Marketing, Branding & Advertising Titles - Selected Excerpts

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An Excerpt from Hit Brands • 1

CreAte. tArget. engAge. meAsure.

A sAmpler of mArketing, BrAnding And Advertising Books from pAlgrAve professionAl Business

Selected Excerpts from: power Branding the power of Customer misbehavior Hit Brands How to measure digital marketing the meaningful Brand Brand romance Buyographics

Contents 3 Power Branding

Steve McKee

12 The Power of Customer Misbehavior 29 Hit Brands

Michael Fisher, Martin Abbott & Kalle Lyytinen

Daniel M. Jackson, Richard Jankovich & Eric Sheinkop

51 How to Measure Digital Marketing Laurent Flores 62 The Meaningful Brand

Nigel Hollis

79 Brand Romance Yasushi Kusume & Neil Gridley 93 Buyographics Matt Carmichael

Palgrave Professional Business books are written by the best minds in business, combining topical writing, cutting edge research and strong industry case studies.

In this sampler we have included chapters from our recently published and forthcoming Marketing, Branding and Advertising books. Essential reading for professionals in the field, these books explore innovative concepts with international scope, covering issues from consumer behaviour, to brand building and digital marketing.

To order any of these books, please visit www.palgrave.com and enter the promo code WORLDPALGRAVE20 to receive a 20% discount.

An Excerpt from Hit Brands • 3

9781137278845 | January 2014 ÂŁ18.99 | $28 | $32 CAN Hardback | 256 pages

Ignoring conventional marketing wisdom has enabled many startups to develop into international corporations. Drawing on case studies from iconic brands Coca-Cola, General Motors and Google, amongst others, Power Branding shows how counter-intuitive strategies used by the biggest brands can also best serve small and mid-sized companies.

Available at www.palgrave.com. | Enter the code WORLDPALGRAVE20 to receive a 20% discount.

4 • An Excerpt from Power Branding

introduction

the LaSt tiMe i went ShoPPing for a teLeviSion waS Both

confusing and enlightening. And a little bit embarrassing.

If you don’t often stroll the aisles of your local electronics superstore, the experience can be somewhat overwhelming. After I found my way through the giant warehouse to the home entertainment section (no mean feat), I was confronted with literally dozens of televisions, all beaming and blaring as if they were clamoring for my attention: “Buy me!” “Buy me!” It was instant sensory overload.

I knew what size TV I wanted but was still left with a couple of dozen to sort through. My next step was to do what most rational consumers do when confronted with too much choice—I developed a shortcut.

I couldn’t easily tell all of the different models apart so I simply ruled out the higher-priced options (why pay a premium?) and eliminated the lower-priced options (too cheap is risky), which narrowed my selection down to four or five. Ruling out a few more for picture quality reduced my choice to the beauty of the binary: this TV or that TV. So far, so good.

This is where I got stuck. I gazed at one TV, then the other, then back to the first again, stroking my chin like some amateur Einstein, for an absurdly long time. With the differences so negligible, I honestly didn’t know which TV to choose and had a sneaking suspicion that the employees on break in the back were getting a good laugh watching me through the security camera.

It was then that I noticed something that, in an instant, made my decision simple. One TV was branded Dynex and one Toshiba.

Before I get to the punchline, which one do you think I bought?

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An Excerpt from Power Branding • 5

I’ve used this illustration several times and I’ve never had anyone say anything other than Toshiba. And yes, that is the correct answer.

I bought the television that was built by a brand that I both knew and respected. All other things being equal, Toshiba got my business because the brand has been around for some time and has earned a good reputation. Dynex was unfamiliar to me and therefore had built no reservoir of trust or equity in my mind. Case closed. Sale made.

This story is but one illustration of the raison d’être of this book: Of all the assets any company owns, its brand is the single most valuable. A bold statement? Sure. But think about it: A brand is the only corporate asset that, managed properly, will never depreciate. Never depreciate. Those are magic words. Patents expire, software ages, buildings crumble, roofs leak, machines break, and trucks wear out. But a wellmanaged brand can increase in value year after year after year. That’s jaw-dropping.

In an exhaustive annual study on brand value conducted by Interbrand, a leading global branding consultancy, Coca-Cola has perennially been at or near the top of the list with a value of more than $75 billion. That’s the value of the brand alone—not the bottling plants, the inventory, the truck fleets, the factories, the secret recipe—just the brand. According to the same study, the McDonald’s brand is worth more than $40 billion, and the Toyota, BMW, and Mercedes brands all hover around $30 billion each.

Business-to-business (B2B) brands are no slouches either. IBM, the most valuable B2B brand in the world according to Interbrand, is worth almost as much as Coca-Cola at just over $74 billion. Other B2B brands among the top 20 include GE, Intel, Cisco, and Oracle. In fact, some 20 percent of the top 100 brands in Interbrand’s study are primarily or exclusively B2B.1 Global research firm Millward Brown does its own annual brand valuation study with a different, though equally comprehensive, methodology.2 Its “BrandZ” rankings are dissimilar only in degree, not in kind—similarly valuing Coca-Cola at around $75 billion but suggesting that the Google, IBM, and Apple brands are worth well over $100 billion each.3 You can argue with the amounts but not with the premise: Copyrighted Material

INTRODUCTION

6 • An Excerpt from Power Branding

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The world’s best brands, separate and distinct from their other corporate assets, are worth billions.

If that’s the case, why is branding taken so lightly in the boardroom?

I believe it’s because it’s misunderstood. Branding seems soft and fuzzy.

It’s often incorrectly defined. And (at least historically) it hasn’t been a hard, measurable internal metric like sales, market share, stock price, or price/earnings ratio that a CFO can track on a spreadsheet or a CEO report to the board.

That being said, neglecting a brand is both naive and shortsighted for any company. Not only is nothing more potentially valuable, nothing is more important. In some ways branding is a victim of semantics; call it “reputation,” and nobody in the C-suite would ever argue that it’s anything less than critical.

Corporations are careful to avoid doing anything that would harm their reputations, intuitively understanding Will Rogers’ quip: “It takes a lifetime to build a good reputation, but you can lose it in a minute.”4 (See “Bernie Madoff ” or “BP.”) But management teams commonly underachieve in the application of reputation management best practices—in a word, branding.

True effectiveness in branding requires a proper understanding of the concept. There isn’t anything within an organization that a welldefined brand identity doesn’t impact (and vice-versa). Forbes magazine, in partnership with the Reputation Institute, surveyed more than 55,000 consumers in 15 countries and asked them to describe their perceptions of the most highly regarded companies in the world. The study identified seven factors that drive corporate reputation: products and services (naturally), innovation, workplace, governance, citizenship, leadership, and performance.5 There’s very little that any company does that doesn’t fall within one of those categories, something the best brands understand. (FedEx is now even tying performance review criteria to attributes defined by its brand platform.)

Effective branding improves the visibility of and respect for a product, service, or company and drives sales. It also enhances margins, as customers are willing to pay more for products and services from companies they know and trust. Branding can also improve the internal Copyrighted Material

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An Excerpt from Power Branding • 7

dynamics of an organization and impact both recruiting and employee turnover. And research now demonstrates that branding even affects financial metrics.

According to CoreBrand, a consultancy that has tracked more than 1,200 companies in 47 industries for more than two decades, the average positive impact of the brand on a public company’s stock performance is 5 to 7 percent and in some cases significantly more.6 And Britain’s Bestra Brand Consultants analyzed nearly 500 of the largest U.K. and U.S. public corporations over a five-year period and developed an empirical model that used advanced regression analysis to test variables that might explain variations in market capitalization. According to the model, a 5 percent improvement in the strength of a corporation’s reputation will lead to an increase of as much as 2 percent in its market cap.7 How would your world be different if your stock price was 5, 10, or 15 percent higher, or if the value of your company increased by 2 percent? This kind of impact can translate to immense wealth.

Branding is anything but lightweight, but too few companies intentionally manage their brands as the valuable corporate assets they are.

Sure, all organizations do their best to be honest, to offer high-quality products, to provide responsive service, and to do whatever else will enhance their reputation, knowing that the way they do business affects the value of their company. But not all understand that the way they manage their brands can significantly impact the value of their business.

Here’s how Larry Williams, Vice President for Marketing at Caterpillar (a B2B brand worth more than $6 billion according to Interbrand), put it: “We can influence people’s decisions by shaping attitudes and perceptions. We can do this by building better products—and providing superior service. But we can also affect attitudes by managing the way we present ourselves. We are a different Caterpillar . . . we know it.

But it’s time to let the rest of the world in on the news.”8 Indeed. And it’s time to let the rest of the world in on the principles of Power Branding. The stakes are as high as the statistics are striking: 100 percent of marketing plans promise to generate growth, yet over the course of an average decade (to say nothing of recent years), more than half of all companies witness a decline in revenue for at least one year Copyrighted Material

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8 • An Excerpt from Power BrandingINTRODUCTION

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(and sometimes multiple years). The problem isn’t a lack of desire or ambition—it’s a lack of perspective, understanding, and insight.

Most busy businesspeople don’t have time or inclination to study the ins and outs and ups and downs the world’s master brands have discovered through trial and error. But over the course of a career as a marketing strategist that has spanned nearly 30 years, I have. And I hope to show you how you can leverage your most valuable asset by exploring notable brands’ marketing strategies and explaining why they worked—or didn’t.

Many of the principles in Power Branding I first expounded upon in my long-running column for Businessweek.com. Others arose from the results of a decade of proprietary research underpinning my book about the issues that knock brands off their feet, When Growth Stalls (2009).

All of them are practical, and all are put to the test on a regular basis at my own integrated marketing firm, McKee Wallwork & Company, as we revitalize stalled, stuck, and stale brands.

Every one of the most successful brands in the world was, at some point, worth nothing. Power Branding helps explain what is it that enables some brands to continually grow bigger and better while others stumble along year after year, running but never winning the race. The difference is that the best brands aren’t slaves to conventional marketing wisdom. That gives them a competitive edge that, until now, has been difficult to come by.

In the pages that follow you’ll see many of the best practices of the best brands in the world. Some should go without saying, but since they often go without doing, we can all use the reminder. Some will seem counterintuitive. Some you may not agree with or even believe. That’s OK. Not all of the principles presented here are applicable to all brands.

But if more brands adopted Power Branding thinking, not only would their results improve, what we as consumers experience online, on television, and everywhere else we face the endless onslaught of commercial messages would be much more pleasant.

A word about how Power Branding is organized. You’ve heard of the Journalist’s Six: who, what, when, where, why and how. They’re the elements of information needed to get the full story, whether it’s a reporter Copyrighted Material

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An Excerpt from Power Branding • 9

POWER BRANDING

uncovering a scandal, a detective investigating a crime, or a customer service representative trying to resolve a complaint. There’s even an old PR formula that uses them as a template for how to write a news release.

Most of the time it doesn’t matter in what order the information is gathered, as long as all six questions are ultimately addressed. The customer service rep’s story may begin with who was offended, while the journalist may follow a lead based on what happened. The detective may start with where a crime was committed while details of who and what (not to mention when and why) are still sketchy.

Many marketers instinctively begin with questions about what and where, as in “what” their branding efforts should communicate or “where” they should appear. That’s what gets them into trouble. They may have some success putting their plans together by relying on intuition and experience, but both can be misleading in a rapidly changing marketing world. These days it’s easy for anyone to become confused by (or fall prey to) the latest and greatest tactics.

The common way of citing the Journalist’s Six—who, what, when, where, why, and how—rolls off the tongue and is a great mnemonic device. But unlike in other professions, the development of an effective branding program requires that the six questions be answered in a specific order: Why ➞ Who ➞ What ➞ How ➞ Where ➞ When

By following this pathway, you can avoid a great deal of confusion, trial and error, and blind alleys, preserving your brand’s precious time and resources. Like putting on your socks before your shoes, doing things in order makes all the difference.

The best brands begin by asking “why”: Why do we exist? Why is our brand important? Why is investing our limited resources in branding more beneficial than investing in other aspects of our business?

These questions, properly considered, force company leaders to clearly define their branding objectives and confront their (often-unrealized) assumptions before they get too far down the road.

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10 • An Excerpt from Power Branding INTRODUCTION

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The chapters that follow have been organized according to this approach, each offering a power branding principle brought to life by the example of one or more of the world’s leading brands. Absorb them all and you’ll get a mini-MBA—Master of Brand Administration—that will enable you to achieve your “why” by confidently taking on the other questions: Who (Audience)—Who is essential to our achieving our goals? To whom should we be directing our message? Whose hearts and minds must we win in order to succeed? The better any company defines its “who”—and the more it can know about their lifestyles, behaviors, attitudes, opinions, wants, and needs—the more effectively its branding efforts can address the remaining Ws. What (Strategy)—As in “what” your brand must represent to your target audience in order to accomplish your business objectives. This, of course, encompasses a host of decisions, from product to pricing, policy to packaging, and everything in between. But it is also where key branding issues are addressed, including positioning, differentiation, and a determination of the personality dimensions that are appropriate for both the brand and the customer need.

How (Creativity)—Armed with the knowledge of what you want to communicate to whom, next comes the most mysterious aspect of branding: “how.” This is where intuition and instinct play as important a role as logic and reason, and where you can easily go wrong if you expect your target audience to be rational, to pay attention, or to give you the credit you deserve. Seldom will they let you in the front door of their minds, so the trick lies in figuring out how to climb through a window.

Where and When (Execution)—The last two questions must be addressed together as you dive into the specifics of execution. The task now revolves around determining the best methods, places, and times to communicate your “what” to your “who” in service of your “why.” At this stage you’ll be required to make many tactical decisions, but if you’ve effectively addressed the first four questions, you’ll have the context and perspective you need to make the final two work as hard as possible on your behalf.

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An Excerpt from Power Branding • 11

POWER BRANDING

There’s one more important section of the book, which I’ve affectionately titled “Whoops.” Yes, even the best brands step in it occasionally. By learning from their examples, you can save yourself some headaches.

These days it’s fashionable to focus on what’s current, what’s cool, what’s next. But there are fundamental, timeless principles of branding that we would all do well to learn. Power Branding is not a set of rules to be followed or regulations to be adhered to. It’s simply a suite of commonsense, sometimes-counterintuitive principles based on how real humans interact in the real world. As you apply them to your unique set of circumstances, your brand will become more powerful than ever.

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12 • An Excerpt from Hit Brands

9781137332868 | October UK / November US 2013 ÂŁ19.99 | $32 | $37 CAN Hardback | 294 pages

The Power of Customer Misbehavior explores the importance of customer driven innovation for top line and bottom line growth. It shows how companies should not only learn to identify how their products are being misused, but also how to use this knowledge to innovate new products and services that better meet customer needs and promote viral growth. These techniques also promote longterm customer loyalty and growth even in hypercompetitive environments.

Available at www.palgrave.com. Enter the code WORLDPALGRAVE20 to receive a 20% discount.

An Excerpt from The Power of Customer Misbehavior • 13

1 Why is Viral Growth Important?

‘This is the honey badger. Watch it run in slow motion. It’s pretty badass.

Look, it runs all over the place. “Woah, watch out!”, says that bird. Ew it’s got a snake? Oh, it’s chasing a jackal? Oh my gosh!’ If you read this and the voice in your head sounded like a high-pitched, effeminate male, then you’ve undoubtedly seen the YouTube video ‘The Crazy Nastyass Honey Badger (original narration by Randall)’. It was uploaded on 18 January 2011 by user ‘czg123’ and has been viewed over 56 million times.1 The video features original footage of the tough and ornery Honey badgers taken from a National Geographic special that aired in 2007.

According to the New York Observer the ‘Crazy Nastyass Honey Badger’ video was the brainchild of Christopher Gordon2 (not a guy named Randall) – an actor, writer, comedian, and ‘Randall’s Personal Asst.’3 In an email interview by Michael Humphrey, Contributor at Forbes, we learn that Gordon’s inspiration for the video came from his father’s work on Marlon Perkins’ ‘Mutual of Omaha‘s Wild Kingdom’ as a cameraman.4 Between his father’s film footage and his twiceweekly trips to the zoo with his grandmother, he developed the habit of narrating everything.

With memorable quotes such as ‘honey badger don’t give a shit’ or ‘honey badger don’t care’, the video became an instant hit. It was covered within the first 30 days by humor blogs such as ‘Funny or Die’ and ‘Huffington Post’ as well as mainstream entertainment sites like TMZ.5 The authors of this book became aware of the video in January 2011 when Marty’s friend posted the video on Facebook. He then passed it in email along to Mike and several other colleagues. Kalle (Marty and Mike’s doctoral advisor at the time) stared in disbelief, believing that the foundations of education were sure to crumble beneath him, as Marty showed the video to a group of academics between meetings. Marty singlehandedly invited dozens of people to view the video, many of whom could be seen later excitedly discussing the video amongst themselves and immediately sharing it on Facebook, or emailing a link to it to friends and colleagues.

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2005

2007

2009

2011

2013

Figure 1.1 Google Search for ‘Honey Badger’6 Source: Google and the Google logo are registered trademarks of Google Inc., used with permission.

While the video became a huge Internet sensation, its attraction as an entertainment destination was short lived. Figure 1.1 shows that prior to Randall’s video, not many people were searching for ‘honey badgers’ on the web. During 2011 the interest skyrocketed, while plateauing at the end of the year. After a year in the spotlight, interest in the web search term ‘honey badgers’ started to wane, falling almost as quickly as it rose.

The Honey badger video teaches us several key points that we would like to present in this chapter about viral growth. First, it shows how ideas can spread from one individual to another very quickly. Marty alone was responsible for inviting dozens of people to view the video.

Second, it helps us see the effect of virality without the power of retention. While the Honey badger video was wildly popular in 2011, by 2013 its popularity had disappeared. We’ll cover both of these points in more detail in this chapter as well as answer the question of why viral growth is important. First we need to define the term viral growth.

VIRAL GROWTH CLIFF NOTES Viral growth is achieved when the users of a product cause, on average, more than one additional user, per existing user, to use a product or service. In other words, each user of a product influences more than one additional user to begin using the product during some specified time period. If a product has five users at the end of time period 1, it will have more than ten users using the product in time period 2, more than 20 in time period 3, and so on.

An existing user of a product influencing a friend, colleague, or relative to start using a product can occur in a variety of ways. One method is very direct. A user invites a bunch of friends to start using a product

An Excerpt from The Power of Customer Misbehavior • 15 Why is Viral Growth Important?

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by sending an email with a link to the product. In the real world the user might send a postcard that advertises the product. Another method, that is much less direct, is that people might see another individual using the product. Before a night out, a husband might notice his wife using an online product to search for restaurants. If the next time the husband needs a restaurant he starts using that product, then his spouse has influenced him into using the product. There are as many ways as you can imagine – both directly and indirectly – to influence another user to begin using a product. Of course, marketers for years have been trying to figure out new ways for this to occur.

