Forget ads. Plan with The Information Ecosystem.

Six years ago, as enthusiasm over a new thing called “social media” began to crest, Pepsi went big on social. In 2011 PepsiCo slashed outbound advertising on its Pepsi brand, and redirected communications budgets to Twitter, Facebook, and other inbound social community management. That didn’t go so well. By March of 2012, sales of Pepsi had slumped  and for the first time in two decades Pepsi fell, embarrassingly, to the No. 3 soda brand behind both Coke and Diet Coke.

Inspired by Pepsi’s error, that year we conceived a framework called The Information Ecosystem — in essence, a strategic game board that explains how your brand should communicate to, or engage with, customers. It has two basic information systems — the “flow” of communications outbound or inbound from customers, and the “scale” of information being used by many or a few. All communication either goes out or in, and it’s either for a handful or huge crowds. Map communication strategies into each corner of that ecosystem, and we get four intuitive tactics:

  • Broadcast — not just TV, but here defined as any mass medium “broadcasting” outbound to large groups of people.
  • Personalization — another form of outbound messaging, but this time tailored to a few.
  • Research — the inbound analysis of communications from groups.
  • Engagement — the inbound communications from one person, or just a few.

The Information Ecosystem framework was a hit, because it showed that different communication strategies have different uses. Advertising strategist Faris Yakob was kind enough to publish our theory in his 2015 book “Paid Attention: Innovative Advertising for a Digital World,” commenting that “the important thing to remember is that each task requires the right approach or mix of approaches. Not every problem can be solved with the same solution set, which is a challenge for many agencies, who too often assume that their primary product is the optimal solution.”

But let’s revisit what this means. First, this ecosystem is not just about media tactics.

Yes, various media platforms can be plotted above in different ways. Some, such as Facebook’s social network, can be used in all four areas (for inbound research or organic engagement, and outbound personalization or mass-market communication). But the real value of this model comes from mapping where your customers fit in the ecosystem:

  • C1: Customers in group “C1” have different needs and varying financial value to you. Strategy: Personalization. Why? Your customers need different things, and if you can personalize to the most valuable customer micro-segment, you’ll maximize profits. For this customer group, investments in personalization are required. Examples include real estate, financial investing, travel, fashion and luxury goods. There’s a reason why airlines have numerous loyalty schemes, boarding segments and seating assignments. That lady up front needs something special, and she’s worth a lot more than you.
  • C2: These customers, group “C2,” have similar needs and rather static financial value. Pepsi drinkers go here. A casual Pepsi drinker might imbibe three sodas a month, and a heavy loyalist 30 Pepsis, but that 10:1 ratio really is not enough to justify the expense of personalization. And all these customers want the same thing — a sweet drink. So take out a TV ad or run an OOH campaign; your strategy is to Broadcast outbound messaging to a mass audience. The lower costs of mass media will simply get the job done.
  • C3: For inbound communications, marketers who wish to understand what drives a common need use Research. Inbound inputs from masses are gathered and sliced, but the result is typically a product-centric view, collating the needs of a group around a given sales item or media goal. Nielsen ratings evaluate who watches show A or listens to radio station B; comScore ranks who watches website C; qualitative or quantitative research uncovers which customers will buy product D. Consumers’ financial values may vary greatly, but research is focused on understanding common needs.
  • C4: Engagement is the wild card of the matrix, the area for inbound customers with very different needs — and best if your customers have a range of value. The temptation for marketers to rush into this quadrant is enormous; who would not want to provide individualized answers to any customer question, in an effort to both solve problems and sell products? But this Engagement strategy works best when your customer base wants many different, nuanced things, and provide enough profit to justify the expense. At this point, you can easily see where Pepsi’s rush into social went awry. One-on-one social engagement is not needed when all a customer wants is a sweet sip.

Which brings us to the final question: which inbound and outbound strategies go together?

Ah, sharp readers will have guessed — it all revolves around your customer base analysis. If your customer group varies in what they need, outbound personalization should be matched with inbound engagement (C1 and C4); our agency, for example, works with a fashion e-commerce brand that combines hyper-targeted, personalized outbound advertising with high-touch inbound human service. For customer groups where the needs are varied, and where some have extremely high value, this combination is powerful. The only caveat is to make certain one portion of your customer base provides enough financial value to your business to justify this micro-segmentation and personal service.

But if your customer group contains similar needs, outbound broadcast mass media can be matched with inbound research to great effect (C2 and C3). Traditional research segmentation studies can be used to direct cable television schedules. ComScore ratings will tell which websites have the greatest reach among the largest slice of your target. Analyzing what makes one large group tick is enough to push out messaging that reaches the same large group at the lowest media cost.

Of course, this is all just Step 1

There are of course many layers of nuance behind this Information Ecosystem strategy. Broadcast media are becoming more targeted; addressable TV, for instance, can reach households down to the PII level with personalized commercial breaks based on your past shopping behavior, and technical advances in some digital billboards can recognize the demographic composition of the audience viewing them. Social can be used for research, and research can be used to identify niche group needs. As media outlets advance to the future of Minority Report, communication lines will bleed across all channels.

Which is why this model is useful. As you plan your communications strategy, it’s worth starting with an analysis of just how unique, or common, your target audience is. That one question will help you model whether you should invest in personalization and engagement, or simply research how to go for mass communications scale.

