Cass Sunstein, co-author of Nudge, created this idea which is about deciding how we are going to decide.  As an example (mine, not his), let’s say you want to buy a smart phone but know there are an overwhelming number of options.  You might manage this by doing a lot of research ahead of time (online, ask friends, observe what others have) to make it easier to decide when you get to the store.  That decision STRATEGY is your second order decision and what you actually buy when you get to the store is your first order decision.

Shoppers can be segmented and targeted based on their second-order decision strategies. When we can repeatedly observe how a shopper decides, like in packaged goods, it is likely that a shopper mostly exhibits the same path to purchase for a given type of product, as their underlying decision strategy is likely to be very stable for a given product category. For example, if you know there are sales to be had on bottled water and you wait until an acceptable brand is on sale, you are a “system beater” (a term I helped to create in 1994).  That strategy of searching for sales becomes the core of the shopper’s second-order decision. The first-order decision becomes greatly simplified with that strategy (buy/not buy, how much).  Not all shoppers are system beaters (for example, some are highly brand loyal) suggesting that shoppers can be segmented on their decision strategies and marketed to in that way.

Second-order decision making can be affected by marketing and the economy.  During the recession, I believe that many shoppers changed their second-order decisions.  People’s shopping patterns were greatly affected (more planned purchases and acceptance of store brands increased.) imagine the heuristic at point of purchase becoming “see if a national brand is on sale; compare price to the store brand”.  Dramatic increase in the use of coupons has been documented (highly intensive second-order decision-making/searching for sales that then simplifies the first order decision).  It is the changes in second-order decision strategies that have challenged the value proposition for national marketers. 

Do you want the brand decision in or out of the store? A national marketer with strong brands wants the brand decision to be made at the time the shopping trip is being planned, not in the store.  In other words, they have a strong preference for people using a PARTICULAR second-order decision. What are marketers doing to encourage the second-order strategy that benefits them?  How are their packaging and website encouraging consumers to simply use habit and replenishment as their decision strategy? If you are the new brand or a price brand, how are you DISCOURAGING people from doing that and encouraging shoppers to be more explorative?

What type of second-order decision do you want people to use? I imagine that AT&T and iPhone do not want people to have a high-effort second-order decision strategy.  They want people to just go to the AT&T store and get the leading smart phone (iPhone).  Verizon and Motorola Droid should want people to get curious and to engage in much more information search; a highly engaged second-order decision approach.  In other words, the marketing battle needs to be fought on shaping people’s strategies for deciding and targeting those who have the preferred second-order decision strategy.

One way to get people to engage in a more evolved second-order decision process starts with the realization that it is a coping mechanism when people perceive many available choices.  This idea turns the Schwartz Paradox of Choice concept on its head.  Choice is NOT bad; people want choice to reflect their individuality (that’s why there is a long-tail of choices.) However, when there is a lot of choice, people cope by employing heuristics and second-order decisions to simplify the first-order decision.  Hence, more PERCEIVED choice leads to involved pre-planning. That is what iPhone COMPETITORS should want; get people to see the choices out there.  On the other hand,Apple should want to convince people there is really only one choice.  The battle is waged over the second-order decision strategy.

How can Apple (or any market leader) take a marketplace where there are many choices and make it one with few perceived options? Own the one thing that people should really care about. Taversky pioneered the concept of “elimination by aspects”; all items that don’t possess a certain desired feature are immediately put out of consideration. Dr.  Gerd Gigerenzer has documented many simplifying heuristics that people use, including “take the best” which describes an approach of focusing first on the attribute that is both the most important AND that differentiates the choices. We become blind to other choices.  That’s why Schwartz’ Paradox of Choice is misleading for marketers. 

How do we recognize? The final point I want to make today is the importance of understanding how we recognize things.  When the second-order decision carries the entire load, the planned purchase becomes a foregone conclusion.  Then, the retailer and manufacturer challenge shifts from influencing decisions to influencing recognition.  Gregory Bern, in his book “Iconoclast” talks about perception as a predictive system, where low level visual stimuli are interpreted via retained images and concepts. What cues will best connect your brand to this “predictive system” that people use to recognize things?

