“We are born bargain-hunters”
Online retailers offer low prices and individual sales advice. But what kinds of data are firms interested in and when do customers provide them? Professor Manfred Schwaiger and Antje Niemann of LMU‘s Institute for Market-Based Management explain the uses of big data.
Why is “big data” set to become an important trend in the next few years?
Manfred Schwaiger: Companies believe that by exploiting big data they can extend their profit margins. According to a recent study by Ernst & Young, based on the assumption that firms make the best use of the data they possess for commercial purposes, big data has a potential market worth of 325 billion dollars annually.
What sorts of data are commercial firms interested in?
Schwaiger: Up to now, utilization of customer data has been restricted to the analysis of sales slips. Based on an examination of all receipts, one could work out how much of each product had been sold, but not who had bought what. Then the supermarket manager just had to decide whether to shelve the most popular items close together or place them far apart so that the customer was confronted with other products that might be of interest to her. Nowadays, much more intensive analyses are possible. Thanks to the internet and the increasing utilization of mobile devices, a torrent of data of all kinds is available, amounting to 6 zettabytes – that’s a 6 followed by 21 zeros – per year.
How does one go about analyzing such masses of data?
Schwaiger: The procedures that are used have been well documented since the late 1970s. In those days, data were not easy to come by, and data processors were nothing like as powerful as they are now. The rapid development of digital technology since then has now made it possible to make use of enormous reams of data – and not just in business, as the ongoing debate over electronic data retention demonstrates.
How intensively do firms mine big data? How much do companies know about their customers nowadays?
Schwaiger: Let me cite just one example from the US. Target, a retailer, wanted to reach a specific subset of customers, namely pregnant women. In marketing terms, pregnancy is interesting because, when women are pregnant, their needs and consumption patterns change. It makes sense to identify such customers as soon as possible and politely suggest that they should buy diapers and all the other things that babies need from Company X. So Target started a Baby Program, which women could sign up for. The idea was that the Marketing Division could then determine what products expectant mothers bought at different stages during pregnancy. By comparing these data with data collected from other female customers, Target discovered, for instance, that pregnant women purchased more vitamin supplements and odor-free hand lotion. Based on these findings, the retailer was able to target advertising for such products to the participants in their Baby Program. In one case that became public, this led a parent to complain to Target about the ads for diapers that had been sent to his daughter, who was still at school. The irate father was unaware of what Target already knew – that his daughter was pregnant.
From a marketing point of view, the strategy was certainly successful. But how do customers feel about the wholesale collection and evaluation of detailed information on their personalities, lifestyles and consumption patterns?
Schwaiger: Basically, firms are trying to minimize the losses incurred by broad-based advertising, much of which is currently wasted: I can either send advertising to everyone or I can try to reduce the size of the recipient population by applying appropriate filters, so as to generate a list of addressees who are more likely to respond. This is perfectly obvious on the internet. You visit a New York hotel’s website today, and when you look up the weather forecast tomorrow, you find ads for hotels in New York listed in the margin.
Niemann: Or suggestions that you never even considered might be of interest to you.
Just like on Amazon, where I can see what other people are reading?
Schwaiger: When you go online today, you are automatically shown what other articles were purchased by customers who bought the same item as you bought last time. It would be equally possible to advertise on social networks things one’s friends have purchased. This could be the next stage in E-commerce: consumption that is socially displayed on the internet. That is much more persuasive than knowing what is being bought by people one otherwise knows nothing about.
Is the era of the thoroughly transparent customer already with us then?
Niemann: The companies that I spoke to in the course of my research assured me that they store data on purchases separately from their customers’ personal data. They are not interested in what detective novels Frau Meyer has read. They just want to know who is interested in crime novels, in order to be able to target their advertising more efficiently.
Based on surveys of young consumers, we know that they value the fact that, for example, Amazon is able to provide them with tailor-made recommendations. When they have nothing else to do, they visit the website and have a look at the books that Amazon suggests might interest them. In the past they might have gone to a local bookshop for tips, but of course no bookseller was in a position to remember the titles of the last 50 books the customer bought, and enjoyed.
So we should just accept that our data are out there and put up with the fact that they are being mined?
Schwaiger: If one pursues the current development to its logical conclusion, we would end up receiving only advertising that was actually of some use to us. That would certainly make our lives much easier. After all, we constantly complain that we are overwhelmed with irrelevant information.
Niemann: A start-up in Berlin has already incorporated this into its business model: The firm asks each customer to answer a set of 20 or so questions related to his or her taste in clothes: Do you like striped trousers? What style of shirt collar do you prefer? When the custom completes the online questionnaire, they send out a number of complete outfits on approval.
And it can never again occur to him that he might like to wear a pair of plain or checkered trousers?
Niemann: The target group here consists of men who do not like shopping for clothes – and they seem to be very pleased with what the firm has to offer.
Schwaiger: Eighty percent of customers believe that companies could be much more profitable if they make use of the information they have acquired about their clientele. Consumers know that their data are valuable. Whether they regard the use of their data as fair or not is an interesting question. Maybe they would just like to get something back for it.
People who have electronic loyalty cards that can store data are offered discounts in return.
Schwaiger: We are all born bargain-hunters. Everyone likes to get anything cheaper than the next man; everyone likes to get something for nothing. If the normal cost of a night at the cinema is 10 euros and one can get a ticket for 8, that counts as a gain.
Digital technologies make it possible for firms to obtain and process data in real time. What new possibilities does this open up?
Schwaiger: From the company’s point of view, the object is to recognize when the customer is considering whether to make a purchase. If she is looking in the window of a coffee-shop franchise, one would like to nudge her to come in and buy a cup of coffee. Vouchers sent by mobile phone work well in situations like that. In this case, the firm attracts another customer and the customer profits from lower prices.
Do you see any risks at all in the ubiquitous exploitation of personal data? Are there no limits?
Schwaiger: I would regard the use of big data by health insurers as a critical issue, for example, because it essentially represents an attack to the solidarity principle. The insurance industry is not based on the coverage of each particular individual’s personal risk. It is simply inadmissible that those with a higher level of risk should be ineligible for coverage and are left to look after themselves. That would be undesirable from the point of view of social policy. And in the end, we don’t want to be as transparent as all that. Privacy is a cultural accomplishment of which we are rightly proud.
Professor Manfred Schwaiger is Head of the Institute for Market-Oriented Management (IMM) at LMU.
Antje Niemann is on the research staff of the IMM. Her primary area of interest is the use of big data in marketing.
Big Data Conference 2015
LMU is hosting the Big Data Conference 2015, which takes place on 13. March. Among the topics on the agenda are Practical Aspects of the Utilization of Big Data, Mobile Targeting and Social Media Marketing. The Conference provides a forum for dialog between academic researchers and professional practitioners. The speakers include Jean-Pierre H. Dubé (Professor of Marketing at the University of Chicago), Professor Xueming (Temple University, Philadelphia) and Professor K .Sudhir (Yale University, New Haven). The Conference is sponsored by Ernst & Young, DLA Piper, the HypoVereinsbank and TNS Infratest.