help in any of these areas, or simply want to talk to an expert about the best way to deal with a marketing or customer problem you routinely experience, call us on 0208 241 3730 or drop us an email by clicking here
Why You Should Consider Outsourcing Your Marketing for 2019
Most companies have been outsourcing a portion of their marketing function for many years - advertising.
But increasingly, expertise in marketing lies outside the walls of the traditional firm. In research, strategy optimization, multi-channel digital development, customer management and many more disciplines, project work is outsourced to experts. And that’s why more and more companies are turning to marketing partners like Lucidity London.
When we’re asked “when should I outsource my marketing?” our response is clear and simple: when it’s not a core competency.
Of course, it’s often a more complicated decision than that. But in our experience of working with clients over the past 10 years, the main reasons which prompt our clients to work with us include:
|
# |
Reason |
Scenarios Given |
|
1 |
Access to expertise |
gain access to the expertise and skills needed to perform key marketing tasks, and hook up with talent that may not be attracted working in-house |
|
2 |
Expert point of view |
get unbiased insights and a fresh perspective on the development of a realistic but high performing marketing strategy, and then implement it |
|
3 |
Safe pair of hands |
experienced, qualified project management with links to high quality suppliers e.g. researchers, web designers, photographers, printers and event organisers |
|
4 |
Up-to-date tools |
modern tools and techniques for defining the marketing strategy, reaching the target market and meeting objectives |
|
5 |
Release time |
tick marketing details off the to-do list, reduce time consuming liaison between suppliers and free up precious management time |
|
6 |
Increase flexibility |
options for support in executing a one-off project or for two days a week implementing the marketing strategy |
|
7 |
Keep costs down |
marketing expertise without the commitment and cost of employing full-time employees while maintaining high standards of execution |
|
8 |
Bring new ideas and thinking |
develop new services and campaigns required to get, keep and grow customers |
|
9 |
Mentoring and training |
provide direction to an inexperienced employee, junior marketing team or executive team on an specific topic e.g. multi-channel retail |
|
10 |
Boost quality |
improve the quality of marketing as the business grows while professionalizing the marketing competency |
Marketing Today: Less Bluff, More Puff
Thanks to new digital tools, marketing is no longer voodoo
WHEN a power cut interrupted this year’s Super Bowl, advertisers lit up. “Sending some LEDs to the @MBUSA Superdome right now,” tweeted Audi, swiftly plugging its own LED-accented car while taking a dig at its rival Mercedes, sponsor of the New Orleans Superdome. Tide, a detergent, came up with: “We can’t get your #blackout, but we can get your stains out.” But by general consent Oreo won the tweet-off with “Power out? No problem. You can still dunk in the dark.” The biscuit baker’s reward: 16,000 retweets and 20,000 Facebook likes.
Super Bowl TV commercials are the Broadway spectaculars of the marketing world, broadcast to millions. The blackout banter is more like improv, created on the fly for a select audience. Marketers these days must master both. It is not easy. Lightning reflexes have never been part of a marketer’s toolkit. Chief marketing officers (CMOs) “used to deliver big iconic brand ideas on a seasonal basis,” says Luke Taylor of DigitasLBi, a digital advertising agency. Some “are outside of their comfort zones”.
Nearly 40% of CMOs do not think they have the right people and resources to meet their goals, says an Accenture report entitled “Turbulence for the CMO”. Martin Sorrell, the boss of WPP, the world’s biggest marketing and advertising group, says that since the 2008 financial crisis marketers have been elbowed aside by finance and procurement chiefs. Dominique Turpin, the head of IMD, a Swiss business school, writes that “the CMO is dead”.
Yet some have never felt perkier. With new digital tools marketers can reach the likeliest customers when they are most in the mood to buy. Last summer Wall’s ice cream and O2, a mobile-phone network, teamed up to send advertisements to Londoners’ smartphones when temperatures climbed. When the weather cooled Kleenex, a brand of tissues, used Google search terms and health-service data to target ad spending to areas likely to suffer the most sneezes. Andy Fennell, the marketing boss of Diageo, a drinks firm, thinks this is “a golden era for brand builders”.
On Super Bowl Sunday, Nestlé’s “digital acceleration team” (DAT) gathered at the food giant’s headquarters on Lake Geneva to see how other brands’ TV spots echoed in social media. They watched as the blackout “completely changed the equation”, says the team leader, Pete Blackshaw.
