Marketing and Mathematics

March Madness lasts only three weeks, but Metric Madness goes on all year long.

What is Metric Madness? It's the notion you can run anything by the numbers, and it's become the hottest concept in business today.

One scientist recently predicted that the great discoveries of the future will come from finding patterns in vast archives of data. "The next Jonas Salk will be a mathematician, not a doctor."

I'm not too sure.

Shifting the numbers
Years ago, when I ran a New York advertising agency, our accounting firm showed up every January with the results for the previous year.

"These are your actual numbers," they reported. "Now, what would you like them to be?"

More profits to impress prospective clients, the landlord and employees? No problem, reported the accountants. We'll just shift some of the numbers around.

Less profits to report to the IRS? No problem. We'll do a reverse shift.

But this was nothing compared to what is happening in the business world today.

"Sharp Pencil Lets Citigroup Declare Profit," said a recent headline on the front page of The New York Times. "Citigroup used some creative accounting, all of it legal," reported the Times, "to bolster its bottom line at a pivotal moment."

Then there's Goldman Sachs, which reported a big profit for the year by changing its reporting calendar, erasing the impact of a $1.5 billion loss in December. JPMorgan Chase and Bank of America also used similar strategies to paint rosier financial pictures.

More math as the answer?
Looking at the bigger picture, the entire financial community relied on mathematical models to help them determine risk. Andrew Haldane, Bank of England's director of financial stability, pointed out that the collapse in money markets following the credit squeeze was an event that the models predicted could happen only once every 13.7 billion years.

You might think that the recent financial crisis would have been a warning sign for banks and other financial institutions to back off the metrics and take a more human, holistic approach.
Not so. The answer to a mathematical failure seems to be more math.

Mark Buchanan, writing in Condé Nast Portfolio in April, reported that "Scientists are working to make sure that never happens again." The solution, according to the author: "Physicists are working on massive computer programs to map out entire economies -- and predict what will happen if things go awry."

Furthermore, states Mr. Buchanan: "The technology now exists to go beyond economics to build a massive, complete computer model of the modern economy, from the corner store to the city bank and the Federal Reserve."

(Mathematical models of the universe are like flying cars, always some distance away in the future.)

Notwithstanding their miserable performance in the financial crisis, mathematicians have been emboldened in their efforts to take over the world. Stephen Baker, author of "The Numerati," points out how they are "stitching bits of our data into predictive models."

Humanity as a mathematical model
"The ultimate goal, though, is to build versions of humans that are just as complex as we are -- each one unique. Add all of these efforts together, and we're witnessing (as well as experiencing) the mathematical modeling of humanity."

"It promises to be one of the great undertakings of the twenty-first century," writes Mr. Baker.

Over at IBM, a team of 40 Ph.D.'s, from data miners to linguists, is helping the company develop a database of the skills of its 300,000 employees. "Everything must be turned into numbers," said the head of the team.

One of our biggest complaints about management is their tendency to run companies "by the numbers." Take Macy's, the nation's No. 1 department store.

Macy's is not exactly booming. Last year, the company lost $4.8 billion on sales of $24.9 billion. The New York Times recently asked Macy's chief executive: "Anything you would like business schools to teach more?"

Squeezing organization's life out
Now how do you suppose the chief executive of a company that lost $4.8 billion last year responded to that question? I would hope that he would have asked for business schools to turn out graduates with a little more understanding of marketing. Perhaps they could have helped answer the question, "What's a Macy's?"

But no. This was the chief executive's answer: "In our business, there's not enough emphasis on math. Coming out of college, we really like to have kids who like math, study math and get it. And so I'd like to make sure there is an emphasis on math."

Perhaps it takes mathematical skills to run a major corporation today. But if the CEO loads up the company with similar people, he or she will squeeze the life out of the organization.

If you run a company by the numbers, you'll eventually run the company into the ground. You might be successful in the short term, but never in the long term, as the financial crisis demonstrates.

Left-brain managers are verbal, logical and analytical. Nothing wrong with that, as long as management also takes the remedy to counteract its overemphasis on mathematics.

The antidote to management, to paraphrase Club Med, is marketing.

Almost everything about marketing is the opposite of the typical manager's approach to running a business. Marketing is illogical and definitely not analytical. Marketing is intuitive and holistic.

We're concerned, however, that this message is being ignored by the marketing community, who seem to be drifting from the right to the left -- from a right-brain approach to a left-brain approach.

The emphasis on ROI
A prominent U.S. marketing executive who has held top marketing jobs at Procter & Gamble and other companies said recently: "At its core, marketing is 70% math."

Take the current emphasis on marketing ROI, return on investment. In most cases, to determine the ROI of a marketing program is an expensive exercise with little or no value.

An experienced marketing executive, in my opinion, instinctively knows whether a marketing program is working or not. Does Apple need to waste money trying to determine the ROI of its marketing efforts?

What Apple is doing is working. What Microsoft is doing is not. You don't need ROI numbers to figure this out.

Then there are many situations where the ROI is zero and yet the marketing expenditures are worthwhile. Take leadership, for example.

Nothing about a brand is more valuable than its market leadership. If a brand loses its leadership, it loses its most significant advantage in the marketplace. That valuable position is worth protecting. And advertising is the best way to protect it. Nike in athletic shoes. Heinz in ketchup. Rolex in watches.

Suppose a leading brand spends $50 million a year on advertising. And suppose that brand's market share doesn't budge at all. Was that $50 million wasted? Not necessarily.

Advertising as insurance
Advertising is more like insurance than it is like an investment. What's your "return on investment" of a five-year term life insurance policy if you don't die?

Zero.

But, of course, you don't buy an insurance policy to make money. You buy an insurance policy to protect your family in case you die.

