Monday, 26 October 2009

The future of creative thinking

Sharing a summary of implications of behavioural economics for marketing and us agencies. Most of the specific examples are borrowed from the books listed at end of doc. The rest i hope is orginal. And thanks to Rory and the IPA for encouraging me to to dust off the old economic text books and take a second look at them.

Behavioural Economics

- A marketing perspective -

What is it?

Traditional economic models and assumptions don’t explain why people or consumers do what they do. Behavioural Economics has evolved to help us better understand how economic and consumer decisions are made. And increasingly behavioural economics is being used to explain anything and everything from why people don’t put enough money into their pensions to why it is difficult to get taxis on rainy days (and it is not because they are busy!)*

Behavioural economics is the study of why consumers and economic agents do what they do, especially when what they do is seemingly less than rational.

What is wrong with traditional economic thinking?

Traditional economics is normative in approach. It is rational and deductive, in other words you have to be very good at higher level maths, and a PHD helps.

It utilises two key assumptions.

- Perfect information or knowledge. All possible outcomes and corresponding rewards of an action are known in advance

- Every agent looks to maximise their ‘utility’ or profits at all times over the long term time horizon. I.e. they are rational.

If you adopt these assumptions then it follows, for one, that all stock markets would be efficient, they would assimilate information immediately and there would be no bubbles or ‘sentiment’. [this is a vast over-simplification but don’t worry about it]

Behavioural economics is different to traditional economics, it is built on observation. And observation shows we behave very irrationally. We display brand preference and establish purchasing habits. We spend today and save tomorrow. We smoke. And buying a Porsche is hardly a rational decision.

Why all the excitement now?

We have seen a vast increase in the availability of information, near perfect. Technology has provided us with tools to make more rational choices and as marketers we can increasingly measure what we do and observe behavioural clues (increasingly on line) – but still consumers behave in what we could refer to as irrational ways.

* See last page

Behavioural economics is intuitive

No one believes for a second that we make purely rational choices all the time or reappraise our purchase, health and educational choices on a regular basis ‘in order to maximise our utility’, but the assumption has always been that everything would even itself out over time across the population.

But we see people buying the same detergent their mother always bought. We do follow other people across the road without looking. We do consistently refuse to put enough into our pension. We have unsafe sex, none of this is rational but it makes sense. We do things with our right side of the brain. So clearly we can be rational, habitual as well as intuitive.

What makes behavioural economics doubley fascinating for us is that it is interested in how we can change this behaviour with what Thaler and Sunsten call ‘Nudges’.

Here are a couple of examples (from controlled experiments, not real life). They are taken from Nudge and Predictably Irrational.

Rome or Paris

Say a travel agent offers a weekend break to Paris or Rome; the Rome trip comes with breakfast inclusive. A certain proportion will select Rome, the rest Paris. However if you offer Paris, Rome without breakfast and Rome with breakfast no one selects Rome without breakfast, no surprises there; but there is a significant increase in those who now opt for the Rome with breakfast option over Paris. The Rome with breakfast option has become more interesting by virtue of the existence of a choice no one chooses, namely Rome without breakfast. Everything as they say is relative.

Population of Burundi

If you ask an (uninformed) group how many people live in Burundi they will come up with a figure. The average guess may or may not be close to the actual number. However if you ask them to estimate the population to the nearest Million and tell them that another group estimated 3 Million you will get a very different response. Try it.

And a real example:

Teenage pregnancies

Teenage mothers were given a $1 for every day they did not become pregnant with a second child. The birth rate dropped significantly even though the state benefits would outweigh the relatively insignificant $1 per day contribution. This is what they call a nudge, think of it as an incidental stimulus that modifies behaviour.

The language of behavioural economics

Behavioural economics has its own terminology. Here are the more commonly used.

Choice architecture: The way we present options determines your choice. Kids sweets at the check out or make up at the front of the store are examples.

Loss aversion: this reflects our tendency to prefer avoiding losses to acquiring gains. Experiments have revealed we are infinitely more annoyed about losing £10 as we are gaining £10. This has implications for how we present price rises, direct debit charges and incentives.

