23 July 2015

I was asked to expand on a reponse I made to a question about the costs of marketing at the Guardian’s on line webchat on the Internet of Things. Oscar Williams of the Media and Tech Network asked me if I could give some more background on why marketing costs might increase as we enter a more data driven economy. I’m certainly not an expert on marketing, but the request gave me a chance to expand on the thoughts behind my point.

The title is chosen by the editors, it is probably more confident thant I’d have written, I might have preferred ‘could help marketers’.

Here’s the draft text off the article I submitted.

The mathematical basis of rational behaviour was described in the 17th century by Blaise Pascal, but implications for philosophical thinking and rationality were laid out in the late 18th century by “the french Newton”: Pierre Simon Laplace.

Laplace applied probability to the social and scientific questions of his day, explaining its principles in “A Philosophical Essay on Probabilities”. He envisaged a social utopia based on rational behaviour. He associated the term evil with the idea of a ‘false expectation’, one that isn’t borne out by the underlying probabilities. Today probability still gives us a reference by which human behaviour can be judged, but Laplace’s vision hasn’t come to pass. In some contexts the gap between human behaviour and rational behaviour has actually widened. We are still faced with fixed odds betting machines and three-card tricksters, but the real change has been the sophistication with which the rationality gap is exploited in marketing of products.

The goal of marketing is persuading people to buy things they didn’t know they wanted. At one level this is about increasing awareness of a product, but at another it can be about creating a need or desire where none formerly existed. This can be done by exploiting the rationality gap. Interfacing with our false expectations.

The idea of the rational human is addressed by Daniel Kahneman in his book “Thinking, fast and slow”. Kahneman suggests that our minds have two primary modes of operation. Fast thinking is our instinctive reaction to something. Our gut reaction. It is based on our on our fears and our hopes. But this thinking is easily primed by context, and this happens at a subconcious level. Clever priming makes us susceptible to irrational purchaes. Slow thinking is our concious thought processes, easier to audit, and closer to what we traditionally think of as higher intelligence. Unfortunately, even 200 years after Laplace, most people are not able to use their slow thinking to reason about probability in a coherent manner. We are easily led astray, for example by warnings of impending doom. This allows the insurane industry to feed on our fears, selling us policies for which there is no rational basis. As a society we have developed the profession of statistics to guard against this susceptibility, but this does little to protect individuals.

Sometimes it seems to me that almost every way we make money in modern society is by exploiting the rationality gap. But often this is a symbiotic relationship and we are complicit. Most of us have a narrative about ourselves, who we are and what we represent. We symbolise this not just by our actions, but by our accessories: our car, our home, our hobbies or the sort of place we like to go on holiday. Consumerism allows us to buy part of this dream, we may not be able to run as fast as Usain Bolt, but we can wear the same shoes as he does. We might not be able to win the Formula 1 World Championship, but we can buy a can of Red Bull. Brand identity defies the mathematical rationality of probability because it becomes part of our self-narrative. Most of the time this can be dismissed as harmless fun, part of our need for self-validation, but sometimes it oversteps the mark.

In some countries, like the United States, direct marketing of drugs is permitted. As a result, the cost of US drugs exceeds that in any other country in the world. This is driven by the costs of marketing. While large pharmaceuticals like to portray themselves as carrying the heavy cost of research burden, they often spend twice as much on Marketing than Research and Development. Medical drugs are not part of a lifestyle choice, they should be deployed in the manner in which they will have the best effect. The justification for such high marketing costs can only be dubious at best, nefarious at worst.

In the emerging data driven economy, which will be significantly expanded in scope and depth by the internet of things, better characterisation of the individual is at the core. We obtain free services from Google and Facebook because they are characterising our desires and matching us to companies that can satisfy them. They are acting as lifestyle brokerage. The better they know us the easier they can satisfy our needs. We accessorise ourselves not just with those things we need to survive, but with the things we need to signal to our fellow humans (and ourselves) who we are and what we stand for.

What interests me is how this phenomenon will evolve as the characterisation of the consumer is improved. Will the costs associated with marketing and branding increase or decrease? One argument says that costs will decrease because the products will be more efficiently targeted at their core market. But another argument says they will increase. Prestige brands will be able to far better characterise what it is that justifies increased prices in our minds. Often it will not just be about the quality of their product, but about what it represents for the consumer. Like tropical birds, a dance will begin between the consumer and the supplier. The supplier will aim to develop ever more complex narratives for the consumer to sign up to. These would be tailored more and more precisely to trigger our desires. Pricewise, the associated products would be held just out of easy reach, setting new targets by which we can validate ourselves.

I suspect the actual outcome will be a combination of both of the above, but similar to Laplace I would like to live in a world where the bird-dance of the marketers is recognised for what it is: “leading the people to sacrifice their necessaries to chimerical hopes whose improbability they are not in a condition to appreciate”.

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