Most businesses today subscribe to creating value in the upstream. They continue to structure their operations around their products and solutions, maintaining hierarchies of product divisions and product managers, rewarding them on how well the products were sold. Predictably, managers’ aspirations are driven by new innovations and new product pipelines.
Marketers, especially those who manage product brands, understand this. They annually spend $500 billion on paid advertising globally—a number that is now growing at about 10 per cent per year. And they continue to hone their skills over tactical concerns of efficiency (a cheaper media buy, the development of an effective ad execution, better shelf placement, or search engine optimization).
But is it working?
It may be time to take a step back and question what exactly marketers are really fighting over. The answer is obvious: A piece of the customer’s mind. And the customer’s mind, where the brand resides and the branding games are played, remains an enigma.
Deciphering this enigma requires marketers to shift their focus to creating value in the downstream. It means that businesses need to stop offering lip service to putting the customer in the centre of their business and actually engage in activities that are led by customer interactions and where the competitive advantage lies in trust, reliability of supply and service, experience and brand reputation. Those who shift successfully stand to become the successful brands of the future.
Before shifting, marketers need to first acknowledge that their customers’ minds are finite resources. No consumer can absorb, interpret, store, recall and use all of the information available, not even all the relevant bits. This imbalance between available information and available mental processing and storage capacity gives rise to a necessary principle of scarcity. Without it, there would be no need for marketers to compete for awareness and privileged positions in their customers’ minds.
A direct corollary of limited capacity is the principle of cognitive economy. Cognitive economy states that because their information processing capacity is finite, your customers will often trade off accuracy of results and optimal outcomes for efficiency of information storage and processing. In other words, they may end up choosing products that are easier to purchase rather than ones that are the best for their purposes, simply because they can’t remember everything about the products, or so that they don’t have to think too much about them. This basic principle has many implications, including the mental shortcuts and mental organizing frameworks that consumers use to make sense of the marketplace.
It is useful to note that the principle of cognitive economy underscores the importance of how consumers buy and consume relative to what they buy and consume. It emphasizes the importance of downstream activities. For example, consider how customers respond to radical innovation. Novel products have very high failure rates. Businesses persist in developing and launching radical innovations despite their high failure rates because novel products that do succeed tend to be much more profitable. Still, novel products often fail simply because customers don’t know what to make of them. Consumers see too much risk in adopting them or they can’t see where these new products would fit in their lives.
When customers do come across a new product, their cognitively economical approach is to try to classify it and sort it into a familiar bin or category, so they can make sense of it in familiar terms. If they can do this, they can efficiently apply existing knowledge. For example, coming across a bean bag for the first time, a customer might be confused. But classifying it as a chair clarifies its purpose and usage. This classification is an example of a process called categorization. Categorization is one type of mental organizing framework that consumers use to make sense of the world around them, including the marketplaces in which they work, live and play.
Categorization, like many other cognitive processes, determines the effectiveness of marketing. Early in the life cycle of digital photography, when film-based photography still dominated, Lexar introduced memory cards for digital cameras in gold packaging, similar to Kodak film, with a speed rating similar to traditional film’s ISO rating. Labelled “digital film,” the memory cards were placed alongside photographic film in stores. As a result, Lexar bridged the distance between the new product and what film photographers were accustomed to buying. How the innovation was presented to consumers made it easier for them to understand, compare and contrast the product during the transition from traditional film.
Competitive games between brands are fought inside the customers’ minds. It pays to know the layout of the playing field and the rules of the game. Shifting to create value in the downstream can help marketers to shape the outcomes in their favour.
Niraj Dawar is professor of marketing at Ivey Business School, which has locations in Canada and Greater China. This column is based on his book TILT: Shifting Your Strategy from Products to Customers, published by Harvard Business Review Press.