Status Quo bias: people will only change a habit or established behaviour if the incentive is significant.

Gambler’s fallacy: the balls have no memory! In other words just because it has not come up red for the last three spins it does not mean the next spin of the wheel is any more or less likely to come up red.

Self serving bias: Simply put I deserved my promotion, he was lucky. We look through the world through our very own goggles.

Money illusion: Economists refer to sticky downward pricing. People won’t sell their house at a nominal loss even if every other house is going down in value; we prefer to wait for our house to go up in nominal terms even if inflation has reduced the real value of the house.

Anchoring: The Burundi example is a classic illustration of this. Our responses often over rely on one piece of information.

Inequity aversion: Cut off his nose to spite his face if he thinks you are getting more than your fair share!

Herd behaviour: Individuals act in a group without thinking, believing that not everyone can be that wrong.

Calender effect: The classic one being the New Year resolution. Days and events in the calendar change our behaviour. Are you nicer at Christmas?

Hyperbolic discounting: Within reason – people state a preference for money now over a little bit more in a month’s time. However if they are given the same offer but it is delayed for 12 months they are happy to wait the extra month for the extra amount. So why the change in preference? This explains our attitudes to pensions.

Paradox of choice: Give me a choice of two or three things and I can hopefully decide what I want. Give me 27 (insurance services) and I am lost. This partly explains the existence of middle men and aggregators.

The good news

Most of us are regularly doing or have ‘done’ some behavioural economics within our roles as marketers. In many ways it is what we have done intuitively, behavioural economics is applied marketing.

  • Prize draws and incentives. Don’t miss out (rather than make sure you get).

  • Holiday companies. Book early to avoid disappointment. .

  • Application forms. Just tick this box and we will do the rest.

  • Loyalty programs utilising inertia.

  • Amazon. People like you also purchased.

  • RRP.

  • Leisure brands. You deserve it.

  • Bigger red buttons.

  • Pill packets with dates

  • Telecoms. Different calls packages with various free minute options to reframe the choice around incremental value.

  • Insurance brands. Automated renewal

  • Savings (or credit cards). “With just a £1 a day ...”.

  • Smoking cessation products.

And you could probably add semiotics and any re-positioning projects. Even our very own moments of truth are examples of utilising behavioural economics. Essentially behavioural economics explains what we, as marketers, have been doing for a while but importantly it gives us a framework and a language to do more of it, more often as part of ‘what we do’.

The big implications of behavioural economics

1. Perhaps more than we thought people are doing things without rationalising the decision. This challenges the traditional communications model of change attitude, then change behaviour. We know that if we make products and services more available or simpler to use they will be adopted. Perhaps communications should increasingly be used to reinforce the purchase and encourage inertia rather than change behaviour. Inertia, availability, group behaviour, options, comparisons are much more important marketing tools than we realised.

In other words getting them to do (respond, buy) first; worry about attitude later. Direct marketers take note.

2. The consumer may be making an active decision when and when not to be rational. For example, habit is fine when you are doing the weekly shopping. But if you love running you are going to take a bit longer choosing a pair of trainers and maybe the same applies when you buy a car.

Time is precious and sometimes we can’t be bothered to look around. So intuition and inertia are rational choices if the cost of error i.e. choosing the wrong product is deemed to be insignificant or the cost of acquiring the necessary knowledge to make the ‘correct’ purchase is perceived to be high. So if the consumer is less involved in the category, the chances are there is a greater opportunity to use the tools of the behavioural economist. This would apply to utilities and commoditised markets.

3. Agencies need to encourage their clients to let them focus on the problem, not the medium. How we solve it should not really matter. How we get paid for it will though.

Some final thoughts

- If we can influence choice literally by how we present the options what happens if the choice architect is unethical. (and is not paternalistically libertarian)

- Marketing and communication agencies are probably in the best place to utilise this thinking, how do they charge their clients way of thinking – about them?

- How do we structure our behavioural economics story or even our approach? When do we engage our client?

