The Practicality of Marketing Economics

Inbound marketing. Big Data. Social care. Marketing Analytics. Content marketing. Social neuroscience. Neuromarketing.

What the heck does it all mean?

It means that the evolution of our marketing and advertising landscape is speeding up. And we are all trying to keep up.

For several years now, I have championed the application of economics (both traditional and behavioral) in marketing and advertising activities. Naturally, I have been met with responses (and more, admittedly,  the lack of) from all over the spectrum. Objections and criticism stem from my “attack” on creativity, lack of focus on digital, to simply missing the point.

Forgive me for applying science to an art form.

Right.

Let’s be honest, the majority of the advertising and marketing out there cannot, with a sound conscience, be called art. In many cases, calling it advertising is a stretch.

The reason why I thoroughly enjoy economics can be attributed to the most simple definition of it:

“choice under scarcity.”

Those three words, though simply put, are absolutely profound. Consumers are thrown into a market, and producers must fulfill the needs and wants of these individuals and entities in order to survive. And sometimes, in order to survive, those producers may have to contrive needs and wants to create their own market.

How is this not applied to marketing?

Simply being creative cannot suggest a successful campaign. Running Google Analytics and deciding, based on the numbers, to push a certain product is not a sound foundation for strategy.

Yes, pretty pictures and numbers without context is not enough.

There are great brains already out there on the outskirts of marketing economics. Dan Ariely, for example (whose course on game theory I’m taking in January and am absolutely stoked about), has conducted several research projects on consumers’ “predictable irrationality”. Another author in the UK wrote about how and why consumers make decisions. William Bonner, a finance guy, wrote about how consumers and markets interact. Even Malcolm Gladwell’s books show consumer behavior in an interesting light.

But clearly, their advice falls on deaf ears. Perhaps if they added the words “engagement” and “content is king”, they would get more buy-in.

Forgive the long post, I’m almost done.

The point is, I am fascinated and disappointed at the same time on why marketing economics is failing to take off. If we want to do the lame marketing jargon, I would reckon it to be the Marketing Scientist 2.0. No more focus groups looking at ads saying if it would work or not, but more focus groups that ask consumers how they feel in certain situations, shopping alone versus with others, and making them choose items in different environments.

I’m toying with the idea about writing a white paper, or presentation about marketing economics. If you’ve made it this far, I’ll keep you updated as my idea evolves.

Cheers.

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Americans: Own Up

Tax

Tax (Photo credit: 401(K) 2012)

Let’s start with a story.

 

Imagine that you just moved into a house. It’s beautiful. It’s spacious. It’s warm. Inviting, even. Of course, there is a mortgage to pay. At first, the mortgage isn’t bad.

 

“This price for all of this? Fantastic!” you exclaim.

 

Then the mortgage begins to creep in on the things you like to do. No more vacations. No more gadgets. So what do you think to do? You borrow. As you borrow, you know, some day you will have to pay it back.

 

“Someday”, you say.

 

Then someday comes. The debt is huge. Should you pay it? Should you be responsible for the borrowed money? Of course, this will mean making your overall mortgage payment a little bit more, due to your usage, and the enjoyment of your usage.

 

Why is our story so different than the situation the U.S. finds itself in today?

 

The point: Ask Your Target Market (AYTM), an online research company, released a study saying that people would rather have higher debt than higher taxes.

 

Fiscal cliff? Puh-lease.

 

Fifty-Six (56%) of respondents said that they would rather have a higher national debt, and pay fewer taxes and have government programs. Only 42% said they would rather have a lower national debt, pay more taxes and have fewer government programs.

 

We have created a society that wants everything but refuses to pay for it. People want government programs, but low taxes. People want free access to information, but no advertising. Television with no commercials. Theaters without the expensive candy.

 

Conferences without the sales pitches.

 

The list goes on.

 

In a country where the phrase “no free rides” got popular, it seems that a free ride actually isn’t all that bad.

 

We cannot go on living in a nice house and refuse to pay for the furnishings. It doesn’t make sense.

 

Ah well, I guess we’ll see what happens.

 

 

 

Let’s Play A Game!

Today’s post is going to demonstrate how we can apply economic theory to marketing. If you are a student of marketing, then you may be familiar with Fishbein-Ajzen’s Theory of Reasoned Action (TRA).

This is similar. We are going to apply the Nash model of Game Theory to choosing and refusing to choose marketing. This is modeled closely from Nash’s “Prisoner’s Dilemma”, where a dominant strategy and Nash Equilibrium shows the players in the game what their best course of action may be.

Did I lose you yet? Good. Let’s call this problem the  “Small Business Dilemma.”

