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

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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.

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Working Hours - Get a Life!

BERTRAND RUSSELL, the English philosopher, was not a fan of work. In his 1932 essay, “In Praise of Idleness”, he reckoned that if society were better managed the average person would only need to work four hours a day. Such a small working day would “entitle a man to the necessities and elementary comforts of life.” The rest of the day could be devoted to the pursuit of science, painting and writing.

Russell thought that technological advancement could free people from toil. John Maynard Keynes mooted a similar idea in a 1930 essay, "Economic possibilities for our grandchildren", in which he reckoned people might need work no more than 15 hours per week by 2030. But over 80 years after these speculations people seem to be working harder than ever. The Financial Times reports today that Workaholics Anonymous groups are taking off. Over the summer Bank of America faced intense criticism after a Stakhanovite intern died.

But data from the OECD, a club of rich countries, tell a more positive story. For the countries for which data are available the vast majority of people work fewer hours than they did in 1990:

And it seems that more productive—and, consequently, better-paid—workers put in less time at the office. The graph below shows the relationship between productivity (GDP per hour worked) and annual working hours:

The Greeks are some of the most hardworking in the OECD, putting in over 2,000 hours a year on average. Germans, on the other hand, are comparative slackers, working about 1,400 hours each year. But German productivity is about 70% higher.

One important question concerns whether appetite for work actually diminishes as people earn more. There are countervailing effects. On the one hand, a higher wage raises the opportunity cost of leisure time and should lead people to work more. On the other hand, a higher income should lead a worker to consume more of the stuff he or she enjoys, which presumably includes leisure.

Some research shows that higher pay does not, on net, lead workers to do more. Rather, they may work less. A famous study by Colin Camerer and colleagues, which looked at taxi drivers, reached a controversial conclusion. The authors suggested that taxi drivers had a daily income "target", and that:

"When wages are high, drivers will reach their target more quickly and quit early; on low-wage days they will drive longer hours to reach the target."

Alternatively, the graph above might suggest that people who work fewer hours are more productive. This idea is not new. Adam Smith reckoned that

"(T]he man who works so moderately as to be able to work constantly, not only preserves his health the longest, but in the course of the year, executes the greatest quantity of works."

There are aberrations, of course. Americans are relatively productive and work relatively long hours. And within the American labour force hours worked among the rich have risen while those of the poor have fallen. But a paper released yesterday by the New Zealand Productivity Commission showed that even if you work more hours, you do not necessarily work better. The paper made envious comparisons between Kiwis and Australians—the latter group has more efficient workers.

So maybe we should be more self-critical about how much we work. Working less may make us more productive. And, as Russell argued, working less will guarantee “happiness and joy of life, instead of frayed nerves, weariness, and dyspepsia".

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No miniskirts? But hotpants were OK ..

It was a blazing hot day when 23-year-old student and part-time waitress Kyla Ebbert left her San Diego campus for the airport. She had a doctor's appointment in nearby Tucson and had a flight reservation with Southwest Airlines.

Ebbert handed her stub to the flight attendant and took her seat. But as the crew started the safety announcements she was approached by a safety officer, who asked her to follow him off the plane and onto the connecting skyway. Once outside the officer told her she was dressed in an inappropriate manner and would have to return home to change before she could take her flight.

Ebbert, who was wearing a tight turquoise sweater and white denim mini-skirt, was dumbfounded. 'What part of my outfit is offensive?' she asked the attendant. 'The shirt? The skirt?' The attendant frowned and said 'The whole thing.' The passenger stood her ground and eventually was allowed back on the plane on condition that she pulled down her skirt, pulled up her sweater and wore a blanket over her lap during the journey.

If you work in PR, the beads of sweat have probably already started to form on your forehead; this is, of course, a brand crisis in the making. Ebbert complained first to her mother, then the local radio station and finally the story started to make the national press. The final circle of media hell was achieved last week when Ebbert, clad in her now-infamous outfit, did the Today show followed by Dr Phil. Then a second woman, Setara Qassim, came forward, claiming she had been forced to fly Southwest wrapped in a blanket after her halter-neck dress was deemed too low-cut by flight attendants.