This provides a very high-level explanation of how viral growth occurs. For a more in-depth explanation, continue reading the next section. For those who don’t like math, or just really don’t want to understand the details of this phenomenon, skip ahead two sections in this chapter to one entitled ‘Why do we want to achieve viral growth?’, where you’ll get to read about two companies that achieved viral growth.

WHAT IS VIRAL GROWTH? For our purposes, growth can be defined as building a user base for a product or service. If we had one user yesterday and we gain another user today we have 100 per cent growth day-over-day. The term ‘viral’ is an adjective that describes the picking up of an object or information that can induce agents possessing it to replicate it, resulting in a myriad of new copies being spread around. The etymology of the term viral dates to 1989 according to the Oxford English Dictionary. At that time it came to mean the ‘rapid spread of information’, in addition to its earlier meaning of the spreading of viruses or germs during a contagion of a disease. A viral video would thus be one that induces people to view it and share it with other people, resulting in a growing number of views. One interesting point about being viral is that it does not have to be a purposeful replication. In some instances, people might intentionally share a video with their friends, but in other situations people might see a celebrity watching a video and then view it themselves. The viewing of the video has been replicated, but not by active participation of the celebrity.

The presence of such a fast growth pattern that follows the spread of information in social networks has justified the use of the epidemiological term ‘viral growth’ to characterize these patterns. The spread of information and its consequent use in a population is like that of

16 • An Excerpt from The Power of Customer Misbehavior 20 The Power of Customer Misbehavior

a virus spreading through a population. Though in their everyday life people do not intentionally spread viruses, they can figuratively do so in their social networks by sharing information about rumors, services, features, benefits of a site, or just by telling others about their positive use experiences.7 Combining these two words we can form the term viral growth that we define as the increase in the user base of a product or service resulting from people’s action to induce other people in their networks to repeat their usage of the product or service.

While viral growth has only reached the mainstream vernacular in the past decade when the hyper-growth Internet services made it popular, the idea of viral growth dates back to 1976, with Richard Dawkins’ publication of The Selfish Gene. Dawkins’ book analyzed evolution as a cultural phenomenon, where instead of genes controlling the evolution ideas called ‘memes’ would control the process. A meme is a framework for thinking about things – an idea, behavior, or style, such as wearing white after Labor Day, the phrase ‘You had me at “hello”’ from the 1996 film Jerry McGuire, or the Honey badger story. It can be anything passed from person to person where the rate of acceptance and proliferation are likely to depend on several factors such as entertainment value, news worthiness, educational value, or sheer popularity.

One significant difference between biological evolution and cultural evolution is the pace at which cultural evolution can take place. Memes can spread much faster than genes can replicate, even when compared to the very fast ten-day metamorphosis cycle of a fruit fly. In that amount of time a meme can spread around the Internet and become old news. Viral growth is achieved when a meme spreads very fast, without the conscious plan and effort to spread it. At the same time the growth in a user base will follow a power-law distribution until the adoption reaches a point of non-displacement.8 A power law expresses a mathematical relationship between two quantities in which the frequency that an event occurs varies as a power (or exponentiation) of some attribute of that event. In the case of the Honey badger video, the upward curve of Figure 1.1 (the viral growth phase) is a power of the previous viewings and subsequent shares. To achieve the sharp incline in growth, the cumulative viewers for any given day have to share (on average) the video more than once. Powerlaw distributions are also sometimes called scale-invariant or scale-free distributions, because a power law is the only distribution that is the same whatever scale we look at it on.9

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Why is Viral Growth Important?

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9000000 8000000 7000000 6000000 5000000 4000000 3000000 2000000 1000000

1 10 19 28 37 46 55 64 73 82 91 100 109 118 127 136 145 154 163 172 181 190 199 208 217 226 235 244 253 262 271 280

0

Figure 1.2 US City Populations Few real-world distributions follow a power law over their entire range, especially for smaller values of the event. For example, the population of cities follows a power-law distribution above the minimum population of 40,000. In Figure 1.2 we have plotted the populations of the top 285 US cities according to the 2010 US Census. As you can see, a few cities have the majority of the population and then the amounts drop off quickly. The top city, New York with 8.2 million people, has three times as many people as just the third city, Chicago, with 2.7 million people.

Armed with this initial definition of viral growth and understanding of power laws, we next explore factors that define viral growth.

WHAT ARE THE COMPONENTS OF VIRAL GROWTH? While achieving viral growth can be elusive, calculating and predicting the growth under certain conditions can be accurately determined due to well-defined structural conditions that characterize such growth. In order to do so requires acquiring and estimating information about pivotal factors that affect the spread of the information or ideas. This process of spreading is known as contagion, which can be defined as rapid communication of an influence. It is also derived

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The Power of Customer Misbehavior

from an epidemiological term relating to the spread of infectious disease.10 Contagion simply deals with the rate at which infected new users become ‘converted’ to use a particular product or service. Factors that affect contagion, as known from epidemiological studies, include first fan-out and conversion, both of which we will discuss below. For a more complete coverage of how the term ‘viral growth’ was derived from the study of contagious diseases, see Appendix A. The viral growth of a product or service is determined by the extent to which current users send requests to their friends or colleagues to participate in a service and whether those individuals ‘convert’ and become users as well. To describe the rate of this process, Kalyanam coined the concept of a viral index11 or viral coefficient12 that predicts how quickly viral growth can occur for a service provider. The viral coefficient (Cv) predicts the number of new users that will be generated by one existing user through influencing, recommending, suggesting, sharing, and so on. It is a function of the fan-out (number of new users invited per existing user) multiplied by the conversion rate (number of new users converted to using the service) and is defined as: Cv = fan-out * conversion rate

(1)

Cv must exceed 1.0 to generate viral growth. The variable fan-out is the number of individuals an existing user introduces to the product or service. This factor can be influenced by a wide variety of factors including the ease with which users can share recommendations and linking existing users with potential new users through a process dubbed a ‘social cascade’.13 Conversion rate is the number of new users that convert to using the service or product after receiving an invitation (from the fan-out). It is affected by factors such as the perceived value, learning effort (ease of use),14 service quality,15 and perceived entertainment.16 From our Honey badger story, Marty initially was the recipient of another person’s transmission (or fan-out) of the video. He subsequently converted by watching the video himself. He then invited people via email and displayed the video in public settings. A number of email users converted, and by definition all of the people in the public viewing ‘converted’, because they watched the video. Therefore Marty was responsible for a Cv far greater than 1.0. The sum of all shares (all people like Marty sharing the video) divided by the number of sharing people and subsequently multiplied by the resulting conversion (or

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views) for the month of January would be the Honey badger’s Cv for January of 2011.

Although Cv measures service growth, it cannot identify a sustainable growth strategy for a product or service provider, because it fails to measure sustained growth – growth that takes into account a loss of users to competitors’ new services, or users dropping the service because of loss of interest or value. A high Cv without the new users returning to use the service results in the ‘Slashdot effect’ – so named after the popular technology news site, Slashdot.org. When an article on Slashdot mentions a small site, the ensuing traffic spike can cause the small site to slow down or fail. Once the article has run the news cycle and is no longer popular, the small site’s traffic returns to normal with no recurring or sustained traffic. This ‘moment in the spotlight’ might be thrilling, but it doesn’t produce a sustained growth in new readers or users for the small site. This effect can be seen in the ‘Honey badger’ curve of Figure 1.1, albeit in a somewhat biased way since the graph shows all searches for the term and not just direct views of the video. Clearly a large number of people shared and subsequently watched the video, but ultimately those users did not continue to return to watch the video over and over again resulting in the downward trend.

For the growth to be truly viable, the product or service must increase its number of cumulative users, over a certain period. This requires new users to not only join, but to stick around. To calculate the cumulative users we must multiply the Cv by a retention rate and raise the product to the exponent of the frequency (number of times the service is used per cycle i.e. intensity of social exchanges in any social network, where the cycle is a fixed time period e.g. one day, one week, one month, which depends on the feature and nature of social exchange). The calculation of cumulative users is known as the viral growth equation: cumulative users = (Cv * retention rate)(frequency)

(2)

Obviously the Cv of the product or service expresses the total number of cumulative users if we can estimate all the factors that influence it.

First, if viral coefficients remain below 1 the exponential growth is impossible. But similarly we must retain most of the users we convert.

Therefore combinations of both rates need to meet specific threshold conditions in order for exponential growth to ensue. Figure 1.3 shows several examples of how alternative combinations of values for conversion rate and retention rate affect the number of cumulative users.

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Cv=0.9 R=100%

Cv=1.2 R=100%

Cumulative Users

Cv=1.2 R=70%

Time

Figure 1.3 Viral Growth Equation

The solid line shows Cv at 1.2 (well above 1 which is needed for viral growth) and retention rate at 100 per cent. This is the classic ‘hockey stick’ growth pattern, so named because the graph resembles the shape of a hockey stick, which we typically associate with the experienced viral growth of some products or services. The dotted line shows Cv again at 1.2 but the retention rate at only 70 per cent, still we have a cumulative users growth rate that any product or service provider would love to have. To show the massive effect of Cv, the dashed line shows the Cv of 0.9 and the retention rate back at 100 per cent. Notice that there is no viral growth in this last example. Despite retaining 100 per cent of users this last product cannot achieve viral growth, because it is not capable of bringing in one new user for every existing user.

The equations 1 and 2 suggest a variety of ways the number of cumulative users of a product or service can be improved. Walking through the equation, when on average each user shares (fan-out) the product more than once and a majority of those users attempt to use the product (conversion) this will result in a Cv > 1.0. Furthermore if each of these users on average repeats the usage of the site (retention) over the course of the year (cycle) more than once (frequency) the result

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Why is Viral Growth Important?

25

will repeat itself. The viral growth equation tells us that by sharing information about new services, new features or benefits of services, or just telling others, either intentionally or accidentally, growth will be inevitably achieved. It sounds so simple, right?

Accordingly product and service providers can utilize many strategies to increase the viral coefficient, most of which can be categorized under viral marketing (fan-out), or they can innovate with new features and services that increase the scope and intensity of user experience and cycle of frequency thereby affecting conversion or retention. This, in turn, requires investing in processes through which service innovation can take place quickly. Indeed, the question of how to influence factors that underlie the value of viral coefficient, conversion rate, and retention rate to ultimately achieve viral growth is the foundational question that our research began with. We are going to share our insights on this topic in the remainder of this book, but first we must address the question of why a product or service provider should attempt to achieve viral growth.

WHY DO WE WANT TO ACHIEVE VIRAL GROWTH? Whether your business is an online social network, an auction site, an e-commerce platform, or a real-world store, all these businesses will rely on consumer traffic – either clicks and eyeballs or feet and bodies.

When a product or service is ‘sticky’ (in our equation the frequency is high for the defined interval length or ‘cycle’), the traffic translates to tangible business and growth. Think of this in terms of how many times you return to your local Target or Wal-Mart store (frequency) within a month, a quarter, or a year (cycle). Failing to achieve sufficient growth dooms a company to tepid business, poor financials, and ultimately to failure. Even if you achieve good growth, the market value of your company can tumble precipitously in a short period of time, if you cannot sustain it.

Some online businesses have achieved hyper-fast viral growth, as exemplified by Twitter’s growth in 2009 at a staggering 1382 per cent.17 Products and services that display such viral growth are those that can be adopted by and passed between users incrementally, gaining exponential momentum in adoption rates as time progresses. Viral growth should therefore be a goal for an array of businesses launching today, because it is a way for a company to achieve significant market share faster, and with the flexibility to target new markets in the midst

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of growth. In turn, viral growth allows companies to achieve investor returns faster, assuming the company has figured out how to monetize the traffic. Simply put, for businesses that do not operate in natural monopolies or oligopolies, viral growth will most quickly enable them to create a defensible position.

Viral Growth on the Internet – Friendster vs. Facebook It is easy to understand and instructive to learn the importance of the principle of viral growth, if we consider the effects of the growth of social networking sites. A terrific example of the power of viral growth is the comparison of the fates of Friendster and Facebook. Both launched at almost the same time, were equally well funded, and both hired talented teams, but one ultimately achieved sustainable viral growth while the other did not. Consequently their fortunes differed markedly.

Friendster was founded by Jonathan Abrams and Chris Emmanuel in 2002 in Mountain View, California, before the creation, launch, and adoption of Myspace, Facebook, LinkedIn, and other social networking sites. Friendster’s purpose was to establish a safer, more effective way to meet new people by browsing user profiles and connecting to friends, and friends of friends.18 This allowed members to expand their network more rapidly than in real life.

Friendster.com went live in March 2003 and was adopted by three million users within the first few months. As its popularity increased, page load times slowed – users waited longer for each attempt to use the site. At one point, a Friendster web page took as long as 40 seconds to download. The main reason for this was that Friendster had a product feature, known as the friend-graph (or F-graph), that caused the site’s poor performance. The F-graph calculated the four degrees of connection for every user, every time a new connection between people was made. Technical difficulties in solving this computational problem proved too pedestrian for the Board of Directors to address and thus they were left to the engineers to resolve.

Over the next three years the Board named four CEOs, some of them remaining in office for only a few months. During the five-year term of Kent Lindstrom, one of the earliest investors in Friendster, a new team was recruited, technical challenges were solved, and the company prioritized the Asian market. This resulted in Friendster becoming the leading social network in some Asian countries, and it received $30 million in additional funding from Kleiner Perkins and Benchmark Capital.

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Why is Viral Growth Important?

27

In 2008, Friendster hired ex-Google executive Richard Kimber as the CEO and had a membership base of more than 115 million registered users. On 9 December 2009, it was finally acquired by MOL, a Malaysian company, for $26.4 million despite receiving funding in October 2003 at a reported valuation of $53 million.

The story of Friendster seems like a relative success until we compare it to the meteoric rise of Facebook. Mark Zuckerberg founded Facebook with his college roommates and fellow computer science students, Eduardo Saverin, Dustin Moskovitz, and Chris Hughes, while they were students at Harvard University. The website’s membership was initially limited to Harvard students as a version of hotornot.com, but was expanded to other colleges, then to high school students, and finally to anyone over the age of 13. The site was ranked as the most used social network worldwide by monthly active users in 2009, and had over 500 million active members by 2010. In 2008 the fastest growing demographic was 25 years old and older, while in 2009 the fastest growing demographic was 35–54 year olds.19 In terms of usage – a key component in the viral growth equation – Facebook has over 900 million total users with 35 million users updating their status each day, uploading 2.5 billion photos each month, and sharing 3.5 billion pieces of content each week. The average user has 100 friends and 2.6 billion minutes are spent on the site each day.20 Facebook, having achieved exponential user growth, announced revenues of over $1 billion in 2011, going public in the summer of 2012, which raised $16 billion of capital and valued the company at over $104 billion.

As noted, Friendster and Facebook were launched at almost the same time, had equally talented teams, and were both well-funded; yet one achieved sustained viral growth while the other did not. The resulting valuation for investors was $26.4 million for one and $104 billion for the other. This teaches us that with social networking, and anything on the web, failing to achieve viral growth dooms a company to failure.

Even if one achieves good growth for some time, the market value of the company can tumble precipitously in a short period of time if one cannot sustain it.

Real-World Viral Growth – Tupperware It’s relatively easy to see how viral growth needs to be, and can be, achieved with online services such as Twitter and Facebook, where users are engaged in producing content such as 140-character pithy

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comments or pictures of their latest vacation, but what about the world of atoms – the physical products and services? Most of us are familiar with Tupperware, plastic containers used in our houses to store or serve food and various other items. What you might not know is that the Tupperware story is an example of non-Internet viral growth.21 Earl Tupper developed Tupperware in 1946 and patented the ‘burping seal’ for which the brand was known. However we can argue that not many of us would know the brand, if it wasn’t for the efforts of Brownie Wise, the former sales representative for Stanley Home Products, who developed the direct marketing strategy that made Tupperware a household name. The marketing strategy, also known as the ‘home party plan’, empowered women in the early 1950s who refused to ‘go back to the kitchen’ after World War II, and instead insisted on having a place in the workforce.22 These party plans were where women invited friends and neighbors to a combined social event/ sales presentation. This word-of-mouth model of direct sales relied upon trusted relationships primarily between women and proved incredibly successful. While many of us growing up in the 1960s and 1970s remember comedians joking about Tupperware parties, the result was just more free publicity. In 1958, Mr. Tupper sold the company for $16 million to Rexall Drug Co., renounced his US citizenship, and ended up living in Costa Rica until he died in 1983 at the age of 76.

Unfortunately before the sale, Mr. Tupper ousted Ms. Wise from the company, believing that suitors of the company would have no interest in a female executive (according to Laurie Kahn, who wrote, produced, and directed the 2004 PBS documentary ‘Tupperware!’). The company spun back off as an independent company on 31 May 1996 and continues to thrive, relying primarily on the party plan. A few years ago, Rick Goings, the Chairman and CEO, boasted that a Tupperware party was held somewhere in the world every 2.3 seconds, but with a direct sales force of over 2.6 million, that rate is closer to a party every 1.7 seconds.23 In Figure 1.4, Tupperware’s performance is compared with a competitor, Rubbermaid, showing Tupperware up over 60 per cent, while Rubbermaid is down nearly 20 per cent over the 17-year period since the spinout.

Hopefully, by this point you, along with every other 18-year-old would-be-entrepreneur, are convinced on the value of viral growth.

However you’ve probably realized from these stories that viral growth is somewhat akin to catching lighting in a bottle. It is a rare event,

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Source: © 2013 Yahoo! Inc.

Figure 1.4 Tupperware vs. Rubbermaid Stock

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made more likely by the advent of the Internet or some specific social condition (such as suburbia housewives and their need for socializing), but still exceptional. So, where does that leave us? Should we give up or push on in the quest for viral growth?

WHAT IF YOU CAN’T ACHIEVE VIRAL GROWTH? While true viral growth, where the viral coefficient (Cv) is greater than 1, might be rare, there is still a lot we can achieve with viral replication of our products and services. We are going to refer to this type of organic – with a viral coefficient less than 1 but that is achieved by word-of-mouth – as sub-viral growth or organic growth. By using other means of growth such as marketing, advertising, and search engine optimization,25 we can leverage this sub-viral growth to amplify these into significant growth.26 Let’s look at how we can use organic growth to amplify paid-for growth, such as from advertisements. If we have a site to which we want to attract users, we can leverage non-organic growth by purchasing advertisements. We can then leverage our organic growth to augment the paid-for growth, resulting in higher growth rates. As an example, in Figure 1.5 we have plotted the monthly growth of users on our own site. The solid line is 100,000 new users per month, assuming a loss of 2 per cent of users each month. While the growth is impressive, we can do better. If we amplify our growth by including organic growth, with a viral coefficient of 0.70, we achieve three times the total users, plotted as a dashed line.

