Video: John Hayes on the future of marketing
The CMO of American Express reveals how marketers are losing control over what’s said about their products, while still being held accountable for their success or failure.
Wednesday, August 3, 2011
Management of Financial Institutions - MGT604 Music Videos
Management of Financial Institutions - MGT604 Music Videos: "Management of Financial Institutions - MGT604 Videos"
A new way to measure word-of-mouth marketing - McKinsey Quarterly - Marketing & Sales - Strategy
A new way to measure word-of-mouth marketing - McKinsey Quarterly - Marketing & Sales - Strategy: "A new way to measure word-of-mouth marketing"
Consumers have always valued opinions expressed directly to them. Marketers may spend millions of dollars on elaborately conceived advertising campaigns, yet often what really makes up a consumer’s mind is not only simple but also free: a word-of-mouth recommendation from a trusted source. As consumers overwhelmed by product choices tune out the ever-growing barrage of traditional marketing, word of mouth cuts through the noise quickly and effectively.
Indeed, word of mouth1 is the primary factor behind 20 to 50 percent of all purchasing decisions. Its influence is greatest when consumers are buying a product for the first time or when products are relatively expensive, factors that tend to make people conduct more research, seek more opinions, and deliberate longer than they otherwise would. And its influence will probably grow: the digital revolution has amplified and accelerated its reach to the point where word of mouth is no longer an act of intimate, one-on-one communication. Today, it also operates on a one-to-many basis: product reviews are posted online and opinions disseminated through social networks. Some customers even create Web sites or blogs to praise or punish brands.
As online communities increase in size, number, and character, marketers have come to recognize word of mouth’s growing importance. But measuring and managing it is far from easy. We believe that word of mouth can be dissected to understand exactly what makes it effective and that its impact can be measured using what we call “word-of-mouth equity”—an index of a brand’s power to generate messages that influence the consumer’s decision to purchase. Understanding how and why messages work allows marketers to craft a coordinated, consistent response that reaches the right people with the right content in the right setting. That generates an exponentially greater impact on the products consumers recommend, buy, and become loyal to.
A consumer-driven world
The sheer volume of information available today has dramatically altered the balance of power between companies and consumers. As consumers have become overloaded, they have become increasingly skeptical about traditional company-driven advertising and marketing and increasingly prefer to make purchasing decisions largely independent of what companies tell them about products.
This tectonic power shift toward consumers reflects the way people now make purchasing decisions.2 Once consumers make a decision to buy a product, they start with an initial consideration set of brands formed through product experience, recommendations, or awareness-building marketing. Those brands, and others, are actively evaluated as consumers gather product information from a variety of sources and decide which brand to purchase. Their postsales experience then informs their next purchasing decision. While word of mouth has different degrees of influence on consumers at each stage of this journey (Exhibit 1), it’s the only factor that ranks among the three biggest consumer influencers at every step.
It’s also the most disruptive factor. Word of mouth can prompt a consumer to consider a brand or product in a way that incremental advertising spending simply cannot. It’s also not a one-hit wonder. The right messages resonate and expand within interested networks, affecting brand perceptions, purchase rates, and market share. The rise of online communities and communication has dramatically increased the potential for significant and far-reaching momentum effects. In the mobile-phone market, for example, we have observed that the pass-on rates for key positive and negative messages can increase a company’s market share by as much as 10 percent or reduce it by 20 percent over a two-year period, all other things being equal. This effect alone makes a case for more systematically investigating and managing word of mouth.
Understanding word of mouth
While word of mouth is undeniably complex and has a multitude of potential origins and motivations, we have identified three forms of word of mouth that marketers should understand: experiential, consequential, and intentional.
Experiential
Experiential word of mouth is the most common and powerful form, typically accounting for 50 to 80 percent of word-of-mouth activity in any given product category. It results from a consumer’s direct experience with a product or service, largely when that experience deviates from what’s expected. (Consumers rarely complain about or praise a company when they receive what they expect.) Complaints when airlines lose luggage are a classic example of experiential word of mouth, which adversely affects brand sentiment and, ultimately, equity, reducing both receptiveness to traditional marketing and the effect of positive word of mouth from other sources. Positive word of mouth, on the other hand, can generate a tailwind for a product or service.
