How to target marketing to achieve persuasion

baby

Habit is a book by Charles Duhigg that got an extremely highly-reviews on Amazon.  He also wrote a fantastic article about habits and marketing based on the book for The New York Times Magazine.  You should read the whole thing, but below are some excerpts that are most relevant for marketing:

Andrew Pole had just started working as a statistician for Target in 2002, when two colleagues from the marketing department stopped by his desk to ask an odd question: “If we wanted to figure out if a customer is pregnant, even if she didn’t want us to know, can you do that? ”

…As the marketers explained to Pole …new parents are a retailer’s holy grail. Most shoppers don’t buy everything they need at one store. Instead, they buy groceries at the grocery store and toys at the toy store, and they visit Target only when they need certain items they associate with Target — cleaning supplies, say, or new socks or a six-month supply of toilet paper. But Target sells everything from milk to stuffed animals to lawn furniture to electronics, so one of the company’s primary goals is convincing customers that the only store they need is Target. But it’s a tough message to get across, …because once consumers’ shopping habits are ingrained, it’s incredibly difficult to change them.

There are, however, some brief periods in a person’s life when old routines fall apart and buying habits are suddenly in flux.

One of those moments is when people move to a new home.  Then they are completely open minded about where they are going to be shopping while they live at their new home.  This timing is even more important for young people whose habits are more malleable than for the elderly who are more set in their ways.  Moving to a new house is also correlated with other major life transitions that also upend people’s habits and motivate the move such as college graduation, marriage, divorce, or a new job.

But Target’s marketers argue that the most important life transition for building new habits is the birth of a child and especially the first child.  That is because,

 …right around the birth of a child, …parents are exhausted and overwhelmed and their shopping patterns and brand loyalties are up for grabs. But as Target’s marketers explained to Pole, timing is everything. Because birth records are usually public, the moment a couple have a new baby, they are almost instantaneously barraged with offers and incentives and advertisements from all sorts of companies. Which means that the key is to reach them earlier, before any other retailers know a baby is on the way. Specifically, the marketers said they wanted to send specially designed ads to women in their second trimester, which is when most expectant mothers begin buying all sorts of new things, like prenatal vitamins and maternity clothing. …

“We knew that if we could identify them in their second trimester, there’s a good chance we could capture them for years,” Pole told me. “As soon as we get them buying diapers from us, they’re going to start buying everything else too. If you’re rushing through the store, looking for bottles, and you pass orange juice, you’ll grab a carton. …Soon, you’ll be buying cereal and paper towels from us, and keep coming back.”

The desire to collect information on customers is not new for Target or any other large retailer, of course. For decades, Target has collected vast amounts of data on every person who regularly walks into one of its stores. Whenever possible, Target assigns each shopper a unique code — …the Guest ID number — that keeps tabs on everything they buy. “If you use a credit card or a coupon, or fill out a survey, or mail in a refund, or call the customer help line, or open an e-mail we’ve sent you or visit our Web site, we’ll record it and link it to your Guest ID,” Pole said. “We want to know everything we can.”

Also linked to your Guest ID is demographic information like your age, whether you are married and have kids, which part of town you live in, how long it takes you to drive to the store, your estimated salary, whether you’ve moved recently, what credit cards you carry in your wallet and what Web sites you visit. Target can buy data about your ethnicity, job history, the magazines you read, if you’ve ever declared bankruptcy or got divorced, the year you bought (or lost) your house, where you went to college, what kinds of topics you talk about online, whether you prefer certain brands of coffee, paper towels, cereal or applesauce, your political leanings, reading habits, charitable giving and the number of cars you own. …All that information is meaningless, however, without someone to analyze and make sense of it. That’s where Andrew Pole and the dozens of other members of Target’s Guest Marketing Analytics department come in.

Almost every major retailer, from grocery chains to investment banks to the U.S. Postal Service, has a “predictive analytics” department devoted to understanding not just consumers’ shopping habits but also their personal habits, so as to more efficiently market to them…

The reason Target can snoop on our shopping habits is that, over the past two decades, the science of habit formation has become a major field of research… “It’s like an arms race to hire statisticians nowadays,” said Andreas Weigend, the former chief scientist at Amazon.com. “Mathematicians are suddenly sexy.” As the ability to analyze data has grown more and more fine-grained, the push to understand how daily habits influence our decisions has become one of the most exciting topics in clinical research, even though most of us are hardly aware those patterns exist. One study from Duke University estimated that habits, rather than conscious decision-making, shape 45 percent of the choices we make every day, and recent discoveries have begun to change everything from the way we think about dieting to how doctors conceive treatments for anxiety, depression and addictions.