 

 

Improving mobile advertising via colocation

Every spring for the past five years, analyst Mary Meeker has published her influential report on “Internet Trends” and noticed the same, strange thing – while most media platforms attract a share of advertising budgets closely matching the time consumers spend on them, mobile always falls behind. TV, for example, accounts for 38% of U.S. consumer daily “media time” and also attracts 38% of all U.S. ad spend. Radio has 9% of consumer media attention and gets, yes, 9% of media budgets. But for some reason, mobile falls short.

Today, there are 2.8 billion smartphones on the planet – so nearly 1 in 2 humans use a mobile screen – and in the United States, adults spend 3.1 hours per day on mobile, about 28% of daily “media time.” But mobile attracts only 21% of U.S. ad dollars.

So what’s up? Why are marketers still slow to spend on mobile?

The core reason is media plan budget allocations always try to predict, and then adjust to, actual returns in performance. If the key metric return on ad spend (ROAS) shows that one type of media returns $3 for every $1 spent on advertising (an ROAS of 3:1) and another returns only 90 cents (ROAS 0.9:1), then the first media channel will get more budget. Because ad dollars are not flowing to mobile user eyeballs, something in mobile performance must be broken.

Solution: Moving beyond geo-targeting

The American Marketing Association recently offered a solution, suggesting marketers typically get mobile audience data wrong. In the AMA’s most recent Journal of Marketing, researchers Peter Pal Zubcsek, Zsolt Katona and Miklos Sarvary point out that mobile devices are collecting reams of data about consumers, but marketers typically respond with simplistic geo-targeting that does not take advantage of all options.

First, consider the data. Some audience profile data is “sandboxed” or not shared between apps, while other platforms (especially Facebook and Instagram) can target mobile audiences based on hundreds of profile or interest habits (everything Facebook knows about you can be used to reach you on your iPhone). But the most valuable data from mobile comes from user locations – the geographic coordinates that not only reveal where a mobile user is today, but where he or she has gone over time, and consistencies or variances in those travel patterns. People are just smart animals, after all, and our trails give away our true desires.

Alex Pentland, an MIT researcher who experiments with reams of mobile data, was able to predict which movie theaters in winter have crowds of people who are contagious with the flu virus by assessing slight common variances in mobile travel and communication patterns that indicate who is starting not to feel well – in essence, predicting people will get sick before they know it themselves.

Zubcsek, Katona and Sarvary build on this “spacial-movement-pattern recognition” theory, suggesting marketers need to move past simple geo-targeting to consider the social ties between people visiting locations.

Looking outside the fence

Much geotargeting is still rudimentary, focused on audience member X being at location Y so getting offer Z. For example, a current popular mobile targeting approach is to build a virtual fence around an auto dealer, and then hit a consumer with a mobile offer when she or he enters that perimeter. Another, slightly better approach, can pick up people who have visited a certain type of retail location and then retarget them elsewhere later – say, a child clothing retailer could retarget consumers at home who have recently visited daycares, baby-supply stores and toy stores, knowing those audiences are likely new moms. The thesis here is a consumer makes a “location choice” to maximizing some underlying utility function (to buy something, eat something, make a transaction), so marketers who sell similar services simply match their offers to that location signal.

But what if you consider deeper uses of mobile data?

1. Push consumers slightly off path. Shoppers who travel off planned paths tend to be more profitable. Zubcsek, Katona and Sarvary point out a coupon that hits someone on a pre-planned path may have limited influence, or worse, give away too much, for someone who is already thinking of making a purchase at that location. But if a mobile offer pushes that consumer to go slightly further off path, while response rates may decline, the consumer may make a much more profitable transaction. The “effort” involved in that consumer shifting travel patterns means they may have greater intent to respond. There is obviously an inflection point where the economics break down – someone seeking a restaurant on a Friday night in Chicago is not going to pop over to Los Angeles – but if marketers model distance paths and optimal pushes for changing the consumer pathway within an acceptable distance, the resulting sale and profit will be higher.

2. Consider mobile colocation data for modeling. Zubcsek, Katona and Sarvary write that consumers who visit the same pattern of places have similar preferences, even if they don’t know each other – and that by mining location data, marketers can build segmentation models that are 19% more likely to predict profitable purchases vs. older standard segmentation tools (e.g. psychographic and demographic segmentation or media usage studies). In other words, mobile geo data isn’t just for targeting; it can model groups most likely to be your Most Valuable Customers.

3. Go long. When offering mobile incentives, extend the length of the offer and the frequency of impressions. Once targeted appropriately, consumers are more likely to take action on an offer if their future repeat paths put them in proximity to the desired action. This is intuitive, but many marketers miss the mark by not allowing a frequent-enough series of exposures to align ad impression with audience target as he or she nears the desired location of action.

4. Look elsewhere. Beware that ignoring valuable prospects outside a specific geo-fence “may leave money on the table.” Consumers signal their interests when they share similar travel patterns. So if Consumer B closely matches Consumer A in geo-location travel, but only Consumer A moves within a geo-target fence to “trigger” an offer, Consumer B may be just as – or more – valuable! So targeting of consumers via mobile must move beyond specific single geo-fences to a range of geo-triggers, if you are to reach similar prospects with high interest in purchasing your product.