Consequential
Marketing activities also can trigger word of mouth. The most common is what we callconsequential word of mouth, which occurs when consumers directly exposed to traditional marketing campaigns pass on messages about them or brands they publicize. The impact of those messages on consumers is often stronger than the direct effect of advertisements, because marketing campaigns that trigger positive word of mouth have comparatively higher campaign reach and influence. Marketers need to consider both the direct and the pass-on effects of word of mouth when determining the message and media mix that maximizes the return on their investments.
Intentional
A less common form of word of mouth is intentional—for example, when marketers use celebrity endorsements to trigger positive buzz for product launches. Few companies invest in generating intentional word of mouth, partly because its effects are difficult to measure and because many marketers are unsure if they can successfully execute intentional word-of-mouth campaigns.
What marketers need for all three forms of word of mouth is a way to understand and measure its impact and financial ramifications, both good and bad.
Word-of-mouth equity
A starting point has been to count the number of recommendations and dissuasions for a given product. There’s an appealing power and simplicity to this approach, but also a challenge: it’s difficult for marketers to account for variability in the power of different kinds of word-of-mouth messages. After all, a consumer is significantly more likely to buy a product as a result of a recommendation made by a family member than by a stranger. These two kinds of recommendations constitute a single message, yet the difference in their impact on the receiver’s behavior is immense. In fact, our research shows that a high-impact recommendation—from a trusted friend conveying a relevant message, for example—is up to 50 times more likely to trigger a purchase than is a low-impact recommendation.
To assess the impact of these different kinds of recommendations, we developed a way to calculate what we call word-of-mouth equity. It represents the average sales impact of a brand message multiplied by the number of word-of-mouth messages. By looking at the impact—as well as the volume—of these messages, this metric lets a marketer accurately test their effect on sales and market share for brands, individual campaigns, and companies as a whole (Exhibit 2). That impact—in other words, the ability of any one word-of-mouth recommendation or dissuasion to change behavior—reflects what is said, who says it, and where it is said. It also varies by product category.
What’s said is the primary driver of word-of-mouth impact. Across most product categories, we found that the content of a message must address important product or service features if it is to influence consumer decisions. In the mobile-phone category, for example, design is more important than battery life. In skin care, packaging and ingredients create more powerful word of mouth than do emotional messages about how a product makes people feel. Marketers tend to build campaigns around emotional positioning, yet we found that consumers actually tend to talk—and generate buzz—about functional messages.
The second critical driver is the identity of the person who sends a message: the word-of-mouth receiver must trust the sender and believe that he or she really knows the product or service in question. Our research does not identify a homogenous group of consumers who are influential across categories: consumers who know cars might influence car buyers but not consumers shopping for beauty products. About 8 to 10 percent of consumers are what we call influentials, whose common factor is trust and competence. Influentials typically generate three times more word-of-mouth messages than noninfluentials do, and each message has four times more impact on a recipient’s purchasing decision. About 1 percent of these people are digital influentials—most notably, bloggers—with disproportionate power.
Finally, the environment where word of mouth circulates is crucial to the power of messages. Typically, messages passed within tight, trusted networks have less reach but greater impact than those circulated through dispersed communities—in part, because there’s usually a high correlation between people whose opinions we trust and the members of networks we most value. That’s why old-fashioned kitchen table recommendations and their online equivalents remain so important. After all, a person with 300 friends on Facebook may happily ignore the advice of 290 of them. It’s the small, close-knit network of trusted friends that has the real influence.