The setting was a situation-room-like studio, where the focus is normally on how Nestlé’s own products are faring among electronic opinion-formers. A glowing map shows where social-media buzz is liveliest. A screen records that Kit Kat bars were the subject of 164,462 recent posts on Twitter, Facebook and the like. Of these, 73% were positive. (Though it is hard to imagine why anyone would complain about chocolate. What’s not to like?)
Kit Kat captured 34% of the chocolatey chit-chat, reveals an illuminated pie chart, while Snickers did better, with 39%. If sentiment droops, “community managers”, many of them DAT alumni, can swoop in to soothe a malcontent or suggest a fix. Such give and take has “radically changed the relationship between our brands and the consumer”, says Patrice Bula, Nestlé’s marketing chief. “Today we have really entered the age of conversation.”
This helps explain why marketers are feeling both potent and panicky. Instead of just lobbing messages out into the void, they must now act as customers’ “ambassadors”, says David Edelman of McKinsey, a consultancy. And that is tricky.
Most middle-class consumers will be Asian within a couple of decades. Pop culture can pop up as easily in Gangnam as in Harlem. Technology keeps giving marketers new ways to reach consumers and learn about them. The ensuing flood of data may drown creativity, some fear. Under constant pressure to prove that what they do is effective, “the next generation of marketers may not be able to be as intuitive and creatively inspiring as their predecessors,” worries Grant Duncan of Spencer Stuart, a recruitment firm.
The biggest shock, say marketers, is the schooling in humility that comes with round-the-clock conversation. Consumers are in charge. They can comparison-shop from their couches or badmouth brands via Facebook. They will not tolerate shoddy quality or sloppy ethics. In 2010 Nestlé fought campaigners who said the palm oil used in Kit Kat caused the destruction of Indonesia’s rainforest. Now it is at pains to be orang-utan-friendly. British snackers can scan a QR code on some Kit Kat packets to assure themselves that the cocoa is harmlessly sourced.
But deference is double-edged. Brands want deeper and more profitable relationships with consumers in exchange for the trust they hope to inspire. Marketers are stretching their notions of what brands stand for and smudging the distinction between advertising and entertainment. The lines between marketing and other disciplines within a firm are fading. Brands want to be antidotes to cynicism. But this will not divert marketers from their main task, pungently summed up by an ad exec: “to figure out and fuel consumer desires like they’ve never been fuelled before.”
Happy-clappy about nappies
Did you think Special K was a breakfast cereal? It is so much more. MySpecialK, a website, will advise you on diet, exercise and overall well-being. Do you pay attention to Nike only when your running shoes wear out? Then you don’t wear a Fuelband, which will record your workouts and upload the data to the internet every time you charge it. The point of Pampers is not to sell the most nappies but to help mothers raise happy, healthy children, writes Jim Stengel, a former CMO of Pampers’ owner, Procter & Gamble, in a recent book. From that flow “endless possibilities for growth and profit”.
If brands are to rise in the world, so must advertising. A medium that traditionally earned its keep through interruption now aspires to be sought out and shared. “There used to be ads and then content,” says Mr Fennell. “Now there is just good content and bad.” The advert could come in the form of a mobile-phone game like Captain’s Conquest, a hunt for high-seas booty that promotes Diageo’s Captain Morgan rum. Or it could be a televised chronicle of the travels of Alexander Walker II of the Johnnie Walker whisky dynasty, which drew an audience of 120m.
If only marketers could follow their customers as easily. They used to flow through “funnels”: attraction (where consumer-goods marketers typically concentrated their efforts) was the widest bit, followed by conversion (the actual sale) and retention. Technology complicates this. A marketing manual put out by Google likens today’s customer journey to a “flight plan”, a zig-zagging odyssey of apps, shops, social-media sites and online searches conducted on both fixed and mobile devices and unique to each shopper.
To chase consumers around, CMOs are pinching marketing techniques from other industries. Customer-relationship management (CRM) is used mainly by companies with enduring ties to consumers, such as banks and telephone companies. “Now you see CRM methodology in places where it had not been applied before,” says Marco Rimini of Mindshare, a part of the WPP group. Although makers of packaged goods such as nappies and toothpaste will still deal with consumers mainly through retailers, they can now establish direct relationships. The more marketers learn, the more they will tailor their come-ons to what they think shoppers want.