This idea of using organic, sub-viral growth to amplify more traditional marketing is finding roots in quantitative research. Sharad Goel, Duncan Watts, and Daniel Goldstein – all three from Yahoo!

Research – recently presented a paper at the 13th ACM Conference on Electronic Commerce that described the diffusion patterns of seven online services, including Yahoo! Voice, Friend Sense (a Facebook application), news stories sent via Twitter, and a psychological test called ‘The Secretary Game’.27 Despite the fact that each of these had very different profiles of how users shared, the vast majority of the sharing cascades were small, terminating within one degree of the initial ‘seed’. Adoption or viewing by users from a chain of referrals was extremely rare. But the good news, according to Goel et al, is that while most new services don’t go viral like the flu, they can get a 20 or

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Why is Viral Growth Important?

5,000,000 4,500,000 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 – 1

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Figure 1.5 Amplification Growth – http://afkpartners.com 30 per cent boost in return, where for every ten adoptees of a conventional marketing effort, another two or three people will adopt something organically.28

CONCLUSION We started this chapter by defining the term ‘viral growth’ as the increase in the user base of a product or service, resulting from people’s action to induce other people in their networks to repeat their usage of the product or service.

We learned the etymology of the concept and term. We also learned that viral growth with a viral coefficient greater than 1 follows a power-law distribution. We calculated the viral coefficient by multiplying fan-out (number of new users invited per existing user) by the conversion rate (number of new users converted to using the service). As it turns out however high viral coefficients aren’t enough. What we really need is viral growth with a high number of cumulative users. What is known as the viral growth equation can then be calculated by multiplying the viral coefficient by a retention rate (how many users continue using the product or service) and raising the product to the exponent of the frequency (number of times the service is used per cycle i.e. intensity of social exchanges) and length of the cycle (that is, a fixed time period,

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such as one day, one week, one month, which depends on the feature and nature of social exchange).

Armed with this understanding of viral growth we next explored the question of why one would want to achieve viral growth. We examined two scenarios to answer this question. The first scenario compared Facebook and Friendster, two Internet-based social networks that started within months of each other, had seemingly similar opportunities, and yet achieved dramatically different results. The second scenario investigated Tupperware, a classic example of viral growth in the pre-Internet era, that achieved remarkable results for many individuals who were involved with the company over the past six decades.

Finally we explored the idea of how we might leverage existing users to influence new users, even if we can’t achieve true viral growth. We found that even with a viral coefficient less than 1, we can achieve substantial growth amplification by following ideas of viral growth, and informed by the viral equation. One example demonstrated a total growth rate three times greater, with a viral coefficient of 0.70, than without this user-influenced growth. The conclusion drawn from these examples is that any amount of user-based viral growth is a good thing.

While it works extraordinarily well for Internet-based products and services, the concept can be applied to any real-world commerce as well.

Next we need to explore the factors that influence the viral coefficient and retention rate. Through our research we discovered that how companies respond to customers’ misusing of their product could affect the factors of viral growth. We also uncovered that an underlying motivation of customers to use, and possibly misuse, products and services is the creation and management of their self-identity. These and other factors will be covered in the next few chapters.

Summary •

Viral growth can be defined as the increase in the user base of a product or service, achieved by people inducing other people to repeat the usage.

•

The viral growth equation is: cumulative users = (viral coefficient (frequency) * retention rate)

An Excerpt from Hit Brands • 29

9781137271471 |November 2013 ÂŁ24 | $40 | $46 CAN Hardback | 212 pages

In the battleground for the hearts and minds of customers, music is one of the most powerful tools that brands can use. In this definitive guide, three leading industry experts explain how brands can harness the power of music to drive business, and show how you can create and execute successful music strategies with lasting impact. Includes case studies from Coke, Sephora, NESCAFE and Converse.

Available at www.palgrave.com. Enter the code WORLDPALGRAVE20 to receive a 20% discount.

30 • An Excerpt from Hit Brands

Chapter 1 INTRODUCTION

BRANDS HAVE CHALLENGES

NESTLED SOMEWHERE IN AN INNOCUOUS office building in a neighborhood wedged between the Upper East Side and Yorkville, just off Manhattan’s Central Park, is the financial news and opinion website called 24/7 Wall Street. The reporters for 24/7 Wall Street spend their days publishing opinion pieces on the health of companies, stocks and investment opportunities. These articles get republished all over the web on sites such as MarketWatch, MSNBC, MSN Money, Yahoo! Finance and The Huffington Post. In June 2012, one such article began to ruffle the feathers of those whose job it is to help consumer brands stay relevant to their audience. The article provided a prediction of ten American brands that would fail in 2013. The list included some landmark consumer brands such as American Airlines, Research In Motion (better known for its product, BlackBerry), Avon, Talbots and at least one sports franchise, The Oakland Raiders. The article cites operational issues, changing competitive landscapes and management deficiency as the primary drivers of impending failure.

Prior predictions by 24/7 have proved surprisingly accurate.

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2

There exists today an entire industry employing thousands of people whose job it is to help brands maintain a healthy relationship with their customers. We call this industry by lots of names: advertising, marketing, branding. It is a challenging industry as it is, without financial experts predicting your failure. The good news is that consumer brands generally recover from public failures. In 2007, McDonald’s launched an ill-advised ‘I’d Hit It’ tag line, while The Cartoon Network launched a publicity stunt to promote ‘Aqua Teen Hunger Force’, which resulted in a bomb scare in Boston. Both brands rebounded and today are as relevant as ever. Even CocaCola recovered from what is widely considered the single biggest brand failure, the launch of New Coke in 1985. Every healthy brand encounters on a daily basis often staggeringly complex challenges trying to stay relevant to consumers while still turning a profit for their shareholders. Launching a new brand in this cluttered marketplace is even more difficult than maintaining a known entity.

In addition to publicity stunts, advertising slogans and new product launches, brands have hundreds of ways to reach the world across multiple media outlets including social media, online, television, radio, print, apps, retail, outdoor events and more. Attached to many of these initiatives is an audio or musical component – the ever-present indie song in a TV commercial, the background music playing while you shop, the quick audio sequence that aligns with a product’s logo (think Intel’s chime). Brands will invest in sound and music across their entire marketing and communications platform and are often struggling to know whether they have got it right.

THIS IS A HITS BUSINESS

On average an international brand spends annually somewhere between $10 million and $20 million on music-related rights and licenses. They then multiply that spend by a factor of

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five through media dollars. This means that a big brand’s annual spend, estimated conservatively, is between $50 million and $100 million, specifically allocated to help associate themselves with music and musical talent. How many of those brands become famous for their use of music? How many of them create the kind of value for that investment that their stockholders would want? How many of them create lasting, valuable connections with customers through this music? How many of them have hits?

Put another way, how many of those brands even know the odds for or against success? How many of them have learned how to move those odds in their favor or tried to understand the rules of the game? Have these brands even developed a strategy for using music?

If having a hit is a crapshoot, a brand should at least know when and how to roll the dice.

Based on the issuance of ISRC codes (the international standard for identifying music recordings), a reasonable estimate puts the number of new pieces of music released each year at a staggering one million. Each song is written in the earnest belief that they have something to say and can enhance the human condition. If we make a reasonable assumption that around 500,000 artists are involved in these one million tracks then we can easily start to calculate the base chances that any brand–band association will become a ‘hit’.

We start at 500,000:1 – about the same odds as being dealt a royal flush in poker.

Consider a brand that chooses to use an older, preexisting piece of music rather than a current band or artist’s track as part of their music strategy. Our best guess at the total volume of stereo-recorded music in the world is around half a billion tracks. Now stand back in wonder at how any artist’s song makes it on an ad and realize that it’s not ‘selling-out’; it’s like winning the lottery, only nowhere near as lucrative.

4

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We know that the chances of having a ‘hit’ are small to very small, but brands are still willing to roll the dice and take a chance. And there is something to be said for a meaningful connection with music that is neither a hit, nor a failure, but rather a standard part of any brand’s portfolio. As long as brands want to use music, it’s a moral and commercial imperative for the industry that we represent to help provide some tools; some insight and strategic thinking that will help marketers to cut down the odds to manageable levels. There is no such thing as a certainty but a little bit of clear thinking can certainly make success much more likely. And that’s one point of this book. It is not a guarantee for creating brand value through music but it is a playbook, a form-guide and a ‘method.’ We will lay out a bunch of success stories for you and try to help you move the needle in your favor, whether you are an artist trying to find opportunities or a brand trying to make the right decisions.

Remember, there is no trademark on an idea and what you read here can be stolen and used again. But also remember, there is no guarantee that any of these ideas will work as effectively once you take them and try to make them your own. After all, an idea contributes to maybe 5 percent of the success of a venture, 95 percent is in how you execute it. So, good luck to us all, we’ll need it. But before we roll the dice, let’s go and learn the rules of the game.

INTRODUCING THE HIT BRAND MODEL

If the game is called Hit Brands then the aim of the game is to create value between the players: consumer brands, customers, musicians and the agencies that connect them together.

Everything we do is aimed at building, adding, banking and spending ‘value’ in some form or another. Value is not necessarily monetary; though dollar signs certainly help us to keep score. Value is not soft and fluffy either, there always has to be a measure. Value

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is a combination of practical, emotional and reputational factors that combine to deliver measurable benefits to the business.

In setting out to write this book, the three of us set ourselves the goal of fully defining the complex relationships between music and brands. In doing so, we discovered a model that (to date) has been both specific and general enough to allow us to classify all the case studies we have seen into just three essential categories that together touch all the various components of any brand.

The creation of our model is useful as, now defined, it provides a framework for creating and measuring value. It serves neatly as shorthand for the types of activity that brands undertake, and also enables us as practitioners (albeit with interests in the theoretical) to help the marketing and music industries to talk together positively and with clarity.

This sidesteps us to another reason why this book had to be written. The music industry as defined by its key stakeholders – artists, labels, publishers and distributors – has traditionally viewed the marketing industry, comprising brands and their agencies, as little more than a piggy bank. The view that brand money was somehow ‘soft,’ to be taken and spent as a kind of bonus or subsidy to the ‘real’ music industry pervaded throughout the late 20th century and into the start of this century. The only thing that has changed in recent years with the demise of physical sales of recorded music, is that the record business (the part of the music industry that used to sell plastic discs to people) has run out of steam so thoroughly that anyone left in that business is not only lucky to have a job but probably smart enough to know that playing nicely with brands is a smart idea.

Each of us is on the receiving end every week of hundreds of requests from the music industry on how they can get involved with brands.

So the music industry has had to work out how it can bring value to brands. Not just by way of licensing tracks to commercials, which we could label as the lowest common denominator in the Hit Brand

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HIT BRANDS

model, but also by moving into truer partnerships, where a brand’s ability to distribute music is appreciated, and music’s ability to connect with an audience is paramount.

DISTRIBUTION OF WEALTH

Distributors used to be the people who would ship first vinyl, then cassettes, then finally compact discs to retailers. They would physically distribute music to the public through the retail channel while the public, completely in the thrall of the music industry, was utterly addicted to buying and owning recorded songs.

Then everything changed. First with Napster, then with a slew of torrent sites for peer-to-peer file sharing, and now streaming services such as Spotify, Pandora and even iTunes have come along to feed the public’s addiction to music to such an extent that they no longer need to buy CDs. People still need to hear music; in fact it is now a ubiquitous accompaniment to every waking moment from the alarm in the morning, to the gym, the commute, shopping, at work and at play. But people don’t need to own it any more and certainly don’t need to pay anything like the levels they once did for the joy of ownership. We know that music has value in spite of people’s reluctance to hand over their cash for a copy.

So the buyers stopped buying, the retailers stopped selling and consequently the distributors stopped distributing. So what? So the people making and recording music lost part of their ability to get heard, to get in front of a buying audience. No longer ‘racked’ and promoted in store, the music industry had to find new paths to market. Live concerts filled the void, as did a return to old-fashioned radio plugging and as much online and direct-to-consumer activity as they could manage.

While the rest of the music industry was in flux, however, one line of income stayed steady and started to grow. You could call it the

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Business to Business (B2B) music industry, which has been a constant and a salvation for many record labels and publishers. It has an intact supply chain, in fact its distribution model is growing all the time. It is a fully functioning market and though it is, forgive the pun, a little ‘unsung,’ it nonetheless provides the context within which hit brands reside.

FANS MAKE LOUSY NEGOTIATORS

Brands are acting as distributors of music. The money they spend on licenses and the media amplification of the music they choose makes them a serious force for breaking new music, getting it heard and even getting it bought. This is a truth and also an opportunity that some brands are failing to realize while more and more brands are managing to seize. The budgets that successful businesses across industry sectors are putting into the music industry are significant but the value of the assets being created in no way reflects the investment. Why are brands – and we use the term as a shortcut for the marketing and advertising folk who control the budgets – unable to see that they hold the aces? That the music industry does not serve them well and that things could be so much better?

It has always occurred to us, your humble authors, that the B2B market for music is almost wholly irrational, by which we mean there is no globally accepted method for choosing the music for a brand, no globally accepted method for pricing the music for a brand and no globally accepted method for measuring the usefulness of music for a brand. In fact, there is such a complete lack of these things that the conclusion might be that the B2B music market is intentionally irrational, explicitly obtuse and unapologetically illogical. The answer to the question ‘How much would it cost?’ is invariably ‘Whatever they say’ and recalls the old joke that, when asked what he does for a living, a music publisher once responded ‘I answer the phone.’

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HIT BRANDS

Paul Grecco, the Head of Music at JWT in New York describes the B2B industry as indulging in ‘random acts of music’ and as a 20-year veteran of agencies and record labels, his perspective is insightful. In conversation, he went on to say: It is funny the way it [music] works because music happens at the end, it becomes the bastard stepchild in some ways because they have exhausted all their money on the locations and talent and things like that and now we only have so much left so we still have to post mix and color correct and all that other stuff, it suffers in that respect.

All this adds up to music being random and last-minute – and that is the normal state. This persists no matter what the usage is. Slotting music in a commercial happens mere days before airing, choosing an event to sponsor just a week before it occurs or deciding to pipe in music to a store days before opening. In any other business, a process characterized this way would not be tolerated – the market would (or should) move to correct it. But with music the market has failed.

Brands choose music in so many different ways – senior brand people, retail operators, visual merchandising managers, agency creative directors, ad directors, music supervisors and ad producers all get involved. It is then licensed in just as many ways – expertly, inexpertly, from limited-use licensing to ‘work-for-hire’. And finally, it is characteristically an incredibly fragmented space in terms of the numbers of businesses involved. There are hundreds of sole practitioners and two-person partnerships whose collective activities dominate the market.

Where the brand industry has consolidated, the music industry has fragmented. There are very few globally recognized businesses in the B2B space outside the major labels and publishers – none of which has managed to create a thriving model for interacting with

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brands – and while competition can be good, too much of it can lead to starvation or greed; two sides of the same coin.

So why would a market choose irrationality? It probably wouldn’t.

In the case of music what we can probably see is not a lack of rationality but a lack of education, not so much being intentionally obtuse as covering up an institutional lack of understanding. Brand and ad people simply don’t understand the music industry and are not educated in its ways.

WHO OUTSOURCES FUN?

In most areas of business, when an individual does not understand something, such as the law or a balance sheet or logistics, they tend to hire some experts. That’s a sensible thing to do. But if there is the potential for a marketing executive to enter a negotiation with a major recording artist for a brand partnership, then who would choose to outsource that opportunity? What executive is honestly going to say ‘I don’t want to talk to Lady Gaga – let’s get someone else to do that’? You might outsource IT but music is fun and nobody outsources or calls in the experts to take all the fun.

And being ‘inexpert’ is just the start of the irrationality. A major issue arises (and this is so commonplace as to be an almost universal truth) when being a fan of an artist drives the ad agency or marketing department’s choices. It’s entirely logical of course that any individual wants to meet and work with their music heroes. But it is entirely illogical to let that same person handle negotiations.

It is also true that the nuanced way in which music has traditionally been handled makes it (currently) singularly unsuitable for a separation of the creative from the commercial. Eighty percent of brand music briefs start from a position of ‘What is the perfect music?’ before moving on to ‘Can we afford it?’ and, inevitably, ‘No, we can’t.’ The job of the music buyer for advertising invariably becomes

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characterized by this stream of consciousness and much of the work therefore involves a constant juggling of creativity and cost to find something that sounds like the perfect track but costs about the same as a small family car instead of a Ferrari. Even more controversial, there exists an entire ecosystem of sound-alike music creators who will provide a piece of music that ‘feels like’ the big hit single of the day.

The final and most damning of all the characteristics of the industry is that the irrational and inexcusable behaviors are covered up through a lack of measurement, evaluation and benchmarking. In failing to measure the efficacy of their music choices, in choosing not to define value or keep score, brands simply enable the next irrational choice and next ineffective negotiation.

The solution to the lack of rational, value-based B2B music is not necessarily to introduce hard-nosed negotiation and remove all the fun out of it. And measurement of value is actually very hard. But we do need to move on from the status quo where brands and agencies largely rely upon entirely the wrong method for choosing music – ‘I’m a fan’ – and then trust the wrong people – ‘fans’ – to negotiate the deals.

ADS, DRUGS AND ROCK ‘N’ ROLL

Professor Steven Pinker wrote: Compared with language, vision, social reasoning and physical know-how, music could vanish from our species and the rest of our lifestyle would be virtually unchanged. Music appears to be a pure pleasure technology, a cocktail of recreational drugs that we ingest through the ear to stimulate a mass of pleasure circuits at once.1

So perhaps, as the Professor says, music is a recreational drug, not merely an accompaniment. And given the advertising and marketing

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industry’s generally liberal approach to recreational activities it’s no surprise that they consume music in rock-star proportions, get hooked on it and end up not thinking straight. And like any recreational activity, music and musical choices are at the same time both utterly inconsequential and incredibly important. This is not the paradox it seems.

Given that there are maybe half a billion pieces already recorded and an infinite possibility exists to record new ones, why is nobody else making the point that any one piece of music chosen, does not have to be the only piece a brand could use to have a ‘hit’? And if we agree with that statement, then there are surely hundreds of pieces of music that would probably work just as well as the chosen one, so how can it ever be worth paying a premium for one specific choice?

Yet given the droit d’auteur or ‘right of authorship’ that comes from being senior within a brand organization, it is probably not very realistic to think that anyone can really argue against that senior person’s right to make a choice based upon their musical taste. Why shouldn’t the chief marketing officer’s love of Coldplay, Lady Gaga or Katy Perry be indulged? And if they can afford it and are willing to pay for it, then why can’t they have it?