Word-of-mouth equity empowers companies by allowing them to understand word of mouth’s relative impact on brand and product performance. While marketers have always known that the impact can be significant, they may be surprised to learn just how powerful it really is. When Apple’s iPhone was launched in Germany, for example, its share of word-of-mouth volume in the mobile-phone category—or how many consumers were talking about it—was about 10 percent, or a third less than that of the market leader. Yet the iPhone had launched in other countries, and the buzz accompanying those messages in Germany was about five times more powerful than average. This meant the iPhone’s word-of-mouth equity score was 30 percent higher than that of the market leader, with three times more influentials recommending the iPhone over leading handsets. As a result, sales directly attributable to the positive word of mouth surrounding the iPhone outstripped those attributable to Apple’s paid marketing sixfold. Within 24 months of launch, the iPhone was selling almost one million units a year in Germany.
The flexibility of word-of-mouth equity allows us to gauge the word-of-mouth impact of companies, products, and brands regardless of the category or industry. And because it measures performance rather than the sheer volume of messages, it can be used to identify what’s driving—and hurting—word-of-mouth impact. Both insights are critical if marketers are to convert knowledge into power.
Harnessing word of mouth
The rewards of pursuing excellence in word-of-mouth marketing are huge, and it can deliver a sustainable and significant competitive edge few other marketing approaches can match. Yet many marketers avoid it. Some worry that it remains immature as a marketing discipline compared with the highly sophisticated management of marketing in media such as television and newspapers. Others are concerned that they can’t draw on extensive data or elaborate marketing tools fine-tuned over decades. For those unsure about actively managing word of mouth, consider this: the incremental gain from outperforming competitors with superior television ads, for example, is relatively small. That’s because all companies actively manage their traditional marketing activities and all have similar knowledge. With so few companies actively managing word of mouth—the most powerful form of marketing—the potential upside is exponentially greater.
The starting point for managing word of mouth is understanding which dimensions of word-of-mouth equity are most important to a product category: the who, the what, or the where. In skincare, for example, it’s the what; in retail banks, the who. Word-of-mouth-equity analysis can detail the precise nature of a category’s influentials and pinpoint the highest-impact messages, contexts, and networks. Equipped with these insights, companies can then work on generating positive word of mouth, using the three forms we identified: experiential, consequential, and intentional.
Although the importance of these triggers varies category by category, experiential sources are the most important across them. Harnessing experiential word of mouth is fundamentally about providing customers with the opportunity to share positive experiences and making the story relatable and relevant to the audience. Some companies, such as Miele and Lego, build buzz around products before launch and work to have early, highly influential adopters by involving consumers in product development, supported by online communities. Consistently refreshing the product experience also helps harness experiential word of mouth—consumers are more likely to talk about a product early in its life cycle, which is why product launches or enhancements are so crucial to generating positive word of mouth. Buzz also can be sustained after launch: Apple has maintained interest in and excitement about the iPhone via its apps store, as constantly evolving and user-generated content maintains positive word of mouth.
Most companies actively use customer satisfaction insights when developing new products and services. Yet a satisfied customer base may not be enough to create buzz. To create positive word of mouth that actually has impact, the customer experience must not only deviate significantly from expectations but also deviate on the dimensions that matter to the customer and that he or she is likely to talk about. For instance, while battery life is a crucial driver of satisfaction for mobile-handset consumers, they talk about it less than other product features, such as design and usability. To turn consumers into an effective marketing vehicle, companies need to outperform on product and service attributes that have intrinsic word-of-mouth potential.
Managing consequential word of mouth involves using the insights provided by word-of-mouth equity to maximize the return on marketing activities. By understanding the word-of-mouth effects of the range of channels and messages employed and allocating marketing activities accordingly, companies can equip consumers to spread marketing messages and drive their reach and impact. In fact, McKinsey research shows that marketing-induced consumer-to-consumer word of mouth generates more than twice the sales of paid advertising in categories as diverse as skincare and mobile phones.
Two things supercharge the creation of positive consequential word of mouth: interactivity and creativity. They are interrelated, and particularly important for brands in relatively low-innovation categories that often struggle to gain consumer attention. One example of a company successfully harnessing this power is the UK confectioner Cadbury, whose “Glass and a Half Full” advertising campaign used creative, thoughtful, and integrated online and traditional marketing to spur consumer interaction and sales.
