October 26, 2008

The Five Ways We Generate Demand

Each business model has unique dynamics. You can find low prices at Wal-Mart, or you can buy exotic items at Neiman Marcus.

Within each business, however, there are five ways that we generate demand. We'll rank each method on the basis of overall profitability..

Method #1 = Organic: There is nothing more profitable than organic demand. When you want to purchase an MP3 song and you go straight to Amazon.com or iTunes to purchase the song, you are generating organic demand. It's awfully difficult to generate organic demand, and we spend almost no time as marketers figuring out how to encourage customers to do this, a shame.

Method #2 = Social: Here's a method that we're getting better at. Social shopping combines word of mouth and social media and any viral strategies that essentially have no marketing cost. Whether it is an employee blog from Patagonia or an iTouch review on Crutchfield, customers are doing the marketing for the marketer. Again, this is a highly profitable way to generate demand, but it is awfully difficult to get customers to do the work for you! Overall, we're terrible at this, aren't we?

Method #3 = Algorithmic: We're all heading down this path, and we're all going to rue the day we gave control of our business to algorithms. Catalogers are miles ahead of other brands on this one, yielding control of customer acquisition to co-op statisticians while at the same time working on SEO strategies that game Google into a favorable position. Small online brands exist almost entirely because they can game Google. The more that companies figure out how to game algorithms, the less effective this form of demand generation becomes. The algorithm forces us to do things we wouldn't normally do. We have to write code in a certain way to make sure that the algorithms give us a fighting chance. We beg for links on other sites so that the algorithm likes us better. We change our behavior to make good with an algorithm. Long-term, this is a bad thing, because as computing moves into the cloud, we continually lose control --- the cloud becomes a self-organizing force that dictates our fate.

Method #4 = Advertising: Here's where marketers get to have their say, eroding profit margins while creating demand. Paid search, e-mail marketing, portal advertising, catalog advertising, postcard marketing, radio/television/newspaper advertising, you name it, it falls into this category. The goal, of course, is to get the customer to buy something that the customer wasn't necessarily planning on buying, or to make the customer aware of options the customer didn't know she had. This style of advertising is dying. Customers have been lied to and cheated and manipulated and over-hyped for so long that they've become downright grumpy about advertising. Still, this is what we've been taught, so we continue to execute it, and we'll continue to execute advertising as long as Wall St. demands that sales increase every single quarter.

Method #5 = Begging: Oh, we're really good at this, and we're really good at integrating advertising and begging! Select items up 60% off, or free shipping this week only (even though there will be a free shipping promotion starting mid-week next week), or take 20% off your order of $150 or more, or the biggest sale of the season, we know how to combine words and discounts and promotions to create demand. Of course, begging has limits, because we don't beg on a 1-to-1 basis, do we? We "market" a promotion to a "target audience", causing customers who would have ordered via any of the prior four methods to take advantage of begging. We also teach our customers to expect us to beg to them, ruining e-commerce.

These days, Multichannel Forensics projects focus on the five methods of demand generation. Channels seem to be becoming less important, while migration of customer activity from begging to organic or organic to begging becomes essential to understand. We've been repeatedly manipulated to believe that customer interaction with channels is "where it is at", when in reality, our ability to manage demand across these five dimensions matters more, and is more actionable.

A simple scorecard is all one really needs to understand how the business is evolving.

2008 2007 2006 2005 2004
Method #1 = Organic $18.5 $18.4 $16.9 $12.7 $9.4
Method #2 = Social $1.6 $0.8 $0.5 $0.3 $0.1
Method #3 = Algorithmic $19.2 $17.6 $14.2 $9.5 $5.2
Method #4 = Advetising $35.4 $46.9 $49.3 $53.4 $57.3
Method #5 = Begging $14.5 $9.2 $8.8 $9.0 $8.5
Totals $89.2 $92.9 $89.7 $84.9 $80.5

2008 2007 2006 2005 2004
Method #1 = Organic 20.7% 19.8% 18.8% 15.0% 11.7%
Method #2 = Social 1.8% 0.9% 0.6% 0.4% 0.1%
Method #3 = Algorithmic 21.5% 18.9% 15.8% 11.2% 6.5%
Method #4 = Advetising 39.7% 50.5% 55.0% 62.9% 71.2%
Method #5 = Begging 16.3% 9.9% 9.8% 10.6% 10.6%

The key is to understand how each method of demand generation is evolving. In this case, 2008 is a year of heavy discounts and promotions, significantly increasing the "begging" demand generation channel. Notice how customers are leaking out of advertising, into algorithms.

The database marketer measures the long-term value of customers purchasing from each demand generation method, using Multichannel Forensics to understand how customers migrate between each method. We want to understand the long-term trajectory of the brand on the basis of these critical methods of demand generation.

A final note --- we need to become much, MUCH better at figuring out how to generate demand via organic or social methods.

Ok, time for your thoughts. Do you view the world in this manner, or do you have a different method for thinking about demand generation?

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