It is getting harder to tell where puffery ends and providing a service begins. Paul Kemp-Robertson of Contagious, a marketing magazine and consultancy, points to the Fly Delta app, which tracks passengers’ baggage and lets them peer through a virtual glass bottom to the ground below their flight. Australia’s Commonwealth Bank offers a house-hunting app that identifies the house, shows its price and helps the prospective buyer find a mortgage. “Adaptive marketing”, which varies messages as audiences and circumstances shift, should be as fast as journalism, says Nick Emery of Mindshare, which devised the Kleenex campaign. Or faster. Nike found 21,000 ways to tell people to “find [their] greatness”.
The best trick for CMOs who want to impress the boss would be to measure just what marketing is doing for a company’s bottom line. Los Angeles-based MarketShare (no relation to Mindshare) is one company that claims to be cracking this hoary problem. With more data and new ways of analysing it, a CMO can now predict what mix of media will achieve a company’s sales and margin targets, says Heath Podvesker of MarketShare.
Actually, marketers are not as clueless about that as they are said to be. The smartest were using econometrics to measure marketing’s payoff in the 1980s. Digital advertising made that easier in some ways (advertisers could pay per click) but added bewildering complexity. Now marketers are beginning to get to grips with it by measuring how various media affect each other. MarketShare touts the case of Electronic Arts, which was spending too much on television and cinema advertising and not enough on search advertising and YouTube videos to promote its “Battlefield” video game. After cutting television’s share from 80% to half and boosting spending on video and paid search, sales of the new version jumped by 23%.
This is good news for CMOs. MarketShare reckons that companies spend too little on marketing overall and that the right answer is not always to put more money into digital. Sometimes the algorithms counsel investment in print and television, which is heartening to marketers wedded to the storytelling side of their craft. No longer need CMOs creep diffidently into the chief financial officer’s lair.
But to stride in jauntily they will have to change the way they work. Gartner, a consultancy, has predicted that by 2017 they will spend more on technology than their companies’ chief information officers. Already 70% of big American firms employ a “chief marketing technologist”, says Gartner. With the shift in emphasis from set-piece campaigns to rapid responses, CMOs need more people working directly for them. This is putting into reverse a 20-year trend of favouring “working spend” (what consumers see) over “non-working spend” (overheads), says Dominic Field of the Boston Consulting Group.
Some companies are pulling marketers off the sidelines and onto the pitch. Land Rover, which like many engineering firms had a tradition of connecting with customers only sporadically, signalled a change in approach not long ago by hiring a new marketing chief, Patrick Jubb, from Vodafone. His brief is to cultivate relationships with owners and potential owners of luxury SUVs every bit as intimate as those between a mobile-phone network and its subscribers. “Marketing now works much more closely with the design and engineering teams in sharing a new product with the world,” says Mr Jubb. After dropping to less than two years in the mid-2000s, the average tenure of a CMO at a big-spending American firm has climbed back to 45 months, says Spencer Stuart. That suggests a recovery in jauntiness.
Still, a gap yawns between what CMOs could do and what they actually do. The left-brained bent that the job now demands “is not part of where their experience has been”, says McKinsey’s Mr Edelman. But CMOs are learning. Mindshare installed an “adaptive lab” in its London headquarters to educate them. DigitasLBi teaches its clients that not every utterance about a brand needs to be vetted by lawyers. Next time the floodlights fail, more marketers will know what to do.
Source: The Economist, Print Edition, 18 May 2013
Can Marketing Be Saved?
If the digital age has done nothing else for productivity, it has proved spectacularly effective at generating a supply of mantras.
For those of us old enough to remember the inception of the web, it is occasionally worth pausing to remember a few mantras often heard in the mid-90s, and to ask how well they have survived the test of time.
For example, in 1999 Wired's US edition predicted the rise of "infomediaries". I remember that. These seem not to have fully emerged. Nor, in truth, has the "hyperlocal" web really taken shape.
But another prediction has always stuck with me because it was made with so much confidence:
"There will be no customer loyalty on the internet, since a cheaper price is always just one click away."
That statement was almost universally believed at the time. In the late 90s it was rare to read an article in a business magazine that did not predict that online shopping would degenerate into an orgy of price-comparison sites linked to a plethora of online retailers. What do we see in reality? A kind of inverse-square law is in operation: the largest online retailer, Amazon, sells nearly five times more than its nearest US competitor, Staples.com, and ten times more than Walmart.com. In the UK its dominance is even more pronounced (I am excluding the online grocery services here, since the supplying of perishable goods is unavoidably different).