The campaign began with a television commercial featuring a gorilla playing drums to an iconic Phil Collins song. The bizarre juxtaposition was an immediate hit. The concept so engaged consumers that they were willing to go online, view the commercial, and create amateur versions of their own, triggering a torrent of YouTube imitations. Within three months of the advertisement’s appearance, the video had been viewed more than six million times online, year-on-year sales of Cadbury’s Dairy Milk chocolate had increased by more than 9 percent, and the brand’s positive perception among consumers had improved by about 20 percent.
Intentional word-of-mouth campaigns revolve around identifying influentials who become brand and product advocates. Of course, companies can’t precisely control what consumers tell others. But ambitious marketers can use word-of-mouth equity insights to shift from consequential to intentional campaigning.
The type of campaign that companies choose to adopt depends on the degree to which marketers can find and target influentials. Marketers capable of undertaking one-to-one marketing—such as mobile-phone operators—are uniquely positioned to execute controlled and effective intentional word-of-mouth campaigns. Mobile carriers have granular customer data that can precisely locate influentials who know the category, talk to many people, and provide them with trusted opinions. That means messages can be directed at specific individuals who are most likely to spread positive word of mouth through their social networks. As a message spreads, this approach generates an exponential word-of-mouth impact, similar to the ripple effect when a pebble is dropped in a pond.
Companies unable to target influentials precisely must take a different approach. While Red Bull, for example, can’t send text messages to specific consumers, it has successfully deployed science to orchestrate effective intentional word-of-mouth campaigns. After identifying influentials among its different target segments, the energy-drink company ensures that celebrities and other opinion makers seed the right messages among consumers, often through events. While it can’t be sure who will attend, Red Bull knows that those who do will be the kinds of consumers it seeks—and that the positive messages they will relay across their own social networks can generate a superior return for its marketing investment.
Marketers have always been aware of the effect of word of mouth, and there is clearly an art to effective word-of-mouth campaigning. Yet the science behind word-of-mouth equity helps reveal how to hone and deploy that art: it shows which messages consumers are likely to pass on and the impact of those messages, allowing marketers to estimate the tangible effect word of mouth has on brand equity and sales. These insights are essential for companies that want to harness the potential of word of mouth and to realize higher returns on their marketing investments.
Three senior executives on the future of marketing - McKinsey Quarterly - Marketing & Sales - Strategy
Three senior executives on the future of marketing - McKinsey Quarterly - Marketing & Sales - Strategy: "How we see it: Three senior executives on the future of marketing
Virgin Atlantic Airways CEO Steve Ridgway, American Express CMO John Hayes, and Yahoo! Research scientist Duncan Watts on staying ahead of the changes rocking the world of marketing."
Virgin Atlantic Airways CEO Steve Ridgway, American Express CMO John Hayes, and Yahoo! Research scientist Duncan Watts on staying ahead of the changes rocking the world of marketing."
There is no quick path to success in the new era of customer engagement. Progress is likely to come incrementally—by listening to customers, making adjustments to engagement strategies, and learning through trial and error. Since diverse perspectives will be essential to mastering this new landscape, McKinsey’s Luke Collins, Tom French, and Paul Magill recently sought out three practitioners with very different vantage points on marketing’s future.
Virgin Atlantic Airways CEO Steve Ridgway talks about how his company recently has been pushing the boundaries of collaborating with customers, while experiencing the pleasant surprise of a successful mass-media campaign. American Express CMO John Hayes discusses what today’s “marketing revolution” means and describes some of the organizational steps he has taken to get ahead of it. Duncan Watts, principal research scientist of the Human Social Dynamics group at Yahoo! Research, explains how today’s data-rich environment exposes the limits of intuition in marketing and the need to take a scientific approach to understanding consumers. A summary of those conversations follows.
 | THE CEO: VIRGIN ATLANTIC AIRWAYS’ STEVE RIDGWAYSteve Ridgway has been the CEO of Virgin Atlantic Airways since 2001. A native of England, he joined Virgin in 1990. Previously, he served as executive director of customer service and managed the company’s frequent-flyer program. In 2006, Queen Elizabeth II made Ridgway a commander of the Order of the British Empire (CBE) in recognition of his service to British industry. |
Where mass media still matter
It’s popular these days to say that television and other traditional forms of marketing don’t work—that it’s a fragmented world out there, and marketing is henceforth all about the thousands of little things that companies do in different constituencies, markets, and segments.
