Digital Tonto

Why Adding Followers Alone Won’t Build Your Community

Greg — Wed, 28 Jul 2010 04:06:35 +0000

Hey! Wanna buy 10,000 followers on Twitter?

Lately there seems to be an ever increasing amount of silly offers to increase your social media following. Not only is this sleazy, it betrays a complete lack of understanding of how social networks function.

The evidence is clear: the quality of the communities you build is much more important than the size of your following.

A Bit of Network History

The idea of social networks has been around for a long time. The underlying math, called graph theory, was discovered by Leonhard Euler in 1736 when he set out to solve the famous Königsberg Bridge problem.

In the ensuing centuries, some of the best world’s minds contributed to our understanding networks. Vilfredo Pareto helped establish the importance of power laws. Paul Erdős explained the mathematics behind random networks. Anatol Rapoport came up with the idea of random biased nets and Mark Granovetter introduced us to the strength of weak ties.

Yet things didn’t really get rolling until 1998, when a young graduate student at Cornell named Duncan Watts came up with the idea of small world networks, which formed the basis of our current understanding of how social networks function.

If we want to understand how to build worthwhile communities, Watts’ research is the best place to start.

How Far Information Can Travel

When we consider communicating through social networks, we usually think about it working like this Farrah Fawcett commercial from the 80’s, where she tells two friends about a shampoo and they tell two friends and so on, and so on…

Network theorists have a metric for this effect called the average path length, which calculates the average number of degrees of separation between any two nodes in a network. The smaller the average path length, the less “and so ons” you will need to reach a lot of people.

It should be clear that adding random followers will most likely increase path lengths, not decrease them, so their presence alone will not increase quality of your network.

Clustering, Broken Bottles and Bar Fights

When I was young I lived on a street where I knew all the other kids and their parents. (I was more popular with the kids than the parents). Whenever I got into trouble, all the parents would find out about it and tell their kids not to play with me. That happened a lot.

Things became changed when I got a job and moved to New York City. There, I lived on a block with far more people, but very few knew me or each other. I could go out all night, get into bar fights, carouse with disreputable women and no one would blink an eye.

In the vast network of Manhattan, information wouldn’t travel nearly as far or as fast as back home, even though I came into contact with far more people.

The reach of your network is only one aspect, how it is clustered is far more important. Watts found a simple way to measure this called the clustering coefficient, which is simply the number of links in your network as a percentage of the total potential links you can have.

Closing the Triad

It was this type of thing that Duncan Watts started to think about. In researching his PhD. dissertation at Cornell, he came across Anatol Rapoport’s work and the problem of triadic closure, which can be stated as: If a person knows two other people, what is the chance that those people will get to know each other?

He then came up with a mathematical variable which he called “alpha” that approximated the process of networks developing through triadic closure.

He started with the extreme cases: One, like my childhood neighborhood, where if you know two people, they automatically know each other. The second, more like Manhattan, where you can know two people and will very likely never meet. Then he approximated paths somewhere in between.

His next step was to see what happened to the network as people began connecting with each other. What he found surprised him.

As communities begin to connect, social distance increases (albeit across a larger total community), but then suddenly crash down. Although counter-intuitive, this makes sense in light of the triadic closure concept. People start connecting to each other’s networks and form new clusters organically.

Adding a Little Spice to the Soup

The problem with the alpha model is that it’s really hard to say what “alpha” actually is and relate it to the real world. So Watts came up with a new variable, randomness of connections, and analyzed how that would affect networks.

It works like this: Imagine that you are in a football stadium standing in a ring of 1000 people. You could pass information to those close to you, but it would take a long time for a message to get across the stadium (e.g. figure on the far left).

However, if you randomly passed out a few walkie-talkies, connectivity would increase dramatically. If you went still further and added hundreds of connections, you would make one enormous cluster, but whatever information you wanted to pass on would probably get lost in the din.

Just like with the alpha model, Watts then tested the beta model to see how random connections would affect the network as it developed.

What he found this time was even more surprising than before. Not only does social distance fall very fast, but clustering stays high for quite some time. So, you really can have the best of both worlds: A network that retains the intimacy of small clusters yet still has massive reach.

What’s even more interesting is that it takes just a few random connections to bring social distance down dramatically (about 1/10th of 1% of total links). Far from being difficult to achieve, effective communities develop as a natural process. However, too many random connections (over 10%) can actually decrease connectivity.

Okay, it took us a while to get here, but now we can see the sham. Unless you already have over 100,000 links, adding 10,000 random connections might actually do more harm than good.

Much like I lost connectivity when I moved to Manhattan, your network will probably transmit information worse, not better, if you artificially add too many followers in a short period time.

Common Sense Communities

Far from being responsive to quickie schemes, building communities requires a good sense approach in order to be successful. Here are a few simple rules of thumb:

Context: People will only join and be active in communities that interest them. There’s no sense in adding people to your community who don’t want to be there.

Openness: While it makes no sense to trick people into joining your community, you should make it easy to join. Twitter is well set up for this (anybody can follow anybody), paywalls are not.

Capability: Perhaps the most important thing to realize about communities is that it needs to be easy for people to participate. We often think of online social networking as limited to social media sites. However, simple online features such as comments and ratings can sometimes be even more effective.

With all the excitement about the emergence of online social networks, it’s easy to get carried away. There are so many new ideas and new capabilities, it can be tough to separate the wheat from the chaff, but one thing is clear – buying followers is as stupid as it is sleazy.

- Greg

Creating Efficiency vs. Creating Value

Greg — Sun, 25 Jul 2010 04:57:56 +0000

Do you want to get better at what you do best or do something else entirely?

It’s an important question and one that is not asked nearly enough. All too often the line between creating efficiency and creating value is blurred so much that we hardly even care to make the distinction.

There is, however, a difference and it’s an important one that requires some serious thinking about how you approach your business, especially as more of what we do becomes digitized.

Why Firms Exist

As I wrote in an earlier post about leveraging digital technology, if you want to think seriously about how businesses function there is no better place to start than Ronald Coase and his 1937 paper, The Nature of the Firm.

The major thrust of Coase’s view is that firms exist to minimize transaction costs. Anybody who has run a technology company in an up market knows exactly what he’s talking about. It’s often much better to pay people a salary, even if they are idle some of the time, than to try to find freelancers whenever you need something done.