Behavioral economics has given us a new path to marketing opportunity.  Let’s study how people decide.

This is the second of two posts on applying behavioral economics to marketing issues.  The first posting is here.

Now I understand. 

Marketing is so much more than efficiently offering products and services to people that they want.  Marketing is a fundamental process to a free society; it is a Right. 

Marketing and brands offer consumers choice; without choice, there is no freedom.  Conversely, a repressive society must limit marketing because it would cultivate an appetite for choice, desire, and citizens (rather than the state) wanting to be in control. That is the true meaning of brands and advertising; they are an essential part of the fabric of a culture built on freedom. 

What opened my eyes to the larger societal contribution of the practice of marketing was interviewing (with the help of Sheila Terry, formerly of Kraft) six people of various generations who grew up in essentially brandless worlds; The Soviet Union, Hungary, Poland, and Cuba. What was their life like? What happened when brands became available to them either in their country or because they emigrated? 

State-run economies were the antithesis of a consumer-driven economy.  In fact, as Sheila concluded, “consumers, as we know them, did not exist in these cultures; consumer as boss would be unthinkable in a supply-driven economy.” 

Listen to how people described their experiences. 

About choice and availability:

 Cuba was a world of restrictions; here (in the US) we have possibilities.

You had a ration card…one pair of shoes, so many panties; half a pound of meat every month (Cuba)

 You had to decrease your desires (Hungary)  

If you saw a queue, you got on it.  You would wait 1-4 hours and maybe not even get anything.   

Sometimes you would even buy things you didn’t need just because it was available. (Soviet Union) 

About service:

Rude service.  They were better than you.  They were in possession of what you wanted. (Soviet Union) 

About product quality 

Everyone assumed products from other countries were better because we knew life was better elsewhere (All)

 Produce in government stores was rotten.  Although it was 6-10 times more expensive, 35% of fruits and vegetables were bought in private markets. (Soviet Union) 

About shopping experience  

What was shopping like? Imagine hundreds of identical bottles of vinegar on the store shelf (Poland) 

Was it really a brandless world? 

Patrick Hanlon, author of Primal Branding, states that brands are so important because “we all want to believe in something greater than ourselves”. What I’m about to report supports that. 

One of the most interesting findings from the interviews was how people created their own “brands.”   Country of origin became a brand.  In countries where life was known to be better, it was assumed that products from those countries were better.  In the Soviet Union, the factory where something was made became a “brand” as certain factories were known to make better products.

 In addition, people would seek out brands by visiting other countries or speaking with relatives who emigrated.  For example, Hungary borders Austria and even before privatization, “We were going to Vienna for better brands and products. “

 Certain brands were available and were highly desired.  For example, “We all wanted to buy Levi’s jeans because it symbolized freedom and a better way of life” (comment from a number of those interviewed).

 When markets opened up

 Markets began to open up in the East Bloc, around 1990.  Again, I was a little surprised by what people had to say.

 “Brands started to enter Russia in the early 90s, but it took a while to realize what was happening.” 

 “When brands first came to Poland and advertising started we had to see if changes were permanent.  People were suspicious at first—was thisa government trap?”

 While some were amazed by this new Technicolor world (“You could excite me with a package of gum—all the colors, packaging”; “We would dress up to go to McDonald’s”), it wasn’t as new to others.  Many had already sought out brands from relatives living abroad or by traveling.

Others suffered from culture shock as lack of choice.  Struggling to buy the basics, and reusing everything possible was built into their DNA forever, it seems.

Dr. Nicos Rossides, CEO of MASMI (a firm that specializes in marketing research in Central and Eastern Europe) wrote, “The intense and rapid changes that accompanied this transformation were both exhilarating and unsettling, with citizens from ex-communist states able to travel freely, express themselves openly, vote for their leaders, and own businesses and land for the first time. What is more, they could now have a bewildering range of choice from among tens of thousands of competing brands – provided they could afford them. However, the values, beliefs and norms that entire populations were accustomed to and used as a gauge as to the appropriateness of daily actions – their moral compass – became largely irrelevant, causing a great deal of anxiety and disorientation, particularly for those …(other than)…the younger, more open and receptive people.”