It is difficult for any physical retailer to enjoy physical proximity to all its customers, but mental proximity is a different matter – you can effectively monopolize that.
Why were all the economists so wrong on this question? Or, to paraphrase the Queen on the financial crisis, "Why did nobody see this coming?"
Well, it's only fair to say there are some perfectly conventional economic reasons why Amazon enjoys this supremacy. Its prices by and large are highly competitive.
It offers enormous choice.
Its service is good.
And it benefits from scale in its warehousing and in its negotiations with suppliers (though certainly no more than Walmart/Asda). It also profits from other network effects, for instance, in the volume of customer reviews it attracts and in its appeal to marketplace sellers.
All these are plausible reasons which conventional economists would advance to explain its success. And it seems to maintain its share price without making much of a profit.
But are these the only reasons? None of these post-rationalisations can on their own adequately explain Amazon's dominance. If, as economists believe, people really do check competitive prices before buying a book from Amazon, it doesn't explain why no one much even bothers to compete in the categories Amazon dominates. Try searching book titles on Google if you doubt this.
What if the biggest reasons for Amazon's supremacy are not economic but psychological? Or the product of "heuristics and biases", to use fashionable psychology lingo. These are the cognitive short-cuts we adopt while facing an influx of data presented to us in everyday situations.
Let me give you a few examples:
No 1- The Mere Availability Effect
This is a mental bias whereby we are inclined to adopt a course of action simply because it easily comes to mind. Note that this is not the same as simple "awareness" or "fame". After all, Ryman and Asda both enjoy equivalent name recognition to Amazon in the UK. "A brand's mental availability refers to the probability that a buyer will notice, recognise and/or think of a brand in buying situations," says Byron Sharp, professor of marketing science at the University of South Australia. "It depends on the quality and quantity of memory structures related to the brand".
He continues, "This is much more than awareness, whether that is top-of-mind awareness, recognition or recall. Indeed, all of these [conventional marketing] measures are flawed by the use of a single, a-situational cue".
So, regardless of overall fame or reputation, context matters. When I am in a mall, I am content to wander into Waterstones; when online, it takes less cognitive effort to think of Amazon. It is a mental default.
When I'm offline, whether I go to Tesco or Waitrose may depend on the time of day, my location, mood and a host of other variables, all of which cause me to distribute my retail spending across a plethora of brands. When online, these variables are far fewer; hence the winner-takes-all effect (sometimes called the "Matthew Effect", named after the passage in that gospel where it is suggested that those who already have, inevitably get more) is not diminished by the ease of comparison and switching. On the contrary, it's more extreme.
It is difficult for any physical retailer, even Asda, to enjoy physical proximity to all its customers. But mental proximity is a different matter. You can effectively monopolise that.
No 2 – Habituation and Defaults
Yes, sometimes we do what economists believe, and assiduously check every possible retail outlet to find the lowest cost. But, let's face it, our lives would be intolerable if we evaluated every alternative before doing anything. We rarely test-drive more than two cars before we commit to buy one, so why should we search hundreds of web pages before buying a DVD? Instead we fall back on a simple, default behaviour: "If nothing bad happened last time, do what I did last time".
The evolutionary basis for this default behaviour does not need much explanation. In risk-averse modes (all mail order has an element of uncertainty and risk) it is sensible to be conservative. This conservatism applies to our taste in food: we feel very comfortable eating food which tastes identical to food we have eaten in the past, since the very fact that we are contemplating the decision is evidence that it did not kill us in the past. Ray Kroc, the former owner of McDonald's, spotted this tendency: "People don't want the best burger in the world," he stated, "they want one which tastes just like the one they had last time".
I understand KFC: you go to the counter and tell them what you want. I understand The Ivy: you are seated at a table and someone brings you a menu. But Nando’s puts me in a complete funk. Where am I supposed to go? Where’s the bloody cutlery?
In a desktop internet scenario the force of habit is strengthened by a significant factor. First of all there are none of the other confounding factors (such as proximity or happenstance) that nudge us out of our well-trodden paths. But there is also a further boost to the "familiarity breeds contentment" in online shopping: the cognitive burden of using any unfamiliar website is really quite high. A site you have used 20 times in the last year can be used with a degree of unconscious fluency - whereas a new site requires painful, conscious mental effort, generating uncertainty and doubt. (Think of the first few kilometres you drive in a hire car, where all the controls are in a different place to the car you own at home - or the bemusement you experience in a traditional shop when they rearrange the shelving).