Moreover, firms have informational cost advantages. Having people on staff lets you create systems and methods that make things go faster and minimize errors. While some of this is formal, much of it is informal. Employees pass on information to each other, either explicitly or implicitly, during normal daily interactions.

Coase also mentions organizational costs as an offsetting factor. It takes time and energy to keep track of all those people running around doing different things. He posits that a successful firm must find a happy medium between minimizing transaction costs and not becoming so big that organizational costs become prohibitive.

Creating Value

The problem with Coase’s framework is that it speaks more to efficiency than to creation.

It explains why firms can be much more economical than a collection of individuals transacting with each other, but doesn’t tell us much about how some businesses like Apple and Google come up with really new and wonderful things while others, like Wal-Mart and Toyota, seem to be able to endlessly improve at doing the same thing.

Obviously, every successful company has to do some of both. Yet, it seems clear that a choice must be made to focus on one or the other. Moreover, as technological innovation seems to be more efficient than management innovation for driving down costs at the present moment, I would suggest that managers these days need to focus on creating value.

The Efficiency Trap

The problem with efficiency, it is that it is a slave to it’s own metrics. As I argued in an earlier post about crappy innovation, we don’t always want continual improvements along the same lines but will often choose a product that is either cheaper or outperforms in another area. Clayton Christensen calls this Disruptive Innovation.

We once worried about how many calculations the chips in our personal computers could do per second, while now we value connectivity. We used to count megapixels in our digital cameras, but now we want them to be thin or to have a great lens or whatever.

This is never a smooth transition, but rather an inflection point. At some juncture people think that their pictures look good enough and stop wanting more megapixels, but care about other things like convenience, style, etc. At that point, new value needs to be created.

Christensen’s key insight is that companies that persist in creating efficiencies in areas that are no longer valued risk disaster. Either their products will become low margin commodities or their industry could disappear altogether.

Paradigm Shifts

Another way of looking at creating value is through the framework of paradigm shifts, a term coined by Thomas Kuhn in his classic, The Structure of Scientific Revolutions. In it, he describes 3 phases:

Pre-Paradigm Phase: When something new comes along, nobody is quite sure what to make of it. There are a lot of ideas and opinions, but no clear consensus. It could be argued that many aspects of digital technology, digital media especially, are pre-paradigm.

Normal Phase: At some point,, problems start getting solved and things start happening. A real consensus builds on the “right way of doing things.” It’s not perfect, of course, there are some anomalies that don’t quite fit, but generally everybody is happy.

Revolutionary Science: Eventually, the anomalies add up and they become real problems for the dominant paradigm. A new generation of thinkers comes along with novel approaches to old problems that make significant progress in areas long thought to be dead ends.

It seems clear that creating efficiencies is very effective when applied to existing paradigms, but not particularly good at creating new ones.

Networking Domains

In an earlier post, I pointed out that most great discoveries happen not from specialized expertise, but from synthesizing concepts from different domains. In his book Smart World, author Richard Ogle refers to this as “networking idea spaces.” Others refer to the process as Open Innovation.

Whatever you call it, it does appear that something important has changed. Ogle gives the example in his book of Xerox’s PARC research center, which developed important technologies like the graphical user interface (GUI) and the Ethernet, but failed to capitalize on them because it was poorly connected to the emerging personal computer movement.

Digital technology promises to make the shift toward value creation even more rapid and powerful. Through the web, the semantic web and other developments, creating value is becoming less about uncovering new information and more about matching problems with solutions.

Therefore maximizing connectivity between your organization and the rest the world is increasingly becoming key to superior performance. This is not only a technological issue, but touches how you recruit, train, partner and compete.

Old Tycoons – New Tycoons

Indeed, much has changed since the Industrial Revolution. The early tycoons such as Vanderbilt, Carnegie, Rockefeller and Ford made their mark by increasing efficiency through the introduction enormous economies of scale to cottage industries.

The new tycoons, such as Steve Jobs, the Google guys and Michael Bloomberg made their fortunes by doing something truly different. Even those with monopoly power or something like it, such as Bill Gates and the Walton clan, need to innovate (although much of Wal-mart’s innovation is admittedly in the supply chain and is focused on efficiency).

That’s why consolidation is no longer a grab for power, but a sign of a weakened industry that is unable to create value. Moreover, in some cases such as in the media business, acquisitions destroy value rather than create it. Most probably this is because, as Coase predicted, organizational size and informational flow are often in conflict.

As the future unfolds, it is not enough to do your job and do it well or even do it on a massive scale. What’s imperative is to identify the job that people really want done.

- Greg

The Winner’s Curse: Why Media Companies Really Underperform

Greg — Wed, 21 Jul 2010 04:24:55 +0000

Oh, those poor moguls…

Media and entertainment companies, since the internet came on the scene, have been very poor investments. New media advocates tell us that it’s because traditional media companies are old and slow. The moguls themselves say it’s because people don’t want to pay for content.

Yet above the din and mindless babble, the evidence supports only one conclusion: It is the moguls misplaced egos, more than anything else, that does them in.

A Dismal Record

On one point all can agree, media and entertainment has lagged behind the rest of the market. The chart below shows a basket of media and entertainment stocks vs. the S&P 500.

Even a fairly superficial review will quickly reveal a few things that should be surprising in light of what is widely reported in mainstream media and blathered on about in blogs.

Firstly, the crash in 2000 was far worse for media companies than the recent one. In fact, media stocks have gained a little ground this time (most probably due to the fact that financial companies have fared far worse). Secondly, the only time that media stocks over-performed was during the dot-com boom.

A Failed Narrative

What is striking about the stock performance is that it tells a story that is diametrically opposed to what the pundits would have us believe – that poor traditional media performance is due to the fact that they “just don’t get it” and are being plowed under by smarter and more nimble digital players.

If the pundits’ story was true, we would expect that media stocks would have gotten killed in the dot-com boom and done even worse now that it’s “all about the conversation.” In fact, just the opposite happened.

The truth is that while most digital media companies are awash in red ink, traditional media has never been so lucrative.

A Profitable Business

Upon further examination, the real story emerges: Traditional media companies actually run their business quite well, their problems stem not from ignoring the pundits, but from listening to them and Wall Street too much.