 Living in this country, it’s easy to take freedom for granted and not see how blessed we are that we have the freedom to choose.  Why do you think that the internet has given us access to the accumulated knowledge of mankind and the long tail of choices at any hour of the day or night?  Because, when barriers were removed (blue laws, service costs, etc.), that is what people wanted and what marketers were able to provide.

 Is being in Marketing a worthy profession? “Oh, you’re in marketing”, or “Oh, you’re in advertising?”  (implied ‘ugh’ follows). Well, I beg to differ.  Our most important rights are based on our freedom to make our own life choices which are activated daily by the options that marketing and media give us. Think about the force for democracy that Twitter (a marketer) was in Iran during the elections. Marketing is every bit as noble as the medical profession, or education, or being an environmental scientist.  We are all equally essential to the human condition.

 Some in government want to “nudge” choice.  Legislators who think they know better than we do are attempting to use taxation to dissuade advertising and consumption of certain products.  Seems logical; why “allow” people to make BAD choices?  Well, I hope they read this blog.  As you restrict choice, you move closer to a world our interviewees will find familiar.

 Feel the stories of people who grew up in cultures without choice where daily existence was defined by deprivation rather than hope.  Freedom is spelled C-H-O-I-C-E, and that is the importance of marketing and brands.

As I think about ten “rock my world” changes going on in marketing and media, they fall into three broad themes: changing our approach to media planning; changing our thinking about building brands and understanding the changing consumer and world we live in. This blog is about the second big bucket, changing our approach to brand building.  Click here for part one on media planning.

Here are a number of changes marketers need to get ahead of and what it means for new approaches to brand-building.

4. Understanding the new consumer and your brand influencers

Brand influencers are changing. People can “pull” any information they want via online search, including on mobile devices. Social media influence brand learning and shape choices as recommendations from friends and social media contacts (even strangers like in Yelp) are a highly trusted source of brand information.  In this new environment, traditional advertising is still important, and even plays a new role.  It becomes a source of curiosity about the brand; a conversation starter.  (Traditional “mass” media are statistically proven to drive search and traffic to owned media websites.)

As 50% or more of purchase decisions are made in-store, shopper marketing becomes more important and retailers and store brands are getting more powerful; for example, a year ago, would anyone have thought Costco would delist Coca-Cola?

5. The brand dilemma: globalization and hyper-localization

Marketers need the scale that global branding gives them. It gives them the ability to deploy resources to high growth markets such as those in Asia and to simplify their brand variants. At the same time, a marketplace is really a collection of small markets that vary in tastes and preferences as cultures vary from country to country, and across ethnicities within a country. Retailers are creating localized formats to best meet the cultural, regional, and economics needs of their trading areas and brands must adapt as well. Hence, marketing must build brands globally but activate locally, making sure that packaging, product variants, shopper and mobile marketing all strengthen the local relevance for consumers.

6. The changing meaning of ‘value’ in uncertain times

The recession has had an impact on how people shop and how they trade-off premium national brands versus cheaper store brands. It is unlikely that as the economy rebounds shoppers will completely go back to prior purchasing preferences. In many cases, shoppers have learned where store brands are “fit for purpose” (possibly superior; Kroger’s pies have gotten great press, for example.) National brand marketers need to rethink the value-add they can provide over and above store brands.

7. Geo-triggering of information

In the next few years, we are likely to see a rise in augmented reality and geosensitive messaging delivered to mobile devices based on the “cloud” knowing exactly where you are. Already, some mobile shopping applications even know exactly what aisle you’re in! The same mobile device can also be used, at the owner’s request, to “pull” information. Today, you can take a picture of a UPC code and Shopsavvy will comparison shop for you right at point of purchase. With a smart phone you can search or connect with a friend while deciding what to buy in a store.  You can find out what bars serve Stella Artois as you walk down the street and how that place is rated by others.