I call this feeling of unease "Nando's Syndrome" - from the uncomfortable feeling I experience as a 47-year-old man when dining at the eponymous South African restaurant chain. I understand KFC; you go to the counter and tell them what you want. I understand The Ivy; you are seated at a table and someone brings you a menu. But Nando's puts me in a complete funk. Is it self-service or not? Where am I supposed to go? How do I get a drink? Where is the bloody cutlery? Compared to, say, waterboarding or colonoscopy it is not an extreme form of mental torture, but these feelings of unease are the mental equivalent of a hangnail or a blister - we do everything we can to make them go away.
Again, habit amplifies the abundance of the Matthew Effect. The more often that people go to your site, the more likely they are to come back.
No 3 – Social Proof and Contagion
The other default by which we live all the time is "do what everyone else does". Economists choose to ignore this behaviour, or deride it as "irrational" for a rather self-serving reason: once it is accepted that one person's behaviour may affect that of another, it makes a horrendous mess of their orderly mathematical models. It takes you away from the field of modelling human behaviour as though it were neat, Newtonian physics and brings you into the Wieneresque world of complex systems, emergence and feedback loops, for which they are mathematically ill-equipped. It also throws a spanner into their beloved, Panglossian idea that markets are perfectly efficient.
But we would not be recognisably human at all had we not developed the sensible instinct of copying the behaviour of others. Given limited time and energy, to go with the flow of mass behaviour is both necessary for survival (your tribe can either all fight or all run away - both are preferable to half of you doing one thing, half the other), and cognitively efficient (it draws on collective knowledge and experience, rather than individual enquiry, and allows learned behaviour to spread much faster).
Going to the same chip shop as everyone else may not be a perfect solution but it is unlikely to be terrible. Going out on a limb is risky and mentally demanding. That slight feeling of unease you have on entering an unfamiliar restaurant when you discover you are the only diner. That’s the heuristic at work.
Gerd Gigerenzer, the world's foremost expert on heuristics, would refer to this copying approach as "ecologically rational". The dissident economist Alan Kirman might call it social rationality. This is not "rationality" in the narrow, individualistic sense defined by economists and rational-choice theorists, but a good strategy under the circumstances. Going to the same chip shop as everyone else may not be a perfect solution, but it is unlikely to be terrible. Going out on a limb is risky and mentally demanding. And many human accomplishments depend on social norms - no one can decide on their own what it means to be fashionable. That slight feeling of unease you have on entering an unfamiliar restaurant when you discover you are the only diner? That's the herd heuristic at work.
There are many areas of expenditure that are disproportionately affected by this heuristic - since people are inclined to settle upon a suboptimal but universal consensus rather than ploughing their own lonely perfectionist furrow. Being a vegan is just damn difficult - every time you have to dine out with carnivores you have to explain yourself. Smoking is now mildly embarrassing in all middle-class circles. Coke is not my favourite carbonated drink (I prefer Dr Pepper), but it is a social norm to offer it: you cannot offer only Dr Pepper to guests. To use the language of blood groups, Coke is the type O negative of carbonated drinks - the kind you can give to anyone.
Once again this heuristic tends to increase the Matthew Effect: "To him that hath, more shall be given" (Matthew 13:12).
No 4 – To a Game Theorist Customer Loyalty is Not Irrational
In any conventional economic model, loyalty is irrational. In fact a rational economist would never get married. ("Why should we get married?" an economist asks his girlfriend in psychoanalyst Stephen Grosz's The Examined Life, a collection of case histories. "I choose you every day."He then goes on to insist on a prenup).
This failure to understand the ecological rationality underlying loyalty is a product of the bizarre behavioural model that underlies conventional economics. In the economic model of rational behaviour, a series of essentially anonymous economic actors engage in one-off exchanges, with each possessed of perfect information and complete trust. This is a situation which happens in the real world somewhere between "rarely" and "never". There are and have always been asymmetries of information, questions of trust, and also future unknowns.
In these circumstances, when the identities of the buyer and seller are known to each other, and are known to be known to each other, use of game theory may recommend that you might be better off paying more to buy disproportionately from one supplier rather than spreading your custom meanly and thinly across several.