I’m not sure that’s altogether right. Focused, laser-like efforts are certainly very valuable, but I worry that we might get all the “micro” things right and miss the bigger picture. I don’t want to lose sight of how important it is to have all of our marketing efforts somehow embodied in something bigger—something iconic, even.
That lesson was driven home for me by the recent success of two of our, what would be considered traditional, “above the line” television campaigns.1 The first was in 2009, when Virgin Atlantic Airways was celebrating its 25th birthday. At the time, everyone was depressed about the world economy, and we just wanted to put a smile on our customers’ faces and on our own faces. The result was “Still red hot,” a TV campaign2 that started in the UK, went viral, and had an absolutely massive effect in creating a positive halo for our brand not only among our customers but among our staff and suppliers as well. We’ve always focused heavily on brand and brand awareness, but this campaign sparked something more—it energized and engaged a whole new constituency out there before they’d even set foot on a plane.
Of course, beneath the traditional campaign sat a series of related, “below the line” efforts in all the new mediums. But it was quite a revelation—and a surprise, frankly—for us to see how powerful it can be to put ourselves out there in the market with this really big, confident shop-window, rather than concentrating on the fragmented world that everybody is telling us we have to be in. We simply wanted to reinvigorate our brand, to produce a powerful campaign to show that we were still alive and kicking and that our brand still had spirit, and it suddenly became more than that. The experience has spurred us to launch a second TV campaign, “Your airline’s either got it or it hasn’t,” and its success has taught us more still, while further convincing me of the need to have a traditional, big-hitting, resonant presence in the marketplace.
Catalyzing social-media engagement
Social media hasn’t required a huge investment from us thus far, in part because we’ve tried to build social networking into things that we knew we had to do anyway. We’ve also done some interesting things with outside “self-developer” groups, where we adopt the role of catalyst, or pump primer.
VJAM is an open-innovation initiative we did with NESTA, the UK’s National Endowment for Science, Technology, and the Arts. We provided seed capital to support the development of an outside development group that has gone on to create some very useful applications for our customers. It created a taxi-sharing app, for example, that lets passengers on the same flight or on flights arriving at a similar time share a taxi ride if they’re going the same way. This saves people money and is better for the environment—and it was all done by developers who are themselves our fans, followers, and customers. Our flight tracker app was developed in a similar way and has also become very popular.
It’s been really fun working with this group; they’re very fired up. Of course, we could have spent a fortune on a glitzier version of all this, but it wouldn’t have been better. What they’ve done is very good, and when you consider the speed at which it was done and the infectious enthusiasm they bring to the table—and the pride they take in the work—it’s just fantastic. And it’s all possible because there was sufficient motivation and engagement out there to convince these people to want to do this for us.
Customer experience as a marketing tool
Before we start marketing anything or talking about our brand proposition, we ask ourselves, are we being brave enough to get ahead of consumer expectations? One way we try to think ahead of our customers is through creating a superior customer experience. If we get our customers off the plane happy, and they go on to talk about that and get others to come and then come back again themselves—that’s a huge marketing tool for us.
Making that happen requires having the elements in place to help the staff do their jobs and make our customer experience distinct from what other airlines are offering. Those elements include things like putting our clubhouses in a different design world than the other airlines’ lounges. Differentiation also is visible onboard the aircraft in all the design work we did in our upper-class suites to get the best flatbed possible and in taking the fit and finish inside the aircraft to a whole new standard.
But getting the tools right isn’t enough. We were the first airline to put in-flight entertainment systems in our planes, for example, and now everybody’s got them. And, frankly, there are some airlines out there now—in the Middle East, for example—that have very deep pockets and spend lots of money. So we need to go further.
