Dear Subscribers,
Here’s this week’s sneak peek at a podcast that will drop tomorrow. My guest this week is Rory Sutherland. He’s an advertising legend, the president emeritus of Ogilvy Consulting, author of the book Alchemy: The Dark Art and Curious Science of Creating Magic in Brands, Business, and Life. He’s quite possibly the only person I’ve talked to recently who can move from Edwardian printing presses to Nassim Taleb’s swimming pool to the incentive structure of a Fortune 500 division head without pausing for breath. I’ve been an admirer for years. Getting ninety minutes of it was a genuine treat.
Advertising beat medicine to the randomized controlled trial by about sixty years.
This one I did not know. In the Edwardian era, newspapers were often printed on two parallel presses and then interleaved, like shuffling a deck of cards, so that copies from press A and press B alternated. Which meant advertisers could run two different creative executions, analyze the responses to coupon offers, and measure which one was more effective. And because the papers were interleaved, every newsagent received an equal share of each version. It was, as Rory put it, beautifully randomized.
Medicine didn’t get there for decades. Rory’s gloss on this is characteristically ruthless: medicine had ethical concerns the ad industry didn’t share. “The advertising equivalent of the Hippocratic oath is: don’t get found out.”
There was one thing you weren’t allowed to test, though and that was price. The newspaper proprietors thought it unfair for some readers to be offered a better deal than others. Rory’s dry observation is that modern digital platform owners do not appear to be burdened by the same scruple.
Marketing as a way of thinking, not a way of justifying one’s existence
Rory’s central argument is that locking marketing into a department called “marketing” was a catastrophic strategic error. It meant that marketing had no authority over price and product. It got confined to promotion: the one P of the famous four that shows up on the income statement as a cost (the 4 P’s are product, price, place, and promotion). And then organizations compounded the error by trying to justify the existence of marketing on the basis of what they do, measured today in terms of all kinds of fancy digital metrics. Instead, they should be valued for how they think. It’s the thinking that is the valuable part. His example: Uber changed almost nothing about the experience of riding in a taxi. What it transformed completely was the psychological experience of waiting for one. Because ride-hailing works on an app, questions such as how long it will take, how far away the driver is, and how much it will cost are all resolved within seconds of booking. While it doesn’t change the experience of getting from place to place by much, the innovation is on the questions and issues that surround that experience.
We got into discussing Peter Drucker next. Drucker famously said the only two functions of a business are marketing and innovation; everything else is a cost. Drucker was Austrian. His father was an economist, which is to say, an Austrian economist. And the Austrian school, unlike the Chicago tradition that dominates our business schools, treats value as fundamentally subjective. Hayek’s line is that the purpose of a business is to be a discovery mechanism — it exists to explore adjacent forms of value creation. As someone who has tried to spread the gospel of discovery driven planning and thinking for years, that was very satisfying to hear.
What are you actually competing with?
Companies are quite often totally blind to who their actual competition is. Consider the Zippo lighter. If you ask a bunch of MBA students who Zippo’s competition is, you’ll get back the obvious answers. Bic, of course, matches, and maybe the oddball answer like “magnifying glasses” (used to concentrate the rays of the sun to light twigs and branches, Boy Scout fashion). For decades, the people at Zippo understood that their real competition was men’s wallets. They were competing to be a gift. Anyone who has a man in their life that is impossible to buy for will recognize how useful that can be. And the Zippo people figured this out. In addition to their functional claims (It’s windproof! It’s refillable!) they make the lighters in a huge variety of styles, so they can become collectibles.
Rory extended this beautifully. Men, he argues, are perfectly happy with luxuries, but the luxury needs some notional function attached. There is no scented candle for men. Which, he points out, is very nearly the origin story of the Swiss watch industry: Calvinists disapproved of jewelry, so Swiss jewelers reinvented themselves as watchmakers, because a watch notionally does something.
Hence his description of luxury watches and cruise lines as the Galápagos Islands of human behavior because people develop somewhat bizarre preferences, depending on what the product comes to mean to them. People will literally set the time of a £9,000 Rolex by glancing at a £100 Seiko, because the Seiko keeps better time. Pilots’ watches are purchased by people who don’t fly and divers’ watches for people who’ve never been certified. And people will respond to fears of gatekeepers calling them out. In any category, there are probably five to ten percent of its customers are the nerds. They would notice if the thing wasn’t authentic say so loudly.
In the same vein, and courtesy of a conversation with Taleb: the real value of a dishwasher isn’t that it cleans your plates, it’s that it keeps dirty plates out of sight. And the real value of a swimming pool is that it grants you license to wander your own garden in a bathing costume without feeling ridiculous. Whether you ever swim is beside the point.
The finding that ought to be more famous than it is
Early in Rory’s direct marketing career, his team mailed 150,000 British Telecom customers an offer. Fifty thousand could respond only by phone. Fifty thousand only by post. Fifty thousand could choose either.
Phone only: 2% response. Post only: 4%. Choice of both: nearly 6% — essentially the sum of the other two.
Isn’t that astonishing? The determining factor in whether someone bought the product wasn’t what it was or what it cost. It was how they were permitted to say yes. And most organizations, staffed by people trained to believe that channel is a rounding error, spend their energy herding customers into whichever channel is cheapest to serve, then claim credit for the cost saving and never get charged for the lost revenue.
There are a lot more surprising and delightful insights in the episode itself – I hope you can tune in!