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In the movie Moneyball, the cash-strapped Oakland Athletics baseball team finds a way to compete with the high-spending New York Yankees by using superior analytics called “Sabermetrics,” a term coined by baseball statistics guru Bill James.
In the world of advertising, small companies are trumping big-league ad spenders by using new analytics called “Moneyball Marketing,” a term I’ve coined.
For years there has been no decent measure of advertising effectiveness. Ads are judged on cleverness and memorability, or simulated consumer research that claims to measure “persuasion.” With these old metrics, companies routinely waste billions of dollars on ads that don’t work.
This is the digital age, and now there is a way to measure almost everything accurately, including advertising. You just need some geeks.
Moneyball Marketing, with its roots in direct response, is all about measurement and experimentation. These marketers succeed by trying many unconventional approaches, which are often overlooked by big advertisers. They carefully track their success to minimize the cost of acquiring new customers and maximize retention.
Ten years ago the acne treatment category was dominated by Procter & Gamble’s Clearasil and GlaxoSmithKline’s Oxy, two products whose companies had massive ad budgets. Yet tiny Guthy-Renker launched ProActiv Solution and built it into an $800 million brand, overtaking the established leaders.
Guthy-Renker tests many new product concepts in low-cost TV infomercials. It measures the sales response and tweaks content and media until it finds ads that pay out. It launches products only after it discovers the magic break-even marketing formula.
Ad agencies and traditional marketers look down on companies like Gunthy-Renker, much the way the rest of major league baseball laughed at the Oakland A’s when they assembled a motley team of misfits. Moneyball Marketers don’t produce award-winning ads like those on the Super Bowl. They do whatever it takes to sell product.
Nutro Dog Food (now owned by Mars) became a leading super-premium brand using Moneyball tactics. After testing a number of approaches, Nutro tried stationing company-hired “nutrition experts” in Petco and PetSmart stores on weekends to educate shoppers about its product. The program generated new sales, allowing Nutro to grow from an insignificant player to a $400 million brand, challenging big ad spenders Nestlé (Purina) and P&G (Iams).
Glaceau Vitamin Water—another Moneyball success story—grew from zero to more than $350 million in revenue in six years without traditional marketing. The company tried many different approaches and found that sampling events targeted to young, active adults efficiently converted new users, despite a huge budget disadvantage vs. Coca-Cola and Pepsi. Coke eventually bought Vitamin Water for $4.2 billion—the equivalent of almost 10 percent of Coke’s market cap.
A key advantage of Moneyball Marketing is that it is difficult for competitors to track. They often can’t see or copy your success until it is too late to respond.
Amazon.com is the king of all Moneyball Marketers and is so stealthy that Chief Executive Jeff Bezos has often stated that Amazon has “no marketing department.” What the company does have is hundreds of analytics geeks, running perhaps the world’s most sophisticated marketing effort—monitoring the performance of online and offline ads.
Amazon spent more than $1 billion in marketing last year. The company runs thousands of ad tests each month to find keywords and messages that drive consumers to its website and gets them to buy. Ad spending is carefully analyzed to ensure payout. That’s a big reason why the company has grown an average 27 percent per year for the past 10 years.
The Internet has been a huge enabler for Moneyball Marketing. It is an environment that allows precise targeting and provides rich data, allowing companies to track conversion and retention rates—the two critical metrics—easily.
Most traditional advertisers, like P&G and General Motors, still use old metrics, such as reach, frequency, and awareness, to evaluate marketing plans. These advertisers typically overinvest in traditional media—TV, for example—because it delivers well against these old metrics.
But the old metrics often don’t translate to sales.
In 1998 Blockbuster dominated the video rental market and had a $180 million ad budget. Even though it launched a subscription service similar to Netflix, its business was surpassed by Netflix, a company with a marketing budget less than one-fifth of Blockbuster’s size. Netflix used high-tech analytics to acquire new users efficiently at a low cost. Netflix has since had a downturn in its fortunes, partly because the company lost some of its analytic marketing discipline. But Blockbuster went bankrupt sticking with traditional metrics.
Many other companies are losing ground, focusing on TV because they’re comfortable with the old metrics and don’t yet understand the new ones. According to Advertising Age, the top 100 U.S. advertisers still spend less than 10 percent of their ad budgets online. Young consumers under age 25—the emerging market for most products—now spend more time online than they do watching television.
Even if these big advertisers shifted larger portions of their funds to online ads, the money would be wasted without new tactics to identify the right placements and messages. Many companies struggle when it comes to online advertising, because they try to use conventional metrics that look at total impressions—an old, meaningless metric online.
A key to Moneyball Marketing is tracking immediate sales response to your marketing. This can be a challenge if your company sells entirely through third-party retailers. You must either track your retailers’ data or set up your own store.
Apple Computer, Nike, and Estée Lauder all sell primarily through traditional retailers but also have their own physical and online stores, providing tons of marketing data. These companies have all grown at rates above their peers over the past 10 years.
Compare that with P&G, the New York Yankees of the ad world, which spends an enormous $9.3 billion a year globally (11 percent of revenue) on advertising, largely in traditional TV. P&G has increased its top line a paltry 2 percent a year since 2007.
Moneyball Marketing won’t guarantee better advertising; you still need marketing talent for that. But it will help you get a better return on your ad dollars. Bring on the geeks.