First, some assumptions:

1. We are assuming that they money the players (companies) do not use for marketing stays in the business.
2. We are assuming that the product the players offer is of the same industry, price, and quality.
3. We are assuming that the companies are in direct competition.

Here is the payoff matrix (Company B is the left number):

  Company A Does Marketing Company A Does NOT

Do Marketing

Company B

Does NOT Do Marketing

-1, 3 0,0
Company B Does Marketing 2,2 3,-1

What does this mean?

If Company B does not do marketing, Company A would rather do marketing, because it’s payoff is 3, rather than receiving 0 when not doing marketing. If Company B decides to do marketing, Company A’s best strategy is to do marketing, because it’s payoff is 2. Therefore, Company A’s dominant strategy is to do marketing. Because regardless of what Company B does, Company A’s payoff is greater when it engages in marketing.

Makes sense? Let’s examine Company B.

If Company A engages in marketing, it is Company B’s best interest to also engage in marketing, for its payoff is greater than otherwise. If Company A decides not to engage in marketing, it is in Company B’s best interest to engage in marketing, because again, its personal payoff is better than not doing it at all. Therefore, Company B’s dominant strategy is to do marketing. Regardless of what Company A does, Company B’s payoff is greater when it engages in marketing.

Game Theory is meant to examine the relationship between players in a certain, defined environment. This does not explain external factors, changes in strategy or product, and so on. But, it does give a glimpse of how and why businesses act a certain way. Let’s take Coke and Pepsi. Would one have benefited if the other stayed quiet? Absolutely not. Both Coke and Pepsi benefit more when they both engage in marketing.

What is also interesting in this problem, is that there are two boxes with similar values. When both players do nothing, they receive nothing. When both players engage in marketing, they both gain. Now when they both gain, that is what economists call the Nash Equilibrium, because it is in both players’ interest to engage in a certain activity. It is not in the players’ best interest to do absolutely nothing, because in this game, no payoff is awarded for latency.

The Point, So I Stop Boring You (if you made it this far)

Marketing and advertising is more than creating a brand, a personality. It’s strategy. It’s positioning. Knowing and learning how all the players in your industry moves is crucial to creating an effective strategy. Game theory is just all small piece of how you can achieve it.

Why the Business World Needs Punishment

“The act of policing is, in order to punish less often, to punish more severely.”
-Napoleon Bonaparte

Curtail incentive. Oh yes.

As I have written before, and will continue to do so until I am no longer able, people behave based on incentive. It can be negative, or positive. The same can be applied to businesses.

For example, tax breaks (the incentive in saving money-positive) can lure businesses into counties, states and countries. On the other hand, boycotts and/or product inferiority (failing- negative) can force businesses to open more communication channels, invest in more research so it can stay profitable.

But we as consumers have been waay too forgiving with the powers of business. Let’s bring the hammer down for these folks.

Bailouts are one thing, but consumerism is totally up to us. Will we reward banks like Goldman Sachs, Morgan Stanley and Bank of America with our business?

Will we come running back to Ford, GM and the like after they have been making pieces of junk for the past ten years (and don’t even bring up Toyota..Audi had the same problem in the late 80’s, early 90’s and they seem to be doing fine)?

Risk can be scary, I’ll admit that. But we move our attention to the little guys- small business- and reward them for not being idiots with our money. Punish the big guys by shunning them out of our wallets and purses.

Punishing the big guys can help in several ways:

-It will give a boost to small business
-It will show the government that bailing out these guys isn’t necessary anymore, and should direct funding anyway
-By leaving the public spectacle, it will encourage others to create new products and services
-With the new boost in small business and research, jobs will be created to replace the voids created when punishing the corporations

Providing negative feedback to our Corporate America friends is sorely needed. But instead of writing to our Congresspeople (who are financially supported by them, by the way) to fix the problem, we need to take the initiative and hit their bottom line.

But once again, I am not saying to stop spending (I’m in marketing, after all) but I am encouraging us to spend elsewhere.

Support your local community bank and businesses.

Money is short for a lot of us- enjoy a staycation.

Some people may think that an economic-friendly mind going against Corporate America is a contradiction. Well, yes and no.

I do admire the way many of these companies rose to the top, but I am extremely disappointed with the way they went against the natural order of economics. If you fail…you fail. Give these other guys a shot. Mounting up a dead horse doesn’t solve the problem.

Plus, being community-centered, its the local economies that can do the most growth right now. Cities are hurting. States need investment. Start local and as they get business, all it can do is expand.

Punish those people and companies that have lost touch with reality. With negative feedback at their door in the form of lost business, perhaps we can bring them back.