…Luckily, simply understanding how habits work makes them easier to control. …Some of the most ambitious habit experiments have been conducted by corporate America. …Andrew …Pole’s most important assignment was to identify those unique moments in consumers’ lives when their shopping habits become particularly flexible and the right advertisement or coupon would cause them to begin spending in new ways.

In the 1980s, a team of researchers …undertook a study of peoples’ most mundane purchases, like soap, toothpaste, trash bags and toilet paper. They learned that most shoppers paid almost no attention to how they bought these products, that the purchases occurred habitually, without any complex decision-making. Which meant it was hard for marketers, despite their displays and coupons and product promotions, to persuade shoppers to change.

But when some customers were going through a major life event, like graduating from college or getting a new job or moving to a new town, their shopping habits became flexible in ways that were both predictable and potential gold mines for retailers. The study found that when someone marries, he or she is more likely to start buying a new type of coffee. When a couple move into a new house, they’re more apt to purchase a different kind of cereal. When they divorce, there’s an increased chance they’ll start buying different brands of beer.

Consumers going through major life events often don’t notice, or care, that their shopping habits have shifted, but retailers notice, and they care quite a bit. At those unique moments, …customers are “vulnerable to intervention by marketers.” In other words, a precisely timed advertisement, sent to a recent divorcee or new homebuyer, can change someone’s shopping patterns for years.

And among life events, none are more important than the arrival of a baby. At that moment, new parents’ habits are more flexible than at almost any other time in their adult lives. If companies can identify pregnant shoppers, they can earn millions.

The only problem is that identifying pregnant customers is harder than it sounds. Target has a baby-shower registry, and Pole [used that database of known pregnancies to observe] how shopping habits changed as a woman approached her due date, which women on the registry had willingly disclosed. …and before long some useful patterns emerged. Lotions, for example. Lots of people buy lotion, but one of Pole’s colleagues noticed that women on the baby registry were buying larger quantities of unscented lotion around the beginning of their second trimester. Another analyst noted that sometime in the first 20 weeks, pregnant women loaded up on supplements like calcium, magnesium and zinc. Many shoppers purchase soap and cotton balls, but when someone suddenly starts buying lots of scent-free soap and extra-big bags of cotton balls, in addition to hand sanitizers and washcloths, it signals they could be getting close to their delivery date.

As Pole’s computers crawled through the data, he was able to identify about 25 products that, when analyzed together, allowed him to assign each shopper a “pregnancy prediction” score [and] he could also estimate her due date to within a small window, so Target could send coupons timed to very specific stages of her pregnancy.

One Target employee I spoke to provided a hypothetical example. Take a fictional Target shopper named Jenny Ward, who …in March bought cocoa-butter lotion, a purse large enough to double as a diaper bag, zinc and magnesium supplements and a bright blue rug. There’s, say, an 87 percent chance that she’s pregnant and that her delivery date is sometime in late August. What’s more, because of the data attached to her Guest ID number, Target knows how to trigger Jenny’s habits. They know that if she receives a coupon via e-mail, it will most likely cue her to buy online. They know that if she receives an ad in the mail on Friday, she frequently uses it on a weekend trip to the store. And they know that if they reward her with a printed receipt that entitles her to a free cup of Starbucks coffee, she’ll use it when she comes back again.

In the past, that knowledge had limited value. …But now that she is pregnant, everything is up for grabs. In addition to triggering Jenny’s habits to buy more cleaning products, they can also start including offers for an array of products, some more obvious than others, that a woman at her stage of pregnancy might need.

Pole applied his program to every …female shopper in Target’s national database and soon had a list of tens of thousands of women who were most likely pregnant. If they could entice those women or their husbands to visit Target and buy baby-related products, the company’s [marketers could get] them to buy groceries, bathing suits, toys and clothing, as well. When Pole shared his list with the marketers, he said, they were ecstatic. Soon, Pole was getting invited to meetings above his paygrade. Eventually his paygrade went up.

At which point someone asked an important question: How are women going to react when they figure out how much Target knows?

“If we send someone a catalog and say, ‘Congratulations on your first child!’ and they’ve never told us they’re pregnant, that’s going to make some people uncomfortable… We are very conservative about compliance with all privacy laws. But even if you’re following the law, you can do things where people get queasy.”

About a year after Pole created his pregnancy-prediction model, a man walked into a Target outside Minneapolis and demanded to see the manager. He was clutching coupons that had been sent to his daughter, and he was angry, according to an employee who participated in the conversation.

“My daughter got this in the mail!” he said. “She’s still in high school, and you’re sending her coupons for baby clothes and cribs? Are you trying to encourage her to get pregnant?”

The manager didn’t have any idea what the man was talking about. He looked at the mailer. Sure enough, it was addressed to the man’s daughter and contained advertisements for maternity clothing, nursery furniture and pictures of smiling infants. The manager apologized and then called a few days later to apologize again.

