‘Short-term targets create perverse incentives that hurt businesses’

The rush to show immediate return on investment encourages tactics that ultimately reduce a brand’s ability to grow profitable sales, argues consultant and keynote speaker JP Hanson.

short-term long-termPaul Doumer arrived in 1897 in Hanoi, Vietnam, as a man still sore from the sting of defeat. The 40-year old French government worker’s recently failed income tax scheme had forced him to resign as minister of finance. Now the Governor-General of French Indochina, he had been tasked with setting up an infrastructure befitting France in the colonies.

Determined to make up for his failure, he started an ambitious project – to lay more than nine miles of sewage pipes beneath the French parts of the city. Unfortunately, he inadvertently created miles upon miles of cool and dark rodent paradise, a veritable rat haven where the critters could breed without fear of predators. The furry invaders brought with them the bubonic plague. Clearly, something had to be done.

Monsieur Doumer’s first attempt at a solution was to enlist professional rat hunters. As many as 20,000 rats were killed daily but they failed to make a dent in the population, so Doumer invited any enterprising civilian to get in on the hunt. A bounty was set at 1 cent per dead rat. All one had to do to claim it was submit its tail to the municipal offices.

In France, the idea was met with applause. Tails were pouring in. French ingenuity had triumphed again.

Yet the rat population continued to go up. After a brief investigation, it turned out the hunters were breeding rats for their valuable tails. Entire rat farms were popping up.

Perverse incentives

The bounty had turned out to be a perverse incentive – one that has an unintended and undesirable result, contrary to the interests of the incentive makers. In marketing, the same perverse incentive can often be said to apply to short-term, ROI-focused tactics.

In the headlong rush for short-term results, marketers have become obsessed with activation, meanwhile forgetting the fundamental role of brands – to make consumers want to buy them to the extent that they don’t have to use discounts. In other words, to create mental availability in the mind of the customer and separate the product or service from the generic equivalent.

READ MORE: Nationwide: The term ‘performance marketing’ is fuelling short-termism

Of course, brand and activation work in synergy, as the iconic JWT planning guide from 1974 taught us and IPA researchers Les Binet and Peter Field have proven time and again since. Getting the balance right between long-term brand-building and short-term sales activation, between creating memories and activating them, is crucial for maximum commercial effectiveness.

By now many of us are familiar with the 60:40 rule of thumb; that is, to put 60% of the advertising budget into the long-term and 40% into the short-term. But it’s still not even close to what the average brand will end up doing. For a multitude of reasons – CMO tenure (or lack thereof), venture capital demands, strategic shortcomings, the list goes on – it is far more likely to over-invest in immediate returns and bottom-funnel conversions.

The problem with the approach is that while long-term strategies always provide short-term results, short-term tactics practically never have long-term benefits. In fact, due to their nature, they tend to erode brand equity. This means that in the quest for sales uplifts, the very foundation of long-term sales growth is screwed and the very point of the brand itself lost.

Nowhere is this more clearly on display (bad pun intended) than in the world of what so many call “digital” while actually meaning “online”.

Perils of short-term targets

No matter your personal allegiance, it’s impossible to deny the activation potential of such channels. Big data promises brands and agencies the ability to target potential customers with greater precision than ever. The internet is, by and large, an ideal channel for distributing information on products and prices, and combined with mobile it can drastically hasten the customer journey.

With purchases only a click away and a smartphone practically in every pocket, activation has never been more efficient. In a surprise to probably no one, purely online brands are almost twice as likely to be short-term focused as purely offline brands.

While long-term strategies always provide short-term results, short-term tactics practically never have long-term benefits.

But, as IPA research shows, measuring success in the short-term leads to numerous important false conclusions about effectiveness. ROI-focused activities target consumers with established affiliations to the brand and imminent purchase intentions at the cost of brand growth, long-term base sales and margins.

In the research, very large market share effects were reported in only 3% of the analysed case studies of short-term campaigns. For case studies exceeding 30 months, it was 38%. Long-term case studies (six months or more) drove a rather significant 460% more market share growth than short-term case studies did.

This weakness in short-term campaigns, at least Binet and Field argue, is ignored because of activation effects: 65% of short-term case studies generated very large activation effects, as compared to 33% of case studies running three years or more. If one, for reasons explained above, measures success in the short-term by activation effects, it would appear as if short-term campaigns are highly effective. However, look at the bigger, long-term picture and they are revealed to be highly ineffective.

READ MORE: Three-quarters of marketers prioritising short-term tactics over long-term strategy

Put differently, the solution has increased the number of tails coming in, but against the overall problem the efforts remain ineffective at best and detrimental at worst.

It has become fashionable to quickly point the blame at self-proclaimed digital gurus and their ilk, but to be fair they are merely the rat farmers of the analogy. Marketing channels tend to fall on one side or the other of the divide between short- and long-term. When it comes to online, short-term is its forte. Online metrics are therefore, as we all know, strongly oriented to it.

As Binet and Field point out, attempts to “project forward” short-term effects to long-term growth show an alarming misunderstanding of the very different nature of long-term advertising effects.

But digital agencies are only working off briefs. As destructive to brand equity as the agency efforts may be, they are simply offering supply. It is up to brand-side marketers to change demand.

If their brands are going to avoid perverse incentives, let alone thrive, they will absolutely have to.

JP Hanson is the chief executive of international strategic consultancy Rouser and a marketing keynote speaker.

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