Alchemy in Marketing With Rory Sutherland | The Strategy Sessions Podcast

[Music] Foreign. Welcome to the Strategy Sessions. My name is Andy Jarvis. I am the host of the show and the Strategy Director at XML Marketing. I am absolutely confident that no one who listened to this episode today is here to listen to me. You've all come to listen to Rory Sutherland. If you're thinking, "I don't know who Rory Sutherland is," strap yourself in and get ready for a wild ride.

Rory is one of the most entertaining guests I've ever had on the podcast. Um, his bio will tell you he's a TED talker. Link in the show notes, obviously. He's an author of the book *Alchemy*, a best-selling book *Alchemy*, and he's the Vice Chairman at Ogilvy UK. But none of that really makes sense until you've heard him talk about a subject which is really behavioral psychology. Um, and I love this subject, and I love listening to Rory talk about it, um, because he says things like this: "Because value is in the mind of the customer, this is what the Austrians understood. The Austrians understood that marketing was as much a proper value as manufacturing was." Also, like this: "When weird succeeds, it really, really succeeds. We're back to the realms of penicillin, then, aren't we? In terms of things like that." But not just penicillin, but the wolves, Viennetta. And he's the only person on the podcast, I think, who's ever mentioned the Bible and *Das Kapital*. Um, possibly the only person in the world who's ever mentioned those two books together in the same sentence as well. He is also probably a self-confessed heretic. Now, heresy is not much of a crime these days, um, although it would have possibly had you burnt at the stake, um, or drowned a few hundred years ago. Um, but we talk about that, and, you know, Rory's views of marketing, um, might be heresy to some people. So, interesting, eye-opening. I really hope it's only part one because there were so many subjects that we didn't even get into touching on. Uh, so I am going to pass the Rory and see if he'll come back and do a second part. I'll keep everything crossed. Let me know what you think of this episode. My details are in the show notes. Um, any questions, any thoughts, bang them onto me. Otherwise, listen, just put your earphones in and have a listen to Rory Sutherland talk about, well, a bit of everything, really. This one is an exciting guest for me. Um, I'm really pleased and proud to announce that I'm joined by Rory Sutherland on the Strategy Sessions. Rory, how are you?

It's a pleasure to be here. Absolutely fantastic. Thank you very much indeed.

Well, I am not going to read a bio for Rory, but if you haven't seen his TED Talk, it's in the show notes. He's been on, uh, *Secret Diary of a CEO* with Steve Bartlett and very similar podcasts, and he's always one of the most entertaining and enjoyable guests you could ever have. So this is, this is a great day for me, but more than that, it should be a great day for you. So let's start by, instead of picking Rory's brains and talking about humans and how strange we are, that's what I think we're going to talk about today. And I wanted to start, Rory, by saying you wrote a book called *Alchemy*, and one of my favorite stories in there is about the lionfish. So do you want to tell us about lionfish, and then we can kind of talk about people from there onward?

Yeah, there are a few areas where it's particularly rich, I think, to talk about the role of psychology, uh, in, um, behavior and business and in problem-solving in general. By the way, I think this extends much wider than just being a business concern or indeed a government concern. Um, and one of them, and one of them is railways, which we'll probably come to later. The other one is fish. Um, because there are various cases where simply renaming a fish has led to something which was previously despised becoming perfectly fashionable, indeed, um, highly desired.