5. Mix up the formats. Creative design obviously has influence in any advertising, and mobile creative options are now much more vast than small banners. In-image ads, video ads, sponsored stories, native ad units, and 360-degree immersion units support higher frequency against targets, once identified, without triggering wearout. A mix of ad units can also boost response; in the advertising research book “What Sticks,” authors Rex Briggs and Greg Stuart uncovered that consumers reached with different types of impressions typically respond at higher levels vs. one media format used at the same frequency. So mix it up.

All of this is to say that geo-targeting by itself is not enough. Marketers’ main goal is to match messages with people most inclined to take action. What Zubcsek, Katona and Sarvary have uncovered in their research is that mining the travel connections of consumers across time and space, and matching those paths, unlocks new ways to identify Most Valuable Prospects likely to respond. By mining these pathways through colocation, you can predict not only where consumers will go, but also what they may do next.

Or, as MIT’s Alex Pentland might say, don’t forget to get a flu shot.

This sweet little song was written by AI

Like frogs placed in a pot of cool water set on a stovetop burner turned up high, we have little idea if the growing warmth of artificial intelligence experiments now around us will comfort us or lead to humanity’s devastation. Artificial intelligence, or “AI,” what was once the plot sidekick of science fiction movies such as “2001” and “Alien,” has been gaining speed, surrounding us with tactical adjustments at first, and now, startling advances. For example, the pretty little pop ballad in the video above was entirely scored by an AI algorithm.

If this AI debate sounds theoretical, watch the video, then ponder that a computer wrote that song. If you’re smart, that blows your mind. Then keep reading.

There are two schools of thought on where AI is going. The positive view is led by Kevin Kelly, the granola-y co-founder of Wired magazine who spent his youth backpacking China with a camera before becoming a technology savant. Kelly posits that AI is the electrical grid of the coming era, a growing intelligence service that future applications will simply plug into. We’re seeing evidence of this utility today. Cars have automatic brakes that pulse faster than your feet can reach the peddles. Most of your next airplane flight is navigated and managed smoothly by computer systems, not real pilots. Apple iPhone’s Siri (an offshoot of the government’s DARPA) and Amazon’s Alexa answer almost any question. Because most human requests or desires can be broken down to algebraic solutions, even songwriting can be managed by computers today.

The pop ballad above is sung by human Taryn Southern, but the entire musical score and orchestration were written by an AI algorithm named Amper. Amper was designed by a team of professional musicians, but only computer logic is at its core. Somehow it analyzed what makes pop songs “work,” then built an entirely new melody that you want to hum. The idea that something as nuanced as music that delights your soul can be written by automated code is a bit scary. If emotional storytelling can be modeled and then evolved by a computer, what’s next? Entire novels, written so eloquently that Will Shakespeare or F. Scott Fitzgerald or Cormac McCarthy couldn’t compete? Or perhaps deeper logic structures, such as future religions, with spiritual tales that resonate above and beyond what mere human prophets can conceptualize? God may exist, but if our understanding of God depends on logical interpretation, surely an advanced computer system could write the better belief code.

Which leads us to the negative forecast for AI as well, led by the Oxford philosopher Nick Bostrom. Bostrom is notable for two efforts: His challenging book “Superintelligence,” which predicts there are multiple research pathways to launching AI, so it will happen, and that when it happens, it will soon go beyond our control. And second, for a little paper “Are You Living in a Computer Simulation?,” which gave even Elon Musk pause. Bostrom sure sounds right: If AI can get smart, it will easily soon get smarter than humans; and if not tempered with the right controls, that AI could chase missions at odds with our survival quickly.

Paperclips everywhere

For example, Bostrom imagines an AI working within a factory that manufactures paperclips that escapes the building, with the simple mission to optimize paperclip output, and reconfigures the entire world into machines mining metal for bending wires while humans suffer, unable to stop it. Silly, perhaps, but the U.S. stock market “flash crash” of May 6, 2010, almost tanked the economy when two different computer algorithms started feeding off each other in a strange way that caused the market to tank a whopping 9 percent before circuit breakers kicked in.

AI is becoming a buzzword, but it really is an ecosystem of many moving parts. IBM has rebranded itself around its “Watson,” an AI that does everything from predicting weather patterns and healthcare outcomes to managing display advertising programmatic buys, in tests that outperformed human bidders by 2 to 1, according to IBM’s head of brand, Jon Iwata. In a speech to the U.S. Association of National Advertisers a few years ago, Iwata stood on stage with the image of hundreds of nested hexagons projected behind him, like the honeycomb of a beehive, each with a tiny label showing a different service that AI could complete. IBM had just acquired Weather.com to pull feeds about atmospheric conditions into its AI honey trove. When Iwata told the gathered marketers there that his artificial intelligence behemoth had recently beat humans in planning digital advertising, the audience didn’t gasp, but simply nodded. Later, on the patio of the Florida hotel, real humans representing advertising technology vendors met with marketers over wine, trying to convince each other that their human teams would perform better for advertising results. Watson didn’t show up, but I could feel him lurking, observing somewhere behind the scenes.

Do you speak Chinese?

There is a philosophical puzzle behind AI, which of course is your question, is artificial intelligence really “intelligent”? Philosophers suggest this doesn’t really matter. If IBM’s Watson or Amazon’s Alexa are not really real, that won’t change the outcome of what those AIs do or how you experience them. The classic answer to this question is the Chinese room mind experiment by John Searle.

