Persuasive Advertising - J. Scott Armstrong [14]
You are essentially faced with the choice between two strategies.
Low price: keep your price low, which causes your competition to suffer a substantial loss.
High price: choose a higher price that produces higher profit for your firm, but which also allows the competition to prosper.
You then calculate the present value of the total profits expected for your firm over the next five years, as well as for the competitors (“Other Guys”). You determine the following results for both strategies:
At this point you must choose your strategy, either a low price or a high price. Which strategy would you choose, a low price or a high price?
The above description is one of a series of lab experiments. In all, 1,016 subjects (management students from various countries) made pricing decisions using variations of the above situation. When information about the competitor’s profits was provided, over 40 percent of the subjects ignored the ultimate objectives (that is, maximize profits) and instead chose a strategy designed to beat or harm the competitor. Furthermore, in a field study that examined the performance of 20 large U.S. firms over a half-century, those with competitor-oriented (market-share) objectives were found to be less profitable and less likely to survive than those whose objectives were directly oriented to profits (Armstrong and Collopy 1996). A ten-year follow-up located an additional 12 studies and all supported the original findings (Armstrong and Green 2007).
Similar results have been found for advertising decisions. In one study, 57 subjects were asked to make “advertising spending decisions as marketing managers of a medium-sized manufacturer selling in mature markets,” and to assume they were committed to remaining with the company for five years. The advertising decision involved high (competitive) or low (cooperative) budgets. The payoffs were constructed so that cooperative decisions had much higher profits. Of the 57 subjects, 78 percent focused on beating their competitor—and thus earned lower profits (Corfman and Lehmann 1994).
Turning to non-experimental data, an analysis of 29 winners of the 1993 EFFIES awards found that 38 percent of the marketing objectives were focused on beating competitors. This suggests that many advertising experts favor competitor-oriented objectives (Moriarty 1996).
I expect that the following example is common. In 1990, when setting objectives for marketing a new dish soap, Persil, in the United Kingdom, Lever acted as if its goal was to defeat Procter & Gamble’s Fairy brand. Lever set a goal to achieve an 18 percent market share. In response, P&G vowed to get Persil off the shelves within a year, although Persil tested initially as a superior cleansing product. Both firms increased their advertising levels. By 1992 Lever had failed to reach its objective. More importantly, it had failed to make a profit. According to an executive from J. Walter Thompson (Lever’s ad agency), “What we have succeeded in doing is creating the ultimate spoiler operation, where nobody makes any money” (Ind 1993). Lever should have focused on making money for itself.
Why do many managers cling to their beliefs that market share is a useful objective? I attribute this to folklore—a belief in techniques and concepts without any experimental evidence of their effectiveness, simply because others are using them. Managers’ experience is likely to lead them astray. One chief financial officer, frustrated over his firm’s focus on market share, told me that as best he could tell, the explanation for the competitor orientation was that “the other guys started it.”
Folklore applies to academics as well as to managers. At a presentation in 1992, I asked