Okay, so if you want proof of the kind of arbitrariness of, uh, human value systems. Uh, back in Wales, where I come from, which was rich with salmon in the Wye and in particular in parts of Scotland in the 19th century, um, uh, quite often people would get a job as a servant in a country house and one of their demands or conditions of employment was that they not be served salmon more than three times a week. Now, we think of salmon as a premium food. Uh, in fact, if you were in a Scottish country house in the, uh, sort of middle of the 19th century, it was kind of junk food. Lobster was junk food, by the way, in many areas of the world. You know, it was once you fed the poor, oysters were more or less what you know, uh, maintained approaching the supply to the New York, uh, working classes for a time. Um, and there are more modern examples. So, for example, someone absolutely brilliant in Cornwall discovered that the pilchard, which was a kind of despised fish, probably not helped by being known as a flavor of cat food, someone discovered that the pilchard was actually a member of the sardine family and started calling pilchards Cornish sardines, which transformed exactly the same thing from being a kind of unwanted, unfashionable, um, foodstuff to flying off the shelves of Tesco. Cornish is probably a pretty good adjective to add to more or less anything, actually. Whether it's, you know, Cornish Cruncher is, I think, one of Marks and Spencer's most successful cheeses. Um, a similar case was the Patagonian toothfish, which most of you have probably eaten in a fancy restaurant if you go to fancy restaurants. Um, but you haven't been sold Patagonian toothfish. It's actually sold as Chilean sea bass. Um, and, um, a more brilliant case, I think, of a real kind of rebranding with, um, of a fish-related problem, um, was the lionfish, which I'm fairly sure is a Pacific fish. Escaped somehow, possibly from an aquarium accident, and escaped into the Caribbean, where it was a catastrophe. But it's an extremely vicious predator, and it has, and it has no natural predators of its own, probably because it's brightly colored. And the fish in the Caribbean, um, although it's a perfectly edible and tasty fish in the Caribbean, um, predator fish have evolved, uh, distinct, um, uh, distaste for anything brightly colored because brightly bright colors are often aposematic signaling in the animal world. That they're a way of signaling, "I don't need to camouflage myself," which means I'm probably poisonous or dangerous in some other way. That's why ladybirds aren't green. Okay? Ladybirds aren't green. They, they're the worst color you could be on a leaf, you would have thought, as being red. Uh, ladybirds are actually not exactly poisonous, but they exude a disgusting taste from their knees, so that birds really hate eating them. And if you're either poisonous or disgusting in some way, ironically, it pays not to camouflage yourself, which is imitating the behavior of a tasty food. It pays to do the absolute opposite and just say, you know, you know, "Come and take me on if you think you're hard enough," effectively, which is called aposematic signaling. I mean, it's quite often, you know, it's quite often fake. So some other animals have learned to fake this, that you adopt the appearance of a nasty, um, snake or or a nasty animal, um, simply because you can then exploit this, uh, evolved predisposition, uh, to avoid anything that's too brightly colored. Okay? And, brother, I suspect that's present in humans as well. You know, humans have very distinct color preferences, um, with food. Um, you know, and and certain colors which are just inherently kind of disgusting. And, um, anyway, so what happened? This thing escaped into the, um, into the Caribbean. And so what Ogilvy did, um, in Colombia, I think, I hope I've got that right, um, but was to effectively make lionfish a really palatable fish for humans to eat. So the, you know, in the absence of a natural predator, why not go to the apex super predator, which is humans? And they got kind of Michelin-starred and awarded chefs to produce lionfish recipes, which would then encourage the fishing of lionfish. I think they got the Catholic Church recommended. And so what they effectively did was take something that nobody wanted to kill and turn it into something that humans wanted to eat. And it was a kind of multi-pronged attack on the lionfish, but it seems to have significantly succeeded.