In essence, Searle figured out that AIs can be intelligent even if they don’t have the recursive, self-aware consciousness (i.e., “living souls”) that we humans believe we have. His example: Imagine there is a room with an English-speaking person inside it, who can’t speak Chinese. Before him is a door with a slot, and behind him is a massive library filled with drawers with the answer to any question posed in Chinese.

A Chinese-speaking person on the other side of the door writes down a question, and slips the paper inside the slot.

The English-speaking person picks up the paper. He has a coded instruction manual that leads him to the right drawer; picking up the answer, he pushes the Chinese solution back through the slot.

Here’s the rub: The Chinese speaker outside gets a perfect answer in Chinese. The English speaker inside the Chinese room didn’t understand what he did, but somehow he gave the perfect answer.

The English speaker was not “intelligent” or “self aware” in Chinese, but he got the job done.

Computers are doing that, already, today.

AI is here, and it’s getting warm

The point is, AI is more than a buzzword and much more than a digital tactic. It is no longer a movie fantasy, and it does not need a consciousness to complete the recursive loop of understanding and doing things, even better than humans do. The looming wave of coming intelligent algorithms will be the new electrical current of society, and its application will expedite everything from marketing predictions to media buys to the creative advertising images and stories and music that get people to respond.

Where AI goes is hard to predict, but its mission seems obvious. Computer intelligence will be an accelerant to human desires and objectives. It is more than databases and algebra. AI will do more than pump your brakes or direct your airplane. It will empower anyone to try to predict what anyone else wants.

Like a song structure that anticipates the next note to delight you, AI will build structures that align with your needs. We just hope you know what you really want.

(Thanks to Angela Natividad for the song tip.)

Why Apple tests silly iPhone apps like Clips

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Two weeks ago Apple launched Clips, an app designed for cutesy video editing on your iPhone. Users can combine clips, add filters or emojis, and even use voice translation to quickly put subtitles on videos. The app is not yet embedded in the native iPhone camera app (you have to download it from Apple’s App Store) but expect that to come soon.

But why in the world is Apple doing this, when Snapchat and Instagram and thousands of other apps offer similar video editing and better sharing?

Because Apple needs to protect its iPhone. What many commentators have missed is Apple has morphed in the past five years into, well, an iPhone company. iPhones now make up nearly three-quarters of all Apple revenue. In business-speak, this is known as becoming “concentrated” — where one product line drives the majority of your business — and that is a scary place to be. Because what happens if that one thing starts to go awry?

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Apple’s risk factors

Now, consider the risk. In its annual report, Apple, like all public companies, discloses “risk factors” of things that could go wrong with its business. Public companies are required to share these risks, and if you want insight into the future of any business, it’s always smart to start with the challenges they face ahead. In its 2015 annual report, Apple writes:

Global markets for [Apple’s] products and services are highly competitive and subject to rapid technological change, and the Company may be unable to compete effectively in these markets … if the Company is unable to continue to develop and sell innovative new products with attractive margins … the Company’s ability to maintain a competitive advantage could be adversely affected.

And there’s the rub. Apple lives or dies now on iPhone sales, and the iPhone is becoming a commodity. The current largest model, the iPhone 7 Plus, has a 5.5-inch hi-res diagonal screen, 32GB base storage, and 12 megapixel cameras. Hm. The new Samsung Galaxy S8 has a 5.8-inch screen, 64GB storage, and 8 and 12 megapixel cameras. A space alien exploring our technology culture would be hard pressed to tell mobile hardware apart.

So Apple’s future is software

It sounds irrational to predict that the Cupertino technology giant that conquered the world with slick, Jony Ive-designed hardware will ever pivot to software, but that is exactly what Apple must do. Mobile devices housed in glass and aluminum frames are becoming, well, basic glass rectangles, and the nuances of an Apple iPhone vs. Samsung Galaxy vs. Sony Xperia vs. HTC One M9 are merging fast. The real differentiator of the future will be the images and sounds emerging from transparent panes.

Apple still has some hardware upside, but it is closing fast. In 2016, global smartphone sales were $428 billion, and by this year one-third of the world population now owns at least one mobile phone. Apple and others can push farther into the human population, and entice us all with biannual upgrades. And it’s trying with ever-fancier iPhone shapes.

There are rumors that Apple is building slicker augmented reality visuals into its future iPhones … or that iPhones may have wrap-around glass screens, eventually turning the entire device into a glowing orb that could be translucent, invisible (imagine the front-facing camera making the back of the glass phone “disappear”), or a portal into a 3D immersive world. But these visual tricks are already being tested by other brands’ hardware, such as the Nintendo 3DS which uses eye tracking to project a stereoscopic vision.

Eventually, all these gadgety panes of glass will become like windows in your wall — something that you expect to use, but that you don’t really value much at all. The shape of the portals into the new virtual worlds will start to become less valued, and the software powering those new digital images will be all that matters. We are on the verge of a multibillion-dollar mobile hardware industry collapsing as technology advances to the point where digital screens become as common as pieces of white office paper.

All of which is why Apple is testing silly iPhone apps like Clips.

See more of our point of view on this trend in this edition of Digiday.

