Friday, January 29, 2016

Consumer Behavior: Insufficiency to Hoarding

Marketing metrics such as share-of-market and share-of-wallet attempt to gauge the success of a firm on serving the demand that exists in a given marketplace – but they are often based on specious assumptions about consumption, and as such are often grossly underestimated or overestimated due to an erroneous supposition about how much of a given product the market can reasonably be expected to demand.   This leads to serious flaws in strategic planning, and as such merits some consideration.

Basis of Demand

It is act of consumption that defines an individual as a consumer, and the aggregated consumption of all consumers that constitutes demand in a marketplace.  While seemingly obvious, it is very often overlooked by those who propose models that consider supply to be the basis of demand.  This is the primary flaw in accepting the current level of consumption as an indication of market demand, as consumers can only consume as much as suppliers provide, and are only willing to consume a certain amount at the prices demanded by suppliers.

A secondary flaw, less fatal but still quite debilitating, is that accepting the current level of consumption as market demand assumes that consumption is fixed and inflexible, which leads to competitive strategies (struggling for a greater share of fixed demand) and virtually eliminates innovative strategies (finding ways to increase the amount of demand).  A sustainable business can be built upon this faulty premise, but its potential for growth (and eventually survival) is significantly diminished.

Physiological Range of Consumption

The primary source of demand for goods and services deemed to be necessities is the health and welfare of the consumer.   It can be shown that under- or overconsumption of any product has negative consequences to the consumer.   Deprivation of a survival good such as water leads to thirst, dehydration, and eventually death – but at the same time overconsumption has been shown to have detrimental and deadly effects.   There is only a certain range in which consumption has necessary and positive effects.

However, two factors prevent the physiological range of consumption from being a broad and reliable basis for determining market demand.   First, the vast majority of goods in the present-day market are luxury items rather than physical necessities, so their consumption is not necessary for the sustenance of life, and whose overconsumption does not pose a physiological threat.   Second, this assumes just-in-time acquisition, whereas the majority of goods are accumulated for future use – hence while damage may be done if the goods are consumed immediately, there is no harm done in acquiring them for use at a future time.

Psychological Range of Consumption

Taking those factors into account, consumption of most goods (in terms of their purchase, whether the actual consumption is immediate or delayed) is subject to largely psychological factors. Specifically, the determinant of the behavior of consuming and accumulating goods is driven by an individual’s perception of his security needs, the second level of Maslow’s hierarchy.  At this level, an individual’s immediate survival requirements are met, but he still feels an urge to accumulate goods for future consumption.  This can be extended to include all products (services as well as goods) by the use of money, whose accumulation is functionally infinite.

This begs the question: how much does a person need to accumulate in order to feel adequately secure?   But because perception of need is individual, there can be no universal answer.  The topic becomes politicized when individuals presume to judge for others and seek to deliver benefits to the “poor” who do not have enough or forcibly take from the “rich” who have too much, or to defend themselves when they disagree with the estimation of others whom they perceive to be a threat to their own security.  But this is imposing one’s own will upon others, often by force, and does not reflect the natural behavior of consumers.

There can still be made a plausible case for the extremes.  A person can be said to have “not enough” when they suffer adverse effects as a result of exhausting their inventory and doing without some necessary good. A person can be said to have too much when their inventory goes to waste before it is used or when the amount they have accumulated exceeds the lifetime consumption of their household.  

But psychologically, it’s all about the way a person feels, which is highly subjective: the amount that gives one person a sense of security and comfort may seem insufficient to a second person and superfluous to a third.   It may be based upon a rational estimation of survival needs, consumption and replenishment rates, but it is in fact an entirely emotional matter that is often more rationalized than rational.