The real key is people and developing the chemistry and the attitudes, in our staff, that create the right experience for customers. We’re constantly pushing this in our professional training because without the human element, all the rest counts for nothing. There’s massive complexity in doing this well because it extends from a customer’s first phone call to saying, “Goodbye. Come back soon.”
When we get both things right—connecting the tools and the people—then our staff can really engage customers with attitude and spirit. They feel proud of what they’re doing; they like being winners. And at the end of the day, that really matters. After all, we fly exactly the same planes as everybody else. We fly them under the same very strict safety rules. Yet if you go on one of our planes and experience the service, you’ll see it’s very different from many others.
 | THE CMO: AMERICAN EXPRESS’S JOHN HAYESJohn Hayes has been American Express’s chief marketing officer since 2003. Previously, he was the company’s executive vice president of global advertising and brand management. Hayes joined American Express in 1995, after holding senior positions at advertising agencies, including Lowe & Partners, of which he was the president; Ammirati & Puris; and Saatchi & Saatchi Compton. |
A marketing revolution
We’re going through a revolution a whole lot like the Industrial Revolution. The change is that profound. I had a conversation recently with an employee about this new age of marketing. Basically, it went like this: “As we try to go to market with your idea,” I said, “the world is going to decide whether or not this has real value, talk about it, and then position it pretty much how they want to position it.” The person responded, “OK, so we really have lost control?” I said, “Yes, that’s right. I don’t get to control everything that’s said about us.” Then I said to the person, “But understand, you’re still 100 percent accountable for the outcome.”
The reaction to me was, “That’s not fair.” And it’s not. But it’s the world we live in. It’s more exciting because if you really do have a great product or a great program, it can catch fire in the marketplace. That’s exciting. But the challenge for most people who are marketers today is, “How do you hold me accountable for the success of this when I can’t control what somebody might say about it or what somebody else might contribute to this conversation?”
Meeting the organizational challenge
I haven’t met anybody—and I talk to a lot of my colleagues in the marketing world—who feels they have the organization completely aligned with where this revolution’s going, because it’s happening so fast and so dramatically. Marketing is touching so many more parts of the company now. It touches on service; it touches on product development. We need to organize in a way that starts to break down the traditional silos in the business.
We’re creating cross-business function groups and seeing how they work. If you’re not experimenting, you’re not learning. So we’ve created a marketing council with the key marketer from each business unit. At first we wondered, “What is this marketing council really going to do?” Well, when we got everybody together, it was clear that there were issues that the whole group was having, and there were issues that some parts of the group were having with other parts of the group. Taking folks out of their business unit environment and putting them in more of an enterprise-wide environment changes some behaviors because it helps people understand more clearly that we have shared customers. We need to talk about how to serve them better, and we may have synergies between two or three of our business areas around specific growth opportunities.
We’ve done this now in a variety of areas, not just on a general marketing basis but also, for example, in areas that have to do with digital transformation. The result of some of this work is that we’re not just marketing and selling on Twitter and Facebook today, we’re servicing customers as well. When you bring these cross-functional teams together, people start to say, “Well, if people are asking questions on Facebook and Twitter about how to redeem Membership Rewards points, shouldn’t we be there answering them? Wouldn’t that help our marketing efforts?” When you start to see things come together like this, that’s when the light bulb goes on.
These cross-functional teams—some may be temporary and some may be permanent—will play a very important role in creating more fluidity, more enterprise-wide understanding, and more initiatives that lead to a more cohesive outcome for our customer base.
Understanding and engaging customers
We’re fortunate to have a very passionate, action-oriented community of cardmembers. For example, they know—almost to a person—their “member since” date. Despite all those passwords and all the other things people have to remember in life, they’ll immediately tell you, “Oh, I’m a member since 1991.” I can’t think of too many brands where people know their tenure as a customer.
The strength of that relationship manifests itself in many different ways. Take the earthquake in Haiti that took place in January 2010. We made one small piece of communication to our cardmembers about what they could do to help relief efforts, and within eight weeks our cardmembers had donated over $100 million and 87 million Membership Rewards points.