We believe that there are ways to rationalize the irrational behaviors of brands toward music. We can argue on both sides about the choices that are made and why, blaming them on fandom or the boss having ‘earned the right’, but this ignores the damage that they incur.

The fact is that an addiction to music and the consequent business decisions made under the influence of these addictions, while seemingly benign, are actually undermining the status of advertising and marketing executives.

Which other key executives can spend hundreds of thousands of dollars on licenses without logic or measurement? They are unquestionably limiting the value being sought and delivered from brand investment in music and they are certainly stunting the growth to

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maturity of the music industry. The fact remains that while faced with customers who behave irrationally, there is a disincentive for the music industry to put in place the kind of logical trading practices that characterize rational markets.

Does the incentive really exist for the development of a trading currency? Though it is fairly easy to conceive of a simple equation for costing music as a function of its length, its fame and the advertising ratings being bought, nobody has yet tried the kind of cross-industry initiative that could see pricing models developed. Why should the industry go to that bother if the buyers are not asking?

WHO? A CUSTOMER? NO, I CHOSE THIS FOR ME.

If irrationality characterizes the B2B market for music, then it is surely best summed up by considering the fact that while decisions are made B2B, the end user of the recreational drug is neither the music industry nor the brand (and it is least of all the ad agency).

The real user and the one for and at whom all music choices should be aimed is the consumer, because brands need music not for music’s sake, they need music in order to help them connect on an emotional level with the audiences for their goods or services. It is not, therefore, accurate to consider only a B2B music industry, because the real value chain is business to business to consumer (B2B2C) and only by viewing a brand’s musical choices in the context of their consumers can rational choices start to be made.

The notion of customer-centric musical choices is why we rarely criticize a brand that seeks out wildly popular music for its communications. If it is affordable then it is a pretty good idea to associate your brand with the music that is the most popular with your customers. Of course, there are dangers associated with using very popular music for brands; they range from cost, to lack of control of licensing and the likely inability to link the song explicitly to the

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brand if it is being heard everywhere in every part of the consumer’s life. But at least the intention is right in this kind of choice because the business is asking ‘What do our customers like and how can we be associated with these things?’ That is a good place to start the hit brands journey.

It is also a good place to bring back the concept of value. We must be certain to ask what value brands can bring to their customers through the use of music. More critically, is ‘value to customers’ really the way to judge whether a brand has had a hit? In almost every way possible the answer to this question is ‘yes’. Value to the customer has to be the truest measure of successful branding of any kind, because that value to the customer is what translates into recall, awareness, affinity, loyalty and the love every brand craves from its constituency.

YOU GET WHAT YOU MEASURE

So how do we know if we’ve had a hit? What is the measurement that speaks most truthfully about value created through music in a branding context? Unfortunately, there’s no one method, no single measure, but in this book we want to illustrate a few different ways to judge whether value has been created.

The most direct measure of value is the business’s bottom line.

How much extra money is in the register at the end of the day? It’s rare that anyone in advertising or marketing gets to see these figures and while that holds true for the purveyors of music, there are some places where the right or wrong music has a direct and tangible effect on money in the bank.

This direct music-to-money relationship is easily visible when a brand gets involved in selling music in physical or digital formats.

Apple’s creation of a music download service certainly ticked every box for its customers and the proof has been that sales via iTunes in

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2011 exceeded $6 billion.2 With Apple we see the ultimate study in how a brand – a technology hardware manufacturer in this case – harnessed the power of music to connect emotionally with an audience and rewrote the playbook for corporations. As much as its focus on design and usability, together with its supply-chain management and intelligent retailing, have contributed to the story, it was the iPod that first put Apple technology into the hands of the mass market. Following this, the iTunes software and music then enabled the brand to build a useful and important place in the day-to-day lives of its customers.

The idea of a brand generating hard currency directly from the sale of music was clearly not original to Apple. Many companies have sought to vertically integrate music into their offering – Sony being another obvious example – and Coca-Cola also pioneered digital download stores in the early 1990s with their MyCokeMusic project, which, although ultimately unsuccessful, was before iTunes the biggest in Europe. The mid to late 90s also saw an explosion of lifestyle brands like Hotel Costes and Buddha Bar transferring their brand value to lines of CDs available for purchase.

So back to our Hit Brand Music Planning Model. It is true to say that there are so many brands over the years that have sought to sell music that music as currency has formed one of the three major models that we are introducing in this book.

Eric Sheinkop knows as much as anyone about the power of music to directly deliver revenue for a brand. As a founder of Music Dealers he has built an online platform for B2B music sales that has not only become the envy of the industry, but has even tempted Coca-Cola to invest. As he will describe in his own words, music as a hard currency generator is a key strand of the Hit Brands model, but potentially even more important for now and the future is the concept of music as social currency. His ideas in this area, backed by some of the most interesting case studies out there – told from an insider

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perspective – are in many ways a blueprint for the future of the music and brand relationship.

By way of introduction to the concept of music as social currency, a snapshot of today’s social media users reveals that seven of the top eight most followed people on Twitter are in the music business, as shown in Table 1.

Table 1: Top eight Twitter users User

Followers

Lady Gaga

30,567,050

Justin Bieber

29,309,238

Katy Perry

28,111,938

Rihanna

26,358,990

Britney Spears

21,305,986

Barack Obama

21,239,411

Taylor Swift

19,907,465

Shakira

18,507,525

Source: TwitterCounter.com, as at 24 October 2012

And on YouTube, the top five most viewed of all time is shown in Table 2: Table 2: Top five most viewed YouTube videos Video

Views

Psy – ‘Gangnam Style’

1,238 m

Lady Gaga – ‘Bad Romance’

505 m

Carly Rae Jepsen – ‘Call Me Maybe’

391 m

Eminem – ‘Not Afraid’

387 m

Pitbull – ‘Give Me Everything’

274 m

Source: YouTube.com Most Viewed Videos, All Time, as at 25 January 2013

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Finally, Table 3 shows the top five celebrities on Facebook.

Table 3: Top five celebrities on Facebook Celebrity

Fans

Rihanna

62 m

Eminem

62 m

Shakira

55 m

Lady Gaga

53 m

Michael Jackson

52 m

Source: Socialbaker.com/facebook-pages, as at 24 October 2012

These numbers provide hard evidence of the power of music to get people online and engaged through social media. So, given all the discussions taking place, it is little wonder that music as social currency is probably the most important new development for growing hit brands and also for measuring the value of a brand’s musical activities. Follows, views, fans and likes are proving to be a legitimate currency for valuing social media activities and point the way to how a brand could truly measure a musical ‘hit’ in the new economy.

LET’S GET PHYSICAL

The other area where the direct link between music and a brand’s income may be seen is in physical environments. Brands have been using music explicitly to engage with their customers in retail and corporate environments for as long as the technology has existed, but the levels of sophistication – particularly through zoning and brand-led musical choices – have improved massively since a company called Muzak first delivered ‘elevator music’ to soothe the nervously ascending New Yorkers of the 1930s.

Where ‘soothing’ was the value delivered to listeners in elevators, increases in productivity became the value delivered to management,

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as music was used in the industrial age to keep employees motivated and engaged. The golden age of music in the physical branded environment could be said to have arrived in the 1980s, as stores became increasingly adept at altering music to affect the flow of human traffic – increasing or decreasing dwell time, for example. McDonald’s most famously turned up the volume and beats per minute during busy periods to move people more quickly through the restaurant.

This type of functional or utilitarian use of music has dominated thinking for more than 80 years. Since the turn of the century, however, there has been a massive increase in the level of understanding of how to combine utilitarian music – that soothes or motivates, speeds up or slows down – with the aesthetic use of music that really engages and builds brand affinity.

Companies all over the world have driven forward this combining of utility and aesthetic, and one leading music branding expert, Richard Jankovich, has helped to define the musical aesthetic of major retail, restaurant and hospitality brands across the US. Richard’s belief in the power of music branding is evident in his founding of two businesses dedicated to the symmetry of music and brands. First, B(R)ANDS Music Branding Group, Inc., founded in 2008, provides strategy and music branding services to agencies, music providers and consumer brands. Shoplifter In-Store Radio Promotion, launched in early 2013, is focused specifically on helping artists and labels better understand the world of in-store radio and help get their music placed into the hippest retail playlists.

In his section of this book, Music as engagement, Richard deals with the physical where the value of music is defined in the cash registers at the end of each day. In this, as in other physical environments, the effect of music is instant, visceral and potentially incredibly powerful. We can all admire how branded environments, such as those created by Abercrombie & Fitch or Hollister, have been tailored and designed to deliver music that appeals enormously to

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their target customers, and have the boldness to be far too loud to appeal to anyone over a certain age. Music environments are just as crucial for less energetic brands and Richard’s belief that all customers, not just the youngest and hippest, deserve an intelligent music experience underscores his writing in this book.

Those musical choices are not accidental, certainly not the random acts of music that characterize advertising choices. They are grounded in a creative and commercial strategy. In Chapter 6, through three recent case studies, Richard gives us an insight into how ‘hits’ have been achieved and shows exactly how a retail brand may harness the power of music to really engage its audience.

DANCING – NOT SHOPPING

A different but equally interesting take on music as engagement can be seen in the way that brands are increasingly using music as the primary reason to interact with people and then seeking to turn those people into customers. Most obviously, this has been taking place at music festivals, where brands are setting up to engage with new and existing customers, deliver them some value and then attempting to sell them some of their products. The range of branded, commercial opportunities at existing music festivals is very large and we have not yet seen any one method or case study that really stands out.

What does stand out, however, are the case studies where brands have not simply turned up at a festival in order to sell something to someone, but where they have created and invented musical engagements for people that are intrinsically owned by and linked to the brand and its benefits. Of these, the two most notable are T in the Park, a Scottish music festival owned and run for the benefit (and consumption) of Tennent’s Lager, and Arthur’s Day, an invention of Diageo as a pouring opportunity for its Guinness brand.

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and today there are people and agencies legitimately describing sonic branding in a diverse range of sectors. Some are focused upon retail environments, some in telephony, digital and highly developed experiential design. The majority, however, are clustered within advertising and marketing. The reasons for this are many but are chiefly based on money and opportunity. First, brands tend to put very significant budgets into these areas, and this obviously attracts vendors. Second, the existing model for ad agencies and interested parties to choose and place music in ads is broken, as discussed earlier, and this has created the opportunity for sonic branding to offer an alternative and viable model.

This model is based upon more objective choices of music based upon brand values and customer needs and it provides a robust business case for musical choices based upon established principles of asset creation and investment.

What it has also done is broadened the scope of what might be termed sonic branding. Where once it meant a jingle or a ‘sting’, sonic branding today undoubtedly includes any length or type of music that may be used as part of the brand’s identity.

In this book, Daniel is taking the opportunity to describe the work undertaken by his company on behalf of Barclaycard – a UK-based global payments business – and NESCAFÉ, the world’s number one hot beverage brand. Both cases, with their scale and scope, should provide an understanding of what is possible in the realm of music as identity. From our point of view they describe just how far the industry has come!

AND THIS IS WHERE WE ARE GOING

The model on which we have structured this book states that a brand’s involvement in music falls into one of three categories: identity, engagement and currency. By developing this model we are

INTRODUCTION

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establishing a new paradigm and codifying a new specialism, that of music planning. In advertising and media, the planner is an established member of the team, providing the data and logic that are required to balance the softer creative processes that characterized the Mad Men era. In music, the Mad Men only left the building a few years ago and the advent of the music planner – a person in the creative process for a brand who provides robust thinking and longterm strategies in music – is becoming increasingly important.

Firstly, good music planning provides a strategy to underpin creative choices and greatly enhances and accelerates success. Secondly, good planning should extract more value from investments and ensure that money doesn’t go to waste – which in turn should secure further funding in the future. Music planning is, therefore, a necessary function both for brands and the music industry.

There is a question, however, about who the music planner should work for. Should they work directly for brands, be part of the advertising industry (like traditional brand planners) or be a function of the record labels and publishers?

We are seeing all possible scenarios currently being played out.

Big branding businesses such as Diageo and P&G are beginning to employ heads of music, chiefly from a procurement perspective.

Independent agencies are offering the services direct to brands as a ‘decoupled’ strategic or production service. Ad agency networks themselves are building their own capabilities – with each of the Big Five (Omnicom, WPP, Publicis, IPG and Havas) having at least one of their own network music offerings. Finally, the labels themselves are building a capability to advise brands on how to navigate the waters.

Music planning will probably continue to exist for some time within each of these silos, but the principle of independence will almost certainly separate those who are successful from the rest.

The vested interests of the labels and publishers will be a corrupting

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influence on the need of the planner to do what’s right for the brand.

It is also likely that the dominance of the creative director will diminish the ability of a planner within an ad agency to be truly brandcentric. It is most likely that in-house and independent will be the right places to be to provide for a brand’s needs in music as these situations will provide insight into business strategy at a level above advertising or retail. They will also allow and encourage creative freedom, unshackled by a desire to ‘sell’ the copyrights in a label or publisher’s portfolio.

So the future belongs to the music planner – a person who can understand the complexities of brands and the music industry, and provide compelling and successful strategies that allow them to have a hit. If we have got this book right, then we are offering a toolkit and methodology for a music planner to succeed in the future. And it certainly helps to succeed in the future if you know first how we got where we are.

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9781137340689 | December 2013 ÂŁ24.99 | $35 | $40 CAN Hardback | 272 pages

How to Measure Digital Marketing explains how to assess the success of a digital marketing campaign by demonstrating what the digital marketing metrics are as well as how to measure and use them. Beyond the basics, it provides a practical framework for achieving marketing, media and advertising objectives. This insightful and in-depth book also features interviews with experts and real-life case studies to help marketers navigate the digital world and to better understand and demonstrate the value of digital marketing.

Available to order at www.palgrave.com. Enter the code WORLDPALGRAVE20 to receive a 20% discount.

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Definitions of and actors involved in digital marketing’s return on investment

Executive summary The emergence of the Internet – a wholly new medium – and its implications are probably the biggest change that marketing has faced since World War II. It is no longer just a fad, but a truly new order.

The effectiveness and return on investment (ROI) of digital marketing are often difficult to assess, although in theory, they are highly quantifiable. Counting is not the same thing as measuring, and therein lies the great paradox of digital.

All the stakeholders in the digital ecosystem must agree to establish a common language and a set of effectiveness metrics understood by everyone – the sustainability of digital marketing depends on this.

Defining digital marketing The term “digital marketing” appeared only recently in the world of professional marketing and communication. It refers to the promotion of products and brands among consumers, through the use of all digital media and contact points.

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Although digital marketing has many similarities with Internet marketing, it goes beyond it, since it frees itself from the Internet’s single point of contact and accesses all so-called “digital media,” including, for example, mobile telephony (SMS or applications) and interactive television, as the communication channel. The term “digital marketing” therefore seeks to bring together all the interactive digital tools at the service of marketers for promoting products and services, while seeking to develop more direct and personalized relationships with consumers.

An advanced form of marketing Far from following a fashion, with marketing and advertising becoming increasingly interactive, digital marketing covers ever more techniques and methods generally derived from traditional marketing, for example direct marketing, since it can communicate individually with a target but in a digital way. At present, its role is also tending to expand and go beyond simply the “promotion” of marketing products to include customer marketing or consumer commitment, that is, making available various ways of serving customers so as to maintain and develop the relationship, loyalty, and commitment of certain customers in the co-creation or co-promotion of offerings.1 In the coming years, marketing will be digital or nothing. Capable not only of selling but also creating loyalty and even “fanaticizing” customer relationships (in the Facebook sense), with digital marketing, the marketing of “the good” and “the link” are equally important, complementary, and essential for attracting and retaining increasingly “connected” consumers and for ever more fragmented media uses.

Toward a mix of push and pull Marketing specialists are no doubt familiar with the expressions “push” and “pull.” They refer to communication actions implemented by brands which, in the case of push, will enable them to reach their targets. Whatever the goals set – to make known and develop the image, or to acquire

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and/or retain customers and prospects – brands are first and foremost senders of messages. Each brand has a number of ways – the media – to implement its own marketing communication policy.

Action levers Until relatively recently, the “mainstream media” or mass media, such as television or the press, saw themselves as relays for the brand message.

With the Internet, it is now possible to advertise on websites and thus “push” a message to a relatively large and qualified audience, in accordance with affinity with the target, thanks to the audience of media plan sites, and also to send a message personalized to a greater or lesser extent, by email or via an SMS, for example, to a set of prospects or customers.

Digital media, therefore, like traditional media, allow push marketing actions to be implemented but also – and this is what gives them their great specificity – to authorize the implementation of pull marketing actions, where the brand invites rather than, as push can too often give the impression, “imposes” its presence.

Think interactive Inviting the audience to participate, making one’s brand content always available, or getting Internet users to create or co-create their own brand experience are all opportunities that social media, such as Facebook, as well as brand sites, YouTube videos or blogs and forums make possible.

With the Internet and digital media, it is often said that communication, too often confined to a monologue, has finally acquired its full meaning.

More than ever before, brands have a responsibility, even an obligation, to enter into dialog with their audiences. The most skilful brands at this level are, moreover, those that do best and are often some of the most respected and most popular, for example the Apple brand.

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How to Measure Digital Marketing

Better mixture means better communication Instead of the policy of push that has long characterized marketing, digital marketing leaves room for a mix of push and pull. The brand must, of course, be widely disseminated, but must also (re)position itself at the level of its consumers, be open, available, ready to listen and share its content, and go beyond simply addressing people directly (through its policy of push). All this can be done by means of pull, for example through the word of mouth of its ambassadors and fans (on the Internet and beyond).2 Digital marketing thus allows both push and pull to be fully used so that the brand can express itself and encourage feedback and dialog.

The idea of feedback is also central for measuring effectiveness, since it allows the concept of “response” to a marketing stimulus to be introduced. Indeed, we could represent the effectiveness of a marketing campaign simply by its capacity to achieve the goals that have been set.

We develop this topic in more detail below.

The effectiveness of digital marketing The issue of return on investment (ROI) Effectiveness refers to the ability of a person, group or system to achieve its goals and objectives, or those that have been set for it. Being effective means producing the expected results and achieving the agreed objectives in a timely manner. Objectives can be defined in terms of quantity, quality, timeliness, costs, profitability, and so on. The concept of effectiveness is widely used in economics and management. Effectiveness should not be confused with efficiency, which characterizes the capacity to achieve objectives at the cost of an optimal consumption of resources – personnel, materials, finance. The term “effectiveness” is often associated with the concept of return on investment.

As marketing is an aspect of management science, it is not surprising to find the notion of effectiveness at the heart of the marketing process.