On the phone, though, the father was somewhat abashed. “I had a talk with my daughter,” he said. “It turns out there’s been some activities in my house I haven’t been completely aware of. She’s due in August. I owe you an apology.”

…Using data to predict a woman’s pregnancy, Target realized soon after Pole perfected his model, could be a public-relations disaster. So the question became: how could they get their advertisements into expectant mothers’ hands without making it appear they were spying on them? How do you take advantage of someone’s habits without letting them know you’re studying their lives?

…After Andrew Pole built his pregnancy-prediction model …someone pointed out that some of those women might be a little upset if they received an advertisement making it obvious Target was studying their reproductive status, everyone decided to slow things down.

The marketing department conducted a few tests by choosing a small, random sample of women from Pole’s list and mailing them combinations of advertisements to see how they reacted.

“We have the capacity to send every customer an ad booklet, specifically designed for them… We do that for grocery products all the time.” But for pregnant women, Target’s goal was selling them baby items they didn’t even know they needed yet.

“With the pregnancy products, though, we learned that some women react badly… Then we started mixing in all these ads for things we knew pregnant women would never buy, so the baby ads looked random. We’d put an ad for a lawn mower next to diapers. We’d put a coupon for wineglasses next to infant clothes. That way, it looked like all the products were chosen by chance.

“And we found out that as long as a pregnant woman thinks she hasn’t been spied on, she’ll use the coupons. She just assumes that everyone else on her block got the same mailer for diapers and cribs. As long as we don’t spook her, it works.”

…Soon after the new ad campaign began, Target’s Mom and Baby sales exploded. …Pole was promoted. He has been invited to speak at conferences. “I never expected this would become such a big deal.”

Getting habitual customers is the art of lowering prices when people have more elastic demand because that is when people change their habits.  Then raise prices later when they are habitual customers.  Amazon Prime is an effort to make customers more habitual & inelastic.

Age and Politics

Targeting young people is also more important for consumer goods whereas targeting older people is more important for political ads.  I rarely watch TV, so I don’t see many ads, but sometimes TV ads draw enough controversy that the print media reports on them. During the first Superbowl after Trump was inaugurated, there were several corporate advertisements celebrating immigration and diversity. Some Trump supporters and opponents interpreted the ads as being anti-Trump. For example, some Trump supporters called for a boycott of Budweiser in retaliation for the company’s ad celebrating immigration and Senate Democratic leader Chuck Schumer argued that the Superbowl ads were rebuking Trump’s agenda. I disagree with both sets of partisans, but you can watch the Budweiser ad and judge for yourself.

I think Budweiser was just trying to look cool to their target demographic to make money.  But the most politically controversial corporate TV ad in memory was Nike’s recent Colin Kaepernick ad.

Nike’s ad immediately drew a rebuke from the President who personally responded on Twitter within a matter of hours:

Just like the NFL, whose ratings have gone WAY DOWN, Nike is getting absolutely killed with anger and boycotts. I wonder if they had any idea that it would be this way? As far as the NFL is concerned, I just find it hard to watch, and always will, until they stand for the FLAG!

Donald J. Trump @realDonaldTrump, 9:39 AM – Sep 5, 2018

And the following day:

What was Nike thinking?

Donald J. Trump @realDonaldTrump, 

In response, numerous Trump supporters created videos of themselves burning or defacing their Nike gear. The controversy immediately caused Nike stock to fall but within a few days the stock rebounded to new heights buoyed by higher sales and the stock is up by $5 billion since the ad came out despite boycotts by some Trump supporters.  Ironically, Nike seemed to have the same kind of media philosophy as Donald Trump who tends to believe that all publicity is good publicity.  By that philosophy, Nike’s ad was a dramatic success generating over six million articles in less than two weeks as measured by Google News.  That is an extraordinary amount of free publicity for an ad that was rarely even shown on TV.

Mathew Yglesias explains why a company like Nike might deliberately lose sales from partisan conservatives rather than stick with ads that appeal across the entire political spectrum.  Yglesais argues that corporate ads tend to have a more liberal bias simply because American youth tend to be more liberal whereas political ads (for both parties) have a more conservative bias compared to the true median of the American political spectrum today because older Americans tend to be more conservative these days.

The target demographic of consumer-focused advertising skews younger than the national average, while the electorate skews older… Advertisers need to target young people

The key thing about brand loyalty is that it starts young. In the trade press, the only question is about exactly how young. A conventional approach might have thought of kids between the ages of 5 and 14 as a key target for consumer packaged goods, while some newer thinking holds that companies should really aim younger than that. According to AdWeek, McDonalds has a 2-7 segment that they target.

