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Are Marketing and Mathematics Getting Married?

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Think marketing doesn't have much to do with mathematics? An unseen mathematical world is giving some companies a competitive edge in better understanding customers. Indeed, companies across all industries are now capturing data and creating rich profiles of customers to "predict" their wants, needs and future desires.


Mathematics has left the ivory tower of academia for a marketing department near you. Are you ready for this massive paradigm shift?
Let's be clear. I hate the phrase, "paradigm shift". The words are close to meaningless due to overuse.

However, in this rare instance, where the world of mathematics is invading the marketing kingdom, it makes sense to emphasize a new way of thinking that is radically changing the way marketers do business.

Marketers have always wanted to know more about customers–after all, better segmentation and targeting of a customer base helps improve marketing ROI and ultimately increases satisfaction as customers are not bombarded with irrelevant offers.

Fortunately for marketers, advances in technology (both applications and infrastructure) have made it easier to capture, manage and analyze data so as to piece together a more complete picture of customer behavior and of enterprise operations.

Case in point, an article from Business Week, published in 2006 titled, "Math Will Rock Your World", highlights companies such as Google, Aetna, Harrah's and others that are using mathematics via analytical applications to sort out "swelling oceans of data" and mine data for insights to better understand customers.

While arguably a bit dated, the Business Week article showcases how companies are using customer data to build profiles and formulate models of both customers and employees that they believe will allow them to simulate and predict how to, "sell us things, steer us clear of diseases, and ramp up (employee) productivity."

Other examples in the article show how companies are using advanced algorithms to make sense of unstructured data (emails, documents, call center notes), and optimize online advertising campaigns through the refinement and selection of keywords for search.

Using mathematics to better understand customers is serious business–just ask Netflix. According to a recent Wired magazine article, this online movie rental company is offering a $1 million dollar prize to any one person or team that can improve its current movie recommendation algorithm.

By opening access to one of the largest data sets available of online behavior–100 million customer movie ratings–Netflix is ultimately hoping to "crowdsource" improvements to Cinematch, its engine that essentially recommends, "If you liked this movie, you'll also like this one."

The Wired article details how different teams from across the globe have attempted to help Netflix improve its recommendation algorithm, and how difficult a challenge this is turning out to be. The contest is two years running and still a 10% predictive improvement remains elusive.

However, even minor improvements to Cinematch have thus far helped Netflix utilize more of its DVD inventory and improved customer loyalty as subscribers find movies of interest that perhaps they might have previously overlooked.

In another article, "Guessing the Online Customer's Next Want", Barney's New York is mentioned as a company that's seen dramatic marketing ROI improvement from using sophisticated analytical applications based on complex mathematics.
Through the use of technology, Barney's is able to collect and analyze the online behavior of its customers and then craft smarter and more appropriate responses to interested audiences.

For example, the article notes, "An e-mail message announcing sales might go to those Web site visitors who had purchased certain products or types of products in the past, but who had done so only when the items were on sale. In the simplest terms, if someone buys only when something is on sale, but never buys anything in December, then the e-mail sale flier might not be sent to that customer in December."

Just as in the early 1980s, when the financial industry was upended by the flight of quants from academia to Wall Street, marketers are starting to reap the brainpower of mathematicians, physicists and others as they codify their expertise and knowledge into sophisticated information technology systems and analytical applications. These innovative systems are helping marketers leverage information to better connect with customers and drive the business forward.

Paradigm shift? Absolutely. The world of marketing will likely never be the same again.
Questions:
* Are you seeing these trends in your particular industry? If so, how so?
* The companies mentioned above are starting to treat data as one of their most valuable assets. Is your company on that path?
* Are you concerned with the potential "dark side" of simulating and modeling customer behavior–i.e. privacy issues?
* What skill sets will marketers need in the future to be able to compete in this new world of mathematics and marketing?
I'd love to hear from you!


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Paul Barsch directs services marketing programs for Teradata, the world's largest data warehousing and analytics company. Previously, Paul was marketing director for HP Enterprise Services $1.3 billion healthcare industry and a senior marketing manager at global consultancy, BearingPoint. Paul is a senior contributor to MarketingProfs, a frequent columnist for MarketingProfs DailyFix, and has published over fifteen articles in marketing, management, technology and healthcare publications. Paul earned his Bachelors of Science in Business Administration from California Polytechnic State University, San Luis Obispo. He and his family reside in San Diego, CA.

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  • by Marketing sussex Tue Jun 3, 2008 via blog

    Interesting subject

  • by Claire Ratushny Tue Jun 3, 2008 via blog

    What Netflix and other forward-thinking companies are doing by employing "advanced algorithms" is just plain smart. The examples you've used to illustrate your points proves that this is a faster, more precise way to distill volumes of data to marketers' advantages. More targeted information helps to direct marketing efforts more meaningfully. Hence, time and money are saved while yielding better sales results. At a time when there is increasing pressure for marketers to prove their worth and a solid ROI, the time and effort spent to refine the right algorithm is probably worth its weight in gold. Thanks for another great post, Paul.