Mary Meeker points to a hands-free, zero-screen future

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Wouldn’t it be ironic if in our rush to adopt media technology, we all decided to ditch computer hardware and screens altogether?

It’s starting to happen. Several years ago Disney Research created a Touche interface that turns any surface into a digital input device. By tracking the vibrations you make when you sit on a coach, or tap on a tabletop, or even splash your hand in a bathtub, Touche would signal electronic devices to take action. Lie down on the sofa, and your living room lights would dim. No keyboard required.

We thought of that innovation recently reading Mary Meeker’s influential “2016 Internet Trends” report. Meeker, one of the top analysts in the first 1990s Internet boom, is now a consultant for the VC firm Kleiner Perkins Caufield Byers, and her annual late-spring slide show on media trends is one of the most anticipated pieces of content in the marketing industry. This year’s report had some typical, predictable findings (mobile ad spend is still out of sync with mobile share of eyeballs!), but one intriguing new section on … hands-free device inputs.

Meeker expends several of her slides on voice-recognition trends: the use of technologies such as Apple’s Siri or Amazon’s Alexa to understand commands and respond with actions. Philips, for instance, now sells Hue “personal wireless lighting” bulbs that can be given individual names and controlled via voice, partnering with Siri on an iPhone. “Reading light, please dim” will now make your reading light dim. Home Depot sells Bluetooth wireless locks that open with a tap, no key required. Belkin offers electrical outlets that turn on triggered by motion, so your coffee maker can boot up when you stroll into the kitchen each morning.

Meeker notes that this trend toward hands-free, screens-free user interfaces on electronic devices is rising fast, thanks to a few factors:

  • Voice accuracy is improving. Google’s voice systems now clear 91% accuracy in recognition of tens of thousands of words. What used to be difficult, getting a gadget to understand a voice command, is now easy.
  • Consumers are tired of the plethora of touch-screen-oriented apps. While the typical U.S. smartphone user has 37 apps on her phone, she uses only 3 of them — Facebook, the Chrome mobile web browser, and YouTube — 80% of the time.
  • Simple tasks, after all, don’t need keyboards. Consumers are recognizing that voice just works better for short commands. 55% of voice searches are done while driving a car or “on the go,” with top commands including “navigate home,” “call Mom,” or “call Dad.” (Sadly, moms get twice as many calls from kids as dads, but that’s another story.)

The use of hands-free computing interfaces is rising fast; only 30% of U.S. consumers reported using voice commands with technology in 2013, while by 2015 that portion had jumped to 65%. With augmented vision devices such as Magic Leap soon replacing video displays, thanks to their ability to beam hi-def images of screens into the air like a Tony Stark Iron Man hologram, keyboards and computer monitors may become a thing of the past.

The irony of this rush to control the Internet of things via the air is some device-makers may put themselves out of business. When your couch controls your lights, and your TV screen floats in front of your augmented eyeglasses, will we need solid screens or keyboards at all?

Why marketers play with price

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When advertising agencies brainstorm client solutions, pricing rarely comes up, because “price” is perceived as both dangerous and boring. Dangerous because get it wrong, and sales will plummet. Boring because, hey, who cares about pennies when we could be discussing brand positioning?

So when a friend recently asked us whether an airline-related client should adjust price, we dug into the research — and realized, yes, this lever is critical. Here are two frameworks for price strategy: One based on logic, the second tied to emotion.

Economic logic: The price elasticity of demand

The “price elasticity of demand” is a classic model that rekindles visions of boring Econ 101 classes, but it is fascinating when put in human terms. Think of this fancy phrase as how elastic, or stretchable, demand will be if you change the price. If you lower your price, will demand “stretch” up much higher, with many more people clamoring for your service? Or is demand inelastic or “unstretchable,” with shifts in price barely moving sales?

This elasticity concept is important for marketing, because it tells you whether you can justify a high price. Consider our friend’s question:

“I’m working for a travel-related service, and they charge about $80 for a unique [service offering X]. The client wants to know, should they lower the price by a few dollars to spur more sales?”

At first, the puzzle seems unanswerable. But the theory of price elasticity of demand has an answer: Demand will respond most to price changes if the product and service has (a) readily available substitutes or (b) if it is a big chunk of the buyer’s income. Demand fluctuates least if your offering is (a) unique and (b) a small part of the buyer’s income.

Consider milk and houses. Milk is an example of a product with many brand substitutes — if one brand charges $2.10 a gallon and the other brand in the store cooler costs only $1.90, consumers will readily shift from Acme Farm Milk to purchase the cheaper Beta Farm Milk. Same product perceptions; lots of substitutes; thus a price shift makes a change in demand for a given brand. 

Houses are an example of something that’s a big chunk of your income. If you are moving to a new city and find one home priced at $500,000 and another similar house for $490,000, you’ll go for the lower price — even though the difference is only 2%. Same product perceptions; high share of your income; thus a price change also makes a quick shift in demand.

But let’s think now of this unique travel service. It’s only $80 and the service is unique. Should the marketer drop the price to say, $75? Nope. A small change in price would do zilch to stimulate demand. There are no substitutes, and it’s a small part of a frequent traveler’s annual budget. To back up our recommendation, we researched how airlines charge for other up-selling services and found that, indeed, travelers pay $38.1 billion annually in surcharge fees to U.S. carriers for things as odd as more legroom, booking by phone, changing flights, or bringing extra bags. Apparently, in the crush to get on a plane, people will pay something for almost anything that makes the trip easier.