There is a neurological basis, derived from studies into the phenomenon of hoarding in which subjects were asked to sort through a variety of items to decide what should be kept or thrown away.  The experiment correlated the level of hesitation a subject showed in deciding to throw something away to activity in the anterior cingulate cortex – an area of the brain associated to emotional discomfort.  Curiously, it is the same region of the brain that shows activity when religious individuals are asked to seriously contemplate that god may not exist, which further underscores the poignancy of the comfort people achieve by accumulating products.  However, the assessment of what level cortex activity is dysfunctional is based upon a largely arbitrary assessment of what level of attachment is functional.


Thus considered, it does not seem reasonable to attempt to draw a firm conclusion for determining market demand, even if the consideration is limited to current practices, but there are clearly a few factors to be taken into account:
  1. Whether the product in question is a necessity or convenience
  2. The durability of the product (for physical accumulation)
  3. The degree of attachment customers feel to its possession
  4. The economic trade-offs of accumulating one good rather than others 

In all, it remains a far more complex matter than merely considering current levels of consumption or unfounded speculation about the “right” or “normal” level of consumption.

Monday, January 25, 2016

Romance to Break-Up

It’s been suggested that you learn more about someone at the end of a relationship than at the beginning.   This is because when forming relationships, people tend to act in a manner that accommodates the perceived preferences of the other party.  In time, they stop acting and settle into their normal patterns of behavior.  And at the end, they are often at their worst because they no longer care about making a favorable impression.

Commercial relationships follow much the same pattern: companies put on their best face to appeal to prospects and convert them into first-time buyers.   Once a purchase is made, the company settles into “business as usual” and expects the customer to attend to their needs and preferences.  And when a customer calls to cancel service, things get ugly.  

It would be pessimistic to say that this is their “true” character, as character considers behavior as a whole rather than in specific situations – but it is certainly fair to say that it is their natural behavior, in that it reflects the way they are inclined to act when there is not an external motivator (profit).

This pattern is evident even in organizations that are applauded for their customer relations.   They are very accommodating when attempting to win business, indifferent once the contract is signed, and very difficult to work with when a customer wishes to end the relationship.  

And while it is fair to state that businesses should be motivated by profit, as profit is often the sole reason for the formation of a commercial organization (though ideally it should be regarded as a by product of successful operations rather than the primary motive), it remains entirely short-sighted: it is the difference between a former customer who might return in future, and one who certainly never will – hence it is in the financial interest of a firm to maintain its values in every interaction, even interactions that are financially unfavorable.

Wednesday, January 20, 2016

Nobody Likes an Attention Whore

Social interaction is a form of exchange, but rather than currency and goods, the coin of the social realm is admiration.  Most brands (and some people) fail to recognize this: their desire is to be popular, to amass followers and have many people like, comment upon, and pass along what they post in social media – but they refuse to pay in kind.   They wish to collect admiration, but give no affection back to their admirers.   And this is a violation of the unwritten rules of social interaction.

Reciprocation is the very basis of society.  People form alliances for practical reasons: they get something from interacting with others.   A one-sided relationship, in which one person acts as a parasite upon another by constantly taking from them while giving nothing in return, is highly undesirable – at least to the party who acts as host to an ungrateful parasite.   Such people are disliked and, when the host has had their fill, they become actively disliked and even shunned.

Yet this is the behavior of most brands in social media: they are shameless self-promoters who want attention, and the celebrity status of being adored by millions while remaining aloof and disdainful of their followers.   They do seem to pay general lip-service – “we thank our customers” and “we appreciate our fans” – but in terms of their behavior in general, it certainly doesn’t show.   In this sense, it’s fair to say that most brands are attention whores, who demand admiration and affection while giving none in return – and yet they wonder why their social media campaigning has such poor results.

Reciprocity is one of the most powerful weapons of influence, so powerful that it is a common tactic used by con artists: they pretend to like someone, do them a small favor, and then ask for a much larger favor in return.  And quite often, they get it.   Normal people are fair in their dealings with others, and this can be easily exploited – if someone likes them, they feel they must like them back; if someone does them a favor, they feel they owe a favor in return.   They feel uneasy, like the scales of justice are out of balance until they take action to even things out.   But to leverage this propensity, one must take the initiative – to give before asking for something in return.