The overall practice of marketing is not mathematically based, although subsets of the discipline may be: direct marketing, research, media selection.

Marketing is certainly not 70% mathematics. It's not even 1% mathematics. (As a math major in college, I don't think I've ever used integral calculus or differential equations or any other mathematical concept in our marketing practice.)

Marketing is a discipline that can only be learned by exposure to marketing case histories over an extensive period of time.

Mathematics is logical. Marketing is not. That's why marketing is so difficult to learn.

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Comments

[Andy]

While I agree that marketing often has a lot more to do with intuition than calculation, you completely lost me with the comparison of advertising to insurance. An insurance policy protects you in a concrete way against specific risks. Advertising doesn't.

Especially for small business owners, advertising can be nothing more than an expensive boondoggle, and expensive waste of money with no (here in comes) ROI.

It is important to think about how your marketing dollars are being spent and what you are getting for them. For example, a real estate agent might find that her or his marketing budget is much better spent building up a brand with a blog than on ads in the newspaper. Or, does it really make sense to blow the budget on fancy-looking business cards when a clever closing gift will generate more word-of-mouth?

While I certainly don't consider myself a "numbers person", part of being a business person is thinking rationally about how you spend your money and what you get for it in return.

[Derek Chen]

I'm sorry, but I must disagree. In my humble opinion, marketing is this beautiful endeavor precisely because it marries the left-brain and the right-brain. The qualitative side informs the quantitative side and vice versa.

First, marketing uses more math than most people think. As you mentioned, there is direct mailing, consumer research, and media selection. But there are also funnel metrics, CPAs, and segmentation analysis. This is not to mention statistics, econometrics, ROI calculations, and countless other math-related derivatives. Perhaps the math isn't quite as complicated as integral calculus or differential equations, but math is definitely involved.

From my experience, too many people believe marketers just sit around all day dreaming up creative ideas with no objective data to back up what they do. Rather, the marketing team can (and should) be running the numbers on a consistent basis to find value-added insight on the consumer for the company. To say that we know what we're doing just because we have read lots of stories is like saying the CIA knows how to do their job because they've seen a lot of James Bond movies. No wonder the marketing department often has no credibility!

Keep in mind, I'm not saying marketing doesn't need intuition. Instead, I'm saying holistic marketing should be an amalgamation of logic and intuition. Otherwise, how can we see all sides of the issue?

In the end, if we as marketers want to be treated with the same level of respect as others in the C-suite, then we better have solid frameworks and robust analysis to back up what we do. And one of the best ways to achieve that is with math.

[Elli Strauss]

This article made my day, week, month, year! In the course of my ongoing search for an executive level marketing position I began to fear I had somehow become a dinosaur nearing extinction. Where in any of the requirements was the insight and experience, the passion for the holistic, intuitive, creative and often difficult to define process that is marketing? Where was the person with gut feeling and leadership qualities? Every position of responsibility was primarily about solid metrics, ROI, measuring tools, etc. I asked myself if marketing had become bloodless, cold and inhuman - just a numbers game. I wanted no part of it. To me, it's about balance. Yes, we are all looking to validate our investments and the metrics help guide us, but that simply can't be the all dominating aspect.

The brilliant comparison with the insurance policy is in itself an example of the creative thinking that is required to drive marketing as it is meant to be. Not metaphoric, but very real (and I have the case studies that demonstrate this). Maintaining an advertising level that keeps a brand uppermost in the hearts and minds of consumers is protection - from stagnation and ultimate demise.

Interestingly, this goes back to your recent article decrying the lack of respect paid to marketing (that inspired on blog by yours truly) - it's another reason why marketing is the first area of a company to be subject to the cost cutting shears! After all, it's primarily about numbers and (primarily short term)return on investment.

I am hoping you have set something in motion to remedy this unsustainable situation.

[JR Randall]

Thanks for the post. I agree with your point and examples illustrating the weaknesses of focusing entirely on analytics. However, I don't think marketing can entirely abandon or be divorced from left-brained analytics. It's a matter of looking at marketing spending on the margins versus considering the breadth of marketing activities.

For example, an experienced marketing executive may have the intuition to know if an incremental $500K spent is having an impact. But when you consider the entire marketing budget, without any measurement of effectiveness, what's to stop a marketing executive to push for a doubling of his budget year-over-year whenever his "instinct" suggests it would have an impact.

Fact is, I'm not sure we'll ever be able to boil marketing effectiveness down to a pure science. And that might be the more responsible admonition: while analytics can add rich insight to qualitative instinct, it must always supplement that instinct, and never replace it.

[Tom Brzezina]

I would take your closing statement further and say that math is logical. People are not.

The idea of a "mathematical model of humanity" is laughable. As a species, we don't know enough about ourselves to create a mathematical model of the most basic human relationship.

That said, its hard to imagine effective marketing—even effective advertising—without mathematics. But I don't think that's your premise here. My take is that you believe buying into the idea of mathematics as a total marketing solution is dangerous. I agree.

By the way, you have good company in your belief. Bill Bernbach, the man who made Avis a contender and the funny-looking Volkswagen Beetle fashionable, famously said:

"I warn you against believing that advertising is a science."

[Matt Daniels]

Hey Al--wasn't expecting this post from you, honestly. Measuring, optimizing, and iterating in marketing separates the good marketers from the lousy ones, in my opinion.

Regarding ROI, "Take the current emphasis on marketing ROI, return on investment. In most cases, to determine the ROI of a marketing program is an expensive exercise with little or no value."

ROI helps you compare marketing programs and optimize $'s. Why would Apple want to know their ROI of ALL of their marketing? Of course that makes no sense. But if Apple is deciding among TV, web, print, loyalty, etc, you'd hope that they just didn't guess a $ to invest into each channel without measuring results...