Behavioral emotion: Playing with price framing

That’s the logical way to look at price changes. But, as our election debates show this year, consumers are often illogical and emotional, too. In 1980, Richard Thaler wrote the landmark paper on behavioral economics outlining how consumers often use a “mental accounting model” to decide if prices are good or bad. Thaler’s central argument was that shifting a price point is not the only way to stimulate demand; instead “framing” the perception of price could be more effective.

Consider, which offer is more appealing?

1. A dress that costs $60.

2. A dress that costs $70 marked down from $140 (50% off sale).

Thaler noted, in several studies, that choices such as No. 2 above are often preferred by consumers, when in reality, the second dress is just more expensive. His explanation: People are inherently bad at judging value, so use “reference points” see if they are getting a benefit or loss. Because in option 2, the dress is positioned as being far below the “real” price of $140, it feels like a better deal. This illogical-but-compelling mental accounting is why most retail stores offer goods “on sale,” or why candy at movie theaters that costs $5.00 comes in oddly shaped boxes. We feel great when we get something that looks larger than usual, or is bundled with other things, or is “marked down” in price, when the reality is each of these experiences is a bit of manipulation from a marketer creating an artificial reference point.

So there you have it: With logic, moving a price point makes sense if there are few substitutes or the total cost is a low overall risk to the buyer. With emotion, you can keep prices as is, and even increase them, by positioning the cost against a “reference point” that makes the buyer feel better about her or his mental accounting.

We all want to win. Prices are numbers that, if used carefully, can make every buyer feel a winner. Sorry if this sounds manipulative, but we have to run — there’s a great sale at the hardware store we want to hit on the way home.

 

 

Focus Features promotes ‘Insidious’ with an AI bot. Should this scare you?

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Japanese roboticist Hiroshi Ishiguro unveils an android copy of himself at SXSW. Will marketing bots based on artificial intelligence help advertisers?

We love the idea of boosting a horror movie with an AI chatbot. Marketers looking to scale communications are watching Focus Features’ clever experiment in awe. Marketing bots are coming fast. But before we explain, let’s catch up on AI advances.

It’s been a whirlwind year so far for artificial intelligence. At SXSW Interactive in Austin this March, Japanese scientist Hiroshi Ishiguro presented an android that looked exactly like himself, capable of carrying on intelligent conversations in either English or Japanese thanks to Siri-like database matching, linguistic software and voice recognition. Days later, AlphaGo, an AI software developed by Google DeepMind, beat South Korean champion Lee Sedol at Go, a game multiple times more complicated than chess. And weeks later, Microsoft launched the silly Twitter bot Tay on the world, trying to demonstrate its AI could learn conversations by tweeting back and forth with users. Tay flamed out when online trolls taught it to say racist, violent things, forcing Microsoft to abort its Twitter experiment … but Tay did learn a human personality, albeit a mean one, quickly.

Artificial intelligence is no longer science fiction. It’s here to stay.

In marketing, AI algorithms and “bots” in recent years have earned a bad name, typically attributed to “black box” digital media buying systems that may opaquely distort ad campaigns with bad impressions, or bots that pretend to be human but are really designed to jack up clicks for inflating results. The media buyers who run today’s programmatic systems often invest a sizable portion of their time in monitoring digital ad campaigns for quality control—a war against bots, if you will. But now, some bots may be bringing benefits to marketing.

When marketing bots help promote a horror film

MIT Technology Review reports that some new mobile services such as Kik and Telegram have created “bot shops,” where AI virtual users provide everything from simple horoscopes (just fun) to helpful service and personal conversation. Focus Features used this AI-type system in Kik to promote the new film “Insidious: Chapter 3,” in a brilliant virtual conversation. In the movie, a girl named Quinn is stuck in bed, and needs to converse with the outside world. The Kik bot allowed you to do just that … with your personal conversation growing more and more intense.

Kik Insidious

 

Yikes. And well done. Just scanning those messages makes us feel like we’re inside the actual movie.

Marketers are watching this because one-on-one conversation agents could unlock value, in everything from explaining products to stamping out customer complaints. In call centers, human labor accounts for up to 85% of costs, while customers grow irate if hold times exceed a few minutes. Deploying bots in customer service could save companies millions while helping customers gain faster answers, in turn reducing customer churn.

When AI systems work well, they not only duplicate human intelligent conversation but do so at scale. Imagine a world where there was no more “on hold” time when you call a call center, and a friendly, Siri-type intelligence immediately took your complaint or order.

But can AI manage the real complexities of life?

But as the Tay debacle showed, AIs are still rough simulacrums at best, and prone to error, or worse, offense. The reason it took 20 years between IBM’s supercomputer Deep Blue beating Garry Kasparov in chess and AlphaGo whipping Sedol at Go this spring is chess, on average, has only 35 possible legal options per player move, while Go is far more complex, with approximately 250 game options to consider per player turn. AI can finally keep up with just 250 scenarios on a simple board. Real life has millions of possible turns in every human move. While marketers may rush soon to deploy AI bots to try to influence or serve customers more easily, they’ll need to tread carefully.

