Unleashing the power of algorithmic marketing

Unleashing the power of algorithmic marketing
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A massively disruptive transformation is taking place at leading companies – a disruption that could rewrite the entire traditional marketing canon.

Instead of gut instinct and experience, companies are turning to big data, algorithms and automation to win and retain customers.

Algorithmic marketing is an approach for scientifically managing a full range of marketing issues. Issues that include targeted offers, communications and pricing.

It employs advanced analytical methods, including predictive statistics, machine learning and natural language text mining. It harnesses data such as customer location and behavioural information, along with powerful computing systems to match customers with context-sensitive products and services.

It also helps to optimise customer processes and experiences and plays a role in core operational processes like call routing, payment processing and risk assessment.

There are already some signs that suggest the algorithmic marketing transformation is underway, especially in industries that rank high in terms of big data value potential, such as financial or information services.

As algorithmic marketing takes hold, it is likely that big winners – and potentially even bigger losers – will emerge in the near future.

In North America, Amazon.com grew 30 to 40%, quarter after quarter, throughout the recession, while other major retailers shrank or went out of business. How Amazon achieved these results may be surprising.

From 2006 to 2010, Amazon spent 5.6% of its sales revenue on IT, while rivals Target and Best Buy spent 1.3% and 0.5% respectively.

The results of this spending and focus include:

• Sophisticated recommendation engines that deliver over 35% of all sales

• Automated email/customer service systems (90% are automated, versus 44% for the average retailer)

• A highly efficient supply chain that has reduced Amazon’s cost of goods sold by 3 to 4%

• Dynamic pricing systems that crawl the web and react to competitor pricing and stock levels by altering prices on Amazon.com, in some cases every 15 seconds.

A more recent and perhaps even more ambitious example of the move towards algo marketing is Citibank’s announcement that it will partner with IBM to explore how IBM’s Watson (an artificial intelligence computer system capable of answering questions in natural language and quickly processing huge amounts of data) can help analyse customer needs and process vast amounts of up-to-the-minute economic, product, and client data.

Over time, algorithmic marketing will become a new type of corporate asset that cuts across business units and functions and determines the success – and perhaps the very survival – of companies.

Leaders need to start thinking now about whether they have the right strategy, technology, and talent to exploit its full potential.

There are three imperatives for organisations to thrive: 

• Recruit and retain the best technical talent. In order to successfully hire and retain top mathematicians, computer scientists and other technical experts, organisations must help them thrive in an environment that has not traditionally leveraged these skills. The ability to compete for and retain this talent will likely form a key competitive advantage, since it is likely that these skill sets will be in short supply during the next three to five years.

• Leverage big data and algorithmic marketing to drive innovation. How can your organisation leverage algorithmic marketing to make better decisions faster and manage the business in ways that weren’t possible before? One leading global credit card issuer built models to predict the possible reasons for calls made to customer care, based on a customer’s recent product holdings, balances and multi-channel interactions. The company leveraged this information to equip their IVR (Interactive Voice Response) with the information and options most likely to satisfy the customer, which minimised live call handling while increasing overall customer care satisfaction scores.

• Build the infrastructure required to enable algorithmic marketing and innovation at scale. Firms must invest in creating integrated information systems that not only transcend organisational silos but also align with suppliers and partners.

Organisations need to introduce automated computing systems and algorithms capable of delivering real-time products and services.

Big data and intelligent, self-learning algorithms offer the potential for companies to conduct controlled real-world testing in order to minimise errors of judgment and interpretation.

Experimentation can help managers distinguish causation from mere correlation, thus reducing the variability of outcomes, while improving the organisation’s financial and product performance.

As business and marketing leaders grapple with these challenges and opportunities, they must realise that there isn’t really a choice – sometime soon, they or one of their key competitors will fully unlock the power of algorithmic marketing and upset the fine competitive balance of the industry.

And the best way to benefit from this kind of disruption is to be that pioneering organisation.

Joshua Goff is a senior expert at McKinsey & Company in Tokyo and will be speaking about global marketing trends at the ADMA Forum on August 8. 

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