Humane Economics

24 July 2009

Terminal Advertising

Children, teenagers, vibrant, happy and bouncy young adults and economists all have in common an assumption of permanent good health, mental or physical. It’s just one of those things you count on without thinking, until you can’t. You never foresee the possibility of spending your entire summer vacation bedridden with the flu. Your vision of yourself in the future doesn’t include a decades’ long battle with a bad knee, a career plagued by repetitive strain injury or being dogged by depression.¹

Good health is implicit in all of our models of the future, especially our economic models, and yet it is the single thing after job loss that is most likely to badly affect our future finances. We assume our own health, the health of our family, the health of our co-workers, and of everybody who surrounds us in our towns and cities.

We also assume that our markets are and will be healthy, although it’s been clear in economics for a long, long time that markets can become unhealthy, sick and, for all intents and purposes, die.

The best formulation and model for the health of markets was put forward by George Akerlof in his seminal 1970 paper “The Market for Lemons”². In it he described how a healthy market can become unhealthy or a ‘market of lemons’ to use his terms.

It’s a very simple idea (with bonus points for being somewhat common sense): If you have a market that has a mix of good products and duds (‘lemons’) and the buyer has no way of telling a dud from a non-dud, the sellers of ‘lemons’ will drive the sellers of good products out of the market.

Because of the information asymmetry, the buyers have to buy the good to find out whether it is a dud or not, the prices they’re willing to buy at will reflect that risk and be correspondingly lower. Some of the sellers of good products can’t sell their products for what they’re worth and so won’t participate in the market. The number of good products in the market goes down, risk goes up, prices go down, more sellers of good products leave. The cycle continues until either some sort of rock-bottom equilibrium is reached or until no product, dud or non-dud, can be sold in the market for any price.

The market dies. The cause of death is information asymmetry and a mix of bad and good products in a single market: the buyer has to buy to find out if the product is any good.

The online ad market is highly competitive and the prices are strongly trending downward.³ That’s all par for the course⁴ in a competitive, free market, but the sellers of advertising inventory (ads on the page) are in denial of the overall health of the market.

It’s no secret among us who work in marketing that the only way to find out whether an ad venue is effective is to buy ads and then measure the effect. The statistics and traffic information you have access to before you buy are irrelevant noise. Traffic stats are indistinct goops of unusable nonsense that have no relationship to whatever the actual results or what the return on investment will be.

It’s even less of a secret that most of the ad inventory out there is absolute garbage, blog content being almost as notorious as ‘user-generated-content’.

So, that’s a pretty bad cough they’ve got going there.

Given the characteristics of the web advertising industry, the behaviour and secrecy of the behemoths selling the inventory and the overall measurability of the utility and (in)effectiveness of online advertising, anybody planning on basing their business on online advertising will see their livelihood caught up in the industry’s overall terminal decline.

The only way they can avoid that fate is if they specifically take measures to overcompensate for the bad health of the market in general and work hard to differentiate their ‘product’ so that the competitive forces of the market don’t tear them a new arsehole.

But wait … it could be even worse …

Baldur Bjarnason – Follow me on twitter because otherwise you might miss an update, and you don't want that, now do you?

29 July 2009

I wake up when I dream of smelling coffee

Some jobs and industries come bundled with coffee addiction. Mine started with the time I worked on the gas pumps at Iceland’s only propane gas plant (a place where I worked part time and during summers throughout, and to pay for, Junior College) where, as with most Icelandic blue-collar jobs, the coffee staple was ‘molakaffi’, where you stick a sugar-cube into your mouth and suck your strong, black coffee through the cube.

My addiction was solidified by my stint as a night watchman (and often bartender) at one of Iceland’s seedier hotels. But the absolute clincher was working as a part of the production team (as a vision mixer) in the Icelandic National Broadcasting Service’s TV newsroom. There aren’t many people on the planet that drink as much, coffee or booze, as news reporters.

It shouldn’t be surprising, then, that coffee doesn’t run out in any household where I live, if the coffee tin is empty, I go out, come rain or snow, to buy some more. One of the habits I’ve developed since I moved to Southville, Bristol (UK) is to buy my coffee at the local deli. The coffee’s good and the people are nice.