Microsoft CEO Satya Nadella told a conference of developers this spring, “We want to take the power of human language and apply it more pervasively to all of the computing interface and the computing interactions.” But to paraphrase Microsoft’s twitter AI-bot Tay, as she went off the deep end about Hillary Clinton, beware of “a lizard person hell-bent on destroying America.”

DARPA red balloons and network incentives

darpa-red-balloon

In 2009 the U.S. Department of Defense’s research arm DARPA issued a seemingly impossible challenge: To celebrate the 40th anniversary of the creation of the Internet, it would station 10 huge, red weather balloons at random, undisclosed locations around the United States and offer a $40,000 prize to first team of people to find them all. The challenge was daunting by traditional intelligence-gathering standards. A roaming team of 10,000 people might take a year to find all the red balloons. DARPA built the puzzle to see if modern social-media networks might solve what government spies could not, and also to generate ideas on how social networks might help during natural disasters when mass communications or even 911 systems might fail.

The winning MIT team found all the balloons in less than 9 hours. How?

In his remarkable book “Social Physics,” MIT professor Alex Pentland explains he used theories of how ideas flow through people to create action to solve the puzzle. A traditional marketer might have realized the $40k prize wasn’t enough to get millions of people looking, so would have spent $4 million in national advertising with the $40k prize as an offer. Others would have tried PR, or pleas for a common good, or hiring thousands of students to work for pennies. Or maybe hacked weather satellites.

Pentland instead came up with a brilliant team-building idea — where he motivated individuals to influence others to search, and not just to win a prize. He divided the $40,000 prize into 10 prizes of $4,000 for each found balloon … but further split each individual balloon prize into the referring networks of all who found it. The actual person who found a balloon would get $2,000. The person who invited him or her to play would get $1,000. The person who invited that person to search would get $500. And the person above them $250 … etc. The chain looked like this:

balloon search pattern

Why did people then suddenly participate on the MIT team? In post-contest interviews, MIT found people thought if they invited others, they were doing their friends a favor … similar to sharing a lottery ticket. In other words, they weren’t incentivized to win a prize, but instead, to build a bigger network of participants.

The moored balloons were set up at 10 a.m. on Dec. 5, 2009, randomly located across the 3.8 million square miles of the United States. More than 4,000 search teams had signed up. But within hours, Pentland’s MIT group had enlisted 5,000 core volunteers who shared the network incentives to an average of 400 friends each, creating a network of 2 million people who … found all the balloons in 8 hours, 52 minutes and 41 seconds.

The underlying strategy is networks of peers are extremely influential; so to move people, marketers must learn to move the network connections. (Consider: If you play golf, you may wear a golf jacket you purchased after seeing an ad. But the reason you play golf is that you grew up with a father or college buddies surrounding you with the idea that golf is a fun game. The network of peers around you is what inspired you at the core.)

Pentland suggests that if you find ways to motivate people to share ideas across network connections, and not just respond, you are more likely to make an impact.

 

 

 

The ‘Small World Theory’ of going viral

LL Bean Duck Boots

Why are L.L. Bean duck boots, a product that’s been around for 100 years, suddenly everywhere? The retailer will sell 500,000 pairs this year, up 3x from a few years ago. Kanye West just launched his own brand of the footwear. Marketers trying to “go viral” in today’s world of social media likely understand the basic dynamics of seeding conversations among influencers. But one model often neglected is how ideas that completely oppose each other — say, Hillary Clinton vs. Donald Trump, or rubberized Maine boots donning the feet of New York City hipsters — often collide in networks to surprising effects.

Let’s start first with how things spread in social networks. In 1990 John Guare wrote the play “Six Degrees of Separation,” later made into a movie with Will Smith, which theorized everyone in the world is connected via relationships in only six or fewer steps. Put the right idea in the right network connection, and that idea might spread to everyone. The theory was made more popular by Malcolm Gladwell’s writings and the movie game “Six Degrees of Kevin Bacon” (think of a film with Kevin in it, his other actor, and you’ll likely connect that second actor to any other actor if you’re clever, ’cause Kevin gets around…).

As social media emerged, this theory was one of several others — including Robin Dunbar’s rule of 150 relationships, Metcalfe’s law of network value, and Zipf’s law that things in series always follow in statistical diminishing value — that helped marketers understand how things spread virally online.

The mathematical formula for going viral

The idea of “going viral” actually has a basic mathematical model. Ideas, or “memes,” spread when the passalong rate exceeds the absorption rate of each next node, multiplied by the cycle time. This basic formula for “going viral” …

Viral spread = (Message generation rate — Absorption rate) *Cycle time

is used by companies such as Symantec and organizations like the Centers for Disease Control and Prevention to predict when digital or biological viruses will scale to the masses. 

But there is an important second part to network theory, which explains why ideas seem to replicate and also run into their polar opposites at the same time in human networks.

The Small World Theory

In June 1998, researchers Duncan Watts and Steven Strogatz published a letter in Nature called “Collective Dynamics of ‘Small-World’ Networks.” They analyzed biological, technical and social networks and found a paradox in almost all network connections: While individual “nodes,” such as humans on a computer, tend to cluster in groups of similar beings, even tightly knit network groups tend to have a few links that shoot out to another clustered group somewhere. It only takes a few of these distant links to collapse the overall network into a “small world,” where ideas or viruses or memes from one clustered population can rapidly spread to another. Imagine, a community is hit with a bad flu virus, and then just one person gets on a plane. Or you share a funny story about Donald Trump or Hillary Clinton, and suddenly one Facebook friend gets upset. Watts and Strogatz called this near-and-yet-far propagation the Small World Theory.