The chart below shows operating earnings (the money media companies make from running their businesses) vs. net earnings (after tax and other charges).

Operating margins for media companies have actually steadily increased since the dawn of the internet. They seem to be getting better at what they do, not worse. Given what we generally hear reported, this seems almost incredible, but it’s true.

Net margins tell a different story. Not only have they failed to improve, but every time a downturn comes along net earnings drop like a stone even as operating margins hold amazingly steady.

The Missing Link

So what is holding media companies back? Is it the journalists that have failed to adapt to the web? Or the ad sales people who can’t seem to grasp a new business model? Possibly the programming executives who have a tin ear for what the public wants?

Nope. As the positive operating earnings trend shows, these guys are doing their jobs and doing them well. The real problem is the masterminds in the C-Suite., who use the money their operations generate to go out on crackpot shopping sprees.

This can be clearly seen from impairment charges they have had to declare, which are listed under “non-recurring items” on financial statements.

Here, we see the real source of all the red ink that has made headlines. Although media company operations have been earning money during the crises, their investments haven’t faired so well. In CBS, News Corp and Time Warner alone have written off an astounding $48 billion in two years!

Many might say that this is normal in a downturn. Companies make investments that inevitably go bad. However, if that were true, we would see even bigger writedowns in technology companies than we see in media. In fact, quite the opposite is true.

For comparison, here’s the write offs of Microsoft, Cisco and Oracle; three companies with much bigger market caps than media companies as well as highly aggressive acquisition strategies:

How is it that these companies, who’ve made dozens of acquisitions in an industry of dizzying complexity have had to write off only a small fraction of what media companies have?

How it Happens

Media is a sexy business, with lots of glamorous people and cool parties. It’s only natural for the people who run media companies to want to be glamorous and sexy themselves. If you can’t sing or dance, then making risky acquisitions is the best way to get your name in the paper.

These investments are usually in new operating areas (e.g. digital) that are unproven, but seem like they could be the next big thing. When moguls buy such companies they are hailed for their far reaching vision and strategic brilliance (i.e. Murdoch and MySpace).

Of course, in order to buy companies exciting enough to gain accolades from an adoring business press, they have to outbid other moguls who also want to think of themselves as forward looking visionaries. Inevitably, they over-pay.

That’s the winner’s curse.

Don’t Seek Out the Unimaginably Brilliant – Avoid the Unbelievably Stupid

All of this could be avoided if instead of trying achieve the unimaginable brilliant, media executives simply avoided doing the incredibly stupid. Clearly, media is a very profitable business when it’s not screwed up by people gullible enough to listen to investment bankers.

There is, of course, another way. I previously wrote about unlikely digital heroes who’ve managed to conquer new media through operational strategies, rather than flashy acquisitions.

Time Warner’s in-house digital businesses have performed much better than the properties gained from their ill fated AOL acquisition. Conde Nast has turned around its digital business without any major purchases (albeit two minor ones) and Naspers proves that an acquisition strategy can work if it’s well thought out and executed rather than ego driven.

Despite what pundits say, media companies are very profitable and will continue to be as long as the people who run them avoid listening to…er…the pundits. Instead of trying to become masters of the universe, they should focus on running their business.

As the old saying goes, “pigs get slaughtered.”

- Greg

Note: A special thanks to the Matthew 25 Fund for helping with the research for this post.

The Importance of Attitudes

Greg — Sun, 18 Jul 2010 05:39:40 +0000

Hey, you got an attitude?

As marketing becomes increasingly mathematical, attitudes are often overlooked. They don’t fit easily into the ROI, PPC, tweeterific framework that is so popular these days.

Nevertheless, understanding people’s biases is essential to grasping how and what they will consume. Thinking seriously about attitudes is an essential skill for any marketer.

What is an Attitude?

We humans don’t like to think much because evolution has favored acting before thinking. As neurologist (and former marketer) Joseph Ledoux points out, cavemen who stopped to ponder a hungry lion didn’t pass on as many genes as those who tore off and ran.

In a more modern context, attitudes serve as convenient short cuts. We can’t possibly think through every decision we make, so we form positive or negative associations with groups of ideas. This lets us make decisions efficiently and is essential to how we function in society.

The way form biases is fairly well understood. Our brains are essentially patterns of synapses. Some, like fear of snakes, appear to be ingrained and cross-cultural. Most, however, we gain through experiences built up over time. (For more on this, see Advertising on the Brain).

Because using attitudes as shortcuts has been ingrained in our DNA by evolution, it shouldn’t be surprising that we depend on them heavily to make brand decisions.

The Failure of Demographics

For many products, demographics such as age, sex, income and occupation work quite well. Young people are more likely to buy surfboards than old, women buy feminine hygiene products, poor people aren’t likely to shop for a Mercedes, etc.

However, for many categories, demographics are of little use. When you start looking at products like cigarettes, cosmetics, beer, soft drinks and so on, you find that there is little demographic difference among brands.

The reason why is well documented in the book Trading Up. We buy many things as an expression of our identity. That’s why receptionists will save up to buy Prada shoes and millionaires will shop for bargains at Costco. Our consumption often reflects our values more than it does our affluence.

Changing Attitudes

Another important thing to consider is that attitudes change, albeit slowly. A few decades ago, recycling was seen as quirky, even radical. Now it is almost a moral imperative. The American politician Rand Paul found out how much attitudes about race had changed when he decided to question the wisdom of the Civil Rights Act of 1964.

Smart marketers know the importance of attitudes and continually track consumer perceptions of their products quality, value, taste, etc. through the use of tracking studies. As attitudes change, they alter their marketing strategy to address the prevailing attitudes.

One good example is McDonald’s, which continually tracks consumer perceptions of its brand in every country in which it operates. When scores get low, you are bound to see a brand campaign addressing the quality of its products, cleanliness of its restaurants and friendliness of its staff.

Moonlit Nights, Jogging in the Park and Feeding Squirrels in the Park

Of course, like anything else, attitudes are often misused, usually with the aid of questionable techniques such as cluster analysis. By using algorithms they don’t understand, marketers are often able to find separation between consumers that doesn’t really exist.

Most often, the attitudes that are uncovered often reflect those of the marketers themselves (or of people they aspire to be) more than any consumer they are targeting. Marketers like to conjure images of people who like moonlit nights, jogging in the park and feeding squirrels (and then propose a fairly conventional TV strategy, but include a cool party they can invite their friends to).

