Keystrokes of the ‘faint-hearted’ closet economist: The advertising ‘nudge’

There’s a quiet revolution playing out amidst the advertising fraternity. The advertisers are attracted by the new possibilities that emerge when the world is viewed through the behavioural economics lens: the study, if you like, of how people actually behave rather than how more theoretical models declare that they should. They are looking to behavioural economics to help find new ways to influence the decisions we take, as consumers.

Many behavioural economists describe their discipline as a complement to the world of classical economics: an alternative framework to the centuries-old view that economic agents behave consistently and rationally, choosing the best outcome in every situation, making the right decisions in a world of perfect information.

In fact, it is a much more direct challenge to the old orthodoxy than this suggests.

To the layman at least their observation and experiment-rich brand of psychology (a worldview that accepts that humans are irrational, inconsistent and don’t always act in their best interests) explains far better the world around us: be it stock market bubbles or conspicuous consumption.

The advertising industry, of course, instinctively understands this ‘new’ economic startpoint. It has long understood that decisions are often made habitually, emotionally and on the basis of what others think or will think; at odds, in other words, with the classical economist’s predictions.

Although you will still hear the term ‘USP’ lazily bandied about, it long ago enlarged its mental model of ‘how advertising works’ from one where the unadorned statement of a product’s unique advantage would coerce the attentive and rational consumer into forming a preference for it.

A behavioural economics perspective is not, then, a bolt from the blue for advertising folk.

At its broadest, behavioural economics reminds us of the ‘status quo bias’ that keeps most markets stable (because we crave the familiar, and are adverse to the potential loss that attaches to a ‘new’ decision) and the ‘heuristics’, or rules of thumb, that we use to aid decision-making.

Brands, of course, are the ultimate heuristic: mental shortcuts that make potentially complex decisions simple for consumers. They speak to the ‘cognitive miser’ in all of us. Behavioural economics gives us also the notion of ‘anchoring’: that brand (and other) decisions are typically made in relation to other options, rather than in isolation.
This alone should provide food for thought and an obvious action plan for those advertisers and brand-owners who spend too much time staring at their own brand or campaign, and not enough understanding their competitors’. (Marketing history is littered with brands that were effectively repositioned by others while brand managers fiddled).

But whether or not the advertising fraternity has a long-lasting love affair with behavioural economoics – by its very nature, its focus on what people actually do – brings with it an overdue challenge to the implicit assumption in some corners of our industry that ‘brand’ and ‘brand image’ are the exclusive levers of marketing success.

Our impulse to understand behavioural economics, then, is a helpful corrective to lazy or narrow thinking; a reminder that attitudes to a brand will often follow rather than lead behaviour change and that an advertising campaign is one answer, not always the answer.

We would all do well to make the assumptions with which we market and advertise more explicit, a kind of ‘contract’ with our organisation and others that makes concrete our underlying beliefs. Meanwhile let’s remember that what people say about brands and what brands say about themselves is, in the end, less important than what people (and brands) actually do.

There’s always been this long-drawn debate about whether advertising is strongly persuasive or nudging?

And see how Haagen-Dazs used salience to create an all new product.

A version of this article appeared in Bangalore Mirror last month.

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Keystrokes of the ‘faint-hearted’ closet economist: Signalling & Brands

The concept of signalling has to do with the transfer of information from one party to another, often in order to achieve some sort of mutual satisfaction or arrangement. When explaining the way that signalling occurs, the party that is transmitting the information is often referred to as the agent. The party that receives and evaluates the information is usually understood to be the principal.

One of the classic illustrations of how signalling works involves an individual who is seeking employment. In order to attract the attention of an employer, the prospective employee may choose to engage in signalling as a means of gaining the attention of the employer. This segment of the process often begins with the crafting of the resume. If the information on the resume generates sufficient interest, then the employer will often schedule an interview and seek to broaden his or her knowledge base about the prospective employee.

At the interview, the prospect assumes the role of agent and seeks to build on the rapport already established through the resume. This will involve emphasizing certain facts that are relevant to the position and the general goals of the company. Essentially, the agent is taking true data and presenting it in the most attractive manner possible.

In turn, the employer assumes the role of principal and receives the information. As the information is received, principals assimilate and evaluate the data. At the end of this process, the principal can extend an offer of employment to one agent, as well as inform other agents that there is no need for further information and the position is now filled.

One of the key components of ethical signalling is that only true and correct information is provided by an agent to a principal. While the agent may choose to downplay some data while spotlighting other information that he or she believes is of more interest to the principal, honesty is essential if the conveyance or signal of information is to be considered successful.