The problem for Southwest was threefold. First, it had treated two women who were dressed normally by current standards extremely badly. Second, Southwest has a strong reputation in the US as the fun and approachable airline. Its treatment of the women was not just inconsistent but directly contradictory to its positioning. Third, and perhaps worst of all, the airline looked hypocritical. In the 70s it used the strapline 'Sex sells seats' and dressed its stewardesses in hotpants that made Ebbert look like Auntie Edna at Christmas. Blogs began to erupt and the media to circle; a strong brand was in trouble.

There is an almost legendary move in marketing called the Tylenol 180. It happens when a company handles a crisis in a manner so consistent with its brand that it not only recovers from the crisis, it builds brand equity and market share as a result. The move was named after painkiller brand Tylenol's ability to not only survive a tampering incident but emerge more trusted due to the way it handled the situation.

In the nick of time Southwest chief executive Gary Kelly executed this very move. Live on Dr Phil, an upset Ebbert was read a statement that apologised to her and offered her two free tickets. But the manner of the apology won the day. Kelly declared: 'From a company who really loves PR, touche to you, Kyla. Some have said we've gone from wearing our famous hotpants to having hot flashes at Southwest, but nothing could be further from the truth. As we both know, this story has great legs, but the true issue here is that you are a valued customer, and you did not get an adequate apology. Kyla, we could have handled this better, and on behalf of Southwest Airlines, I am truly sorry.' The same day, Kelly recorded national radio ads announcing extra-low 'miniskirt' fares.

Crisis averted, brand restored and sales increased. A fully executed Tylenol 180 is a rare, but beautiful, thing.

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Mobile Churn

Mobile brands make poor call on value

Marketing has always been about more than just sales. Getting the customer to sign on the dotted line is merely the opening volley in the battle, not the victory salute. Getting that consumer to stay with you longer and spend more are the real drivers of a company's success.

It is an obvious point, but one frequently missed by marketers. Take mobile phone operators, for example. For years, the four big operators in the UK have been fighting a war of acquisition intended to lure subscribers from their rivals and onto their network. But while O2, Orange, Vodafone and T-Mobile have succeeded in acquiring customers by the busload, they have all failed in the more lucrative challenge of retention.

With no new consumers entering the market and annual churn levels hovering around 25%, the operators remain engaged in a multimillion-pound game of musical chairs. Price reductions and special offers lure a consumer to one network just in time to replace the one heading across the road for the new handset and special tariff being offered by a competitor.

In 2006, T-Mobile slashed tariffs in its infamous Flext offering. UK managing director Jim Hyde was unequivocal about his acquisitory motives. 'We intend to grow our market share, and simple, fair value for our customers is at the heart of this,' he said. Vodafone's UK chief executive Nick Read, however, was having none of it. 'With Flext, (T-Mobile) came in, dropped the price and thought we would not respond. We responded. They didn't gain market share and took a hit on margins. If anyone thinks that just by dropping prices they will take share from us, I will respond. I will compete, so they won't be getting an advantage on pure price,' he hit back.

Aside from hurting profits, this also restricts brand equity. Rather than investing in building this, operators have no choice but to maintain mass awareness, communicate commodifying tariffs and promote generic handsets. Meanwhile, consumers are actively incentivised to break any nascent brand loyalty they may have, and switch.

If you measure branding success by the size of the marketing budget, then mobile operators come top of the list. But if your criteria are the amount of differentiation, loyalty and price premium created, they come last. Hundreds of millions in marketing spend have resulted in distinctive logos and unaided recall but little else. Rarely has so much money been spent so badly and for so long in the name of marketing.

The biggest casualty in this war of acquisition has been use. Despite networks and most handsets now offering the capability to access the web, check email or send photos, the vast majority of consumers have steadfastly continued to use their phones just to make calls. This is the most damaging implication of an industry intent on acquiring consumers rather than helping existing subscribers get more from their phones (and, as a result, generate bigger bills).

Within the mobile industry, many executives concluded that the iPhone, with only 190,000 unit sales in the first 6 months after launch, had been a big disappointment. But usage figures gave a different perspective. Of the iPhone users contracted to O2, 60% used more than 25mb of data a month, compared with less than 2% of O2's other contract subscribers. This is even more impressive when you consider that the iPhone relied on WiFi locations rather than the faster 3G network.

Apple has now sold millions of iPhones. It has entered the British market and achieved things beyond the wildest imaginations of the big four operators: differentiation, price premium, loyalty, and usage.

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