So what your factory did is you said, you know, fishermen aren't going to actually bother with this thing if it has no value. So we'll give you a value. Now, I've never tasted it. I've never been to Colombia. It's apparently delicious. And so this is really, really important because actually, um, how things taste is not and are, uh, what you might call our predisposition to eat things is not based solely on on what they are. Okay? It's, it's based on the stories we tell about them and how we think of them and how we perceive them. I mean, two examples I gave in the food space. One of them is miso soup. Okay? Now, um, miso soup, I think, benefits enormously from being known as Japanese. I mean, if one of your kids or your nephews or nieces or your brother or your sister said, "I've just invented this new soup," imagine a world where miso soup didn't exist. Okay? And there was this slightly murky colored liquid with a couple of white cubes and a weird leaf in it. What you would not say to them is, "Hey, give up the day job. Your future is as a soup inventor." Now, I kind of like miso soup, okay? But I don't think I like it objectively. You could argue, okay, that there's quite a bit of sort of food racism, if you want to call it that, not necessarily negative, but positive. So in a in a world where sushi didn't exist, if you imagine I came to you and said, um, uh, you know, there's an awful state in Somalia where, you know, the population is so poor they're reduced to eating raw fish wrapped up in rice with a bit of leaf around it. Okay? Your reaction would not be one of supreme delicacy. It would be, "Poor bastards. I hope that never happens to me." Right? And that was one of the most wonderful things. I never remember his name because it's bloody difficult to pronounce, but he's the same man who said, "I'm going to Google it now." "The map is not the territory." And he used to, it used to, uh, indicate this. There we go. It's Alfred, I think it's called, Jimski. Okay? And he's famous for saying the map is not the territory. But he also is less famous, but deservedly famous, for an experiment he used to do on his students in the lecture hall, which is he'd walk onto the lecture theater stage with a brown paper bag, effectively, and start munching biscuits from the bag while he was lecturing. And then, as a gesture of kindness, he'd go and hand out some of these biscuits to the front row of the lecture theater, who'd also start chewing and munching on them, crunching away perfectly happily. And then he'd remove the brown paper bag and reveal what it actually said was "dog biscuits" on the bag. Now, at that point, the reaction of the people happily crunching the biscuits completely changed from mild contentment to absolute disgust. One person was apparently sick. Okay? That's quite an extreme. And I think I can manage that. Quite a lot of people spat them out into their hands or into handy tins or whatever, or basically, you know, refused to eat it or consume any more of what they were contentedly eating only a short time before. And it's really, really interesting because, um, what Koshimski said there is, he said, "So you see, we don't only eat food, we also eat words." And his point was, I think, a very valid one, that the value of anything depends not necessarily on purely the objective qualities of the thing itself. Actually, when I was a kid, I used to be go cat because it was quite tasty. Okay? Now, okay, that's quite young. Okay. Avoidance of doubt. How, how young are we talking? 16, 17? Yeah. They're more like sort of seven or eight. Yeah. Okay.

But, but actually, our perception of anything, our evaluation of anything, our desire for everything, is heavily contextually conditioned. And it's a nonsense, therefore, to formulate any kind of school of economics which sees value creation purely as a product of efficient manufacturing of a predefined good without understanding that a very large part of economic value is created in the mind, not in the factory. Now, unfortunately, marketers, who should have been the beneficiary of this realization, and indeed the Austrian School of Economics, fully realized this. The Austrian School of Economics, which was much more attuned to psychology and what you might call behavioral considerations rather than just kind of weird considerations of efficiency, understood that marketing is as much a source of value creation as manufacturing. Unfortunately, we have a business world dominated by kind of left-hemisphere thinkers who effectively believe that the definition of value is pre-existing and can somehow be mathematically determined. Okay? And your job, therefore, is to create it through more and more efficient manufacturing. And and the only innovations that matter are innovations in what you can offer and how you can make it, rather than, I would argue, the cheaper, more effective, more potent, faster, and actually more interesting, though admittedly less easily defined, practice of adding value in changing how people think rather than changing what, um, in changing what you make. And the phrase I always use is that innovation, okay, innovation, um, and marketing are fundamentally two