When you understand that this is a group of people who really feel a sense of belonging—that this brand matters to them—you start to build your marketing plans around the sense of joining a community. So if we find, based on your purchasing profile, that you love wine or you love dining out or you love golf, we can further engage you in the things you’ve already made clear are important to you as a person. It’s really a dialogue, which isn’t just us sending out an e-mail and somebody sending something back to us. The dialogue has to do with us guarding your privacy at all times but doing appropriate things to understand what interests you and then serving you better. That’s part of the dialogue; that’s how we listen.
We also benefit from seeing what people are writing about us in blogs, what’s being said in the social space, and understanding the buzz out there. We’re at the point where we can actually monitor this pretty carefully by just reading what people are saying on the Web, understanding whether there’s a positive or negative sentiment, and how it compares with the buzz around our competitors. It’s become very useful because we learn, for example, not to overreact to something that is likely to dissipate very quickly. It has really helped to calibrate how we respond in different circumstances.
We’ve created a group of measurements that are early indicators, which tell us we’re on the right track. And then we have business measures that give us the ultimate outcome. Consider a program like Small Business Saturday.3 When we asked ourselves, “Did it work?” we first measured the buzz—what were people saying about it in social media? There were nearly 1.5 million people who liked this effort on Facebook. That’s a lot of people and a positive early indicator. Then that support materialized into business: among all retailers that accepted our card on that day, sales increased 9 percent year on year. Among small businesses that participated in Small Business Saturday, sales rose 28 percent. Those are pretty strong numbers.
 | THE SCIENTIST: YAHOO! RESEARCH’S DUNCAN WATTSDuncan Watts is the principal research scientist at Yahoo! Research and director of its Human Social Dynamics group, which explores how information diffuses and people influence one another online. The Australia-born researcher was a professor of sociology at Columbia University from 2000 to 2007. He is the author, most recently, of Everything is Obvious: Once You Know the Answer (Crown Business, March 2011). |
The data revolution
Marketing has long been data driven, with a lot of survey research and polling. But the volume and kind of data that we are beginning to acquire is vastly increasing, requiring better computing facilities and greater knowledge to handle. The kinds of questions that we can ask are much more sophisticated and require a whole new science.
The study of social networks, for example, has long been something that sociologists and marketers have thought was important. But there really wasn’t much we could do, because a lot of the data simply was not available to us. Prior to a few years ago, you couldn’t have observed the ties that existed between hundreds of millions of individuals. Now we have Web services that provide exactly that kind of data.
The limits of intuition
One consequence is that we now need to start suspecting our intuition. We can’t help thinking that we know why people do what they do or what they’re going to do. But whatever hypothesis or intuition you have, however self-evident it may seem, when you test it against the data, it’s wrong—not every time, but very often.
So the marketing world is about to experience a shock. We have these spontaneous intuitions about why people do certain things and how we can make them do other things, whether it’s engaging with our brand or buying our product or evangelizing our product to other people. We tell ourselves plausible stories about how consumers are going to behave if we do x, y, and z. But then when you actually get the data, they don’t do that. They don’t do anything crazy; they just do something different from what you expected.
A recent example of this strong intuition that seems to be wrong is word-of-mouth influence. We imagine information or influence propagating through a network in the manner of an infectious disease. We talk about viral videos and viral media, and we really think things spread this way. What we recently stumbled on is that almost nothing spreads. Instead, the vast majority of all adoptions happen within just one degree of the seed. This is shocking to people who study diffusion, and it’s shocking to viral marketers because it completely changes your premise of how things work in the social world.
Research suggests that when we do see big events—things that we call viral—something other than word-of-mouth, peer-to-peer diffusion is happening. Once you think about it, in fact, it’s clear that this has to be true. If you consider the famous viral video of the little baby penguin that suddenly got 100 million views or the subservient-chicken campaign, which was one of the first to be labeled a viral campaign, all of these benefited from tremendous mass-media coverage. Once you get your so-called viral video on the front page of Yahoo!, 100 million people see that. So this is not about viral anymore. This is mass media.