It is this type of soft headedness that gets marketers ridiculed ( hilariously, in the Ad Contrarian blog, ). Nevertheless, as we found when researching Turkish consumers, sometimes segmenting by attitude is not only useful, it’s absolutely essential.

Why Rebels are Often Middle Class

Often, as with red and blue states in the US, markets can be described geographically. Turkey is just such a country. It borders Europe to the West and Syria and Iraq to the East. It shouldn’t be surprising that there are stark demographic differences in income from one side of the country to the other.

Usually, we would expect that attitudes vary by economics and geography, but as much as we tried we could find no discernable difference in sentiment between Eastern and Western Regions. We did find, however, that the country was almost perfectly split down the middle on the question of whether Turkey should move closer to Western values or not.

Interestingly, the question cut right across demographic and geographic lines. Eastern or Western attitudes tell you very little about where a Turkish person lives or how much they earn, but explains brand and category consumption better than any other single characteristic.

What’s more, the people with traditional values in the upscale West are angry. They answer even innocuous questions like whether they go to the doctor for regular checkups or try to eat healthy with a resounding “no.” They are hostile to advertising and sponsoring.

So, by looking at attitudes, we uncovered a valuable group of consumers (people with Eastern attitudes living in the prosperous West) who need to be communicated to in a much different way than people with the same incomes living in the same cities.

A Simple Rule

Mathematicians have a rule that is useful for many other disciplines: Use the simplest model that explains the most data. It would behoove marketers to follow it.

When choosing how to target, what’s important is to identify as many viable consumers in the simplest possible way. Sometimes, basic characteristics such as age and sex are sufficient, but often they are not and that’s why attitudes are so important. They serve as useful proxies for how people will make decisions.

Just remember to leave out the silly talk about jogging squirrel feeders.

- Greg

The Problem with Direct Response Marketing

Greg — Wed, 14 Jul 2010 04:30:52 +0000

There are many today who advocate direct response marketing to the exclusion of other marketing channels. These are very silly people.

The problem isn’t that direct response marketing (which I define as advertising with a concrete offer and a measurable response mechanism) isn’t important and necessary. It’s just not sufficient. As a matter of fact, it isn’t even close.

The real issue isn’t what direct response measures, but what it doesn’t. Those that ignore other marketing channels either aren’t aware of the facts or are just not thinking clearly.

The Allure of Direct Response Marketing

The case for direct response marketing is logical: Why waste money on lots of fuzzy concepts when you can directly spur sales and get clear, measurable results? Unfortunately, the results aren’t as clear as they might seem and branding isn’t as nebulous as direct response advocates often claim.

Firstly, direct response campaigns vary widely in their results. Some of this is due to how well the campaign itself is executed, but a lot has to do with how strong the brand being promoted is and what other promotion is going on at the same time. Marketing channels work better in combination than they do as isolated entities.

Secondly, branding metrics are as measurable as anything else. Many corporations regularly track their brands and can access brand data as easily as they do sales data. You can be sure that successful, profit oriented enterprises wouldn’t continue to do so unless they had clearly established a link between the two.

In truth, there is a lot more to a purchase than simply seeing an offer and responding to it.

The Path to Purchase

It has long been known that the purchase decision is much more than an event, it’s a process. The evidence for this is overwhelming and there are a wealth of frameworks to describe it (the agency that I work for describes 7 stages in the purchase process).

The following is my own summary, which is probably no better nor worse than any other.

Awareness: Awareness is probably the most overused term in marketing, so much so that it is often meaningless in common usage. In actuality, it is a blanket term that describes a variety of metrics, including aided and unaided awareness, awareness of brand attributes, etc.

Nevertheless, awareness is quite important and has been linked to brand usage. Although some skeptics point out that brand usage itself promotes awareness and the relationship is somewhat reflexive, awareness is something we can directly control and raising it increases sales.

Another issue is that many brands have nearly total brand awareness, so there is little utility in increasing it. However, even for the biggest brands, awareness of brand attributes (i.e. quality, value, taste, safety, etc.) remains an important factor for sales and again, raising awareness of an attribute that is something that is highly actionable.

Many direct response advocates point out that direct response produces awareness as well as sales and this is undoubtedly true. However, it does so much less efficiently than mass media and doesn’t communicate brand attributes as effectively.

Consideration: For most categories, consumers develop mental consideration lists (usually 3-5 brands) from which they will make their final purchase decision. While the consideration phase is less important low involvement categories like potato chips, it is essential for durables.

Take a car purchase, for instance. Let’s assume that consumers buy a car every 3 years, surely they will not respond to an offer for the majority of that time. They will only do so when they are actively in the market (usually the last 6 months or so). During the rest of the time, they are building their list.

Ask someone who is starting to think about buying a car. Inevitably, they will be able to rattle of a handful of brands that they are going to research further. Buying a car is a big deal that requires a lot of research and involves a lot of money, so consumers will use their lists to filter out other brands.

Consideration is a synaptic, emotional process, so direct response is not well suited to this phase.

Trial: Okay, this is where direct response marketing really shines. You can get people to try your product even if they weren’t aware of it or considering it before. If it’s really a standout product, you might be able to turn them into loyal customers.

However, it should be obvious by now that this won’t be very effective in isolation. People tend to respond to offers from brands they know better than ones they don’t. This is a big reason why some brands direct response campaigns perform so much better than others.

Loyalty: Many categories are essentially portfolios. People tend to frequent several restaraunts, drink several brands of soft drinks etc. Most families even have more than one car.

One way of increasing revenue is to market to current customers in order to increase your share of the consumer’s mix. Direct response marketing can be effective here, but so can a lot of other things, including events and TV.

Another aspect of loyaty is switching, which is often price driven. Many of the same channels that are effective for promoting loyalty work to promote switching too, but the messaging of course needs to be vastly different.

Advocacy: The ideal customer is one who not only buys your product, but goes out and recommends it to others. Non-traditional promotion such as events and social media thrive in this area and it’s tough to see how direct response can play much of a role.

Just like the previous stages, advocacy has specific metrics that can be monitored. The most popular is the Net Promoter Score, however it is fairly new and there are some detractors. This article gives a good overview of why some are skeptical.