We see this dichotomy in our U.S. presidential race (Donald Trump vs. Bernie Sanders supporters applauding each other while yelling at others), in our broader media ecosystems (Fox News vs. MSNBC information bubbles, often reacting to what the other side says), and even in our global political tribes (Western liberalism vs. ISIS conservatism, a fight that The Atlantic recently reported is largely based on the perceived role of women in society). What one group considers normal is validated by others in close proximity, but the idea is shared across a long connection to another group who may despise the same idea.

For marketers, this Small World Theory has big implications, because occasionally an idea loved by one community can break through to another via these random long connections. Think of today’s fad for L.L. Bean duck boots, which are now running out of stock due to college-student demand; or the surge in beards among all U.S. males started by a few hipsters for a November “Movember” cancer-awareness stunt, harming razor blade sales. Small led to big, and somehow, big adapted.

Because ideas spread from close homogeneous groups first to different-interest groups second, a marketer must rethink her strategy to two stages. First, an idea should not only resonate among the product’s closest fans or prospects, but also be able to influence a different population at the second stage, when it is boosted via long-network links to groups outside the core audience. If both stages can be achieved, the marketing idea will then truly scale. The ideas with the greatest sticking power — today’s major religions — have followed this dynamic.

As James Gleick wrote in his masterful book “The Information,” “the network has a structure, and that structure stands upon a paradox. Everything is close, and everything is far, at the same time.” Networks are built to replicate the ideas we love among those nearest us, and at the same time, send our ideas into orbit among others who don’t understand how we think at all.

Who’s fighting for Black Friday?

Screen Shot 2015-11-30 at 11.22.20 AM

Our friend Edward Boches, a professor of advertising at Boston University, recently posed a question on Facebook: “Are we, in advertising, responsible for the real life version of Hunger Games?” He was alluding of course to the images of Black Friday shoppers battling for electronics, parents stealing boxes from the hands of other parents’ children, stampedes by doors, that type of thing. Boches linked to a 2014 column by Luke O’Neil in The Washington Post, who suggested Black Friday “brawl videos” are how rich people shame the poor: that is, wealthy people stay home, aghast at the consumerism we see among the less-fortunate, who race for sales stoked by the elite.

Well, no, this is not the case. Holiday retail sales in fact appeal to all demographics, with the price framing thought up by Richard Thaler in 1980 becoming a core motivator of human behavior. Black Friday shoppers closely mirror national averages for household income. What is different is the crowds on Thanksgiving Day and the Friday thereafter skew young.

But before we dig into Black Friday profiles, let’s see where this strange shopping holiday came from.

Army vs. Navy

The common legend is the day after Thanksgiving was the date in the calendar year when retailers went from being in the “red” – with expenses greater than profits – to making it into the “black” financially; hence “Black Friday.” But the History Channel recently reported the actual holiday name stems from a day of raucous shopping and shoplifting in Philadelphia in the 1960s, when an annual Saturday Army-Navy football game brought throngs of consumers into the city the day after Thanksgiving. Police staffed up to manage all the retail turmoil. This year, the National Retail Federation reported 135 million Americans planned to shop over Thanksgiving weekend. Many retailers began opening their doors to sales on Thanksgiving as well. Walmart and Target opened on Thursday this year at 6 p.m.; JCPenney at 3 p.m.; and the Family Dollar Store at the ungodly hour of 7 a.m. The encroachment of retail sales on turkey day seems unstoppable.

Who shops on Black Friday?

The crowds that come on Thanksgiving or the Friday after closely match national demographics for household income, countering O’Neil’s opinion that Black Friday shopping is a sport for the poor – but they do skew younger, being 86% more likely to be under age 30 than average shoppers, and slightly more female, according to a national study by CivicScience.  (Gallup found similar results in a 2012 poll, with 34% of adults age 18-29 being the predominant Black Friday shoppers.) These consumers are technologically savvy, with a majority using smart phones to check prices and coupons. And they’re most interested in buying electronics or clothes — items where seeing, touching and feeling seem intrinsic to the purchase decision.

But beyond the youthful rush at the mall, consumers may be pushing back on Thanksgiving-week sales. CivicScience found that 90% of U.S. consumers said they were not at all likely to shop on Thanksgiving Day, and 81% were unlikely to shop on Black Friday.

And all the rush to open physical doors earlier does not appear to be jacking brick-and-mortar sales. The National Retail Federation reported today that 103 million U.S. consumers shopped online over Thanksgiving weekend, beating the 102 million who showed up at malls. ComScore reports that digital sales last Thursday and Friday were up 20% over the prior year, compared to brick-and-mortar sales being slightly down.

The upshot is ironic: Retailers continue to push further into the holiday calendar, opening earlier and earlier on Thanksgiving Day, while the holiday shoppers are moving more to online outlets. Black Friday is not an event the preys on poorer people, but rather on the psychology of all consumers, enticing with perceived deals as the dark of winter approaches. The most interesting trend is older consumers, where wealth is concentrated, appear most likely to stay home, surfing for discounts by the warm light of their computers. Why hello, there, Cyber Monday.