sides of the same coin. Okay? There are two ways you can create new economic value. You can either find out what people want and work out a really clever way to make it, or you can work out what you can make and find out a really clever way to make people want it. Okay? Now, the money you make is indistinguishable either way. But there's a strange mentality among people, particularly sort of with an engineering background or with a financial economics background, or in B2B, actually, which is a, which is a boring to boring, as regular listeners will know, that so that's actually B2B marketing is spectacularly important. The problem is because of this myth that all B2B decisions are completely rational. Okay? A lot of people utterly fail to realize the component of value in B2B that is actually emotionally driven. Now, so, so the money you make is indistinguishable whether you solve a problem or create a new value space through doing something new or making people think in a new way. I'll give you a lovely example of this, which I only discovered watching what an endless YouTube videos. It was probably on cold fusion or something like that. YouTube, by the way, I think is absolutely miraculously valuable. And that it's a perfect case of a technology really reaching its apotheosis when it's 10 or 15 years old and therefore not getting the attention it deserves. YouTube is becoming basically Wikipedia with video. One of the things I recommend to all your listeners is get YouTube Premium. It's 15 quid a month, ad-free YouTube. Watch it on your 4K flat screen TV. If you've got a smart TV, if you haven't, get something like Google Chromecast, okay, so that you can, because that will now come. If you're a curious person, but into the fact that you're listening to a podcast, I think you're one of the kind of 30, 20, 30% of the population who are inherently curious. If you're a curious person, uh, YouTube is the gift that keeps on giving. Um, so I discovered this thing on YouTube, which is very interesting because it kind of lets, I'm always interested in decisions that have bad consequences that are then written off as bad decisions because accepting the large amount of the future is unknowable. Okay? You can't always say that a decision that had bad consequences was a terrible decision, nor can you necessarily say that the decision that had good consequences was a good decision. So I, I was at Abbey Road yesterday recording a podcast and I made the point that actually Decca's decision to turn down The Beatles at the time was not particularly ridiculous. In that, if you look at the tracks The Beatles presented to Decca on some demo tape or whatever, they're so obscure that not even weird Beatles fanatics are even aware of them. Most of them are covers. Okay? And let's be honest, "Love Me Do," which is their first charting song, isn't a very good song. Okay? That, I mean, the, no one could have predicted the extraordinary kind of leap between "Love Me Do" and "I Want to Hold Your Hand," put it that way. Okay? One of them's a forgettable piece of, you know, I mean, okay, the harmonica was a bit interesting, but I mean, apart from that, you know, there's, you know, there's not much to it really. I mean, and actually, what they did, Decca signed, uh, Jerry and the Tremolos, instead of The Beatles, partly because they were based in London and therefore their transport costs would be lower. That wasn't a great piece of cost-saving, okay? Whoever the procurement guy was involved, I don't think I should rational. Again, I don't, I don't think you should be selecting bands on proximity to London, right? Um, but the second reason, uh, this, I mean, they signed Jerry and the Tremolos, and actually, um, I'm fairly sure that the Tremolos had a number one before The Beatles did. So given what you could tell at the time, that wasn't necessarily a good decision because no one could have expected this extraordinary kind of, you know, apotheosis that came after "Love Me Do." Yeah, you know, um, even Brian Epstein thought they were a bit [ __ ] he just saw potential where other people didn't. This is in the early days. Yeah. And I think sometimes as well, as you say, not knowing the future, doesn't, there's no way of saying if The Beatles would have signed for Decca, well, they wouldn't have had George Martin. And George Martin's background was in recording comedy records with The Goons, which meant he did things with them, you know, starting with the Marseilles, for example, which would be second nature to someone who'd worked with The Goons, but at the time would have seemed really, really weird, uh, to someone who had a conventional music background. Yeah. You know, it's rather like the simultaneous point that actually all the really, really successful eternal books, you know, whether it's the Bible or *Das Kapital* or whatever, violate all the principles that publishers hold there. You know, um, uh, and, um, so anyway, get to get back to my YouTube, uh, epiphany. Okay. Um, I'm watching this kind of history of Netflix, and there's the famous moment where Netflix offered themselves to sell to Blockbuster Video. The late Blockbuster Video. Their request for 