Smart marketers will integrate mobile and shoppers marketing into their media strategies as information and opinion then become instantly accessible right at point of purchase and impact the buying choices people make.

Brand Building in a two-way world

Consumers are no longer just members of passive audiences they are now active participants.  They can pull information via search, going to owned media sites, become brand ambassadors by exchanging ideas with friends in social networks and can even help you create new products.  However, they can also become activist in a heartbeat if a marketer does not provide the access, transparency, authenticity, and customer care people expect.

In the new marketing world, brands can (and should) compete in a mental marketplace to connect with people in four ways; functional needs, social attraction, self-expressive value, and offering entertaining and informative content that stimulates curiosity. Thinking this way reveals new ways of making your brand relevant and top of mind and if you succeed at creating that connection, you will be shopped for first even if, rationally speaking, you are only one of a number of similar, acceptable brands.  Of course, being shopped for is not the same thing as being bought, which is why locally relevant activation is so important to seal the deal.

The “mental marketplace” changes the rules of competition; your brand must vie for attention against functionally unrelated brands including celebrities and games like Farmville. For example, Whole Foods vies in the mental marketplace of “wellness” with Dannon, Kashi, Subway even WebMD. Whole Foods “competes” wonderfully via brand community across social media (e.g. 800,000+ Twitter followers), has an active blog and iPhone app about a wellness lifestyle from organic/fresh foods.

Brand building in a two way world will separate marketers into two groups; those who feel a sense of gain from conversation with consumers and those who feel a sense of loss because they are no longer in control.  The first group is the future of marketing.

—Wikipedia

So what does curiosity mean for marketers?

Curiosity impels us to do things beyond functional need. It makes us explorers, discoverers.

From shopper insights, we know that consumers like to browse, to discover new things. We purchase many (perhaps most) new products not because we arrive at the store with a perceived need for those particular items but, instead, because they’re fun things we encounter as we shop. We’re curious to try that new gourmet coffee, to unscrew the lid off of a shampoo bottle and take a sniff. Many shoppers love wandering around a Trader Joe’s intending to find something interesting.

So marketers, take note: the curiosity impulse can lead people to discover and engage with your brand.  When curiosity takes over there is no need to patiently move consumers through a linear funnel from awareness to interest to desire, blah blah.  Curiosity leads to purchases that are serendipitous and often spontaneous.

To leverage people’s natural curiosity, consider the following strategies.

Build curiosity into your marketing plans

• Create a brand experience that requires exploration and play. (Twitter, gaming and Bing—with the wonderful exotic photos– are three examples.)
• Create a stream of interesting new product forms. Air-freshener products are great at this.
• Create an offering that never stops surprising. iPhone apps, for instance, provide endless opportunities for discovery.

Build curiosity into your brand communications

• Use both traditional and digital advertising to make people curious about your brand, and then send them to an owned-media digital destination for more. For an example, look no further than the Frito-Lay award-winning ad campaign that Ogilvy created for Cheetos: it used a variety of media to deliver people into “The Orange Underground,” an imaginative, entertaining digital place that further whetted consumers’ appetite for the snack food.
• Use teaser advertising for a major launch to build intrigue. For an active case in point, look at what Verizon used to pre-launch the new Android phones.
• Use massive multi-player games to build awareness—a practice well established by the movie and gaming industries.
• Use state-of-the-digital-art technology Augmented reality and QR codes will allow people to explore your brand in a retail setting like never before.

Build curiosity by retail activation

For a retailer, curiosity equals exploration equals shopper excitement. Retailers always are struggling to create in-store excitement to engage shoppers to more fully navigate up and down the aisles.

• Create demo and tasting stations. People love to sample new foods; it combines curiosity with the strong attraction that people have to “free.”
• Create thematic retail activation ideas that break the linear shelves (e.g., a party center; a “here’s-what’s-new-this-month” venue; an “essentials-for-less” destination, where any brand [including the store brand] that meets certain affordability guidelines gets secondary placement).