This can be seen in social media: if you follow a person on Twitter, chances are they will follow you back; if you view someone’s profile on LinkedIn, chances are they will view yours; if you “like” someone’s post on Facebook, chances are they will “like” one of your posts in a relatively short amount of time.   Show interest in someone, and they will reciprocate by showing interest in you.   But you must make the first move if you want to initiate a relationship with another person.

Granted, this is not universally true: there is the concept of the creep/stalker who follows people around on social media.  Psychologically, men are more likely than women to welcome the affection of a stranger (women take it as a threat) – and it does depend on what kind of person is showing affection.   There are some individuals who are distrusted, whether for superficial reasons (their appearance or reputation) or practical concerns (their behavior).  But for the most part, people respond warmly to those who warm to them.

But back on point: the behavior of most brands in social media is entirely parasitic: they want to be “liked” and even abjectly beg people to follow them, but they do not like or follow others in return.   It’s rare, almost unheard of, for a brand to “like” a post by one of their customers or prospects – and it seems to me that if a brand wishes to make successful use of social media, it should consider what it is willing to give in exchange for what it wishes to get.

Friday, January 15, 2016

The Preference for Tradition

People, in general, are much more inclined to stick to what they know rather than undertake the risk to try something new that has the potential to be even more successful.   There's a certain comfort in a familiar routine and the perception that past results will be repeated if past procedures are followed.  And in many instances, this turns out to be true, which reinforces the notion that they should keep doing what they are doing rather than attempt something different.

As consumers, they purchase the same products and brands to serve the same needs and in spite of their verbal fascination with novelty tend to stick to the well-worn path.   And as professionals, in any act of production to earn revenue, they likewise follow established procedures rather than branch out.   And as managers and executives, they coach their people in the same manner.

For this reason, companies tend to be fond of procedures and policies that prevent deviating from established procedures.   What they did yesterday was adequate and created results that were good enough to earn enough profit to keep the firm sustainable, or at least slow the degradation that occurs naturally over time.

Companies are in that way can be likened to historical amusement parks, where actors do things the way they were done in the distant past rather than taking a more efficient and modern approach.   And make no mistake: their procedures are historical.   A procedure is generally not created or institutionalized until it has proven itself to be sustainable - by which time technology and markets have already evolved.

Once an adequate procedure has been institutionalized, it is defended until a crisis occurs.   The craftsman who produces simple products by hand shuns the use of newfangled machinery other producers who make use of it exceed his quality and undercut his prices to the point that his existing practices are not competitive - and even then, he will often wait until he is in a financial crisis, on the verge of bankruptcy, before he will consider changing his production processes or getting out of the business.  Often, this occurs too late.

The very same behavior occurs in corporations, particularly during financial downturns when risk aversion runs highest: board members and senior executives cling to the past rather than looking to the future, seeing tradition as proven and safe and innovation as unproven and risky.  And in the end, they fail.

Monday, January 11, 2016

Extrinsic Motivation in Marketing

In an ideal world of rational customers, extrinsic motivation would not be necessary.  Customers would purchase items for the value they receive from using them and vendors would be satisfied with getting the business of customers with a genuine need for their product.   The use of extrinsic motivation, adding some additional incentive to convince a customer to purchase a product for which he seems no intrinsic value, is a questionable practice and I find arguments to the contrary difficult to accept.

The main argument in favor of extrinsic motivation is that customers are not rational or particularly intelligent, and that an extrinsic reward can provide motivation to purchase a product whose intrinsic reward is not recognized until it is owned.   Aside of the condescending attitude, there is a grain of truth: people do not know the value of something they have never tried, so the "free sample" is an effective way to get a product into a customer's hands so that he can determine whether he has a genuine need for it - and other forms of extrinsic rewards can likewise be used to convince someone to try a product or brand that they might not have otherwise considered.