The first time I went there to buy coffee, I walked into an empty store and only after a few moments’ wander around did I meet the bright-eyed and chirpy clerk. After a quick conversation, an exchange of laughs about lives being busy as the coffee was ground, the clerk began frantically to look for a marker. The pack of coffee was one of unmarked brown paper and the thing a clerk is supposed to do in these situations, obviously, is to write the name of the coffee on the pack.

“No worries” I said and smiled, the job of a store clerk can be pretty frantic, “I’m sure I’ll remember.”

All our commercial interactions in our offline lives are filled with moments like these. The business of sales and purchases is filled with conversations, simple and complex, short and long, even in the cases where every commercial step of the interaction is automated and computerised, there are still other customers. The only way to avoid words, glances, smiles or frowns is to be dead. Alive, we interact, always with emotion, whether it is joy, anger, curiosity or frustration.

One of the first uses of the net was to transplant these interactions, largely without context, onto dial-up bulletinboard systems. It’s been one of the foundations of the web since inception, anything that is placed on the web will be enveloped by communication. These communications systems take on many forms: Forums on subjects, hobbies, products and companies. Blogs, single or multi-user, with or without comments. Facebook. Twitter. E-mail. These are largely free, for a variety of economic and social reason, but they are plentiful, often easily replaced and addictive, through the intentional integration of operant conditioning into the services’ basic designs.

The business models of these systems are often just plain loss, someone runs and pays for a small forum on a subject they care about, sometimes it is bundling as it is with some e-mail systems, sometimes they are just a cost of doing business as it is with work e-mail. But some of these can and will make money by indirectly competing with advertising. Not through the idiotic health ads such as those you see on Facebook but through offering free communications services to your average user and then selling data and management services to businesses that need to communicate with a large number of people.

These businesses are those that are trying to sell you something. By codifying and commodifying communications, companies hope to measure and manage the basic human interactions that take place in the context of their business, and then to use it to sell us more stuff. My conversation and laugh with the deli clerk becomes and exchange of @replies on twitter, where my response, conversion, traffic and business will be measured and calculated through my replies and clicks on links.

This is why I’m not worried about twitter’s or facebook’s long-term business model. Any sort of collection of user data is a point of value: Measure traffic and replies to the business’s twitter account. Or use url shortening services to mark a particular individual communication and follow the path of the user from first interaction to sale, communications systems. Rampant collection of user data has countless possibilities for premium business services, all at the cost of the customer’s privacy and the basic humanity of the communication itself.

The appeal of these sort of services to businesses when compared to the lousy and risky online ad market is clear. You let your staff interact with the customers as peers, you leverage that interaction, both as increased customer support and as a subtle and non-threatening marketing venue, often without either the employee or the customer realising it.

The online marketing tactics of most businesses will, over time, be largely two-pronged. One part will emphasise search engines, both through search engine optimisation and through search engine advertising. Another will measure and leverage peer-level interactions between the employees and customers to drive brand awareness and sales. Sometimes the two will go hand in hand, as with corporate blogs, and the marketing department will be very, very happy.

Online advertising has problems to begin with, from lousy overall quality to ruthless competition, but its final and decisive adversary is measured human interaction which seamlessly scale from free services to very involved and expensive operations.

Over time, businesses will find that some online writing and communications styles have a higher ‘return on investment’, that some types of interactions will be more ‘valuable’ than others and they will invest in preparation and training to make their employees more effective. But that won’t be much of a loss from our perspective as customers because they do this already with our off-line commercial communications. We will have lost or gained nothing except that when we attempt to interact with the scripted lines of a minimum wage worker online, all of it will be analysed, broken apart and measured in ways not possible with the ‘real-world’ equivalent.

The coffee I bought that first day I walked into the Southville Deli was wonderful. It was strong without being bitter or overwhelming and rich without reducing the fundamental ‘coffeeness’ of the taste.

Of course, I can’t for the life of me remember its name, but despite that I manage to buy it every time I’ve gone to the deli since then.

“400 grams of that Fairtrade coffee you’ve got, please. The one from somewhere in Asia, I think. … Yeah, that’s the one … Ground, please—for a cafetière.”

Baldur Bjarnason – Follow me on twitter because otherwise you might miss an update, and you don't want that, now do you?