50 million dollars is viewed as practically an insult. You know, you know, it's just, "You're being ridiculous here." Okay? And everybody goes, "Hahaha, the people of Blockbuster Video, they couldn't see the future, they're complete morons," blah, blah, blah, blah. I break here. And the reason is that Blockbuster Video could have replicated Netflix's technology for less than 50 million dollars. They could have done it overnight, and they could have signed up their own customers. What made Netflix valuable, and there were lots of also other players in that space, you may remember Lovefilm, for example, etc. What made Netflix remarkable was none of that stuff. It was an idea they had after they had failed to sell themselves to Blockbuster Video. And it was the idea of, um, three, three discs, three CD DVDs, right? Three DVDs at any time, replace them as frequently as you like, 15, I think it was, 15.99 a month. I can't remember the exact price. And no late fees ever. And they came up with that later, almost in desperation. And it so happened that that particular pricing format just captured the imagination in a way that none of their previous attempts had done. So previously, it was kind of like, "Hey, it's like your local video store, but you do it by post." Suddenly, this idea that potentially, you know, now, what the reason it worked is that, I mean, potentially lots of people could be watching 25 goddamn films a month, and they would have lost a fortune. And probably actually, for the first month or two, that's exactly what people did, which probably created total despair in their finance director. But rather like gym membership, most people, through natural inertia, settled down to a slower rate of replacement. And the whole thing finally worked. And so it was that very brave step because you had it after all, created a business model that was potentially a living disaster if the only people who'd taken it up were utter film fanatics who were students, were unemployed, and watched 47 films a day. Okay? You know, you would have been absolutely on a road to bankruptcy. But desperation forced them to try it, and it turned out that it worked. So it's unfair because the real innovation in Netflix was not DVDs through the post. It was a pricing mechanism, which is a marketing question. Okay? And, you know, I'll say the same about solar panels, which I say repeatedly. Okay? Loads and loads of absolutely brilliant people, vastly cleverer than me, have somehow converted solar panels to a level of efficiency where they kind of make sense in the UK. You know, when I was a kid, solar energy was discussed for something you did in the Sahara Desert or Arizona, but it was never going to be anything of much use in Britain. Okay? Through utter scientific genius, you know, they've reached, you know, they're getting to a level of kind of, um, extraordinary proficiency and double-digit efficiency in terms of the conversion. Yeah, but what they failed to do is that second thing, the Netflix stage, where they've worked out how to sell them. And they have this mistaken thing, which is basically the assumption that most people have about solar panels is that I have to call in some weird company I've never heard of, okay, a totally unknown brand, who are going to cover my entire roof with solar panels. I then hope that my electricity provider will credit me for energy I feed into the grid, but I have no particular certainty around this. And then at the end of this installation on the roof of a house, which I may be planning to sell in the next five years, I have to write a check for 25 grand. Okay? Now, marketers will tell you, you know, that is an appalling way to sell things. Nobody wants to write a huge check upfront for a long-term payoff that may be totally catastrophic. Okay? Now, I don't know what the answer is. Maybe it's mobile panels that you can take with you when you move. You know, after anybody with a big garden could easily just, you know, rig something up in the, you know, uh, in the paddock. Right, okay. Um, and, you know, maybe it starts off with a completely scalable thing where you buy three panels and they trickle charge your car. And so for the next 48 hours, I'm not going anywhere. I could be charging my car right now, but I'm not. Okay? And maybe you start off small, you start modular, and then after people are pretty happy with their two grand's worth of solar panels, they buy another two grand's worth. Now, apparently, there's a Dutch company that's just started doing this in the Netherlands, and it seems absolutely the right way to sell this product. Okay? Yeah. And so this thing that engineers and finance people instinctively hate marketing, and they think that success through marketing is essentially cheating, is a massive, massive obstacle to successful innovation.

So your book is called *Alchemy*, and I wonder from reading it and from listening to your talk if you should have called it *Heresy* because there's a little bit of me that's, yeah, you're right, you're, you're eventually economic theory, and what you do is you are a heretic to some of the conventional business wisdom. Um, do you get that pushback from clients?

