Extinction by Algorithm
Side effects of #theBlur: Brands at risk of extinction by algorithm
In our research, ‘Premium Beyond Digital’, we have defined the megatrend of #theBlur, whereby categories, occasions and ultimately our lifestyles, are overlapping and blurring into new concepts. These new constructs tend to be not as actionable as the previous paradigms, because they lack repetitiveness and they are not often categorised by a clear beginning and a well-defined end. As we discussed, the notions of work and leisure time are intertwined because of technology, as we keep switching to and from them at any point given in time, throughout the day, and during holidays, weekends, etc. Hence, it is difficult to distinguish clearly when we are actually at work versus when we are enjoying leisure time.
Because of this, certain notions are disappearing or are set to disappear in the near future. Consumers don’t distinguish between online and offline shopping or socializing. Soon, we will have more applications for augmented reality, virtual reality and mixed reality and consumers will not be able to distinguish between one and the other – rather, it will be just a conjugation of reality.
This is very important. Because of #theBlur and because of this phenomenon, the most traditional brands methods and approaches to innovating will have to change. Moreover many of the brands who are less receptive to those changes, risk extinction by algorithm. Before explaining what it means and what it implicates, we need to provide a quick overview of the current promotional mechanics typical of points of sale. Promotional mechanics compromise two macro categories: the first one is seasonal sales, nothing but temporary price reductions occurring at the end of season, with the sole purpose of removing as much stock as possible from retailers’ inventories. They do so by reducing the prices of the products because they need to make space for the new season, or a new line. Everyone is familiar with the sales at the beginning or middle of the year, which is when the fashion, for example, changes from summer to winter or viceversa.
In addition to this, there are on-going promo-mechanics, which are almost fully financed by brand owners, and are very welcome by the retailers, and have the objective of increasing the rotation of the products and points of sales by creating temporary reasons for buying the products. The notion is, that by changing the value equation of the product, the consumers will try them and eventually adopt the product within their repertoire of choice. Of course, some of these promotions also have the objective of loading the shopper, so consumers anticipate their future shopping trips and hence are less likely to buy products from the competition. So, to this category belong temporary price reductions, products with gifts, or promotional activities with rewards, but also Valentine’s Day and Xmas promotional efforts. Moreover in the latter category, belong also ‘buy three/ pay two’ type of promotions or extra discounts for multiple purchases – e.g., buy 1 and get the second with 50% discount – aiming at shoppers who have certain familiarity with our promoted products already. The importance is, of course, that despite the brand positioning, consumers who are more mindful of convenience and pricing very often buy on promotion because they think it is better value. These consumers also often won’t repeat unless there is another promotion. This is why, while these promotions are very good for building audiences, they are often problematic especially when they are not accompanied by strong brand-building activities.
Those promotional dynamics are a combination of a dual objective. On one hand, by reducing the price and reducing the size, they are also reducing the risk for the shopper and therefore promoting the consumption of a new product as a trial. On the other hand, they trade off a full margin purchase for a lower budget purchase with a bigger transaction size so that the consumers who are returning at a certain period in time, can anticipate the purchase and stay within the same franchise. The latter creates value for the consumer, however the only value it creates for the producer is in terms of measuring market share. It doesn’t generate long term loyalty but it looks better in the performance and performance reviews for the managers and marketing managers.
As stupid as it may sound, these promotional mechanics are developed for human psychology and work better on human psychology. But, with the smartification of devices, a new category of products is emerging: virtual assistants, which can do a number of things for us, from booking flights, to ordering products, buying media content or sharing our pictures. In the Internet of things, they are responsible for activating certain procedures and processes, so we can, by issuing a specific command, trigger an event in our connected home. For example, in the summer, we could start the air conditioning at home once we are on the way back from work using a simple voice command. Of course, this could be completely automated, so virtual assistants and algorithms can function autonomously or triggered by events/ commands.
In #theBlur reality, because of the increasing number of choices and the confusion that #theBlur can generate within consumers, consumers will decide to delegate more and more. Even some purchasing choices will be delegated: because they can be executed by a program, because it’s convenient and because it reduces complexity. Let’s assume you have a party at home and you forgot to buy the wine. You don’t want to stop at the wine store because you have the option to buy the wine online and have it delivered to you while you are driving back home. From a pure shopping approach, as a consumer you have the option to ask for a specific type of wine, which is perfect if you want your guests to enjoy a specific brand of Prosecco or Cava. Sometimes, you might decide that for you, any white wine within a specific price range works perfectly. Other times, you might just want to rely on your previous purchase history to ensure that you get delivered a product that is part of your repertoire and that you have tried and enjoyed. So you would ask your assistant to buy for you either a Cava Freixenet, or a White wine between 8 and 12 euros; or one of the prosecco I have ordered in the past. Because of these choices, we are approaching a world where by mining our previous transactions, preferences and relying on big data, algorithms will be proposing certain shopping alternatives, better choices or more convenient choices depending on how much we care or don’t care for a category. Therefore, while we might be wine savvy, we might decide for the long term, it is a category we simply don’t understand and we want a brand at the best possible value for the money. Hence, our repertoire of brands in a specific category might actually be at the mercy of an algorithm. Because of this emerging solution, possibility and emerging shopping pattern, the way the brands will have to adapt and identify new promotional approaches. This is due to the fact that promotion mechanics, which rely on human psychology for driving a purchase in store, will not work with big data machines or artificial intelligence-based algorithms.
This is why we talk about extinction by algorithm. The brands that have a strong pull and that consumers order by calling their names – for example, in lieu of a Vodka martini, an Absolute martini or a Grey Goose martini – and brands who have a strong relevance, recognition and brand equity in their categories, will be still far away from any algorithm induced risk. But brands who rely on promotional activities to generate volumes, and who might generate sixty, sixty-five, seventy percent of their yearly volumes during one promotional window, will have to adapt and redefine themselves based on those new emerging purchasing dynamics. Otherwise, by simply doing a temporary price reduction at a given point in time, they will not be able to make a proposition which is compelling enough for our big data-based algorithm. Of course, there isn’t one ready-made solution for those brands and there isn’t just one solution – this is an emerging phase and a lot of new processes will have to change. A certain level of sophistication in understanding those algorithms and in understanding how to work with them, will also have to be developed. So, dynamic pricing, dynamic redefinition of promotional activities, and working with online retailers to develop those promotions will become critical for the survival of most. Of course, the risk is still very high, due to the vertical and horizontal integration which is happening. Not only with wholefoods, but in buying products and technologies in IOT, it is also clear that certain retailers, which also serve as marketplaces and purchasing assistant developers, are going to always try and promote their own brands before anything else.
Therefore, as a brand at risk of extinction by algorithm, there is a route of being true to yourself, by claiming: “We still want to have a vision of selling sixty, seventy, eighty percent of our volume during a promotional window because we have a value convenience trend.” This route entails adaptation to the up and coming, algorithm centered, promo mechanics. Moreover, there is also an alternative solution, claiming, “Okay, we might want to sell less in the short term, but we also want to build a compelling and relevant story for our shoppers so that we can escape this corner and become a true brand – maybe even a loved brand.”