Marketing and Mathematics

March Madness lasts only three weeks, but Metric Madness goes on all year long.

What is Metric Madness? It's the notion you can run anything by the numbers, and it's become the hottest concept in business today.

One scientist recently predicted that the great discoveries of the future will come from finding patterns in vast archives of data. "The next Jonas Salk will be a mathematician, not a doctor."

I'm not too sure.

Shifting the numbers
Years ago, when I ran a New York advertising agency, our accounting firm showed up every January with the results for the previous year.

"These are your actual numbers," they reported. "Now, what would you like them to be?"

More profits to impress prospective clients, the landlord and employees? No problem, reported the accountants. We'll just shift some of the numbers around.

Less profits to report to the IRS? No problem. We'll do a reverse shift.

But this was nothing compared to what is happening in the business world today.

"Sharp Pencil Lets Citigroup Declare Profit," said a recent headline on the front page of The New York Times. "Citigroup used some creative accounting, all of it legal," reported the Times, "to bolster its bottom line at a pivotal moment."

Then there's Goldman Sachs, which reported a big profit for the year by changing its reporting calendar, erasing the impact of a $1.5 billion loss in December. JPMorgan Chase and Bank of America also used similar strategies to paint rosier financial pictures.

More math as the answer?
Looking at the bigger picture, the entire financial community relied on mathematical models to help them determine risk. Andrew Haldane, Bank of England's director of financial stability, pointed out that the collapse in money markets following the credit squeeze was an event that the models predicted could happen only once every 13.7 billion years.

You might think that the recent financial crisis would have been a warning sign for banks and other financial institutions to back off the metrics and take a more human, holistic approach.
Not so. The answer to a mathematical failure seems to be more math.

Mark Buchanan, writing in Condé Nast Portfolio in April, reported that "Scientists are working to make sure that never happens again." The solution, according to the author: "Physicists are working on massive computer programs to map out entire economies -- and predict what will happen if things go awry."

Furthermore, states Mr. Buchanan: "The technology now exists to go beyond economics to build a massive, complete computer model of the modern economy, from the corner store to the city bank and the Federal Reserve."

(Mathematical models of the universe are like flying cars, always some distance away in the future.)

Notwithstanding their miserable performance in the financial crisis, mathematicians have been emboldened in their efforts to take over the world. Stephen Baker, author of "The Numerati," points out how they are "stitching bits of our data into predictive models."

Humanity as a mathematical model
"The ultimate goal, though, is to build versions of humans that are just as complex as we are -- each one unique. Add all of these efforts together, and we're witnessing (as well as experiencing) the mathematical modeling of humanity."

"It promises to be one of the great undertakings of the twenty-first century," writes Mr. Baker.

Over at IBM, a team of 40 Ph.D.'s, from data miners to linguists, is helping the company develop a database of the skills of its 300,000 employees. "Everything must be turned into numbers," said the head of the team.

One of our biggest complaints about management is their tendency to run companies "by the numbers." Take Macy's, the nation's No. 1 department store.

Macy's is not exactly booming. Last year, the company lost $4.8 billion on sales of $24.9 billion. The New York Times recently asked Macy's chief executive: "Anything you would like business schools to teach more?"

Squeezing organization's life out
Now how do you suppose the chief executive of a company that lost $4.8 billion last year responded to that question? I would hope that he would have asked for business schools to turn out graduates with a little more understanding of marketing. Perhaps they could have helped answer the question, "What's a Macy's?"

But no. This was the chief executive's answer: "In our business, there's not enough emphasis on math. Coming out of college, we really like to have kids who like math, study math and get it. And so I'd like to make sure there is an emphasis on math."

Perhaps it takes mathematical skills to run a major corporation today. But if the CEO loads up the company with similar people, he or she will squeeze the life out of the organization.

If you run a company by the numbers, you'll eventually run the company into the ground. You might be successful in the short term, but never in the long term, as the financial crisis demonstrates.

Left-brain managers are verbal, logical and analytical. Nothing wrong with that, as long as management also takes the remedy to counteract its overemphasis on mathematics.

The antidote to management, to paraphrase Club Med, is marketing.

Almost everything about marketing is the opposite of the typical manager's approach to running a business. Marketing is illogical and definitely not analytical. Marketing is intuitive and holistic.

We're concerned, however, that this message is being ignored by the marketing community, who seem to be drifting from the right to the left -- from a right-brain approach to a left-brain approach.

The emphasis on ROI
A prominent U.S. marketing executive who has held top marketing jobs at Procter & Gamble and other companies said recently: "At its core, marketing is 70% math."

Take the current emphasis on marketing ROI, return on investment. In most cases, to determine the ROI of a marketing program is an expensive exercise with little or no value.

An experienced marketing executive, in my opinion, instinctively knows whether a marketing program is working or not. Does Apple need to waste money trying to determine the ROI of its marketing efforts?

What Apple is doing is working. What Microsoft is doing is not. You don't need ROI numbers to figure this out.

Then there are many situations where the ROI is zero and yet the marketing expenditures are worthwhile. Take leadership, for example.

Nothing about a brand is more valuable than its market leadership. If a brand loses its leadership, it loses its most significant advantage in the marketplace. That valuable position is worth protecting. And advertising is the best way to protect it. Nike in athletic shoes. Heinz in ketchup. Rolex in watches.

Suppose a leading brand spends $50 million a year on advertising. And suppose that brand's market share doesn't budge at all. Was that $50 million wasted? Not necessarily.

Advertising as insurance
Advertising is more like insurance than it is like an investment. What's your "return on investment" of a five-year term life insurance policy if you don't die?

Zero.

But, of course, you don't buy an insurance policy to make money. You buy an insurance policy to protect your family in case you die.

The overall practice of marketing is not mathematically based, although subsets of the discipline may be: direct marketing, research, media selection.

Marketing is certainly not 70% mathematics. It's not even 1% mathematics. (As a math major in college, I don't think I've ever used integral calculus or differential equations or any other mathematical concept in our marketing practice.)

Marketing is a discipline that can only be learned by exposure to marketing case histories over an extensive period of time.

Mathematics is logical. Marketing is not. That's why marketing is so difficult to learn.

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