Yeah, what it is is that, uh, actually *Alchemy* is heresy in a sense because, well, yeah, it won't seem if you have, if you have the mentality that, you know, essentially a Newtonian mentality that something cannot be created out of nothing, okay, then magic is anathema to you because it violates your worldview of trade-offs, proportionality, linearity, and everything else, which are the assumptions you use to make sense of the world. Yeah. And it's, you know, as a result, um, I mean, a much cleverer person than me, the Australian economist Nick Gruen, makes a parallel point to mine, which is that the economic obsession with trade-offs and the belief that trade-offs are inevitable is actually a massive limiter on the imagination. Okay? Because there are many cases, and growing points to several of them, where a really good idea isn't a trade-off between two opposing forces. It's a resolution of the two things to create something better. So you can, you, you could say, well, there's always going to be a trade-off between price and quality. Okay? And then he points to the case where Toyota managed to produce a car with the highest quality levels in the world, I think second only to a Mercedes at the time. The Mercedes had something like 37 false checkers involved in the process, and Toyota had none. And that's because they'd invented a way where quality control was built into the manufacturing process. It wasn't a separate step. Yeah. Okay? Now, there are lots and lots of cases where you say, "Oh God, the trouble with doing this is it's going to be expensive." And the marketer would say, "That isn't necessarily a trade-off, because you can create circumstances where people want to spend more." You know, there are lots and lots of cases in markets where people want to spend more. If you look at wine, for example, and I get here, um, I defer to Joe Fattorini, who you may know from Channel 5 as their wine expert. He's an absolute wine expert, but he's also extremely knowledgeable about behavioral science. Okay? What drives consumption of expensive wine is not, okay, the fact that people want a better wine. People spend more to mark an occasion. That's probably true of women's clothes when they go to a wedding. Okay? You could actually get away with, you know, Zara, ASOS, whatever, okay? But if it's your best friend's wedding, you kind of feel, "I probably should drop 300 here," you know, to mark the occasion. Okay? Now, a marketing guy took over Chapel Down in the UK. Now, Chapel Down produces English or British, technically, because they're also Welsh producers, British sparkling wine. British sparkling wine is actually, at its best, unbelievably good. Okay? But he didn't improve the quality. I'm not suggesting he was entirely. As I said, when I said their two directions of travel, you know, you either make people want something or you, you make something they want. Uh, most successful innovation involves a bit of both. I'm not, I'm not suggesting it's one or the other. They're not mutually excluded. Okay? The pet rock, okay, is entirely psychological value creation. That's the most extreme marketing case, right? Okay? And there are other things, commodities, which are all about, you know, what the thing is. Okay? Things that are bought as commodities. Yeah. Um, but most things involve both. And he did raise the quality of Chapel Down and its, uh, I would argue, other than perhaps the very best champagne, it's as good a white sparkling wine as you can drink. Okay? But he also did something else. He actually ramped up the price to kind of champagne prices, or champagne prices plus. And what he realized is that the role of champagne is partly to drink, but it's also to communicate generosity or hospitality. You know, "Congratulations on your, so-and-so, Andy. Here's a bottle of English sparkling wine." It doesn't matter how good that wine is, if you suspect I've paid 8.95 for it, I'm not doing the job. It's not doing the job it's supposed to do, right? Yeah. And one of the great things about champagne is it's impossible to produce champagne below a certain price point. So if I give someone a bottle of champagne, they know I'm not [ __ ] around. You know, they know I'm not skimping. Okay? I'd say one of the most brilliant things he did is he put the price up. And actually, the entire category, not only Chapel Down, but, you know, many, I won't call them imitators, that's unfair, but many other English sparkling lines, well, sparkling wines have actually done the same thing. And it's absolutely critical because it's the classic case where actually in economics, there always has to be a trade-off. In psychology, there doesn't. So the, the road to premium. Sorry to interrupt you like that. There's an interesting case of Volvo at the moment, who are one of the few examples in the car category, at least, who have gone, who are moving upmarket. They went from kind of middle-of-the-road family vehicle to now being, they're a premium vehicle. And and putting your price up is only one