  • by Paul Barsch Tue Jun 3, 2008 via blog

    Claire, thank you for commenting and adding to the discussion. You are right about companies that compete with analytics generally tend to get much more ROI from their marketing efforts. In the Wired article, Netflix was coy as to their expected ROI in customer loyalty from improving Cinematch, but surely it has to be more than the $1m prize they're offering--probably much more!

  • by Leslie Tue Jun 3, 2008 via blog

    Agreed, there's no turning back. Interactive marketing's language of ROI and KPIs is now pervasive throughout the marketing (and even PR) landscape. Another great read on this topic is Supercrunchers by Ian Ayres. He and Duncan Watts are emerging as the kind of "anti-Malcolm Gladwells" of marketing. Interesting stuff!

  • by Paul Barsch Tue Jun 3, 2008 via blog

    Leslie, thank you for commenting! The use of analytical and data warehousing technologies will not only help us improve our marketing ROI, but also ultimately help us understand and react better/faster to customer needs. Regarding marketing ROI, Forrester did some research on this topic and notes that with right IT infrastructure in place, marketers will be able to track the metrics they've always wanted to track (customer retention, campaign and customer profitability etc) in addition to metrics we usually track such as conversation rate, marketing to lead spend, click thru's etc.

  • by Search Engine Optimization Journal Tue Jun 3, 2008 via blog

    It certainly does go hand in hand... although many people would argue that marketing is FAR more enjoyable than mathematics!

  • by Vincent Wed Jun 4, 2008 via blog

    This article made me feel I may be from a different planet - I thought marketing always required mathematical analysis of customer data!?

  • by Paul Barsch Wed Jun 4, 2008 via blog

    SEOJ, thanks for commenting on this post. Fortunately in most instances, the complex mathematics is behind the scenes--incorporated into analytical applications. We'll still need an understanding of the techniques, but the hard number crunching of large data sets we'll leave to computers!

  • by Paul Barsch Wed Jun 4, 2008 via blog

    Vincent, believe it or not, you may be in the minority! It does, of course, depend on the type of business you are in - transactional businesses that kick off tons of data are more likely to engage in competing with analytics. That said, the trend is clearly favoring those enterprises that compete using data analysis to understand customer behavior and optimize operational processes.

  • by Suzanne Obermire Fri Jun 6, 2008 via blog

    As a direct marketer, I tend to agree with Vincent! (Yes, I live in an insulated world, I guess!) Using analytics to understand your customers and to build business strategy is a business necessity now.

  • by Paul Barsch Fri Jun 6, 2008 via blog

    Suzanne, direct marketers and web marketers have used analytics for many years now, but what's new is the adoption of analytical applications and processes across the organization for better decision making --not just for strategic decisions (marketing falls in this category) but operational decision making (employee productivity, store operations, flight ops etc). As the entire organization learns to compete using analytics companies can literally change the game and go from average to good and in some instances, "worst to first"!

  • by Jacquelyn Thu Jun 12, 2008 via blog

    Ah, the best marketers are one part business maven, one part historian, one part mathematician/statistician, one part anthropologist, one part sociologist, one part psychologist... there's nary a field I can imagine that doesn't impact our complex discipline in useful and interesting ways. Great article!

  • by Tope Ajayi Fri Jun 13, 2008 via blog

    Marketing and Mathematics are already celebrating over a 100 year Holy Matrimony! Check basic principles of demand and market structures from O' Level Economics. Coming home now, Yahoo and suchlike (Check Forbes, 2000), have been using serious mathematics to generate serious data to improve offerings, convince advertisers, forecast trends. This will continue as Information Technology helps to make the dream of perfect marketing (one-to-one product-customer match) a reality. Just watch, the train is already cruising at jet speed.

  • by Paul Barsch Sun Jun 15, 2008 via blog

    Jacquelyn, thanks for your observant comments. As you note, marketing draws from a wide repository of talents and as such, sometimes it's hard to define what exact talents make up a great marketer. Thank goodness, much like a doctor, we have our specializations (advertising, segmentation, events, strategy, SEO etc...) We cannot be good at everything!

  • by Paul Barsch Sun Jun 15, 2008 via blog

    Tope, you are right that in data driven businesses, marketing and mathematics have been paired for quite some time. However, the new trend is enterprises in all industries are starting to use their data for competitive advantage - and marketing is on the forefront of this change. Focus groups, surveys--all important. But any business serious about learning more about their customers should take a look at capturing and analyzing customer/transactional data to help piece together a complete view of their customers. This is the trend of the future.

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