Want to know more? Then read


Undercover economist

The economic naturalist

Predictably irrational


Black Swan

*The taxi example: Taxi drivers make more money in wet weather faster. So once they have reached their target, it is off to the golf course. Makes sense when you think about it.

Tuesday, 20 October 2009

The new marketing funnel(s)

Thought i would share a couple of versions of the new marketing funnel, not exactly original but i really like the idea of ... long listing ... the notion that customers decide their initial selection maybe wrong after doing their research ... the acknowledgment that (digital allows) the added value relationship to start before the purchase ... brand 'exchangement' (whatever i mean by that, i have not fully thought that through but i wanted to make it more tangible than engagement) ... and that everything can change at the POS.

I also wanted to make it business friendly, something clients could put metrics against rather than just being told it's complex, and the customer is in control (even more so than last time we presented). Any thoughts appreciated or perhaps you have used something similar successfully.

See the other version below, it has a bit more detail and is a wee bit different.

The neo-classical funnel

Sorry about the title but is sort of says what i want to communicate. Comments appreciated. Posting an alternative version above.

Thursday, 8 October 2009

Customer centric vending

.... don't worry i can get some ... give me two minutes. Headache, what now? Don't go anywhere. I'll be back.

Its Anadin, what do you think it is.

That was a one off, but just in case i got something small, hard, shiny and comes in a canister.

... not a lot of garlic, why?

3 or will 2 be enough ... any brand preference?

The vending machines in the mens (mid market hotel) sell condoms, condoms - coloured, condoms - with Ferraris (why speed?) on the pack, something for erectile disfunction (whatever that is), headache tablets and, of course, mints

Great thinking. Good marketers solve a customer problem, they sell the solution - not the product. I get the nagging feeling they are missing a trick but cant think what that would be or whether it would fit in a vending machine?

Sunday, 4 October 2009

The social media conundrum

Most businesses understandably see social media as an attractive opportunity.
  • 200m blogs on blogger
  • 100m Youtube videos watched every day
  • 5,000m facebook minutes daily
  • 38% of all on line media is on social media platforms
  • 2/3 of the global internet population visit social networks and they are the 4th most popular on line activity
  • 20% of twitter conversations mention brands
Every marketing director is drooling by this stage, because in their heads they have added word of mouth and FREE-ish into this heady mix. Lots of customers for next to nothing brilliant. A facebook page, a bit of twitter, followed by world domination and entering newly developed south American markets, all before tea time. Just in time for early orders at Corney and Barrow or Yates Wine Lodge, depending on how business is doing.

Now to bring everyone back down to earth (because that is what i have to do as a job more often than not) we could make a rational argument pointing out the resource, content, relevance demands and complexities. It would be dull and you won't remember it anyway. Lets try another way.

WH Smiths have just launched their facebook page and you can twitter with them when ever you want. How does that make you feel? Excited? Thought not. But point made, that is how customers may see your brand's social media activity. By the way WH Smiths haven't or i hope they haven't.

Everyday millions of people commute into London by train, they sit there for two to three hours a day. A captive audience, waiting to be marketed to. That is why i am launching my commuter marketing agency tomorrow. I suspect your first reaction is, he is an idiot. Second reaction is why not just put an ad in the newspaper at least they will have something useful (content) to read. Third reaction is, if you are still being polite, 'we will include transport in the media schedule if it fits with the strategy, thanks for your contribution'.

So just because the customers are there does not mean there is the opportunity to market to them. Social media is a really confusing term. Most of them are social networking sites not marketing tools waiting to be utilised.

By all means use social media to listen, or resolve, engage and participate if you can add value but don't think of it as a marketing panacea. And of course first work out what your customers want and if you can credibly provide a solution. Many brands have used social media well (Dell, Mini, Amex, BT) but they have invested considerable time and resource, they also know what they wanted to get out of it.

The social media strategy is easy, do things that customers want or find useful. It's the execution which is the tricky time consuming bit.

About Me

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United Kingdom
Just curious about marketing, psychology, economics, business, irrational behaviour, people, models, communications, advertising, market imperfections, b2b marketing. I work in the marketing communications industry for OgilvyOne.