First of all, the kind of exchanges that take place within a non-anonymous iterated-game framework tend to be more trusting and mutually beneficial than those that take place as a one-off transaction. Economic study of actions in, of all places, the Marseilles fish market has consistently demonstrated this instinctive preference repeatedly to deal with the same suppliers, even when it costs you a little more. The difference in optimal strategies between one-off exchanges and repeated exchanges is worth stressing. It is this distinction that essentially differentiates the capitalism of the functioning market from the capitalism of the tourist souk.
The Souk-vendor also has no prospect of reputational damage through selling sub-standard merchandise (nor of any reputational gain through selling something especially good).
When you buy from a tourist souk, you are participating in a zero-sum game. There is almost no prospect of repeat purchase, since the tourist in the souk will be back on a plane home to Luton the following week. Hence the sole interest of the vendor is to sell at as high a price as possible a carpet of as execrable a quality as possible. He has no interest in the future satisfaction of his customer, since any satisfaction or disappointment will have no economic gain or loss to his future business, which depends simply on a steady stream of new suckers passing his stall every day.
The souk vendor also has no prospect of reputational damage through selling substandard merchandise (nor of reputational gain through selling something especially good). Tourists generally do not fly back to Luton on easyJet and spend the next week recommending that their friends avoid the third stall along in the Marrakech market. Even if they did, it is unlikely that this reputational retaliation would affect the carpet seller's business very much. (TripAdvisor and other rating technologies may be changing this. In certain categories, such as small hotels, TripAdvisor may be of considerable economic importance)
It is for this reason that any economic transaction with strangers in a strange place is so mentally harrowing. The usual reputational and repeat mechanisms which ensure fair dealings (and even a kind of altruism) no longer function; suddenly you are operating in a low-trust, high-deception marketplace. As I often advise people, "If you want a bad meal, go to a tourist restaurant - and if you want a really bad meal go to a tourist restaurant with a view." The worst service I have ever received anywhere in the world was in Granada, where the entire customer base for restaurants consists of transients - tourists visiting the Alhambra and a large body of students. Without the prospect of repeat custom or the risk of reputational retaliation, markets simply do not function very well. (It's one of the reasons why, in any tourist area, it often makes sense, in game-theory terms, to go to McDonald's - since they will care about your custom back in Luton, and about their reputation overall).
Contrast this souk-like uncertainty and mistrust with the relationship that exists between you and, say, your local butcher. He is anxious that you are not disappointed by his sausages, since he stands to lose your future custom if they are found to contain large quantities of horse. Hence, when your local butcher sells to you, he is mindful of your future satisfaction. He also stands to suffer significant collateral reputational damage, because you can go around the neighbourhood mouthing off about your disappointing cheval-burgers, and hurt his business still more than by simply boycotting him on the quiet.
And the butcher, since he knows who you are, can engage in a form of reciprocation, rewarding you in ways that transcend simple monetary exchange. If you shop at the same butcher each week, you can reasonably expect a slightly better turkey at Christmas, for instance, or the best cuts of steak.
Tourists generally do not fly back to Luton on Easyjet and spend the next week recommending that their friends avoid the third stall along in the Marrakech market.
But how does Amazon operate in this way? Well, unlike a large impersonal bookshop, Amazon does know who you are. It knows your transaction history. And you know that it knows. Hence if you have satisfactorily bought 20 books from them over the last year and then the twenty-first book fails to arrive in the post, you can reasonably expect that Amazon accords you "the benefit of the doubt" and resends the book. If I am a one-off customer, I can have no such expectation. What indication do they have that I am not a con artist? After all, they have no record of any past transaction with me where I have not issued a complaint.
For the same reason, aside from the obvious economic incentive of air miles, I prefer flying with airlines I fly with quite a lot when I belong to their frequent-flier programme. Because of my frequent-flier record, I know that they know I am fairly valuable to them. If there is only one seat left on the last flight out of Stockholm before the snows come down at Heathrow, I can reasonably expect that the seat goes to me and not to some random backpacker. On an airline I rarely use I have no such hope or expectation.
These social currencies of exchange are usually not mathematically expressible (there is no mathematical notation for the "tit" or the "tat") but they do exist in our heads. In evolutionary terms, tit-for-tat reciprocation predated the invention of money by a million years or more, and it is necessary in many social situations. It would be seen as ethically intolerable for anyone besides a trained economist if British Airways were to hold a spot auction at Stockholm airport to determine who gets that last seat - and so past value is probably the only socially acceptable and economically intelligent way of allocating it. In any non-anonymous exchange, loyalty buys you a kind of insurance. Do we understand this instinctively? Once you look, real life, as opposed to theoretical "markets", is full of game theory.