Herb Sorensen, author of Inside the Mind of the Shopper says that a typical supermarket carries some 40,000 SKUs but that a typical shopper buys 400 items in a year. Maybe part of the reason is that shoppers are out of ideas but would welcome new ones.

Shift Marketing Thinking; from products to experiences

To be interesting, you not only compete for attention with functional competitors, you go up against “unrelated” brands. Whole Foods (a retailer) competes in the mental marketplace of health/fresh with Dannon, Kashi (products), and Subway (restaurant). Whole Foods “competes” pretty well by building a sizable brand community across social media (e.g., more than 800,000 Twitter followers), having a wonderful blog and iPhone app about a wellness lifestyle with organic and fresh foods. Coke competes in social media such as Facebook and Twitter with Nike and with celebrities to be fanned and followed by consumers.

Brands as experience is an important marketing concept.  In a long-tail world of choices that are sometimes not very functionally different, perhaps “interesting” is the new “better”.

For more on this topic, please check out my article in the Dec ‘09 Journal of Advertising Research.

Certainly Mr. Stuart was right, but the irony is that few marketers systematically try to link brand-building efforts to changes in brand value, instead, judging their effectiveness by marketing mix modeling results on short term sales or bumps in intermediate measures such as awareness or purchase intention.

In the early 1980s, $50 billion or more was shifted by US marketers from advertising to trade promotion.  The reason was that IRI and Nielsen made weekly store scanner data available that showed huge spikes in weekly sales when a trade deal (e.g. end of aisle display with price off) was run.  A typical result was that only 5-10% of lift above baseline was associated with advertising. Obviously, trade dealing was the way to go.

In 2005, in an ANA Advertiser paper, I asked marketers to consider, “where did the baselines come from”?  Why do some brands have 5-10X the baseline of their competitors?  Maybe we should start focusing on the baseline as much as the spikes?

Professor Len Lodish noticed the same thing and in HBR 2007 co-authored a paper entitled, “If brands are built over years, why are they managed over quarters?”  He notes that promotions lift sales but also reduce baselines and increase a brand’s price sensitivity. However as brand management rotates from brand to brand, they hit their numbers with effective promotion and by cutting the 4^th quarter ad budget, leaving the problem for the next team.

The assessment? Marketers are mortgaging their brand’s future.

However, even if a marketer commits to measuring advertising’s impact on brand value, the path forward is unclear.

Lodish calls for a dashboard approach, where baselines are re-calculated regularly so the effect of brand-building can be assess against brand baselines and changes in price sensitivity. Unfortunately, excessive promotion will reduce the baseline making it appear that promotions are working and incorrectly concluding that a simultaneous ad campaign is reducing baseline, leading to more promotion and less advertising—reinforcing the exact wrong conclusion.

Another approach would be to calculate the financial value of a brand in a way that is trackable over time.  However, at this point, two main ways the industry can choose to do brand valuation, BrandZ and Interbrand, produce quite different answers as shown in the following graph (2008 data) that depicts brand value (in millions) on those brands (ranked by Brandz valuation) in common to both sets of rankings.

Is Google worth $86 billion or $25 billion?  Is Google worth much MORE or LESS that Microsoft?  These discrepancies between the two methods would give marketers and CFOs pause to treat this as hard information upon which to base investment decisions unless one of the two methods is carefully validated by a given marketer.

A third class of tools comprises attitudinally-based measures of brand equity which can come from asking a magic brand equity question, attitudinal modeling, or conjoint/discrete-choice where the contribution to utility from the brand name alone is isolated.  All valuable, but do they give an ROI?  “I spent this much and I got this increase in the value of my brand, so this campaign was ROI-positive…”  Probably not (yet).

Especially in recessionary times, marketers are tempted into make exactly the wrong decisions by cutting advertising and minimizing sales declines through promotions.  This will have the long-term effect of cheapening national brands and mortgaging their future.

According to Brandz, the total value of the top 100 brands is close to $2 trillion. That is a huge amount of asset creation from advertising and other brand building investments and marketers need to find a way to make the connection or they will continue to make the wrong marketing investments.