“Marketing effectiveness” or ROMI (return on marketing investment)

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is one of the central concerns of marketing departments. The economic crisis of recent years has only amplified the phenomenon. The recent Ad Age CMO Strategy/Forrester CMO Group Survey, conducted among marketing departments of large US companies,3 showed that, in 2011, chief marketing officers (CMOs) prioritized the maximization of return on marketing investments and not just the efficiency of these investments (we return to this topic later). In addition, marketing activities that are too expensive or too difficult to measure are quite simply dropped. These same US marketing managers made social media and digital marketing their number two priority for 2011.

In France, and in Europe more generally, the same priorities apply.

As of November 2008, the effectiveness of marketing actions was the leading priority for CMOs. Our recent conversations with major industry associations confirm this trend. The same is true at a European level, as evidenced by the digital initiatives of advertisers through the World Federation of Advertisers (WFA) and digital industry experts through the Interactive Advertising Bureau (IAB) Europe.

Structural needs: necessary structural changes In the case of France, the UDA e-marketing barometer is instructive, since it shows that even if the level of expertise of French advertisers in terms of knowledge and use of digital media is progressing, only 45% of them (compared to 40% in 2010) believe they have a good or very good knowledge of the tools available.

While these advertisers applaud digital marketing for its low cost, its relative simplicity of implementation, and its greater efficiency, they consider that the absence of a dedicated team in their organization (55% in 2011, 25% in 2010) and the lack of expertise and information about its effectiveness (44% in 2011, 45% in 2010) are the main obstacles to its development. In the space of a year, while investments have continued to grow and the lack of specialists and dedicated teams has become increasingly noticeable, the expertise in terms of efficiency has not improved.

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If things do not move forward on this last point, the whole profession and digital marketing will suffer as a result, and its development will be that much slower. However, according to the sector’s professionals (see the Ad Age CMO Strategy/Forrester survey cited above), one only has to measure the effectiveness of digital marketing to see that is inevitable and even central to the marketing processes. So what is it in reality?

How effective is digital marketing? Can its effectiveness be measured?

Do brands and marketing departments feel they have sufficient expertise on the subject? We shall see below that it is in regard to these points that much progress still remains to be made.

What does it mean to measure effectiveness?

The word “measure” refers to the need to “seek to know, to determine a quantity by means of a measurement.” The measurement is the quantity used as the basic unit for evaluation. Measuring marketing effectiveness thus means assessing its effects, that is, evaluating the anticipated results and achieving the set objectives. Whatever the objectives of digital marketing – increasing awareness, brand image, esteem, sales, loyalty or commitment – measuring consists of updating a measurement, metric or key performance indicator (KPI), so as to assess the expected impact of the various objectives. All this may seem obvious, but my experience as a practitioner shows that resources are often deployed without really identifying the priority objectives of the actions envisaged. Do they increase awareness? Enhance the brand image? Increase sales? Without objectives, it is hard to set up a monitoring stage, or measure the return or effectiveness, that will be able to make use of measurements and metrics geared to the objectives.

Choosing metrics and indicators In the process, it is the objectives that should allow the most appropriate measures to be decided on and kept up to date. These measures must be

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chosen in advance, that is, before the launch of the marketing campaign and not afterwards, as is too often the case.

It is not uncommon for advertisers and agencies to update a series of inappropriate (in relation to the objectives) measures or KPIs during or at the end of a campaign. Pressed for time, or more often because the “monitoring” stage of the marketing actions is inadequately planned, the relative ease of access to the metrics most often available free of charge (via tracking tools that specify the number of impressions given, the number of visits/visitors, the number of clicks) has the effect of not allowing the potential impact of a campaign to be accurately measured.

All too often the measures used are not suitable for the purpose, and in no time the medium that is supposed to be the most measurable of all media gains a reputation for being unable to quantify the effects of its actions – a considerable shame at a time when it is essential to demonstrate the effectiveness of marketing so as to justify investment and additional resources.

A special discipline It is vital, even before addressing the choice of the most appropriate metrics, to recognize the importance of monitoring in the marketing process. Without monitoring, there can be no measurement, and without measurement there can be no monitoring, and therefore no optimal management of resources – “you cannot manage what you cannot measure.”

Monitoring and measurement are therefore primarily a discipline, or a state of mind, which must be integrated upstream of the marketing process, in the same way as other activities. Measuring involves the formulation of clear objectives (because otherwise it is difficult to measure them), which requires a common language between the project’s various actors, and this in turn facilitates communication and the development of marketing actions. If we are not clear about these objectives, and are unable to communicate and measure them, then the

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various stakeholders, particularly the financial and general departments, may well question the value of digital marketing.

Validity and reliability of measurement Validity and reliability are the two necessary conditions for ensuring the quality of the instruments used and therefore the results obtained.

Validity Validity refers to the capacity of the measure to correctly quantify or represent the concept or construct being measured. In other words, if the measurement of effectiveness seeks, for example, to verify the impact on brand image, a valid measure must be able to correctly measure the potential impact of the online campaign on the brand image.

Purists and academic marketing researchers want to verify: The internal validity of the effectiveness study, that is, to show that changes in the response variable (in our example, the measurement of the brand image) are caused solely by changes in the independent or explanatory variable. The explanatory variable in this case is the online campaign.

External validity represents the possibilities (and limitations) of the extrapolation of the results and conclusions of the effectiveness study to the whole area that was the subject of the investigation, or possibly to a wider area.4

The development of appropriate measures In practice, brand managers generally have confidence in their providers of studies and measurements, which in principle should ensure the validity of the measuring instruments deployed. Too often, however, because the measures and metrics used are unsuited to the campaign objectives, it is unlikely that the measure is “valid,” since from the outset it is illadapted to the objective.

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The most common case is the measurement of the branding effectiveness of online campaigns, that is, the capacity of campaigns to raise awareness and enhance the image, which today is too often evaluated using metrics such as the percentage of clicks, with generally less than 0.5 percent of clicks on a campaign. It is impossible to estimate the branding effect, not because of the low click level, but simply because the measure itself is unsuitable for the purpose; it is therefore “invalid” (in the sense of its internal validity).

The results of a campaign test may be considered externally valid if the entire campaign has been correctly measured and if the other variables, which may influence these “monitored” outcomes, have been taken into account in measuring the overall effect of the campaign; for example, the presence and effect of the TV media plan in the case of a TV plus online campaign.

It is, however, difficult to extend and expand the results to all campaigns and brands of a product category, as the results are generally dependent on the context in which the campaign is conducted and therefore tested (media budget, competitors’ media plans, and size of the brand).

Nevertheless, the experience accumulated by the companies specializing in measuring effectiveness, which take the form of sectoral “standards” and benchmarks, makes it possible to situate the results and provide guidance and lessons “about what works and what does not work,” as well as optimization methods. Once the validity of the measure has been established, its reliability must be checked.

Reliability The reliability of a measurement instrument refers to its capacity to reproduce the same result when the same phenomenon is measured several times with the same instrument. In turn, sensitivity refers to the capacity of the instrument to record relatively small variations in the phenomenon measured.

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Web analytics In practice, what can we say about the reliability of digital marketing measurements? Take the case of web analytics, which includes all measurement tools of audience and traffic on the Internet and is able to quantify a website’s audience and traffic based on indicators such as the number of unique visitors, page views, visits, and the average duration of visits. But before long, web analytics had to face concerns about the reliability of its measures.

Indeed, the analysis of log files, on which the first statistical analyses were based, was quickly limited to “faithfully”5 collecting the number of visits, visitors, and so on. Log files were not originally directly intended for this analytical use, and measuring traffic was therefore developed with marker technologies or tags. Placed on each page of the site being measured, tags can count visits, visitors, and so on. This led to improved reliability of the measurements collected.

Even today the comparison of measures from web analytics tools, and using the same tag technology, such as Google Analytics or At Internet solutions, often produces different measurements when they are installed on a given site.

Complementarity of metrics Similarly, “site-centric” audience measurements – tools based on measurement using tags – and “user-centric” audience measurements – based on the observation of recruited panels (usually those of Nielsen Online, formerly known as Nielsen NetRatings, and comScore) and Internet user representatives, whose behavior is measured over time – are not comparable. The figures are often different and are largely fueled by heated exchanges between supporters of one or other of the measures. In reality, of course, these two measures are complementary.

But beyond this complementarity, the reality of the practice of measuring on the Internet shows that it is complex, difficult to implement, and often imperfect. Yet could we manage without it?

62 • An Excerpt from Hit Brands

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Instilling brand loyalty among consumers is the key to long-term success, and requires focusing on meaningful differentiation: functional, emotional, or societal.

Supported by data analyses, case studies and interviews, The Meaningful Brand explores the four components of a distinguished brand: purpose, delivery, resonance, and difference.

Available to order at www.palgrave.com. Enter the code WORLDPALGRAVE20 to receive a 20% discount.

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Chapter 1 How Marketing Adds Financial Value to a Business

Since 2006, Millward Brown has created an annual ranking of the world’s most valuable brands on behalf of its parent company, WPP. The BrandZ Top 100 Most Valuable Global Brands Ranking is different from other rankings because it integrates financial data with attitudinal survey data to identify the degree to which consumers’ beliefs about brands drive their purchase decisions. We call the attitudinal component the brand contribution. The higher the brand contribution, the greater the importance of the brand in driving financial value compared to other tangible and intangible business assets.

To create the ranking, Millward Brown’s consulting unit, Millward Brown Optimor, combines publicly available financial data, sales data from Kantar Worldpanel, and results from 150,000 consumer interviews. Table 1.1 shows the top ten most valuable brands in the 2013 ranking.

These top ten brands have increased in value by nearly $500 billion since the first ranking. Some of the growth, but not all, reflects the rise of leading technology brands over that period. Against the technology tide of Apple, Google, and IBM, brands like Coca-Cola, McDonald’s, and Marlboro have not only held their own but grown. McDonald’s was not ranked in the top ten in 2006, but strong growth over the intervening period means it is now ranked fourth.

The brand contribution varies depending on the brand and the product category. Coca-Cola is far more dependent on consumers’ desire to buy its product than is a brand like GE (ranked eleventh, with a brand contribution index of 2), for which purchase decisions are heavily influenced by business requirements, corporate buying policies, budgets, and so on. A high brand contribution is most often found in categories such as luxury goods, for which the emotional connection to the consumer is more salient than any functional benefit. While brand contribution differs across categories, within Copyrighted Material

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BrandZ Top 10 Most Valuable Brands 2013

Rank 2013

Category

Brand

1 2 3 4 5 6 7 8 9 10

Technology Technology Technology Fast food Soft Drinks Telecoms Technology Tobacco Credit Card Telecoms

Apple Google IBM McDonald’s Coca-Cola AT&T Microsoft Marlboro Visa China Mobile

Brand Value 2013 ($M)

Brand Contribution Index

% Brand Value Change 2013 vs 2012

Rank Change

185,071 113,669 112,536 90,256 78,415 75,507 69,814 69,383 56,060 55,368

4 3 3 4 5 5 3 3 4 3

1% 5% –3% 5% 6% 10% –9% –6% 46% 18%

0 1 –1 0 1 2 –2 –1 6 0

a product category, better-known and better-liked brands create stronger demand for that brand’s product or service, are worth more, and tend to grow revenues and profits faster than their peers.

Brands are valuable not just for the profits they generate today but also for their future earnings. A brand’s current momentum is important to its future earnings potential. Momentum takes into account product category, country growth rates, and consumers’ attitudes toward the brand. Technology and telecom brands typically have high momentum scores because of strong momentum takes category growth rates and booming consumer demand in developing economies, but strong consumer demand helps give brands like McDonald’s strong growth potential.

STRONG BRANDS OUTPERFORM THE S&P 500 The Standard & Poor’s 500, or S&P 500, is a stock market index based on the market capitalizations of five hundred leading companies publicly traded in the U.S. stock market. In terms of stock prices, the strong brands measured in the BrandZ ranking consistently outperform their peers and the S&P 500.

Strong brands, defined by the perceptions of their target consumer, not only create more business value but also command higher share prices as a result. Figure 1.1 compares the share price performance of companies that are strong brands in our BrandZ portfolio with the S&P 500 and shows that over time, strong brands have significantly outperformed the average, showing a 28 percent improvement in share price over the S&P 500 since Copyrighted Material

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Figure 1.1 BrandZTM Strong Brands Portfolio vs. S&P 500 (April 2006– December 2012) Source: Bloomberg, MB Optimor analysis

April 2006 in spite of the impact of the Great Recession brought on by the 2007 financial crisis.

What is noteworthy is that while the average share price of these strong brands was equally affected by the advent of the recession, it bounced back faster, regaining the 2006 level at least a year earlier than the overall index.

Strong brands are resilient in times of crisis and recover more quickly than others, in part because they are important to and trusted by their consumers.

SO WHAT IS A BRAND? In my previous book, The Global Brand, I defined a brand as “a set of enduring and shared perceptions in the minds of consumers. The stronger, more coherent and motivating those perceptions are, the more likely they will be to influence purchase decisions and add value to a business.”1 Copyrighted Material

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People’s perceptions of a brand are rooted in their ideas, feelings, impressions, and experiences, and the job of marketing is to help ensure that people’s perceptions are as motivating as possible; to make people value the brand more than the alternatives; and, in some cases, to blind them to the fact that there are acceptable alternatives. Marketing is all about creating value based on consumers’ intangible memories and associations. The end result of successful marketing is that more people desire a product and are willing to pay the price asked for it—a price that will be more than the product is intrinsically worth because consumers value some aspect of it over and above the tangible product. They value the brand.

People value brands because brands are shortcuts to meaning. That meaning may originate from the function the product performs and a belief that the brand performs that function in a meaningfully better way than do alternatives. More likely, people intuitively recognize that the product does its job well but is not functionally different from the alternatives. Instead, they think the brand is more interesting, likeable, inspiring, aspirational, compelling, or shareable. Ultimately, people think the brand is more meaningful, and people value things that provide them with rewarding and meaningful experiences—brands are no exception. We will explore the dimensions of brand meaning in more detail in Chapter 3, particularly the importance of being meaningfully different from competitors.

A FAIR EXCHANGE OF VALUE To create sustainable value, a transaction must be viewed as a fair exchange by both seller and buyer. If a brand is to survive and prosper, then its consumers must believe that each purchase is a fair exchange: the service rendered must justify the price paid. Repeated transactions, the ultimate goal of any strong brand, require the consumer to feel that he or she is continuing to enjoy fair value each time he or she uses the brand. Repeated positive experiences are the foundation of long-term brand value (even if the experience is not consciously appreciated every time). The event most likely to destroy brand value is the unexpected bad experience, one that forces the customer to consciously reconsider his or her feelings about the brand.

Product experience may be the cornerstone of brand experience, but it is far from the totality. Brand experience encompasses everything from the earliest fleeting impression of a brand to the latest interaction; from the positive feeling created by seeing a funny TV ad to the discussion of the brand’s shortcomings with a friend. It is the job of marketing to shape those experiences to the best advantage—to shape expectations, frame Copyrighted Material

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experiences, play down weaknesses, and keep positive associations alive in consumers’ minds. Far from letting go in the face of growing consumer control, marketers must work even harder to create a positive and meaningful brand experience. In order to manage our brands effectively, we must first have a clear perspective on what really matters to our consumers. Then, and only then, can we tailor the total brand experience to best effect.

EVERYTHING IS BRAND When does the taste of the product stop being a function of the recipe and start being a memory of a pleasant experience? There are two sides to any brand: the tangible assets that the brand owner controls and the intangible assets that arise from consumers’ feelings about the brand. Because marketers usually concern themselves with the intangible—the ideas and associations that they promote with the intention of making the brand more desirable—they risk decoupling those ideas and associations from the tangible brand experience. That risk is exacerbated by the growing focus on digital communication, since ideas and information are paramount in the virtual domain.

In reality, the tangible assets have far more influence than the “advertising” on whether someone buys a brand and sticks with it. Even if advertising alone leads someone to consider purchasing a brand, most buyers will try to check it out before buying; they will try to anticipate what the brand experience will be like. If marketing is to be really effective, then it needs to encompass both the tangible and the intangible. Sometimes the biggest return on marketing investment will come from simply highlighting a good product experience and the feelings it evokes.

In a recent post on the Harvard Business Review blog, Dan Pallotta drives home the point that a brand is a two-sided coin. Pallotta proposes that “brand is everything, and everything is brand.”2 Your brand is your strategy, call to action, customer service, communication with customers, and, yes, your logo and visuals too. He concludes, “Ultimately, brand is about caring about your business at every level and in every detail, from the big things like mission and vision, to your people, your customers, and every interaction anyone is ever going to have with you, no matter how small.”

To Dan, a brand is essentially a promise incarnate, but there is another side to this coin: how well the brand lives up to its promise in the mind of the customer. This is what will determine how much the brand is actually worth to someone. You can care about your business as much as you like, Copyrighted Material

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but unless your customers care too, your brand is not worth anything. To create value from your brand, you must understand what matters most to your customer.3 While a brand is everything its owner controls, it is also everything it suggests in the minds of its customers. A brand is the ideas, the memories, and the feelings evoked every time someone thinks of the brand. To create value, those mental associations must make the product or service more salient, more interesting, or more compelling than the alternatives. They must make the brand meaningfully different in some way. That difference does not need to be tangible or significant, but to create value for the brand owner, that difference must resonate with the potential customer more strongly than competitive brands do. The degree of differentiation required for a brand to create value will depend on the nature of the brand and category. The key question to ask is whether your brand is perceived to be different enough given its competitive context.

So Dan Pallotta is right—“everything is brand.” The person on the street makes no distinction between marketing, production, sales, or customer service—those distinctions are reserved for the business world alone. To the individual consumer, these are simply different aspects of the same brand.

A compelling online video is just as much a part of a consumer’s brand experience as is using the product, seeing the brand on sale in the store, or talking to a customer service representative on the phone. These interactions are all part of the brand experience, and everything a brand does should be aligned to make that experience meaningful. The objective should be to build, reinforce, and enhance the ideas and associations that resonate with customers and drive their predisposition to buy the brand and pay a premium for it. The end result will be the creation of value for both brand owner and brand buyer. And if consumers believe they are getting good value from a brand, then they will talk about it. They will become advocates for the brand.

OVERSTATED EXPECTATIONS— DON’T BE DELUSIONAL It is the dirty little secret of marketing that much of the time its promises of growth are grossly overstated.