But this seems to be rational only if it is used to introduce a new product to the customer.   Once they have tried a product and experienced it, the customers are able to make a realistic objective of whether they value it for its intrinsic value.   So if a firm offers extrinsic enticements on an ongoing basis, there is clearly a lack of intrinsic value.   Interestingly enough, few customers seem to consider an enticement to be an indicator of such a problem - one would think that more people would have caught on by now.

Another argument is that the intrinsic reward may be perceived as being worth less than the effort required to obtain the product, and as such the additional enticement tips the scale in the advantage of one brand over another.  This also seems valid, though it is also a shabby (and costly) alternative to rectifying the problem with the product or acquisition process that causes it to be unacceptable without the additional incentive.    Until the real problem is solved, additional incentives are necessary to convince customers to take the brand's offer instead of a different offer that is functionally better.

A rather interesting argument is made that extrinsic rewards are useful when an individual does not wish to admit to being interested in the intrinsic value.  For example, someone who  purchases a box of cookies claims to have done so because the brand donates to a given charity, and in that way is able to escape the embarrassing admission that they simply wanted a sweet snack.   This seems entirely valid, though it does seem to reflect poorly on the culture itself - it requires customers who are hypocritical and disingenuous, which seem to exist in ample supply.

In all, I'm led back to the initial consideration: that customers are naturally motivated to purchase products that provide intrinsic value and that extrinsic motivation is unnecessary - and this does seem to be the practice in (true) luxury good and B2B  marketing, neither of which typically use extrinsic incentives.

Tuesday, January 5, 2016

Innovation: Vision, Strategy, and Execution

Lately, there has been a major push across multiple industries to be "innovative" - that is, to come up with wild and crazy ideas that will take the market by storm and build them right away.  It's a spirit of adventure that has not been seen since the years leading to the dot-com crash - and unfortunately, it is the exact same spirit that resulted in the dot-com crash.

As with anything, there is a "right way" and a "wrong way" to approach innovation, and I have the distinct sense that many firms are going about it with reckless abandon, resulting in nonsensical ideas rushed to market and, ultimately, in embarrassing and expensive failures.   It's possible to innovate quickly and effectively, but it require a more measured and sober approach.   Specifically, consider a three step process:

  1. Vision - Come up with a bunch of wild and crazy ideas, ignoring all constraints.
  2. Strategy - Filter those ideas to see which ones are actually worth pursuing.
  3. Execution - Once an idea has been qualified and vetted, seek to bring it to the market quickly and efficiently.

My sense is that many firms are completely skipping the second step and seeking to bring fresh ideas to the market as quickly as possible without asking key questions such as:  Is this idea something people want enough to pay for?  Is it in line with the mission and purpose of the firm?   Is it something that can be done in a financially sustainable manner?   Is it even legal to do such a thing?

Granted, that is a generalization.  There are also problems that arise (chiefly stagnation) when the vision step is omitted and firms remain too grounded in the constraints of business as usual.   This happens quite frequently in stodgy and slow-moving industries where there is higher demand than supply and little competitive pressure.  But such situations are fewer in the present day, where every industry seems to be crowded with firms that are striving to lead the field, desperately trying to be innovative, and making the most tragic mistakes.

It was most often the case in the years leading to the dot-com crash that the strategy step was skipped: a novel idea was struck upon, funded, and built, without any sense of whether it was worth pursuing.   And I see this tragic perspective becoming dominant again in the present day.  And as amusing as it is to watch, it's certainly worth pausing to consider in order to avoid a repeat of those events.

Friday, January 1, 2016

Back from the Break

I’ve taken a month off from posting, and now I’m back at it and will resume posting a meditation/rumination about every five days.  

I wish I could say that I’ve built up a backlog of material, or am returning with a fresh sense of purpose – but no, just took some time to put my mind on other things, and it’s going to be as random and unstructured as before.