An engagement ring or an expensive wedding is, in effect, a game-theoretic device, an up-front expense that indicates long-term commitment. It is through these sunk costs that we come to trust one another. A market where we "rationally" shift our loyalties according to short-term expediency may work less well than a more loyal market when a mental or digital record exists of each individual's transactions over time.
It is this instinctive urge to reciprocate and to retaliate that may allow markets with imperfect or asymmetrical information to work. It is one way we get around the problem of information asymmetry: how can you trust the seller of a car when he knows the quality of his car far better than you do? You look to futurity (by repeatedly using the same local car dealer) or to reputational collateral (by buying from someone local, whose reputation you can hurt). Unless you are desperate, you do not buy a second-hand car from a bloke called Dave living 200km away, for whom the only contact information you have is the number of a pay-as-you-go mobile.
While living in London, I noticed how many of my friends, on buying their first car, would return to their homes in Yorkshire, Wales or somewhere else far away and arrange the purchase through their father or friend. In retrospect the reasons for this seem obvious: London is too fluid, large and anonymous a place for anyone selling a dodgy second-hand car to worry about endangering his reputation. In Yorkshire, the private seller of the car drank in the same pub as the buyer's father.
Since advertising is expensive and difficult to do well, the cost of advertising is also a virtual engagement ring, proffered to the potential consumer: the upfront expense entailed being proof of long-term intention for the product, the brand and the relationship.
I agree with the social scientist Jon Elster when he says it is difficult to understand social behaviour without an understanding of game theory. Yet most economic and marketing models are almost totally blind to it and its effects. But it again helps explain why the Matthew Effect is so pronounced in online retailing. In an uncertain field such as mail order, you are more likely to be trusted and respected when things go wrong if there exists a record of your previous transactions - as an indicator of your trustworthiness and a hint to the likely loss of future value should you choose to defect.
In my view much advertising expenditure probably works this way. Since advertising is expensive - and difficult to do well - the cost of advertising is also a virtual engagement ring proffered to the potential consumer; the upfront expense entailed being proof of long-term commitment to the product, the brand and the relationship. Advertising sometimes conveys information, of course. But much of it ostensibly conveys really very little that is new or compelling. But the act of advertising, especially in expensive media, is a form of information in itself. Since it takes time to recoup the cost of an advertising campaign, it only pays to run one when the advertiser has reasonable expectations of the long-term, widespread popularity of the product being advertised. The act of advertising your product is hence a valuable signal that the manufacturer has faith in its own product - equivalent to a racehorse owner betting heavily on his own horse. It is not irrational that we're influenced by such as an action - on the contrary, it shows a high degree of instinctive social intelligence.
Therefore, the idea that brand loyalty is irrational is not true. In real life, we cannot assume the good intentions of the people we deal with. We need to look for relationships we can trust. A preference for dealing repeatedly with people who have reputations to lose by ill-treating us seems far from irrational - it is the very basis on which all human dealings rest.
When that economist said to his girlfriend "I choose you every day", he fundamentally misunderstood the nature of human relationships, which require something more enduring than a commitment that is reassessed on a daily basis. She - rightly, I think - ditched him soon afterwards.
What I've listed here are just four psychological theories as to why Amazon enjoys unrivalled success - alongside its obvious virtues as a highly efficient and well-run business.
Now you may not agree with all of these. In fact you may not agree with any of them. But bear with me. You see, what is really significant about these mental biases is that they are for the most part completely neglected by business and government in their decision-making. Businesses today may be making decisions - to compete, to undercut, to launch products, to enter a market, to advertise - with no understanding of the powerful effect these biases may have on success or failure. Governments may define policy or tax schemes in a way which makes sense to economists, but which is psychologically blind.
Take, for instance, the recent riots over student fees. Part of the reason for the fury aroused by student tuition fees is that they were paid for by "a loan" - a concept that involves a student labouring for years under a debt the size of which is depressing enough to people who are rich. For the poorer student, the sums are enough to discourage all but the most confident from going to university at all. Yet you could have instigated exactly the same financial mechanism but called it a graduate tax, which would have meant no-one would have needed to know of the depressing debt figure at all.
This simple reframing technique was probably considered by nobody, since all the effort was put into designing the scheme, and no attention at all paid to its psychological effects.