Nevertheless, advocacy is increasingly recognized as an important marketing objective, however you want to measure it.

Recency Planning

The framework described above is fairly basic and I don’t think many professional marketers would have much of a problem with the basic logic. There are, however, other approaches which have proved effective. One is recency planning, championed Erwin Ephron.

The basic idea is that the most effective ad is the one seen closest to purchase and we have no idea when that purchase will happen. Therefore, we should minimize campaign weights and seek to be on air for as many weeks as possible.

Many people believe that recency is an argument for certain types of direct response marketing (some consider point-of-sale a type of direct response channel). However, it isn’t. In fact it is an argument for efficiency and therefore favors mass media.

Again, we run into the same problem: response mechanisms cost money and there are other ways of monitoring marketing effectiveness. One of the reasons that cost-per-action pricing never took off on the web is that most marketers feel they can optimize conversions better themselves.

Who’s asleep at the wheel?

Before I sign off, I want to re-emphasize that I have no problem with direct response marketing. I do, however, have a big problem with the notion that there is no other way to monitor marketing effectiveness.

For each stage of the path to purchase described above there are well established methods of monitoring and a variety of solutions for different marketing problems. Direct response is a perfectly viable one for some marketing tasks, but absolutely deficient for others.

In my many travels there are two things that I’ve found no shortage of: Different ideas about how to do great marketing and incompetent jerks who think they’ve found the one, true path.

- Greg

Top-down vs. Bottom-up Strategy

Greg — Sun, 11 Jul 2010 05:53:25 +0000

Who should drive strategy? The dreamers with the big ideas or the people on the ground?

This is an ancient debate that is still raging and can inflame passions on both sides. Those on the ground feel that the dreamers miss the practicalities of everyday operations while those in the C-suite lament that implementational people fail to see the big picture.

In truth, the major issues have been settled for decades and it’s a wonder why there is still so much fuss about it.

The Ancient Debate

The dispute goes at least as far back as Plato and Aristotle. Plato was definitely a big picture guy. He believed that we should do our best to approximate ideal forms. Moreover, as he made clear in is allegory of the cave, he was suspicious of supposed knowledge gained from everyday experiences.

His star pupil, Aristotle, took a different view. He believed that it was best to work up from basic facts and observations to general principles. Furthermore, he practiced what he preached. Many regard Aristotle to be the first real scientist and he catalogued and astounding amount of his observations about the natural world.

Up till about a century ago, you could argue that Aristotle won the argument. Although during the Middle Ages, the Platonic dominated Church held sway, axiomatic systems such as Aristotle’s logic and Euclid’s geometry endured up until the late 19^th century.

From Rational to Empirical

In the late Renaissance, the French thinker Rene Descartes set out to create a new body of knowledge that would be independent of experience and therefore certain. He made a big step in the right direction when he proclaimed, “I think, therefore I am,” proving that such a feat was possible. Unfortunately, that was the last real achievement of Rationalism. It ended there.

The Scottish Enlightenment was more practical. Men like John Locke and Adam Smith framed the political and economic principles, respectively, of the modern western world. The greatest of them all, however, was David Hume who held that we can only know what we experience.

Unfortunately, this also led to a radical skepticism. Hume proclaimed that we only believe that the sun will rise tomorrow as a matter of convenience and expediency. In Hume’s view we’re just stuck. Although, being the fat and jolly sort (think of a philosophical John Candy) he didn’t mind much, he felt we should just accept that the world is often not what it seems.

Hume’s ideas ushered in the scientific age. The 19^th century saw astounding progress in engineering and science. The steam engine spurred the industrial revolution, while Darwin and Maxwell led similar revolutions in biology and physics, which led to the discovery of genetics, relativity and quantum mechanics.

Logic Returns

As the 20th century began, it became clear that scientists were beginning to answer many of the questions philosophers had pondered for millennia. They did so not by building up from long accepted principles but through imagining how the world might work differently than previously thought.

The axiomatic method of the Aristotelians was in danger of becoming extinct or, at best, irrelevant. However, there were those who would not let it go. Men like Bertrand Russell, David Hilbert and Ludwig Wittgenstein rebuilt logic on new foundations. It was the first real attempt to do so since Aristotle created the field.

There were some real achievements. The father of the modern computer, John von Neumann, was a student of Hilbert’s and much of modern programming theory rests on the logical advances early in the 20^th century. Nevertheless, this effort to0 would ultimately fail.

Trouble of Both Fronts

The 1930’s brought trouble to both camps. Einstein, who was perhaps the best example of the Platonic method (and who considered Hume one of his most important influences), was so blinded by his own vision that he missed one of the most profound developments in his field.

Although evidence was mounting for quantum mechanics, he refused to believe it (although its origins lay in Einstein’s own 1905 paper). Younger men such as Bohr and Heisenberg led the way while Einstein’s career as a serious scientist was effectively ended. Even a man of his enormous imagination failed to see the next curve in the road.

Logic fared no better. In fact, it was done in by one of its own – the logician Kurt Gödel. In 1931 he published his famous incompleteness theorems, which proved that any complete logical system must contradict itself. In other words, every system crashes no matter what principles it’s based on. Logical certainty was dead.

Strategic Synthesis

Quite frankly, as the basic questions have been answered for almost 80 years, I’m surprised that any confusion remains about what was a silly debate to begin with. Both methods, when used exclusively, lead to disaster. As I’ve written before, synthesizing approaches is clearly the best way to solve problems.

Nevertheless, egotistic CEO’s such as Jeff Skilling and Bernie Ebbers continue to ride their visions off a cliff while countless others die a less spectacular death by getting so mired in the details that they miss the big picture. One would hope that those who are responsible for thousands and get paid millions can walk and chew gum at the same time.

The answer to the most basic strategic question is clear: Follow your dreams, but check your facts.

- Greg

Why You Shouldn’t Leave the Web to the Web Guys

Greg — Wed, 07 Jul 2010 06:28:19 +0000

These days, everyone is struggling to catch up on digital marketing. In the rush, too much of the thinking is often left to impressive young webbies who seem to know a lot about all of the hubbub.

Your business on the web is far too important to leave to a bunch of technobabble. What’s more, in their quest to show off their dazzling skills, the webbies often forget that your digital strategy needs to fit into overall strategy. The result is usually wasted money and missed opportunities.