Gen. Y: Stop Wasting Your Talent

I do not have many pet peeves. Very few, in fact. Some of the few include:

-Chewing with your mouth open
-Blissful ignorance
-People wasting their talent

This post is dedicated to the third on the list. Nothing bothers me more than to see people blessed with amazing talent and opportunity to excel in whatever they want, and for some reason choose not do to so. Whether it is intelligence, an invention, or having an influential network, I am continually astounded by the lack of drive some people have. And nothing disappoints me more than seeing my peers- Generation Y- fall into this mix of mediocrity.

By no means is this my version of Colbert’s “Wag of my Finger”, this is supposed to be a rally cry for Gen. Y to start changing the business environment the way we see fit. Below are the reasons and the Gen. Y’ers that should get this movement in full swing.

Smartest Generation…EVER
Okay, according to Pew Research, the number of Y’ers in higher education and those that graduated, we are supposed to be. You and I know plenty of Y’ers that shouldn’t cross the street by themselves, but overall we are a bunch of smartypants. If that is the case then, where is all the brainpower? Why are Y’ers spending hours a day looking for entry-level positions that are beneath them, instead of spending that same amount of time creating? Let’s divert the energy to expand our environment, not looking for a space to fit in it. We’re better than that.

Follow the Path Before Us
In the fantastic book of SUPERFreakonomics, it talked about the probability of a person being a professional athlete, specifically one becoming a baseball player. What was the most accurate predictor? If their direct line (parents, grandparents, etc.) were professional athletes. The same can be applied to starting and running your own enterprise. If your parents, brothers, close cousins started their own idea, that same gene is in you. My father started his own business before, and I observed how he ran it; the ups and downs of management, the trials and tribulations of small business, and yet the pure joy he had while he was doing it. Hence, when I saw the opportunity of starting a company, I seized it.

With the Baby Boomers and Late-Boomers running this system, there are plenty of Gen. Y’ers that have that entrepreneur gene. I’ve seen it. Here in Area Fifteen, we’re doing a study about entrepreneurs. Not only are the majority of people here under 35, but more than 90 percent of them were the eldest child of the family. And with my hypothesis being that someone in their family owned and/or started their own business while they were growing up, I hope to have quite the fascinating white paper.

Competition is WIDE Open
If there is any time to test your ideas, the time is now. The market is demanding new products and services, new methods in doing business. This is the time when we can take the torch and starting building a new economy.

Community
We have several options: we can let this Great Recession beat us into submission, we can rise up, join together and build something new, or we can choose to do nothing, and rely on others to bail us out.

If I know my group of folks, there is only one option above that’s salient. So let’s do something about it.

We are in a transitional period in the economy people. We got to keep Society’s Baton from hitting the ground.

Goodness forbid if we willingly eliminate ourselves from the race.

Spot the Trend Before it Happens: The Black Swan Theory

I cannot remember if I wrote about the Black Swan Theory before, so if I did, my loyal readers, bear with me.

Like I’ve said before, I love to dabble in behavioral economics. It fascinates me. Perhaps it is the symmetry it has with consumer behavior. Or the way it combines data with behavior and economics that really tickles me. In any case, the black swan theory has an particular use for marketers and communicators: predicting trends.

The theory suggests that there are little, barely noticeable events that happen, and multiply that then create  seemingly unpredictable HUGE events (i.e. the Great Depression, the .Com bubble burst, the Great Recession, Reality TV).

So how does that apply to marketing and communicators? Let’s take the rise of social media and apply gradual, seemingly unrelated events together and see where the relevance lies.

The Events:
-The rise of divorce in the U.S.
-The increase of work hours a week
-The rising price of gas
-The rise of U.S. Suburbia

The Effects:

– Large base of single, dating, and/or bored people
-Working more, more time on the computer, less time interacting with people, family
-Increased demand for real-time results and faster information flow
-Less traveling via car/plane
-Less concentrated business areas

With putting those events and effects together, is it then a real surprise that social media became so big? With interaction with people becoming more difficult, our society is brilliant enough to create easier, faster ways to communicate.

Now let’s apply this Black Swan theory. What is the next big event? What are the little events happening? Here is my opinion:

Trends to watch:
-Dependence on social networks
-Shift from fossil fuels
-Emphasis on local/community buildup
-Rebirth of “youthful” cities
-Federal Government expansion
-Corporate independence
-Fed funding of small business
-Death of Big Business Banking

Black Swan Event Predictions-
-U.S. electric grid short-circuiting
-National community “cliques”
-Corporate Communities (i.e. instead of “Google”, think “Google Charlotte”, or “Google- Carolina”)
-A network of Community Banks…richer communities

What does this mode of thinking show? It demonstrates that there is always a cause and effect. We as communicators must be vigilant in watching these little events, so we don’t miss (or perhaps prevent) any black swans from happening.