Killer marketing tricks Amex, Apple and Domino's use on you - Rory Sutherland

Rory Sutherland: An invention isn't an innovation until it changes behavior. And you can invent anything you like, but if you can't get anybody to adopt it, it's an invention, but it's not an innovation. And what was selling steam engines to mine owners? And the purpose of the steam engine was to replace the horses they used to walk round and round in circles draining the mines so that miners could go in and effectively mine coal slate coal whatever without drowning. What he realized is that you could you as an engineer you could talk around you know the calorific capacity of the boiler or the length of the piston stroke or whatever and these people didn't want to know. So Watson and Bolton amongst themselves said, 'Well, what do these people really want to know before they're prepared to buy a steam engine?' They said, 'They want to know how many horses they no longer need to feed if they buy a steam engine. How many horses can I get rid of if I buy the steam engine?' So what went out and invented a unit we still use today, which is called the horsepower. And the reason it's not named after a famous scientist like the M or the Newton or the Koulom or the Watt for that matter or Celsius or anything of that kind is because it's a marketing unit. It was invented for marketing purposes because he could then go and say if you buy 25 horsepower steam engine you can actually get rid of 75 horses cuz I think the horses worked in shift. So it does the work of 25 horses but it does it 24 hours a day. So you can now get rid of of 75 horses. And these people would go scribble, scribble, scribble, scribble, scribble. Cost of horses, cost of feeding horses, cost of looking after horses. And you know, on the back of an envelope, they could then go, we'll have two of those. By the way, it went even further than that. I mean, the industrial revolution was a marketing revolution every bit as much as it was an industrial revolution because there was no point in being able to produce things in abundance if you couldn't create corresponding demand. So, you know, one of the things about the 18th and 19th century in England was it was an absolutely pioneering period in terms of how people marketed things and that included the steam engine where what and Bolton would go to a mine owner. Now, let me get this right. Some people were already using Nukeman engines which were less efficient steam engines than the Watt engine. and Watt and Bolton would go along to the people who are already using these inefficient steam engines and this is how they priced their their own steam engine. They said, 'We'll supply it for free. You pay us a third of the money you save on coal.' So it was literally hardware as a service. Bear in mind this was 1775. I mean years later Rolls-Royce started charging airlines for jet engines in the same way. Effectively, you pay us for every hour the engine is in service. Now what was ingenious about that was of course it aligned the interests of the people selling the steam engines and the people owning the mines because the people in the country where coal was most expensive most needed to save money on coal that was Cornwall where there were tin mines quite a long way away from any available coal field. So coal was more expensive there. And so the first Watt engines tended to be installed in places where coal was most expensive which meant the mine owners saved more money and Watt and Bolton made more money. So they were actually capturing the upside. Whereas if all you done is said, 'Yep, it's 100 guineas for a steam engine.' You wouldn't been capturing any of the upside.

Rory Sutherland: So I call this reverse benchmarking. In other words, you look at all the metrics that everybody cares about in the category. You find a metric that's been completely and ridiculously neglected and you double down on that thing. Now I first came across this in Will Guidara's fantastic book, Unreasonable Hospitality. He goes to the number one restaurant in the world. All of his team say, 'We ought to copy this. We ought to do that thing with the napkins. I really like what they do in the bathrooms with the scented whatever. Let's copy that.' And Guidara goes, 'Not going to copy any of that.' Because two, one, we can't afford to. And two, they're already doing it. What I want to know from you is what out of this evening at the world's best restaurant, a Michelin star restaurant somewhere. What was a bit disappointing? What was a bit meh? And they said the coffee was a bit average, you know, it was nothing special. And the beer drinkers, probably the chefs who'd gone along, got treated really crappily, shabbily compared to the wine drinkers. So he goes back to his own restaurant and he appoints a coffee sommelier and a beer sommelier. And he says, 'Your job is not just to benchmark against these people, it's to hit it out of the park.' Now, if you think about it, taking something that's bad about the category, not not saying we need to raise our level to the category average, but instead doing it spectacularly well, something that nobody's expecting. That was what Apple did, I would argue. Okay. That's what Bies did. I don't know if you're Bies. Where where are you in the US? Okay. It basically started with an insight around women's restrooms. Now, you could have just had averely clean women's restrooms and you would have benchmarked. No, no, no. They're like the bloody hall of mirrors at Versailles, right? I mean, I haven't been in them, but the men's restrooms are pretty good, but the women's ones are apparently sensational.

Rory Sutherland: There's a wonderful story I always tell which is Richard Thaler the Nobel prize winning economist and behavioral economist the author of Nudge. He once spoke to a board of about 10 people very large company. And he goes to the eight heads of the largest divisions of this company and he asks them all simultaneously a question. Would you take a decision if it had a 50% chance of increasing your profits next year by 50% and a 20% chance of reducing your profits by 30%. And six out of the eight of them said no. And Thaler goes back and says well you know you're all good enough mathematicians I assume to realize these are highly favorable odds. to a gambling man, you know, this is a very very good bet and yet you declined to take part. Why is that? And they reply six out of the eight of them uh because uh 20% of the time or 30% of time I'd lose my job. And then the interesting thing happens which is the chief executive is sitting at the end of the table and looks aghast at the eight people and goes but I want all of you to take those odds because net net in aggregate we'd almost certainly end up massively better off. Yes, two divisions, one division might have a slightly disappointing year but four of them would perform spectacularly. And you realize that the way that businesses are structured, as you push responsibility and accountability further and further down the organization, they become more and more risk averse and they become more and more uncertainty averse. So they would prefer a definite 5 to 10% to a probabilistic a 50% chance of 50%. And what happens then is that you fundamentally you become highly conservative. You're more worried about downside avoidance than you are upside opportunity. And as a result, obviously both innovation and marketing, I would argue, are fat tailed activities where 10% of what you do is probably more valuable than everything else. You know, you can't tell in advance which 10% it's going to be. They are processes of exploration and discovery. And what you do is you get rid of the discovery layer in the pursuit of efficiency. And in the short term it looks like a great idea but in the longer term it it proves fatal I think because you've lost the capacity to adapt to reinvent to reposition in pursuit of the occasional um the occasional breakthrough.

Rory Sutherland: Everybody was looking at it as if it was purely cannibalizing an existing market. Now what the economists and what the Harvard Business Review would say is that they achieved this through lower prices. I don't think they did. I don't think Uber's actually reliably cheaper necessarily. Okay? I think they achieved it through better psychology. And the example I had of what I call these are the sort of fat tailed Jeff Bezos puts it very well. He says, you know, in baseball the most you can score is four, but in business you can hit a thousand. And I think that the fear of uncertainty and the and the unwillingness to experiment in business is causing people to endlessly try and sort of hit singles and at the expense of occasionally trying to hit a thousand.