Here are a few simple rules that will help you get the most out of your web development and digital strategy.

Usability before Design

The most important thing about your web site is how people will use it. Before you are shown any snappy graphics, you should insist on a functional, clickable model of your web project.

It should give you a basic idea of what your web project will look like, but mostly focus on how users will interact with it. You can concentrate on design elements later. This will help you concentrate on what’s important – how users will understand what the hell you expect them to actually do (as opposed to showing off some cool eye candy).

Usability guru Jakob Nielsen (he’s to usability what Kotler is to marketing) has what is probably the world’s ugliest site. Nevertheless, it is highly popular and extremely valuable (which I believe is part of his point).

You should also conduct ongoing usability testing to ensure that users are getting as much value out of the web site as possible. Here’s a useful and easy to understand guide that will help get you started.

Clarity before Creativity

One of the hardest parts of forming a digital strategy is that not only are there a dizzying array of options, but new and exciting things are coming out all the time (even though we still don’t really understand the old stuff). Everybody feels like they are getting left behind.

However, like anything else, the most important part of your digital strategy is that everybody understands it – both internally and externally. Marketers, in their misguided quest to be different, often forget this simple rule and it’s even worse with digital marketers.

On the web, originality is the original sin. You should always follow web conventions (i.e. logo and home page link on the top left) unless you have a very good reason not to. Conventional design and functionality allow people to use your site easily without a steep learning curve.

That doesn’t mean that you should never do anything new and different, just that when you do the reasoning should be clear and compelling.

And, please…kill the flash intros!

Use the Simplest Tech that Can Get the Job Done

Mathematicians have a great rule which says that you should always use the simplest model that explains the data. The concept is just as important in digital strategy.

Technology moves fast, but people change slowly. Humans, by nature, form habits that we are loathe to alter. If you are hearing about technology for the first time, you probably shouldn’t use it. New tech is often full of bugs and there is usually a shortage of people who know how to deploy it properly.

The web was designed to be scalable, so it’s usually easy to upgrade later if the new tech is really that important. If the old stuff works, go ahead and use it.

Iterate

All too often, people start their digital strategy with big plans: A new web site with lots of features, a complex new social media initiative that will engage consumers as never before, etc. What usually happens is that after the initial excitement, the big proposal gets bogged down in internal squabbles, technical glitches and other problems.

I have found an easy way to solve this problem – roll out your strategy in stages. Start with something so simple that you can’t screw it up. Then you can build in complexity. A stupid strategy that is well executed will outperform a smart one that is overly complex.

As for social media, the strength of a network comes from building tight communities, not massive reach. So starting off with just one or two social media channels is perfectly viable. You can always add more later on.

By starting simple instead of launching a massive initiative that you think will solve all of your problems, you are more likely to encounter small issues that are easy to deal with rather than massive problems that will kill your initiative.

It’s much better to launch three 2-month projects that build on each other than to go for a six month project that might never get done.

Your Web Site is a Starting Point, not a Finish Line

Most probably your digital strategy has very little to do with digital and everything to do with your business. You might want to get more customers, engage them more, service them better, and so on. That means that it will need to work well with your existing personnel and processes directed at the same goals.

The problem with many digital people is that they don’t know anything about your business. What’s more, they usually don’t care. What they want is to impress other digital people and are not much concerned with how your digital strategy fits in with everything else you’re doing.

So don’t leave your web strategy to web people. You know your business and where you want to take it. It is their job to fit into your process, not your job to fit into theirs.

And don’t let them forget it.

- Greg

2010 Whine Guide

Greg — Sat, 03 Jul 2010 21:26:58 +0000

I’ll admit it, I like to complain. I find it gratifying and self-affirming. It allows me to let off steam and the same time feel superior to whomever or whatever I’m complaining about.

Whining is another story. It stinks of weakness and has none of complaining’s therapeutic effects, which makes it a waste of time.

Complaining about whining, however, is a worthwhile sport. So here’s a guide to the most popular whines among media and marketing people this year.

We Can’t Make Money By Giving Away Content

The media industry was built on free content. While this is obvious for broadcast, it’s also true for print, where people don’t pay for content but for distribution and even that is heavily subsidized (as much as 90% in the US). Somehow, a lot of people decided that they can’t make money this way and that makes them angry.

There are, of course some important exceptions. Some businesses have been very successful getting people to pay for their content. HBO, The Wall Street Journal and Pay-Per-View all spring to mind, but that’s a pretty small slice of the overall pie.

Most of the time, people want access to basic information and the room for paid content is going to remain a small part of consumer’s media portfolio. Advertisers, however, have been willing to consistently spend about 1% of GDP on advertising and there’s no sign that’s going to change. Most probably, ads will continue to be the most common way content is financed.

So don’t worry, be happy. Here’s a post about how to make digital media profitable. Now go out and play.

Advertisers Just Don’t Get It!

Yes, we all want attention, but sometimes marketers are busy with things like researching consumers, developing new products and optimizing TV campaigns. Whatever you’re selling, it is most likely a small part of what they need to get done.

Consumers lead full and vibrant lives, they go online, watch TV, shop at malls and commute to work. There are a variety of ways to reach them just as there are a multitude of ideas about the best way to go about it.

If you go talk politely to your friendly neighborhood media agency they might be nice enough to show you the expenditure trends for your target industry. Then you can evaluate the media mix and figure out where you might fit in.

Alternatively, you can barge into a meeting unprepared, blather on for an hour about how your offer is different from the hundreds of others they will receive this week and get their name wrong on the way out.

Life is full of choices.

I Want My ROI!

Yes, and I want to sleep with a supermodel. Life is full of these little disappointments.

You see following trends and deriving regression models only tell us about the past. The future, however, is always uncertain which is why the viability of any prognosis should always be in doubt. We can, and should, make some educated guesses, but in the end any single action is always a crapshoot.

In actuality, it’s not trends that are interesting, but inflection points. Those are what create the big hits and the catastrophic failures that make life and business really exciting and worthwhile.

The best opportunities lie where the data is scarce and hard to come by. If we could predict the “next big thing,” it would be the “present big thing.”

All They Talk About is Discount!