Video: Duncan Watts on the future of marketing
The principal research scientist at Yahoo! Research discusses the limits of intuition, and how conventional wisdom keeps being overturned as marketers apply science to data.
Measure and react
Once you accept that your intuition about how people behave is inherently flawed, then you really need a different model for learning about the world. Everything becomes data driven in a real-time, reactive way. A classic example in the Web industry is what we call bucket testing, where you might say, “I don’t know what to put on the front page of Yahoo!. I have very good editors who have plenty of ideas, and they can generate a pool of good candidates.” But if we want to optimize this, we actually have to go and show these different combinations of articles to buckets of people. Within a few minutes, we’ve got a million clicks that we can use to tell us which articles are getting clicked on more.
We can do the same thing for the display of advertisements, for the design of pages. All sorts of design parameters and choices that were once within the purview of intuition, of experts, are now tasks that can be distributed to the user population and learned empirically in real time.
This kind of measure-and-react strategy, as I call it, is particularly powerful on the Web because the numbers are very large and the cost of generating multiple versions is very low. But, in principle, this is something that could be done in the offline world as well. We see it in the fashion industry with Zara and in the casino industry with Harrah’s or in retailing, where you can systematically rearrange product positions on shelves in stores.
Making better predictions
Grasping the limits of your intuition is not the same thing as saying the world is completely unpredictable. We have this irrepressible tendency to make predictions about the future. We see it in the media all the time—talking heads and experts and pundits constantly making predictions. There are some things that we can predict and others that we cannot. We need to be able to tell the difference between the two, and if it turns out that certain things are hard to predict, it’s better to know that.
Advertisers, for example, create elaborate stories about representative consumers, and then they build a campaign around selling to this person that they’ve created in their minds. That, to me, is deeply flawed because what we’ve learned from many years of psychological research—not to mention what we should have learned from actual business experience—is that if any of these assumed factors that you’re including in your simulation are wrong, then the person may do something completely different. So this way of predicting behavior by simulating it in our own brains is a problem.
But if you have data on billions of mouse clicks per day by hundreds of millions of users, there are empirical regularities. They can be modeled. They can be predicted—not deterministically, with 100 percent accuracy, but that’s not the point. The point is that you can do better than guessing. There are some things that are predictable. And we should learn how to predict them.
So by all means, make predictions. But record them. Nobody ever keeps track of the predictions they make. Our enthusiasm for making predictions is matched only by our reluctance to be held accountable for them. There’s a tremendous amount that can be learned—both about your own ability and about your organization’s collective ability to predict things—simply by measuring the track record over time. This is something that is difficult to do. But it would have a transformative effect on the way people think about their ability to predict and plan.
Three senior executives on the future of marketing - McKinsey Quarterly - Marketing & Sales - Strategy
Three senior executives on the future of marketing - McKinsey Quarterly - Marketing & Sales - Strategy: "measure-and-react strategy"
Measure and react
Once you accept that your intuition about how people behave is inherently flawed, then you really need a different model for learning about the world. Everything becomes data driven in a real-time, reactive way. A classic example in the Web industry is what we call bucket testing, where you might say, “I don’t know what to put on the front page of Yahoo!. I have very good editors who have plenty of ideas, and they can generate a pool of good candidates.” But if we want to optimize this, we actually have to go and show these different combinations of articles to buckets of people. Within a few minutes, we’ve got a million clicks that we can use to tell us which articles are getting clicked on more.
We can do the same thing for the display of advertisements, for the design of pages. All sorts of design parameters and choices that were once within the purview of intuition, of experts, are now tasks that can be distributed to the user population and learned empirically in real time.
This kind of measure-and-react strategy, as I call it, is particularly powerful on the Web because the numbers are very large and the cost of generating multiple versions is very low. But, in principle, this is something that could be done in the offline world as well. We see it in the fashion industry with Zara and in the casino industry with Harrah’s or in retailing, where you can systematically rearrange product positions on shelves in stores.
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