I can understand why this happens, because I have experienced it firsthand. When I ran a small Internet start-up for Millward Brown just before the dotcom bust of the early nineties, I was responsible for both management and marketing. I submitted several budgets with expectations of Copyrighted Material

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significant revenue growth, only to see those expectations dashed. The problem was not that we weren’t publicizing the company enough—Millward Brown Interactive had great publicity, more coverage than even Millward Brown—but we just could not hit the sales numbers. In preparing my budgets, I overestimated the demand for what we had to offer. Money was flowing freely, and there was little need for market research to justify whether online advertising worked or not. The stuff that we could do, which was traditional market research conducted online, did not pay the bills. And the radical new approach—the vision on which the company was founded— proved difficult to build and implement. (As an aside, that is why we ended up buying Dynamic Logic some years later. They shared the vision and got the business model right. If you can’t beat them, buy them.)

I think marketing’s promise gets exaggerated for a number of reasons.

First, marketers know that they will be judged by how well they drive top-line growth and try to act accordingly. However, the relationship between what marketers do and the effect of those actions on financial value is not direct—inputs do not translate immediately or directly to outputs but are instead mediated by consumers’ mindset and behavior—and cannot easily be separated from the state of the business itself. A brand is everything that the company does, not just its marketing, and marketing itself is a multiplier of what the company does—it is not independent. If the business is flagging, then so too will the return on its marketing investment.

Rory Sutherland, vice chairman of Ogilvy Group, suggests that marketers have become their own worst enemies by trying to justify every action with a spreadsheet. In a YouTube video he states, “What marketers have developed is a sort of Stockholm Syndrome where we have been so beaten up by procurement and finance and other people that we have started to take on the worst qualities of our abusers.”4 He concedes that justifying marketing actions with numbers is well and good, but he suggests that all too often we predict linear outcomes that scarcely pay for the investment, when the magic of marketing lies in the fact that relatively small actions can sometimes have a very large payoff. He states, “The glorious thing about marketing is that a very small intervention can have huge effects.”

Second, expectations of change are often simply out of alignment with reality. Millward Brown Interactive had enough trouble hitting its sales targets at a time when the money put into the Internet was going through the roof, and the biggest drivers of business growth are economic demand and category demand, not market share gain. So, for example, between 2002 Copyrighted Material

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and 2007, simply holding market share constant in the automotive market in China was going to guarantee massive returns. Unfortunately, most marketers are operating in categories in which the growth rate is limited.

Their challenge is to grow market share, and, unfortunately for the optimists in marketing, market share proves remarkably difficult to change.

Finally, working on a quarterly or annual planning horizon makes it easy to get duped into thinking that the current planning cycle is the only one that counts. However, if you look across several years, then you get a different picture. Successful innovation works on a very different beat than the rest of the business cycle. Groundbreaking innovation only comes once in a while, and, even if effective, new marketing campaigns take time to impact all the potential buyers of a category. Binet and Field find that positive pricing effects—one of the most overlooked benefits of marketing investment— are most demonstrable over a three-year time frame.5 Competitive advantage gained by brand building must be viewed in the context of years, not months.

THREE WAYS IN WHICH MARKETING DRIVES BRAND VALUE With the preceding caveats in mind, let me say for the record that marketing can drive enormous financial value growth, particularly when it is aligned with a great business model, and driving top-line growth is really just the tip of the iceberg. The contribution of marketing is far more than just driving the acquisition of new customers; successful marketing also helps make sure you keep the ones you have. In the next section of this chapter, I will consider three ways in which marketing adds value to a business.

1. Driving Financial Growth: Amplifying Tangible Advantages Marketing drives financial growth best when it is aligned with meaningful and differentiating product offers. Look back across the history of any category. Substantial market share changes happen when a brand introduces something new and meaningfully different to the category. Sometimes the innovation will transcend an existing category or create an entirely new one. For example, the launch of Nespresso has fundamentally changed the way that many people in Europe make coffee at home. The 2011 Nestlé annual report states that Nespresso’s revenues grew 20 percent over the course of the year, to well in excess of $3.3 billion. By contrast, the iPhone did not create a new product category; it simply reset the gold standard of

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what a phone could be. Product-based innovation that creates a tangible advantage over the existing alternatives causes people to stop and reconsider their existing choices, giving new users a compelling reason to choose.

This is when marketing can achieve the most effect and when it is worth investing more than normal to ensure that people hear about and understand the new offer.

Innovations like these do not come along often. In established consumer packaged goods categories, the gap between real innovations can be measured in decades. Even in the fast-paced world of technology, there is usually a gap of a couple of years between innovations like the Razr, BlackBerry, and iPhone. When a company does create an innovation, marketing is responsible for spreading the word and letting people know what the brand represents. If you know what aspects of the total brand experience make it valuable to people, then this task is relatively simple. If you don’t, then it can seem daunting and all-consuming.

When a brand possesses an intrinsic product or service advantage, then marketing simply needs to enhance perceptions of the value that is already there and amplify that meaningful experience out into the marketplace.

Marketing puts relevant and differentiating elements of the product experience under a spotlight. This helps focus people’s attention on the good aspects of the experience and provides a point of comparison that favors the advertised brand. However, competitive advantages like these are often short-lived, and, as we shall see, the critical challenge for marketing is not only to create those initial perceptions of difference but also to maintain the feeling of difference for as long as possible.

2. Creating Financial Growth through Intangible Differentiation In the absence of radical product innovation, marketing can create a similar effect by finding ways to get people to re-envisage what the brand stands for. The innovation is extrinsic, not intrinsic. In cases like these, marketing creates additional and related experiences that improve the brand’s value to its customers.

This strategy may take the form of a repositioning exercise that finds a new way to make what the brand stands for different and relevant to its potential consumers. A brand can create perceptions of difference based on its values, personality, tone of voice, and the causes it espouses. But—and this is a big but—this form of advantage is only as good as your last execution. Relying solely on intangible differentiation puts the marketer on a treadmill that requires continued successful implementation.

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That said, even a generic category benefit can create a point of difference if a brand makes the benefit its own. Take, for instance, Johnnie Walker and the idea of progress. After a two-year research program designed to identify a motivating idea on which to base its marketing, the brand team identified the concept of progress as one that resonated with consumers around the world.

Rather than being satisfied with demonstrating their existing status through the traditional trappings of success, the research found that men now aspired to demonstrate continued personal development and achievement.

Mark Murray, director of global consumer planning and brand building DWBB at Diageo, states: “Any brand of whiskey could have claimed the idea of progress, but Johnnie Walker got in first with an iconic campaign and claimed that territory.”6 By identifying itself with the universal values associated with the concept of progress and allying that idea with the image of the striding man and a strong marketing campaign, Johnnie Walker managed to carve out a “different enough” positioning in people’s minds. The end result has been a dramatic reversal of fortunes for the brand, with strong increases in sales and market share.

To the best of my knowledge, Johnnie Walker did not change its product; the brand relied on marketing to create a perception of difference. But that did not stop the “Keep Walking” campaign from helping increase Johnnie Walker’s sales by 48 percent in just eight years.7 In other categories, product innovation is often the means by which brands seek to achieve advantage.

This type of advantage is often short-lived, but, as Murray puts it, “the challenge is to sustain the feeling of difference.” And sustaining that feeling is often easier than you would expect. Not only is it very difficult for competitors to displace a well-established idea, but people also equate “first” or “original” with “best.”

3. Fighting for More than a Fair Share of “In-Play” Consumers One of the biggest contributions that marketing makes to a business is simply holding the market share gained as a result of disrupting the status quo. After a disruption, markets tend to return to a state of dynamic tension, in which the actions of each brand tend to cancel out those of their competitors. Buyers lost as a result of dissatisfaction or the competitors’ tactics must be balanced out—and, ideally, exceeded—by the acquisition of new buyers through the brand’s own marketing and sales tactics. In the absence of real product or positioning innovation, top-line growth becomes a long, slow process of incremental gain. Even in fast-growing markets like Copyrighted Material

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China, sales gains will lag behind those of the category if you don’t hold market share.

At any one point in time, there are only so many people likely to buy within your product category. For instance, according to Polk, Americans are now keeping their new cars for an average of six years, two years more than before the Great Recession.8 Most people driving a car today are not actively thinking about buying a new one. And when it comes to buying a new mobile phone, there is substantial variation by country. In the United States the replacement cycle is short, just under two years on average, but in many other countries the cycle is longer than three years.9 Obviously, food and drink products are bought more frequently, but even so, not everyone is interested in buying all the time.

This is an important point that many people tend to overlook. For a large percentage of product categories, only a minority of people are “in play” at any one time. Those individuals who are actively considering a purchase or shopping within the category will be most likely to note, consciously reflect, and act on marketing communications and sales activities. Those not actively shopping within the category, either because the category itself is not relevant to them or because they do not plan to buy in it again for a while, are unlikely to reflect on what they see and hear. If the news is compelling enough, they might remember it when they do purchase within the category, but more likely, the specifics will simply be forgotten. In most cases, all that will be retained are a few general impressions. Marketing’s job is to make these impressions as clear and compelling as possible so that when the time comes for these people to buy, they are positively primed to respond to the brand.

The Red Queen Effect The term Red Queen Effect was first coined by Leigh Van Valen, an American evolutionary biologist.10 The phrase refers to the Red Queen’s pronouncement to Alice in Lewis Carroll’s Through the Looking Glass that “it takes all the running you can do to keep in place!” Though the Red Queen was running, she was going nowhere, because everything around her was running too.

As applied to business, the Red Queen Effect describes situations in which companies need to escalate investment to maintain their market position while the returns on those investments are diminishing. Many suggest that Red Queen competition results from management

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preoccupation with operational effectiveness and cost control at the expense of strategic differentiation. Rather than looking for new ways of competing, companies fall back on doing what they have always done, just faster and more cheaply. Competitors respond in kind, thus creating a vicious cycle of quicker product cycles and falling prices.

This cycle often continues until a third party disrupts the category by introducing a more innovative approach.

I believe that exactly the same effect applies to brands within a product category. As soon as one brand introduces a new and disruptive innovation to a category—whether tangible or intangible—and appears to benefit as a result, then its competitors will inevitably follow in its footsteps, thus negating the competitive advantage of the first mover.

We can see the Red Queen Effect in action in one of today’s most rapidly evolving product categories: mobile phone handsets.

In 2005, the two big players in the U.S. consumer phone market were Nokia and Motorola. According to our estimates from BrandZ, these two brands held roughly half the category between them, with Samsung and LG trailing by a wide margin. BlackBerry, introduced in 2003, had yet to make significant inroads into the consumer market and was still the go-to business device. Market shares in 2006 remained mostly unchanged. BlackBerry and LG gained some ground. Nokia and Samsung lost some.

Then came Apple. In June 2007, the company launched the iPhone, and the fortunes of the existing brands changed dramatically. By 2010, the iPhone had consolidated its position as the most desirable (if not the most affordable) mobile phone. At the same time, BlackBerry had succeeded in making inroads into the consumer market. Both brands were more likely to be perceived as different from existing consumer models: they set the trends for the category and were more appealing than other makes. In terms of market share, Nokia and Motorola were particularly hard-hit, while Samsung and LG managed to hold their ground.

What was important about the introduction of the iPhone was that it reset expectations of what was important when buying a mobile phone. This was not just a matter of form and function. Which brand you owned had become more important in the decision. Before the launch of the iPhone, 35 percent of mobile phone buyers interviewed in the BrandZ survey said brand choice was very important. This number rose to 47 percent in the two years after the launch.

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Since 2010, however, the proportion of people saying brand choice is important has returned to 2006 levels, and the proportion saying brand is not important has risen back to 19 percent. Why? Because competitors have adjusted to the new standard set by the iPhone. The Samsung Galaxy S, first launched in June 2010, is now considered by many to be a direct competitor to the iPhone. Everyone, it seems, has their sights set on beating Apple at its own game, and, with many phones that appear functionally similar, which brand of phone you carry has once again become less important. The iPhone was once a game changer. But now the game has changed, and unless Apple can invest more and move even faster, it is bound to find itself responding to the increased competition.

Apple has tried to preempt competition by quickly introducing new models and dropping the price of the iPhone over time. Early in 2013 in the United States, a 16-gigabyte iPhone 5 cost $199, compared to $599 for the 8-gigabyte first-generation model. It has become Apple’s modus operandi to start out by pricing new products at a premium (in part to recoup the investment in new manufacturing techniques) and then price down over time. If the company did not do this purposefully, then it would be forced to do so anyway. Outside of the United States, an iPhone 5 can still cost the equivalent of $650, and even the cheaper models are more expensive than Android phones. This high price did not stop Apple from reporting record sales of iPhones in the last quarter of 2012. However, the 28 percent increase over the prior year’s sales failed to meet analysts’ expectations, and, with profit flat, the company’s stock price slid lower. Apple may not need to launch a cheaper phone to meet consumer demand, but it seems likely that it will do so to meet investor demand.

CONNECTING THE MEANS WITH THE END In many companies, a fundamental disconnect exists between senior management and marketers regarding marketing priorities. One Economist Intelligence Unit report finds that “non-marketing executives—including the CEO, CFO, CIO, other functional heads and board members—see marketing’s top priority as driving revenue, by a wide margin over finding new customers (30% to 19%). For CMOs, however, marketing’s priorities are creating new products/services and customer acquisition; driving revenue ranks third.”11

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The two groups appear to possess very different perspectives on what is important, but I suspect that management is more focused on the end result—driving revenue—and marketers are more focused on the means— how to drive that revenue. Of course, both groups ought to be more concerned with driving profit growth than revenue. The value of strong brands lies not only in their ability to create demand but also in their ability to justify a price premium.

REDEFINING THE ROLE OF MARKETING The biggest challenge that brands face is creating sustainable and profitable growth, but today, the vast majority of brands trade on past equity and transient buzz. As a result, consumers increasingly perceive brands as substitutable, and they value getting a good deal more than a specific brand. A widely held excuse for this situation is that it is impossible to sustain differentiation in today’s competitive marketplace. As a result, many marketers tend to focus on creating awareness without regard to meaningful differentiation. They value innovation for innovation’s sake; fame, not substance; buzz, not advocacy.

To my mind, the belief that it is impossible to sustain differentiation is an excuse. While product innovation remains the best way to create meaningful differentiation, it is certainly not the only way. Johnnie Walker is just one example of a brand that differentiated itself through effective marketing communication of a meaningful idea. There are always opportunities to change the way people feel about your brand, to change their expectations of the product experience, to introduce new criteria that separate it from the competition, to demonstrate how much others enjoy it, or to reframe price perceptions to make the brand seem like a good value.

MARKETING, REINVENTED A survey of 191 organizations conducted by Forrester Research and Heidrick & Struggles finds that the majority of marketers (86 percent of those interviewed) believe they have ownership of brand strategy and positioning, creative development, and advertising.12 However, less than a third felt they had ownership of pricing (31 percent), product and service development (30 percent), or in-store or branch experience (25 percent). While a higher proportion felt they had involvement with these functions, only 14 percent agreed that everyone in the organization had a synchronized view of the customer. How, then, can marketing be held accountable for revenue growth

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when some of the most important tools are not under their control and, worse, there is a lack of alignment regarding what customers want?

As I noted before, customers make no distinction between the brand they see in-store, the brand with which they chat online, and the brand they see in TV commercials. If a brand is to drive as much value as possible, then the first step must be to align all functions to deliver a consistent experience across all touch points. If marketing is to be held accountable for driving top-line growth, then it must move beyond its traditional boundaries and encompass all aspects of the customer experience, including product and service formulation, customer service, and point-of-sale activity. This requires not only a shift in the way marketers are perceived, from spin doctors to experience architects, but also a shift toward marketers taking responsibility for a much wider remit. They need to seek opportunities to shape the whole brand experience to be meaningfully different from that offered by the competition—instead of just worrying about their latest campaign.

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78 • An Excerpt from Hit Brands

9781137369000 | November 2013 £29.99 | $47 | $54 CAN Hardback | 246 pages

For brands to succeed in a competitive environment they need to build a ‘loving’ relationship with their customers. Brands need to construct an emotional engagement with customers so that they feel genuinely connected to it and what it has to offer.

Through 15 steps Brand Romance reveals how to use High Design principles to build a truly loved brand.

Available to order at www.palgrave.com. Enter the code WORLDPALGRAVE20 to receive a 20% discount.

An Excerpt from Brand Romance • 79

Introduction

Introduction Much as two parents offer unconditional love to their children, a “loved” brand offers unconditional love to its specific audience. And just as with parents, such a brand should not expect any return of that love. Instead, if it treats its loved ones with true care and attention, then they will – we believe – come to understand the brand’s values and beliefs. And when they come to share those values and beliefs, willparents return the brand’s love to it. love to their Much they as two offer unconditional Love between people represents choice and a long-term children, a “loved” brand offers aunconditional love to its commitment.

In much the same way, a brand also specific audience. And just as with parents, suchcan a brand choose a loving connection audience. should to notbuild expect any return of that with love. its Instead, if it When, as a brand owner and/or CEO of a company, you treats its loved ones with true care and attention, then they make a choice, you have to face are: will –such we believe – then comethe to questions understand the brand’s values and beliefs. And when they come to share those values and •beliefs, Do you understand people’s theyreally will return the brand’s loveneeds, to it. experiences and Lovefeelings? between people represents a choice and a long-term much the people same way, a brand canthem also •commitment.

How do youInunderstand and engage with choose to build a loving connection with its audience. emotionally?

When, as a brand owner and/or CEO of a company, you •make Howsuch do you find athen waythe notquestions just to meet a choice, you their have needs, to face but are: to make them realize that that is what you are doing?

• Do you really understand people’s needs, experiences Theand aimfeelings? of this book is to show how your brand can harness the power of design to build a “loving relationship” • How do you understand people and engage with them emotionally?

• How do you find a way not just to meet their needs, but

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with your audience. It will describe how you can use design to construct an emotional engagement with your audience, and to take the lead over your company and brand by applying design thinking and capability.

It will tell you, in short, how to build a truly “loved brand” by design.

WHAT IS A BRAND? Before we dive into design and the ways in which you can utilize its power to build a loving relationship with your audience, we would first like to clarify what we believe a brand is.

In his book The Brand Gap, Marty Neumeier stated that a brand isn’t a logo, a product or a corporate identity. He wrote, “A brand is a person’s gut feeling about a product service, or company. It’s not what you say it is. It’s what they say it is.”

While we fully agree with this definition, we would go a step further and say that a brand is also what people feel it is. It is defined by people’s instincts and “gut” decisions. In Start with Why, Simon Sinek (2009) describes where such “gut decisions” come from.

There is no part of the stomach that controls decisionmaking, it all happens in the limbic brain. It’s not an accident that we use that word “feel” to explain those decisions either. The reason gut decisions feel right is because the part of the brain that controls them also controls our feelings. Whether you defer to your gut or you’re simply following your heart, no matter which part of the body you think is driving the decision, the reality is it’s all in your limbic.