If your clients are treating you like a commodity and all they want to talk about is what discount you can give, then it probably means:

a. You haven’t shown them any value

b. They have lots of similar offers

c. They have no intention of buying and just want to use a good discount as a negotiating point with another supplier.

d. All of the above

Whatever the case actually is, the failure is yours. A price is a market mechanism, if you can’t get the prices you need to make your company profitable, then you’re probably in the wrong business. Figure out the right one to be in and fast.

Also, you might want to think about how you’re doing negotiations. You could probably get some use out of this game theory approach.

Whiny Profits

The nice thing about whines is that they almost always signal a profit opportunity (albeit not for the whiner). Whining means that somebody isn’t doing their job. It means they’re losing and just begging for someone to come along and take whatever little money they have left.

It also means that they have somehow missed the boat, which has sailed elsewhere. That boat is going someplace worth finding out about.

The best way to find it is to keep moving. We only cry for things that are lost.

- Greg

A Portfolio Approach to Marketing ROI

Greg — Wed, 30 Jun 2010 03:16:15 +0000

The media and marketing industry, much like the financial industry before it, has become blinded by metrics that they don’t understand. Somehow, the notion of accountability has morphed into a misguided quest for the sure thing in the form of ROI metrics for just about everything.

This is silly. In actuality, when we talk about marketing ROI, individual actions don’t account for much. What really matters is portfolio performance and that’s what both buyers and sellers need to focus on.

To see why, we only have to look at the mess the financial industry made when they ignored the simple fact that every investment involves risks that can’t be quantified.

Portfolio Selection

In 1962, Harry Markowitz published his paper on portfolio selection, which was to have great influence on the development of modern finance. The basic idea was that investors should not only seek returns, but look to minimize risk. This was a much different way of looking at finance.

He also showed that by diversifying, better returns could be gained with lower risk. In fact, buying an uncertain security could be a very good idea if the risks are uncorrelated with the rest of the portfolio. In effect, sometimes an investment which is volatile by itself can increase overall portfolio stability.

Although this is standard thinking today, at the time it was revolutionary. In 1990, Markowitz was awarded the Nobel Prize for his work on portfolio selection. It was a true achievement, but it didn’t stop there, it helped form the foundation for much of modern finance.

Valuing Investments

Markowitz’s colleague at the RAND Corporation, William F. Sharpe, took the reasoning a step further. He came up with an ingenius way to value investments using the portfolio selection model as a . He developed a measurement of risk, called beta. (The higher an investment’s beta, the more volatile it is compared to the market).

Sharpe then realized that companies could use beta to not only value securities, but also to evaluate operational investments such as plants and equipment through a purely quantitative process. The result was the Capital Asset Pricing Model (CAPM).

A CAPM example:

Riskless Rate of Return: 2% (i.e. Treasury bonds):

Market Risk Premium: 5% (i.e. difference between S&P 500 and Treasury bonds)

Company Beta: 2

From there, you can just “plug and play.” You multiply the market risk premium and the beta, then add the riskless rate of return:

5% (Market Risk Premium) x 2 (Company Beta) = 10% + 2% = 12%

Therefore any investment within these parameters should have an expected rate of return of at least 12% to be an attractive investment.

The result was a new era of financial engineering. The idea was that through computing power and powerful mathematical models, you could not only improve return on investment, you could eliminate risk through quantifying and then controlling it through hedging techniques.

It seems that a similar overconfidence in numbers is now infecting the marketing industry.

Quantifying Risk

The financial revolution then progressed even further. The development of the Black-Scholes model generated metrics that quantified not just investments, but risk itself. This made possible a large market for derivatives; securities that weren’t actually based on assets, but rather derived from their price movements.

Soon, traders were not just trading based on prices, but volatility (a surrogate for risk). No longer was the object to “buy low and sell high,” but to use complex hedging strategies to engineer enormous returns safely.

The old clubby world of finance became a relic and was replaced by “quants” and massive computing power. Intuition was superseded by mathematical models, relationships by high speed internet connections and judgment by computing power. Fear was for wimps and dullards who didn’t understand the wonders of risk management.

The result: disaster.

The Problem with the Engineering Approach

All of this was completely logical and widely accepted. The problem is that they were using the wrong math. As Mandelbrot and others have shown, people can’t be described by the same principles as atoms and celestial bodies (where Gaussian based models work well).

The problem with statistical models is that they are often based on an independence assumption, which is not valid when markets full of interdependent people are involved.

This should have been clear back in 1998, when the collapse of LTCM nearly took the world financial system along with it. The firm was led by the Nobel prizewinning team of Myron Scholes and Robert Merton along with an impressive cadre of PhD level econometricians. No one knew the models better and no one failed more spectacularly.

In their quest to optimize returns, they became all too enamored of their mathematical certainty. Instead of diversifying their risk, they made highly leveraged bets that were in fact highly dependent on the Russian economic crises. Within a few months, the firm had lost $4.6 billion.

Today, you can find new marketing wizards who believe they can optimize marketing returns for specific media, just as LTCM thought they could calculate risk so accurately that leverage didn’t matter. They haven’t won any Nobels, but their ideas stem from the same flawed reasoning.

Media Portfolios

One of the most emphatic claims of the new media gurus is that if marketers knew what they were doing, they would act much differently. A good way to test that notion is to look at some media market portfolios and see if they make any sense.

The above charts show the biggest developed markets – the US and Western Europe – side by side. What should be immediately apparent is how similar they look, even given vastly different market structures and cultures.

The other thing that stands out, given all the hype about budgets moving to digital, is how small the internet share is. About 85% of budgets still go to traditional media. Although the data shown is for entire markets, not individual advertisers, these baskets make perfect sense according to a portfolio approach to ROI.

Firstly, people tend to be varied in their activities, so it wouldn’t be smart to bet all of your marketing money on just one channel. Moreover, because new media is untested and therefore more risky, new media would have to far outperform traditional media in order to get the same budget allocation.

When we look at two sample developing markets, we can immediately see that TV gets a much higher share (mainly because of cost) and digital is significantly lower (no surprise there). Yet what’s really interesting is that the baskets are much less diversified generally.

Moreover, not only do they differ from the developed markets, they differ from each other. As Tolstoy wrote, “All happy families are alike. Unhappy families are unhappy in their own way.”

The specifics of why they look this way have to do with internal market characteristics (which I won’t go into). However, the reality is that if they could diversify more, they would. It’s just that some areas of the market haven’t developed yet.