Why do businesses and governments make such egregious errors in understanding these heuristics and biases? Because they are unaware of them. Why? Because, frankly, we are largely unaware of them ourselves.
In understanding customer behaviour, companies have traditionally used two tools to determine likely purchasing intent. One is the standard assumptions of neoclassical economic theory, which is psychologically blind: the kind of "perfect" transactions it models are almost never found in reality. In the economist's mind, people are calculating rationalists, merely seeking to maximise their own utility in a world of perfect information, and devoid of such concepts as uncertainty, mistrust, fear and regret. Yet the human is far less a rational calculating machine than a kind of anxious, moralising, herd-like, reciprocating, image-conscious, story-telling game theorist.
The other tool most widely used in ascertaining and predicting consumer preference is market research. This, in truth, is little better than the economic model, as we don't really know why we do what we do. We're good at pretending to know, or constructing plausible-sounding post-rationalisations of our behaviour. But the heuristics that influence and, at times, determine our actions operate on us at a purely unconscious level.
No cricketer knows the heuristic they use to catch a ball. People come up with explanations, but all are wrong. Only observation reveals how people catch balls - and it is the same heuristic for everyone. But we lack the introspective mental mechanisms to understand and relate what we are doing. It is instinctive and tacit.
Hence research cannot really uncover much in the way of explanation for people's behaviour, since the people you are researching often do not understand why they behave as they do.
Moreover, when in groups, the explanations people contrive may be more motivated by the urge to impress the strangers in the room than to give the researcher any true insights. (It isn't only companies which have marketing departments - the brain has a pretty active marketing function of its own.)
So what I am saying here is that both the standard tools we use to predict and model human behaviour are really quite bad. Our ability to model and predict may therefore be little better than, say, weather forecasting in the 1820s. Now this is the critical question. We shall, I suspect, never be able to predict human behaviour exactly - any more that we can ever issue a perfect weather forecast for next year. But what if we could just develop models that improved it by just a bit? We are, after all, starting from a low base…
Much as we all love to decry it, weather forecasting has improved markedly. A four-day forecast today is as accurate as a two-day forecast in 1985. The path of a hurricane can be predicted now within a course over 65% narrower than 40 years ago.
More important perhaps, weather forecasting has improved in another way too - it now acknowledges the limits to its powers. It has learned that the ability to forecast anything more than ten days ahead may be computationally impossible. Knowing the limits to your understanding is a form of intellectual progress in itself.
What if economics and market research were to achieve a similar leap forward both in its ability to predict and in its understanding of its limitations? What would the implications be for business and government efficiency and for economic growth and well-being?
Books such as Nudge and Thinking, Fast and Slow have topped the bestseller lists. "Big data" now provides real-time behavioural information that will make it easier to test smaller behavioural experiments. Computer modelling - the very technology that has transformed weather forecasting - better depicts the complexity of actual market behaviour than the naïve Newtonian models of conventional economics. Darwinian psychology provides insights into those parts of our instinctive nature that we can change - and those we can't. And I haven't even mentioned neuroscience. Will these ever provide us with a perfect means to predict and adjust human tastes and actions? Not a chance. On the other hand, how much would our understanding need to improve before we would notice a significant improvement in economic effects, in quality of life - and in the intelligence of political debate? Remember, we are starting from a very low base - where intelligent people can be diametrically wrong in their predictions of the likely shape of online retail.
If the success of new product launches were to grow from the current six percent to ten, how much more could profitably be spent on Research and Development? Is it from psychological progress, not from physical technology, that we should expect the greater parts of the next 20 years?
I hold out rather small hopes for the gains for further scientific innovation. Once you've progressed from horsepower to the Boeing 747, it is far harder to enjoy a similar increase in velocity again. But what if the next century were marked as the golden age of progress in social sciences? That seems far more feasible and desirable. Or, as the great Robert Trivers puts it: "In short, Darwinian social theory gives us a glimpse of an underlying symmetry and logic in social relationships which, when more fully comprehended by ourselves, should revitalise our political understanding and provide the intellectual support for a science and medicine of psychology. In the process it should also give us a deeper understanding of the many roots of our suffering."
It is not to the next Steve Jobs or Bill Gates that we should look for the next great revolution in economic life, but rather to thinkers such as Daniel Kahneman, Robert Kurzban, Dan Ariely, Robert Trivers, Gerd Gigerenzer, Timothy D Wilson and John Tooby.