But beyond those extreme cases, the main groups that advertisers worry about are millennials and the younger “Generation Z.” That’s in part because young people spend a larger share of their budget on branded products (as opposed to boring things like mortgages and child care) but it’s primarily because once people find a brand they like they are unlikely to switch.

Older people have found brands that they like, and less inclined to try new things. What’s more, if you’re already a fan of a given brand’s products, it doesn’t really matter whether or not you like their new marketing campaigns.

Meanwhile, the oldest consumers not only tend to have a whole set of brands they are already committed to, they are also unlikely to be interested in exploring new product categories. Even new categories that eventually become ubiquitous such as televisions or smartphones initially face reluctance from older consumers. Companies with new products normally focus on winning young adults first and expand to older customers later.

On the other hand, seniors are disproportionately likely to vote. Older people move around less, have more knowledge of the community they live in, and have deeper ties to local institutions. They have more time on their hands to engage with the political system. And they reliably turn out to vote at a higher rate than younger people.

ElectProject

This means that while senior citizens are largely irrelevant to mass-market consumer brand advertising, they are crucial to politics. Teenagers, conversely, are overwhelmingly ineligible to vote and yet are absolutely central to consumer advertising.

These things have both been true for a long time. What’s made them salient recently is that it’s only over the past few election cycles that age has been a major driver of partisan politics.

Corporations aren’t anti-Trump.  They are just pro-profits, and Trump’s average supporter just happens to be a lot older than the most valuable target demographic for marketers.  Some research indicates that people generally get more conservative as they get older, so some liberal bias among corporate advertisements is probably common, but right now there is a much generational divide than usual between the preferences of voters under age 28 and those over 59.

Before the 2000s young and old Americans were fairly evenly divided between support for Democrats and Republicans.  Today there is about twice as much support for Democrats among Americans under age 29 as for Republicans which is highly unusual. One of the ways Trump defied the polling predictions was by appealing to older Americans who turn out to vote at nearly twice the rate of younger Americans. That is one reason why Trump won the Electoral College despite poor performance in polls. He did much better with the demographic that votes.

According to Pew data, the only age of voters with majority support for president Trump were over age 59 as shown on this Vox graph:

votingbyage

The trend is for elderly voting to increase their political dominance.  According to the Census Bureau, the only demographic that has been increasing their voting rates have been people over age 65:

votingages

Both Democrats and Republicans always have to pander to the preferences of older Americans because they vote at twice the rate of younger Americans. But consumer-goods corporations want the most effective advertisements at winning life-long consumers rather than just winning an election year, so they pander to the tastes of youth who have the biggest potential life-long expenditures and who are easier to influence than old people who are more set in their habits.

Americans over age 59 are a minority of the population, but they were a majority of the electorate in 2016 because a lot bigger percentage of them vote than younger Americans.  As long as old Americans are more conservative than young Americans, political ads will be more conservative than consumer ads, but I doubt this kind of demographic political divide will last.  Either American youth will get more conservative or our elders will get more liberal.  The only question is which way will the winds blow.

[Note that there is some discrepancy between the data produced by the Census Bureau versus the Pew data above and that neither one perfectly shows what really happened in the election because this data is based on polls of self-reported behavior and some people either lie or forget how they actually behaved during elections. That explains the discrepancies, but the results are close to what actually happened.  In reality, Trump got 46% of the vote and Clinton got 48% of the vote, so the above exit poll is quite close to the actual result.]

Individualized Pricing

The Boston Globe wrote about research by Consumer Reports into car insurance pricing that found:

You’ll …be charged more if big data says you won’t notice. In yet another bid to maximize profits, some insurance companies have begun in the past few years to use a new technique to determine your sensitivity to prices. That way, they can base your premiums not just on your risk profile or credit score, but also on how high a price you’re willing to tolerate. Called price optimization, the practice — which isn’t allowed in California, Florida, Indiana, Maryland, Ohio, Vermont, and Washington for car insurance — uses data about you and statistical models to gauge how likely you are to shop around for a better price. Two factors are whether you have complained about your policy, and how much of an increase you accepted when you renewed your policy in the past. So don’t be shy about complaining a little more.

Longtime loyalty to a company might work against you. Many companies, including car insurers, reward their most loyal customers with discounts or other incentives. But Consumer Reports’ study found that while some insurers give a sizable discount, others give a small one, and still others offer nothing at all. Some insurers even salute your allegiance with a price hike.

Additionally, Consumer Reports found that insurance companies tended to charge more for adding a teen driver to an existing policy than for new customers and the highly advertised “discounts” for bundling home and auto insurance saved very little.  That makes sense because people who bundle more services probably become less elastic for either one.  They are less likely to switch their car insurance when the price rises if they like their home insurance and vice versa.

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Posted in Managerial Micro, Public Finance

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