People’s perceptions are subjective and selective. If your brand is defined by what people are feeling, then that

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An Excerpt from Brand Romance 3 • 81 • 81

perception is built from their subjective and selective emotions. And that is why design can play an important role for a brand, because its enduring role is to ensure that a brand makes the right emotional connection with its audience. By creating that emotional connection – by enabling a brand to build a trusted relationship with audiences, just as loving couples build trust with each other, design is building a “loved” brand. in the world today, as we listen to the news, the quest for Paradise Regained may seem to be an impossible, unreachable illusion. Perhaps it is; perhaps it isn’t. But if it guides us in making the right choices, if it inspires us to learn the things we need to know to do good with our design, it will serve its purpose. In the final analysis, design is an act of love.

Stefano Marzano, Philips Design annual event 2005

A LOVED BRAND The best way to illustrate how a “loved” brand works is to ask you to think about how you built a loving relationship with you own partner.

First sight Do you remember the first time you saw them? Before you actually met them? They very probably made some impression on you with their appearance. Perhaps it was their face, or another part of their body, or even what they were wearing that day. It might have happened in an instant or gradually, over time. But however it happened, it almost certainly started with (some part of) their appearance.

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We believe that exactly the same idea applies to a brand and a brand proposition. And it explains why a brand should apply design thinking and capability to give it a striking appearance – an appearance that not only makes it irresistible to those who encounter it, but also one that forces them to engage fully with each and every one of its touchpoints.

Getting to know them So, having met someone whose appearance attracted you, you found a way to approach them. And from there a deeper, more emotional bond began to grow – adding a more intense level of attraction by experiencing the way they smiled at your jokes, the way they talked or just their body language. It’s exactly the same for a brand: a brand and its proposition should try to build an emotional bond with its audience. To put it another way, a product should be designed with qualities that engage the audience’s relevant senses, to give it qualities that continuously surprise, delight and differentiate it from other brands.

A real partner Finally, after you’d spent time together, you began to discover your partner’s character and personality and, from there, to touch on their values and beliefs. Then, when you realized that you shared most – or all – of those values and beliefs you recognized that you had found a real partner, someone with whom you could build a truly loving relationship. It’s just such a connection that a brand and a proposition should try to achieve with its audience.

And to do that, design thinking and capability needs to be totally honest about what the brand is and what its beliefs are.

Introduction

5 An Excerpt from Brand Romance • 83

The key What we are trying to pinpoint here is the key to building a true love: the discovery, and sharing, of each other’s values and beliefs. And while this may begin with appearance, that appearance is not – unless you’re just looking for a “one night stand” – the ultimate key to success. So it is with a brand: it may look good, but unless it shares its audience’s values and beliefs, there will be no true love between the two.

THE MEANING OF LOVE Before we go any further, it’s important to note that we are not using the word “love” in just its spiritual and metaphoric sense. In the context of brands and audiences, “love” has two very specific aspects.

One is a natural desire to deeply understand and embrace those you love – and not just their positive but also their negative sides. You want to be the one who best understands all their mental and physical aspects, everything from values, motivations, needs, desires, hopes and dreams to problems, worries, jealousies, hatreds and fears.

The other is the satisfaction of your loved one. Do you only think about their short-term pleasure, or do you also try to anticipate their long-term happiness. Are you the one who best understands what they really want and need?

If the answer is yes, then you’ve built a truly loving relationship with your audience. The question then is: how do you go about building that love?

In any relationship, a positive first impression is critical. But as time goes on and the relationship develops, it is important that consecutive experiences and interactions confirm those original positive first impressions. This also applies to brands and end-users for

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which the brand acts as a trust portal. People who are prepared to commit themselves to a brand are looking for integrity, confidence and authenticity and design plays a very important role in building this. Design is able to create a series of experiences that increase satisfaction, bonding and loyalty, as in any other fulfilling relationship. Design helps identify what is at the core of a company, differentiating and enhancing it by providing appropriate propositions across all touchpoints of the brand. As designers we continually explore how each moment contributes to the user’s experience of the brand, how it will influence their relationship with it and what we can do to further build and develop our relationship with them.

This relationship – an experience-based romance – guides what should be our fundamental question as designers and as a brand: Does your customer love you?

Stefano Marzano, 2011 Markets are becoming more competitive every day. More than 20 years in the business have shown us that people have started to solely rely on rational aspects to make business decisions. We believe this is a negative phenomenon of a very competitive environment. We see that people rely on rational measures (something you can measure with numbers) and data because these are linked to being perceived as “true professional”. But in people’s every day personal lives, they balance rational and emotional value to make a correct “decision” that feels right. Nobody tries to fill in a spreadsheet of ROI (return on investment) when they are out with their loved one. Nobody asks ROI of love in their personal life! This book will remind us what we have forgotten about and give us a structured way of achieving it.

We consider the answer to how to build a truly loving relationship with your audience to be High Design.

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An Excerpt from Brand Romance 7 • 85

A HIGHER FORM OF DESIGN Before we translate High Design into more detail, we think it’s a good idea to touch on precisely what we mean by “design”.

Stefano Marzano, the man to whom this book is dedicated, calls it Design – with a capital D – and sees it as a higher form of design, something more than just product styling, aesthetics or graphical execution. For him, Design can and must be concerned with a broader picture, one that includes brand, business, technology, customers and the end-user context.

To be truly effective, it must offer relevant and meaningful solutions that satisfy people’s needs, empower them and make them happier. At the same time, it must contribute to the stakeholder’s prosperity and, above all, respect the world we live in. It must treat customers with love and create direct, holistic brand experiences for all.

It must be “High” Design.

HIGH DESIGN Stefano Marzano introduced the concept of High Design in 1991 in Flying over Las Vegas, but let us refer to the origin of his thinking of High Design from his early speech “Creative Culture”. He said: During the XV century the word “humanism” was associated with the intellectual “summa”. For them the idea to embrace humanism and ignore the scientific and technological developments would have been incomprehensible!! I believe the same, and this is what has also inspired my vision of the “High Design” in 1991, however I think it is time to push it further, it is time to re-establish a new “Holism”, to contribute to the new creative culture, to a new Humanism to drive the epoch toward a sustainable preferable future!

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(Complexity = design, Hi complexity = Hi design, Holistic complexity = Holistic Hi Design.)

The role of the humanist was the one to create a bridge between the present and the future without losing touch with the past. This role has now to be enriched by a revival of the productive and creative thought for the comprehension of the nature of the humankind.

The understanding of the reality of the physical, biological world and of the humanity that is capable to take the best from physic, genetic, bio chemic, from the research on the evolutionary theories and from anthropology and philosophy. In search of new experimental and empirical bases for more solid conclusions about the “good” and the future.

Stefano Marzano wrote that the answer to dealing with several layers of complexity in both the outside (i.e. society) and the inside (i.e. organization) world may be sought in what he called High Design.

By High Design, I mean an integrated process incorporating all the skills on which design has historically based itself, plus all the new design-related skills we need to be able to respond to the complexity and to adopt more advanced cultural and technical criteria. It’s based on the fusion and interaction of high-level skills. ...

Design in a world of high complexity should no longer be a case of clever individuals or teams creating products in splendid isolation, but of multidisciplinary organisations or networks creating “relevant qualities” and “cultural spheres”. If we’re to make the quantum leap from the limited materialistic and quantitative market to the unlimited, more spiritual and qualitative market, then we must provide the design worthy of it.

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Within this context, he claimed there are four important principles in High Design. It must be: • People focused • Business integrated • Research based • Multidisciplinary

HIGH DESIGN IS PEOPLE FOCUSED Everything that I understand, I understand only because I love.

Count Leo Tolstoy Nearly everything that is designed is designed for people, in one way or another. The man-made world around us has, for the most part, been developed on a human scale for people to interact with. Therefore if we are to truly approach design from a people-centred – or maybe it’s better to say an outside-in (not inside-out) – perspective, we must focus fully on people to understand their future wants and current needs.

HIGH DESIGN IS BUSINESS INTEGRATED The limits of my language are the limits of my mind. All I know is what I have words for.

Ludwig Wittgenstein To maximize the value of design (thinking and capability) to achieve brand and business successes and growth, it is important to seamlessly integrate Design into both the

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brand strategy and the business process, and to maximize the collaboration with other functions.

HIGH DESIGN IS RESEARCH BASED I am the wisest man alive, for I know one thing, and that is that I know nothing.

Socrates It is vitally important to install a design process, and methods, that provide you with a way of accessing and working with your audience to co-create relevant and meaningful solutions. This process must be integrated into your normal ways of working and iterative so that solutions are evolved appropriately.

HIGH DESIGN IS MULTIDISCIPLINARY The minute we become an integrated whole, we look through the same eyes and we see a whole different world together.

Azizah Al-Hibri Design is all about people. It is Design’s unique skill to be able to articulate and translate intangible foresights, insights and ideas into something tangible and “discussable” to all stakeholders. It is, in fact, a fundamental enabler for achieving true collaboration with all stakeholders (both inside and outside).

15 COMMITMENTS TO BUILD A LOVED BRAND We, the authors, are both enthusiasts for, and strong believers in, the principles of High Design. By applying its philosophy to our day-to-day work for more than 20 years, we

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have come to realize that it provides the principles needed to build a truly “loved brand”. So what follows – and is explored and translated in greater detail in the corresponding chapters of this book – are descriptions of the 15 “commitments” needed to build a loved brand. We’ve grouped them into four separate topics: • Know who you are • Know your audience • Know what you will bring your audience • Know how you will bring it to your audience Know who you are Commitment 1: Think of your brand as a person A brand is just like a person, with values and beliefs that manifest themselves as personality, character and behaviours. This chapter describes how to structure your brand design by making it reflect human psychology.

Know your audience Commitment 2: Understand short- and long-term needs If you truly love your audience, you will not only think about its short-term satisfaction, but also anticipate its long-term happiness. This chapter describes the importance of understanding people from two perspectives: short-term and long-term needs – both tangible and latent.

Commitment 3: Co-create with people “Co-creation” demands the creation of “a permanent emotional engagement with your audience”. It does not mean involving people in only one phase of your business or

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product creation process. This chapter describes the power of emotionally engaging your users and customers.

Commitment 4: Understand how people experience An experience is personal, memorable and involving. This chapter describes the five stages of experience – imagination, impression, discovery, use and memory – and how to make the best use of them for a properly people-focused approach.

Commitment 5: Measure and optimize When you organize design tests you must ask questions relevant to the needs of your audience. This chapter describes how to conduct long-term, effective design tests.

Commitment 6: Introduce a “love tester” If you want to evaluate design performance and contribution fully, you need clear performance measurements. This chapter describes two design performance measurements we have used in our work.

Know what you will bring your audience Commitment 7: Build a clear brand design architecture You need a clear Brand Design Architecture to help you find a balance between the extension of a product range (leveraging your strong brand) and the maintenance of a strong brand image and associations. This chapter describes how to build such architecture by introducing higher-level propositions.

Commitment 8: Continuously innovate If your brand is to maintain its long-term sustainability, it needs to continuously innovate. This chapter describes the challenges that innovation presents a brand and a company.

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Commitment 9: Give your value proposition the four design drivers Although it is extremely important for you to manage your brand portfolio carefully, it is just as important that you maximize the value of its focused propositions by strategically planning their scope. This chapter describes the four design drivers you can use to maximize the value of your propositions.

Know how you will bring it to your audience Commitment 10: Create a clearly recognizable identity A brand uses touchpoints to create a specific identity and differentiate itself from others. This chapter describes how you can create a recognizable design identity.

Commitment 11: Embrace the three design principles If you truly love and care about others, you will want to fulfil their desires. This chapter describes three principles that contain simple, focused activities to help you uncover and fulfil the needs of your audience.

Commitment 12: Create one vocabulary for the whole organization Communicating only by words has limitations when describing your plan – especially when using adjectives to describe its emotional aspects. This chapter describes how design works as an integrator, using its skills to translate topics into tangible forms through each stage of the business creation process.

Commitment 13: Recognize the maestro and the virtuoso It is important to identify and install the two core leadership roles essential for the effective orchestration of a brand

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experience by the design function. This chapter describes the roles of maestro (conductor/orchestrator) and virtuoso (specialist).

Commitment 14: Nurture your talent The one and only asset of design is people. This chapter describes how to install “open talent management” by focusing on the capability of what we call the “maestro”.

Commitment 15: Create a shared culture Building the right culture is vitally important. This chapter describes how the power of one shared culture extends far beyond the setting of policy, guidelines, KPIs (key performance indicators) and balanced score cards.

An Excerpt from Hit Brands • 93

9781137278630 | November 2013 ÂŁ18.99 | $28 | $32 CAN Hardback | 240 pages

Buyographics follows eleven American families and explores how their life decisions impact consumer behavior. This is not just a data book, because each of these numbers - in datasets big and small - is a person. As you read their stories, trends come to life and provide a greater understanding of how to reach your target.

Available to order at www.palgrave.com. Enter the code WORLDPALGRAVE20 to receive a 20% discount.

94 • An Excerpt from Buyographics

onE the Changing Middle Class How the income gap is Polarizing Markets and Marketers

WHEn you HEAR tHE WoRDs “MiDDLE CLAss,” it’s HARD not to stARt picturing some idealized 1950s version of this scene: A blonde apronwearing mom looks out the kitchen window of her ranch home at the yard where her adorable son and even more adorable daughter are playing. The neighborhood is safe. There might be an American-made Radio Flyer wagon in evidence. They live on a cul-de-sac. Dad’s at work, and Mom is making meatloaf for dinner. She has a range oven and a counter full of new labor-saving devices. In your mind, this scene plays out in black and white, and that doesn’t even strike you as odd.

As long as we’re in fantasy flashback mode, think about ad agency jobs in that time. If Mad Men is to be believed, selling products to the middle class was easy and could be accomplished between cocktails and naps on the office couch. If you worked in this world, you knew everything about that middle-class mom. There were only a handful of shows she could and would watch and only a handful of places for her to buy the products she saw advertised there. You knew roughly what her husband’s income was.

In the driveway was an American-made car. She didn’t have a credit card, and therefore she didn’t really spend beyond her means.1 She might have been worried about whether she needed a bomb shelter, but there was no

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chance she had ever thought about hormones in the milk her kids drank.

If you had tried to explain a vegan to her, she would have thought you were talking about a communist.

More joined the middle class each year and those who aspired to join regarded that goal as achievable. In 1971, the middle class included 61 percent of Americans. Today we see only 51 percent in the middle income tiers.2 In this chapter, we’ll focus on the proportion of the population that could be called “middle class” which is: • Shrinking—taking a lot of the “mass” out of the “mass-market” many products need; • Financially drained on all fronts—leaving brands with fewer viable customers; • Fundamentally impacted by the ever-increasing number of dualincome households.

In short, the middle class has changed. Many of these changes have been building for decades and have been hastened and exacerbated by the recession. Now the changes are reaching critical mass. The path of families who are struggling to get into the middle class has been made harder by the sudden removal of housing equity as a reliable road to get there. Those who are struggling to stay in the middle class are worried about what the loss of a job would do to their standing. They’re being impacted by trends in income, in household structure, in credit and debt. Even the cul-de-sac suburban living they dreamed of makes it harder to sustain their lifestyle because they have to spend more on car ownership and more time in traffic than their younger, single, city-dwelling friends.

Throughout the rest of the book we’ll talk about narrower segments like the aging, the affluent, the single-person households, and racial and ethnic groups and how changes in their demographics are impacting spending on such categories as health care and transportation.

First, though, let’s start more broadly with a look at the changes in the middle class, which has long been the economic and spiritual heart of America. Many of the most well-known brands depend on the sheer bulk of this group and its discretionary spending prowess to fuel their growth and their very existence. The changes happening that are affecting this

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group of consumers are fundamental and therefore fundamentally important, so we’ll start by getting a firm understanding of what’s happening to them. I’ll admit, the data doesn’t paint a pretty picture. But in times of change there is also opportunity. Some brands are adapting to the changes successfully, and we’ll take a look at those.

If the scenario at the start of the chapter is what you still think of as the middle class, you’re increasingly thinking about someone like Rosemary.3 Rosemary, her husband, and their daughter live on a small residential street in a nearly rural area between Washington, D.C., and Baltimore.

They have a four-bedroom home with a yard for their dog and a pair of Acuras parked in their two-car attached garage. They are the first occupants of the recent-construction home tricked out with the standard fare of granite countertops and stainless steel appliances. They recently finished the basement to add a play space for everyone—room for their daughter along with a workout room and a home office for the adults. For their daughter’s first eighteen months, Rosemary worked, but she was able to work from home part of the week, and her mother came over to watch the little one. In what is increasingly a luxury move, she then decided to stay at home full-time, but she plans to return to work once her daughter gets a little older and starts school.

Your middle-class checklist looks pretty complete: two cars; nice house that’s roomy but not a mansion by any means; nice non-flashy cars; established careers; educated parents.

Here’s the problem with her as an example of middle-class living: Rosemary’s income puts her well into the reaches of upper middle class.

She’s not rich, but neither is she anywhere near the median. Therefore, we’ll talk more about Rosemary in the next chapter, which focuses on her bracket: the affluent.

I’ve spent years studying the impacts of demographic changes on consumers. I’ve analyzed the numbers and traveled through the U.S., sitting in living rooms and kitchens talking to real people about what’s happening in their lives. As part of the research that led to this book, I tracked ten representative families who were as geographically and demographically diverse as you can imagine. But themes emerged. These days the middle class sounds a lot less like Rosemary and a lot more like these families:

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“It seems like everything got more expensive. And for me, personally, I got the same pay rate that I’ve had for five, six years. So I’m being paid the same—and the gas prices aren’t helping much, either.”

—Alfredo, a married father with a son in middle school and a daughter in high school, Los Angeles County, California.

“We can’t really help [our daughters in college.] We just can’t afford to. So they’ve got a lot of student loans that they’ll be paying off for a long time.”

—Frankie, a married mother with three daughters— one in high school, one in college, and one recent college graduate, Teton County, Montana.

“I was living paycheck to paycheck with that job and so as much as a 5 percent pay cut sounds like, well, ‘it’s just 5 percent,’ it was enough of a significant difference that I was like, ‘Oh, my God.’ So I actually started working part time for a radio station so that I could make up for it.”

—Liz, an unmarried Millennial, Champaign County, Illinois.

“When my 18-year-old was growing up . . . there was concern about crime, but not to the extent that it is now. So I think I’m more protective of my [4-year-old]. Where we go, who she sees. Who I will let her stay with.

Things like that. Just because of the way the world is changing.”

—Sandra, a Gen-X single mother, East Baton Rouge Parish, Louisiana.

“All our homes here where we live, it’s like, ‘Wow, what happened to our . . . investments?’”

