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August, 2010

Marketing Incentives

Ruminations on incentive structures in the marketing industry.

I just got done reading The Big Short, which is the third book in my personal series of trying to wrap my head around how we managed to so fundamentally screw ourselves over (Gillian Tett's Fool's Gold and Andrew Ross Sorkin's Too Big to Fail). Out of these three books I've taken away two important lessons: First, when evaluating risk, make sure you understand the worst-case-scenario and take it into account and second, incentives explain almost everything.

Of course neither of those ideas are terribly new, and some folks would argue agains the second with behavioral economics (though I don't actually think they'd argue that incentives explain almost everything, but rather that often we just don't understand how people are going to react to those incentives).

But I don't really want to talk about finance, rather I was left thinking about the incentive structure in my own industry: Marketing. Like any industry you have two sides: Buyers (brands that are looking to advertise) and sellers (agencies that are looking to provide their services to brands for a fee). The buyer, theoretically, is looking for something simple: To sell more of whatever it is they sell. This, as with most explanations, is over-simplified, as there could be any number of potential motives for choosing to advertise, but at the end of the day almost all of them eventually get back to selling more stuff.

The sellers price, in a perfect market, would reflect the potential quality of the product (piece of communication) they can deliver against the buyers objective. This leads to two major issues. First, there is no real way for agencies (or the marketers that pay them) to understand the effectiveness of their own campaigns, which leads directly to the second problem, that opacity in effectiveness creates a pretty serious market inefficiency: One side having a whole lot more information than the other (which leads to exploitation).

Eventually that lop-sided information flow leads to an over-emphasis on brand rather than actual ability to deliver results, which gets me to the whole point of this little diatribe: Agencies are more incentivized to build their own brands rather than that of their customers. Sure there are safeguards against this, mainly long-term agreements that agencies covet. But the problem is that even those "long-term" relationships tend to last at most two-or-three years. While there are certainly a few long-term relationships around the business, the vast majority of work being done these days is done with the express understanding the whoever's doing it is unlikely to be doing it three years from now.

What's funny is that this is the exact inefficiency that advertisers so covet, making it all the more surprising they wouldn't recognize the same issue when it's happening to them. By that I mean, in a category (say toothpaste) where the vast majority of the public has no understanding of how effective one product is compared to another they come to rely on brands (this is pretty much the premise of marketing). Ultimately people end up making their decisions based on a bunch of factors that speak to just about everything but whether it will do the job it says it will do.

So I guess what I'm wondering is whether the industry recognizes this? I know everyone in the agency world goes through phases where they wonder whether any of the work they do really has any purpose, but how come there aren't more folks on the buyer-side (clients) who are demanding that the incentive structure change to better reflect (and measure) effectiveness. I have to assume it has to do with a general industry belief that we'll never get there, but there are lots of places on the way to there that are further along then nowhere.

August 8, 2010
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