When a person buys a used car from a stranger, the buyer knows that the purchase involves risks. The seller may tell him that the car has always worked well, but the buyer cannot be sure that the seller is truthful. It is in the interests of the seller to say these things, whether or not they are true. The seller of a “lemon” could say the same thing as the seller of a quality item. Economists say that markets in which one side of the transaction has better knowledge than the other, as in this case, have asymmetric information. In this example sellers of quality items need a way of communicating information to buyers so that only truthful information will be transmitted.

How do sellers convince buyers of the attractive qualities of their products? Or how do buyers seek to filter out erroneous information? Sellers of high-quality items must find a way to signal information about their products, and these signals must be difficult for those selling low-quality products to duplicate.

The way firms signal quality is by building a brand. A brand is valuable only if consumers associate it with quality, and the firm can build this association only with time and resources. Once a brand is established, it is in the interests of the firm to protect it by not offering a poor-quality product.

When consumers are uncertain about product attributes, firms use brands to inform consumers about product positions and to ensure that their product claims are credible(and that there is no information asymmetry.) Brands as market signals improve consumers’ perceptions about brand attribute levels and increase confidence in brands’ claims. The reduced uncertainty lowers information costs and the risks perceived by consumers thus increasing consumers’ expected utility.

What makes a brand?

So the battle over brands will go on. Do not be fooled into thinking it is really about mobile phones, cars or shampoos. It is all about information. And it will continue for as long as buyers need and want information.

PS: Signalling is one of the most seminal works of the economist, George Akerlof who spent a considerable amount of time in India while working on his various theses.

Signalling has been widely used by marketing researchers to understand brand equity and building brand extensions using an umbrella brand as a linchpin.

NEXT POST -> The economic principle that fuels the multi-billion dollar internet advertising industry.

I saw this coming!

It didn’t feature an athletic woman throwing a hammer through a screen, but I thought Google’s Super Bowl ad was pretty well done.

Google has scooped up billions in revenues — and hollowed out much of the traditional media business — with ads targeted to search keywords. However, the search giant made its first foray into the kind of big budget brand advertising it has long pooh-poohed with a Super Bowl ad.

It was an accident, Eric Schmidt explained in a blog post. “We didn’t set out to do a Super Bowl ad, or even a TV ad for search,” Schmidt wrote. “Our goal was simply to create a series of short online videos about our products and our users, and how they interact. But we liked this video so much, and it’s had such a positive reaction on YouTube, that we decided to share it with a wider audience.”

Despite all the brand extensions into phone sales, operating systems, information and idea management, communication, space exploration, and more, Google is still, at its core, about search. Other commentators noted that we know this already, so why waste all that money telling us again? Fair point, but this commercial was not about telling us what we already know. It was Google’s clearest positioning statement in years, and one I think it thought was necessary in the face of the growing number of Microsoft Bing search engine “attack ads.”

Microsoft’s Bing ads never mention competition by name, but we all know the target. They show people asking others simple questions and getting crazy, seemingly random answers that also happen to fit the query string. What Microsoft’s trying to say is that Google’s search engine does give you results, but the ones you want could be buried or obscured by errata.

By the way, Google’s ad is also a demonstration of prowess. The search results come fast and, obviously, are delivered as spot on. As Microsoft argues, and I often agree, good results can be obscured by too much clutter—sponsored links shove my relevant results down.

This is truly a turning point for the brand – a brand that, for nearly ten years, dismissed brand advertising as a waste of money (“The last bastion of unaccountable spending in corporate America,” in Eric Schmidt’s words back in 2006), and built its entire fortune on turning the advertising model upside down.

Google’s Super Bowl message is clear: We give you the search results you want to help propel you forward. The “On” in the “Search On” slogan is not about doing more of it, but about moving forward in life through search. This doesn’t make me like the slogan any more—it smacks of 1960’s flower-power-ism, but I can now see it as a powerful marketing statement.

Google’s spot came in at No. 2 in web buzz to Doritos, according to media-monitoring firm Radian6 and ad agency Mullen due to its high percentage of “positive tweets.” Google’s ad led Zeta Interactive’s measure of online buzz, with positive blog posts running 98%.

Forget market research. Forget focus groups. Forget data tracking. As it has been said, “Advertising is fundamentally persuasion and persuasion happens to be not a science, but an art.” And this ad was as close to “art” as we got during the Super Bowl commercial breaks. But more than calling it art (which is subjective) you can call it something a bit more acurate. Storytelling. Which is what I believe is at the core of all great advertising. It’s the thing that makes a person look over their shoulder and shout, “Hey, come here quick…that commercial is on!” People love stories. We need them. Do you have a favorite TV show, or a favorite song, book, or movie? These are all stories, without which our existence would be pretty bleak (and some would say not at all). So what’s wrong with creating a compelling :30 second, 1:00 minute, or 3:00 minute “story” that impacts as well as informs and influences the audience?