—Basha, a married empty nester, Lake County, Florida.4

If I had to sum up what separates the middle class from those classes above and below, I’d have to say it’s about lifestyle and a word marketers love and fear: discretion.

The middle class has the economic flexibility to make choices, but its members understand that trade-offs must be made and are forced to consider the impacts. The affluent can make choices more freely. But more and more households have fewer and fewer options. That doesn’t mean those households are “poor.” In fact, many would be considered middle class by

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most definitions. They’re struggling because they’ve been impacted on all sides of the financial equation: income, net worth, and debt.

Now try selling them something they want, rather than something they need.

The median household income in 1980 was $17,710 according to the U.S. Census Bureau’s invaluable Current Population Survey. That rose to $50,054 in 2011. But in constant dollars, income grew only $4,030 during that span. Most of that growth happened before 1999, when income peaked at $54,932 in 2011 dollars. It has fallen more or less steadily since then to today’s level. Between 2000 and 2010 the number of families earning $50,000 to $150,000 (a rough approximation of the middle and upper middle class) declined by 2.6 million households, according to my analysis of census data.5 During that time, average household income in constant dollars for all U.S. households fell about $2,500—a 4 percent drop. Added up, that’s a $292 billion drop in total consumer income. The middle-class

Figure 1.1

Change in Average Income

$350,000 Top 5% of earners Highest 20%

$300,000

Second highest 20% Middle 20% $250,000

Second lowest 20% Lowest 20%

$200,000

$150,000

$100,000

$50,000

$0 Year

1971

1976

1981

1986

1991

1996

2001

Source: U.S. Census Bureau, figures in 2011 dollars

2006

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Buyographics

loss was responsible for about half (53 percent) of that. The other 47 percent was lost almost entirely by households earning less than $25,000.

Middle-class incomes are even down slightly from 1988 in inflationadjusted dollars. More importantly, the median household income in the U.S. has been fairly stagnant for the last half century.

That’s pretty incredible when you consider that as recently as 1970, when there were more people in the middle class, those families were typically living on one paycheck.6 Women, and mothers especially, have finally been given the attention they deserve as important decision makers and spenders in the household, but it’s their role as earners that is remaking the American middle class— or rather keeping the middle class alive. As more and more women have taken more and more lucrative jobs in the workplace and in traditionally male-dominated professions, those dual-earning households have kept the middle class afloat. Sort of. Adding a second paycheck has allowed the middle class to tread water, but not to make substantive gains. We will talk about this more in chapter four.

As I said, incomes have remained relatively flat for decades, when adjusted for inflation. The only growth has come by adding that second income. Since 1980, dual-earning families have seen their incomes rise more than $80,000 in 2011 dollars, which is nearly twice the growth seen by single-earning households and four times the growth within the noearning households, according to my analysis of census data.7 Adding a second income can add additional costs, too. For instance, in households with children the gains of a second income are offset somewhat by the costs of caring for those kids. Often if both parents are working, they need another commuter car. With the costs of health care and other items (which we’ll discuss more in chapter eight), that leaves less money to spend on discretionary goods and services like entertainment, education, personal care, clothing, and furniture. More than a third of households have less than $7,000 to spend on those non-essential goods each year. Just over half have less than $10,000.8 If we factor all of this in when comparing today’s dual earners to yesterday’s single-earning households, we find that today’s middle class actually has less discretionary income to spend or save.9 In fact, in the last ten years dual-income households have cut their average household expenditures more than 2 percent in 2011 dollars.

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So these key consumers are earning less and spending less. That presents a challenge for brands. But it’s not an insurmountable one.

All these changes have taken place so slowly that most Americans and, it seems, most brands haven’t entirely noticed. The behavioral economist Dan Ariely coauthored an eye-opening study that asked Americans how they think wealth should be distributed across income brackets and how they think it actually is distributed.10 The people interviewed thought that wealth should be somewhat evenly distributed with very few living in poverty and a smooth rise to those on the upper income levels who would understandably make more than everyone else. They thought that reality wasn’t all that far off from their ideal. They were really, really wrong.

The top 1 percent of earners hold 40 percent of the nation’s wealth.

The bottom 80 percent only hold 7 percent.11 Many factors are at play here. You could look at student loan debt, the changing job market, the rut in which the Millennial generation finds itself, and how that differs from the other generations, and of course how the issues facing the entire rest of the planet impact the U.S. economic situation.

Let’s look at two more pieces of the economic puzzle: consumer debt, which can fuel spending even when income is down, and net worth, which impacts access to credit.

Are consumers loading up on debt in order to afford a little more than they would otherwise?

As of this writing, it’s difficult to find a trend in the most current data. Consumer debt fluctuates pretty widely from quarter to quarter these days. In geek parlance, we say that it’s “noisy”—as in it’s hard to find a signal with all the noise. According to the Federal Reserve, total revolving consumer credit has generally been trending downward since the start of the recession, meaning that people are paying down their credit card debt or are having a harder time accessing credit in the first place.12 The Credit Card Act of 2009 changed a lot of the ways banks did their credit card lending.13 Tougher regulation led to banks issuing less credit to certain riskier consumers. By 2012 that started to turn around, albeit unevenly.14 Uncertainty due to the continued economic malaise, the debt ceiling crisis, and the impending elections meant that access to credit, especially by the middle class, was up some months and down others.15

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In the longer term, anything other than a steady increase in consumer debt is a reversal of decades-long trends. In a panel discussion about the middle class hosted by the Brookings Institution, senior fellow and moderator E. J. Dionne Jr. introduced a panel on “The Endangered Middle Class” with the following observation: From roughly 1950 through the early 1970s the American middle class increased its standard of living by increasing its income. As productivity went up, so did middle-class incomes. Since the late ’70s, there has been a stagnation of middle-class incomes, and in order to keep up, people have had to resort to debt rather than increases in their wages. This has caused an enormous set of problems in our country, and while there is a tendency to talk about individual indebtedness entirely in moral terms as if there is something wrong with people trying to keep up their living standards, I think this underlying force, a stagnation of incomes, has forced people to do things that they would really rather not do. I can bet you that most people would rather increase their living standards by increasing their incomes, not their indebtedness.16

Figure 1.2

Total Consumer Debt

$18,000,000 $16,000,000 $14,000,000 $12,000,000 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 $0 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 Source: Federal Reserve Board

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Indeed, the Federal Reserve shows that in August 2012, revolving household debt (essentially representing credit cards and short-term loans) was $855 billion. Just thirty years earlier that figure was less than $65 billion. Non-revolving debt in that time went from $318 billion to $1.9 trillion.

Yet, as noted, since the recession we’ve seen Americans reducing the debt figures. Between paying down loans, having a harder time getting new loans, decreasing incomes, and gutted housing values, the new challenge for the U.S. economy is that, increasingly, the middle class can’t access as much money.

The story on net worth is a little more clear cut. The bursting of the housing bubble wiped out at least a decade’s worth of gains overall and more than that for many consumers. As the Federal Reserve notes, “The decline in median net worth was especially large for families in groups where housing was a larger share of assets, such as families headed by someone 35 to 44 years old (median net worth fell 54.4 percent) and families in the West region (median net worth fell 55.3 percent).”17 The Census Bureau reports that median net worth dropped 35 percent between 2005 and 2010.18 Most of that decrease was related to housing equity and stock performance. If you exclude home equity, median net worth actually increased 8 percent. Therefore, the Gen-Xers were the most crushed during this period. As the age cohort most likely to have invested a large portion of their money to buy a house, they lost nearly 60 percent of their net worth. Older generations, whose houses are more likely to be paid off, lost less, as did those under thirty-five, who are less likely to own property. As with the other trends, it’s clear that the higher one’s level of education, the more insulated one is likely to be. On its blog, the Census states, “In 2000, those with a bachelor’s degree had a median net worth value almost twice as large as those with a high-school diploma; by 2010, this number had risen to almost three and half times as large. The same pattern can be seen when examining the graduate or professional degree to high school diploma ratio; this ratio has increased from 3.5 to 5.8 over the period of 2000–2010.”19 So where is the middle class going? D’Vera Cohn, a senior writer at the Pew Research Center, and I discussed that after the release of Pew’s report “The Lost Decade of the Middle Class.” The report states that, demographically speaking, there were definite winners and losers. “Over the

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Buyographics • 103 An Excerpt from Buyographics Figure 1.3 Family Net Worth by Percentile of Income

$1,200 90–100% 80–89.9%

$1,000

60–79.9% 40–59.9%

$800

20–39.9% Less than 20%

$600

$400

$200

$0

1989

1992

1995

1998

2001

2004

2007

2010

Source: Federal Reserve Board, dollars in thousands

longer term—1971 to 2011—older adults fared better than younger ones, married adults fared better than the unmarried, and college-educated adults fared better than those with less education.” Not everyone was a success story. In the last decade, all non-white racial and ethnic groups showed economic declines, according to Pew.20 “When there are people moving from the middle class to a lower class, that is a concern,” said Ms. Cohn.21 “Polarization gives us less in common as a people.”

You can read that last sentence as “It’s harder to create a mass-market message.”

Who’s Winning?

If the middle class is struggling, who is succeeding? The next chapter will focus on what’s happening to the upper class, but for now what you need to fully understand is that those in the top tier are doing better at a much faster rate than those in the lower tiers. To put some numbers behind that, the Congressional Budget Office prepared a comprehensive look at income trends and found that “between 1979 and 2007, for the 1 percent of

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the population with the highest income, average real after-tax household income grew by 275 percent. For others in the 20 percent of the population with the highest income, average real after-tax household income grew by 65 percent. For the 60 percent of the population in the middle of the income scale, the growth in average real after-tax household income was just under 40 percent. For the 20 percent of the population with the lowest income, the growth in average real after-tax household income was about 18 percent.”22 The Census shows that the top quintile saw its share of aggregate income rise from 43.3 percent in 1970 to more than 50 percent in 2009.23 The top 5 percent of earners saw their share grow from 16.6 percent to 21.7 percent over that time. All the other quintiles saw their shares decline over that period. The recession took a little wind out of the sails, but now the bifurcation is growing again. During the period between 2009 and 2011, as the recovery was getting underway, only the highest tier fully recovered. The 8 million households with the highest net worths (more than $836,000) gained $5.6 trillion in wealth. The rest of America—more than 111 million households—saw their collective net worth decline more than $600 billion.24 These trends aren’t new, but they’re getting worse. How this happened isn’t so much the story for us here, although one could certainly look at the tax code. In a New York Times op-ed article, Wall Street executive and Obama’s car czar Steven Rattner examines changes since the Bush-era tax cuts were put into place.25 The result, he writes, “is that the top 1 percent has done progressively better in each economic recovery of the past two decades. In the Clinton era expansion, 45 percent of the total income gains went to the top 1 percent; in the Bush recovery, the figure was 65 percent.”26 They did even better during this recession. According to economist Emmanuel Saez, “the top 1% captured 93% of the income gains in the first year of recovery.”27

How Are Marketers Reacting?

When marketers talk about the middle class, the conversation tends to go in one of three directions.

First, there is certainly a school of marketers who aren’t paying much attention to this at all. Consumers are still buying their products, so

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perhaps it’s not as important that they’re buying slightly fewer of them, or buying them with slightly less frequency. It’s certainly not important that consumers have stopped buying someone else’s product in order to afford theirs. If you’re on the winning side of the trade-offs that consumers are making, you might not notice the change as quickly.

Even with the passing of Steve Jobs, Apple continues to gain market share without really altering its price point or its marketing message.

If you think about it, though, the nation now adds more than 2 million people a year—that’s 2 million potential new customers. If your target audience isn’t growing that rapidly, it could signal problems down the road. Some segments grow faster than others. If your target segment grows more quickly than that, so should your share. If your target is everyone, you should have a representative breakdown. For instance, if 16 percent of your customers aren’t Hispanic, then you’re looking at potential to grow in that marketplace.

A second school of marketers quickly turns to discussion of the major post-recession buzzword. The most influential trend is “value.” I’ve had conversations about the topic and its changing definitions with marketers from Kia to Lexus and in between.

The most obvious manifestations of this are in the meteoric rise in the immediate post-recession times of the daily deal space led by Groupon and LivingSocial. Companies in this space created a multibillion-dollar industry out of nowhere by using smarter technology to link value-seeking customers with merchants looking to develop or regain lost scale.

Some leading marketers like Procter & Gamble, Target Corporation, and PepsiCo’s Frito-Lay are evolving strategies that address the shrinking middle class. Despite Tide’s dominance in the liquid laundry detergent world, P&G introduced a less expensive line of products geared toward a lower-income and more diverse audience. Gain liquid detergent has performed well but still drastically undersells its higher-priced cousin.28 Other brand extensions have been mixed according to IRI. Unit sales of Gain powdered laundry detergent were down far more than the category as a whole, but the fabric softener sheets outperformed the category considerably.29 The acknowledgment that the middle class, which has been P&G’s bread and butter for its 175-year history, is changing is significant. If there’s a marketer who will figure out how to deal with economic

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bifurcation, it’s Procter & Gamble. But it’s a tricky adjustment to make.

Even P&G isn’t immune to the new economic realities—the company laid off 10 percent of its workforce in 2012.30 Likewise, Frito-Lay in a 2012 earnings call made a point to call out its performance in both the “value” segment and the “premium” segment while maintaining its dominance in the “mainstream” or middle-class market. It’s not an easy task because marketers don’t want to undercut their own products by creating lower-tier brands.31 As Indra Nooyi, PepsiCo’s chairman and CEO, stated, “We were looking for the right model to compete against the value segment of the business and the premium segment.

We wanted to make sure we did it the right way and not take down the pricing level of the middle.”32 Finally, and somewhat disturbingly, there are marketers who are taking a more global perspective. Given the iconic stature of the middle class in the fabric of the American quilt, it’s hard to imagine a future in which the nation is divided even more into haves and have-nots. The Atlantic’s Don Peck raised an interesting point in his book Pinched: How the Great Recession Has Narrowed Our Futures and What We Can Do about It. While attending the Aspen Institute’s gathering of big thinkers, he noticed that many of the leaders were looking at the market in so completely global a manner that the plight of the American middle class didn’t seem all that important. As one market fades, another rises up to take its place.

Whether that’s in India or Indiana doesn’t matter to the almighty bottom dollar or the shareholder.

On the surface there are some issues with this thinking, but the idea merits discussion here. First, the American middle class still spends a ton of money. Looking at those who rank in the third and fourth quintiles of income (i.e., the fortieth to the eightieth percentile), you’ll find a group who spent $2.45 trillion in 2011, according to the Bureau of Labor Statistics.33 That amounts to 40 percent of all spending on food, 43 percent of transportation spending, 44 percent of health-care spending, and so forth.

The entire spending output of the so-called emerging BRIC (Brazil, Russia, India, and China) markets with a combined population roughly sixteen times that of the American middle class was estimated by a 2010 McKinsey report at just $6.9 trillion in 2010. McKinsey projects that number will grow to $20 billion in the next decade.34 Others aren’t quite so sure

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if the BRICs are the world’s future spending leaders; they point to their recently slowing growth and contrast it with rising growth in a number of other countries like South Korea.35 Regardless of the rates of growth, these markets will grow in importance and purchasing power.

If the wealth is increasingly concentrated on the high end, the spending is more democratic. Some marketers can make up for lost volume with higher-priced items, but that doesn’t work for everyone. A higher-priced, higher-margin car can make up for fewer sales of cheaper cars. But an affluent household making three or four times the median household income doesn’t suddenly need three or four times the amount of toilet paper or soap or ground chuck. There are also all kinds of products and brands they might not buy at all and for which lower-income households make up the main market.

Chrystia Freeland, the global editor at large for Reuters, attended the same Aspen talks as Don Peck. In a piece she wrote for The Atlantic headlined “The Rise of the New Global Elite,” she quoted Allstate CEO Thomas Wilson as saying, “I can get [workers] anywhere in the world. It is a problem for America, but it is not necessarily a problem for American business . . . American businesses will adapt.”36 She also quotes (anonymously) the CEO of one of the world’s largest hedge funds, who told her that a colleague of his felt that the hollowingout of the American middle class didn’t really matter. “His point was that if the transformation of the world economy lifts four people in China and India out of poverty and into the middle class, and meanwhile means one American drops out of the middle class, that’s not such a bad trade.”

Rom Hendler, chief marketing officer of the Las Vegas Sands Corporation, also believes the global market will compensate for the changing demographics here in the U.S. When I asked him about the declining middle class in the U.S., his quick response was to spin the metaphorical globe. “Most of our profitability is coming from Asia and what you describe is the opposite in Asia where the middle class and upper class are growing rapidly. [The decline] is nonexistent in that market. The profits coming from those segments are increasing and grabbing a bigger and bigger share.”37 He goes on to talk about what he sees happening domestically, as well.

“As far as the U.S. is concerned, the properties in Las Vegas did feel the

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overall decline. In the past you would say the gaming industry is considered recession proof.” He cites an example of a typical consumer trade-off.

A trip to Hawaii likely costs more than a trip to Las Vegas and the vacationers would just burn their money. In the recession Las Vegas is seen as a cheaper alternative with an added benefit that other destinations typically lack: the chance to win enough to cover your costs.

Even before 2000, Las Vegas was to some extent making a play for the value-conscious consumer. The reputation of cheap flights, cheap rooms, and all-you-can-eat buffets, any of which might be comped if you spent enough gaming, lured the vast middle class. As the business model of Las Vegas changed, said Mr. Hendler, “Recession proof stopped being real.”

Without saying the word “bifurcation,” Mr. Hendler acknowledges it. Some casino properties gear their target market toward the lower end while his business is focusing on the high-roller market. “If you look at the industry’s marketing since 2008 you will see a lot of value communication. Some of that is looking at the lowest price point. We’re trying to stay away from that. Many of our peers and competitors are playing in that playground. In the U.S. we had to adjust and are still trying to position ourselves in the upper end of luxury. We had to be conscious of value. Even people who weren’t hurt, even people who were doing just fine, they were looking for value.”

There’s that word: “value.”

Some argue that Target’s earnings have been hit by its focus on the middle class as shops like Neiman Marcus at the higher end and Dollar Store–types at the lower end of the spectrum have flourished. Gregg W. Steinhafel, Target’s president and CEO, tried to paint some of that in a more positive light in a 2012 earnings call. He thinks that in times of economic uncertainty, even middle-market Target is a value trade-off for many shoppers. “Against these [economic] pressures, we believe that our value proposition and shopping experience will deliver continued market share gains. We believe our guests will continue to be both cautious and resilient, shopping and spending at Target in disciplined ways.”38 How do you knock a consumer off the “disciplined” platform and get them to be a little more free spending? To see the answer, Mr. Hendler needs only to step outside and look past the Grand Canal of his Venetian property at the throngs of people returning to Las Vegas.

June 2013

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