The data leads to a clear conclusion: the real trend is towards media diversification. If you think that one marketing channel is taking over, you are surely wrong. No amount of bluster or fancy figurin’ will change that simple fact.

What Marketing Portfolios Mean for Buyers and Sellers

The implications are clear. Effective marketing is not about picking winners among channels, but by forging effective combinations focused on achieving specific goals.

Here are some things to keep in mind.

Forget about ROI for Individual Actions: Unless you have a communications planning contract and access to confidential client data, forget about ROI entirely. You simply won’t have any idea what your talking about.

And as Wittgenstein famously pointed out, if you can’t say anything meaningful it’s better to keep quiet than to talk nonsense. False metrics might make people feel smart, but lead to stupid actions.

Time and energy wasted on trying to calculate the ROI of individual channels would be much better spent on devising an effective portfolio. The whole is far more significant than the sum of the parts.

Understand the portfolio: It’s is natural for people to want to advocate something. Sellers, of course, have a fiduciary interest, but marketers often get in the game as well. It feels good to say that you “believe” in social media, or ambient or whatever. Nobody goes out and brags that they bought 1000 GRP’s.

However, treating these things separately completely misses the point. Direct response metrics improve when mass media is on air and social media can vastly extend the reach and involvement of a media campaign through what network theory pioneer Duncan Watts calls Big Seed Marketing (pdf)

Championing a particular marketing channel is a complete waste of time.

Integrate: The biggest problem marketers have today is integrating their marketing programs. Media has fragmented and agencies have metastasized. With so many moving parts, getting it all coordinated is a key success factor.

The real benefit to new media isn’t that it has higher ROI, but that it creates options. Learning how to combine digital with more traditional channels is the fundamental planning challenge today. Mindless talk about competing ROI metrics for various media only serves to muddy the waters.

The marketing world shouldn’t repeat the mistakes of the financial industry. ROI for individual investments is misleading and can even be dangerous. What really matters is portfolio performance and that’s where the focus needs to be, not on devising new and complex ROI metrics.

Information is a poor substitute for understanding.

- Greg

Stupid Strategy

Greg — Sun, 27 Jun 2010 08:12:42 +0000

Einstein said, “Any intelligent fool can make things bigger and more complex… It takes a touch of genius – and a lot of courage to move in the opposite direction.”

In a similar vein, I often tell my analysts that I want them to be dumber. The problem is that the people I hire tend to have achieved some measure of academic success, which they attained by impressing idle professors how sophisticated their thinking was.

Stupid people, on the other hand, look for what is obvious and useful and therefore can often accomplish more. Over the years, I’ve come up with some ways to help smart people to become dumber. Here’s a few of them:

Less Numbers – More Math

In developing a business strategy, you have to wade through a lot of data. It’s an activity that is sometimes enlightening, but almost always painful. After a while, your eyes hurt and your head throbs.

I never could make sense of people who stuffed as much information into charts as possible. Nevertheless, smart people often want to show how complicated it all is, so they not only cram in plenty of numbers, but also include lots of arrows that have the annoying habit of pointing in opposite directions.

A stupid person would never do this, because they would want to minimize the amount of information they would have to deal with. There are a number of fairly simple mathematical concepts that allow you to be a whole lot dumber and understand much more.

Dumb people have the good sense to take short cuts; they’re not trying to prove how smart they are.

Lean Back

Things go up or down, left or right or they don’t go anywhere at all.

I’m amazed at how many smart people miss that simple and obvious fact and instead treat charts as if they were Rorschach tests. They pride themselves in their ability to divine things in them that nobody else can see. ( We don’t have a name for this in marketing, but in finance these people are called Elliot Wave theorists.)

The truth is if what you’re looking for isn’t fairly clear it either isn’t really there or you just don’t understand what it is yet.

A really simple way to correct for this tendency (we all have it) is to simply lean back from your screen. If you can’t see anything, reformat or move on and stop wasting your time. Stupid people know this and just look for what’s obvious.

Aspect Seeing

When Ludwig Wittgenstein wasn’t reading cheap detective novels or watching cowboy movies, he mostly liked to chide other philosophers. Much of the time, he complained about their need to find universal rules in everything.

He saw this as causing unnecessarily confusing and advocated what he called aspect seeing. To get an idea of what he meant, take a look at the famous Klitschko brothers below.

They are obviously very similar. Both are big, strong guys with dark hair who are world champion boxers and share the same mother and father (even having met them both on several occasions, I still sometimes have trouble remembering which one is which).

The problem comes when you try to identify what is the “essence” of Klitschko or the “Klitschkoness” that is essential to their being. If you just accept that one is Vitaly and one is Vladimir and leave it at that there is no confusion. Wittgenstein called this “letting the fly out of the bottle.”

A stupid person would never make such a smart mistake. That takes years of studying and a very senior title or advanced degree.

Have a Point

The basic job of strategy is to provide a plan of action (i.e. getting things done for a specific purpose). Unless you are a professional researcher, your job isn’t to perform intellectual exercises, but to help further specific goals.

I’m sure Napoleon thought it would be interesting to go to Moscow (although having spent time there myself, I suspect he was disappointed). Clearly he felt it would impress his friends and neighbors, but none of that mattered when his troops were starving because his supply lines were overextended.

Strategy only works if it can be clearly explained to the people who will actually do the work of carrying it out. Therefore, it is always a good idea to have a point. It makes all those smart thoughts so much more interesting and useful to those you are presenting it to.

Try it, you might like it!

Stupid Geniuses

Great things are not achieved not by making simple things complex, but by making complex things simple.

Of course there have been extremely intelligent people who have accomplished great things. People like Euler, Gauss and von Neumann were prodigies who could speak half a dozen languages, had photographic memories and amazing computational abilities. These men made serious contributions.

Yet compare them to Kant, Darwin and Einstein, none of whom displayed much early promise and all of whom revolutionized how we look at the world. Richard Feynman, who even other great scientists considered a magician, had an IQ of only 125 – above average but by no means unusual.

G.H. Hardy, who discovered Ramanujan and was himself considered one of the great mathematicians of his day, wrote in his memoirs, “For any serious purpose, intelligence is a very minor gift.”

Let’s take him at his word and dumb it down a bit.

- Greg