step of that. But it's really, it is a difficult thing to do. A marketer would look and go, "Oh, going, going upstream and becoming more premium is really difficult." What, so is it just putting the price up, or is it the other things? If you look at the behavior of Procter & Gamble, who are kind of the smartest tools in the box, like the shopper's tools in the box, um, a huge amount of their revenue growth has come from premium rising things. I mean, Oil of Olay, or Olay, um, which you probably may remember from your childhood, or something that was bought for like 2.75, is now, I think, over a tenner or something like that. Um, I'll have to double-check. Let me, let me get a chance. I don't want to be guilty of, um, here we are. Oil from Olay. Um, now I think they may have improved the formulation. I'm not suggesting that it's all one thing or the other. Um, yeah, here we are. Olay Regenerist 24 Night Moisturizer with Retinol, 19 quid. That's in Ocado. Regenerist 3 Point Firm Anti-Aging Cream Moisturizer, 50 milliliters, at Boots, 17 quid. I just kind of this stuff slapped all over me as a child, by the way. The 17 quid at Boots, that's actually half price now. There are a huge number of advantages, by the way. It's a big expense to having a premium positioning, not least which is you can discount and still make money. Right? Yeah. Okay. So, you know, I mean, the, you know, one of the, one of the ways I occasionally, um, you know, buy clothes is you actually go to a really expensive place like Selfridges and you can basically search for the most discounted items. You know, um, now I'm not probably an advertisement for men. Are you from Yorkshire? Because that sounds like the way I buy clothes. I mean, okay, if you think about it, there's an extra, you know, and if you can't sell something at, I'm probably doing them a disservice because actually they make quite a lot of effort, uh, in terms of sustainability. But you can't sell something at Primark. There's nowhere else you can sell it. Okay? Whereas if you look at the premium stuff, well, you've got, you know, uh, you can have a sale and you can still make money from your sale. Okay? You've got TK Maxx, which is as Yorkshire when you're probably a bit of a devotee, I'm guessing. I am. I've got the TK Maxx tattoo just down here. Absolutely. Just exactly. Yeah. Right, okay. Um, and actually, you know, the point is that value is highly contextual. I mean, if someone buys a can of refrigerated Coke from a vending machine, okay, we think of Coke as a commodity, but that refrigerated Coke is probably selling for six times as much per unit volume as the two-liter bottle you buy in Poundland. I'm not sure they deal with Poundland, but the two-liter bottle you buy at Aldi. Okay, right. You're paying, you know, that is refrigerated. There's a cost of refrigeration, you know, etc. But nonetheless, you know, what something is worth is contextually determined. So I'm going to give this idea away for free because I'm tired of trying to sell it. This, by the way, is actually a huge problem, which is that it's very difficult to sell creative ideas, which I think limits, okay? It's very easy to get in consultants. You'll improve your productivity, efficiency, okay? Because you know, you know, a lot of McKinsey eyes can kind of crawl around your place charging so 200 quid an hour for ages, right? It's really easy to make money doing that kind of [ __ ] right? Whereas the problem with an idea is once you tell someone the idea, you've effectively given it away, right? Okay? And payment by the hour is almost a perfect mechanism to prevent and discourage the generation of ideas. Right? You know, what that does, it incentivizes an obsession with processes and, you know, and Gantt charts and flaming bloody great 200-page PowerPoint things. Now, my idea here, which I can't charge also, so I'll give it away, is why shouldn't you have Coke vending machines also be electronic car chargers? Now, there's an advantage to this, which is if I went to Sevenoaks Council and said, "I'd like to put Coke vending machines on your pavements," they basically show me the door, right? But if I went to Sevenoaks Council and said, "How would you like to meet all your government sustainability targets for the provision of of charging machines for free?" Right? And the solution is we provide electric car chargers which actually sell Coke or Costa Coffee, right? With cogones, I think. Okay, okay, right. Well, the Sevenoaks guys will release, "Think about this, bad boy, haven't they?" Right? Now, my point is that conceptually, a Coke vending machine contains a contactless credit card thing. And by the way, outdoor contactless credit card things are quite difficult because you've got to be very cautious about the potential for fraud. It's much more difficult than an in-store one, right? Okay? Uh, so you have the contactless payment mechanism, which can also cope with RFID, presumably. You have an electricity supply, and you have an internet connection. Well, that, okay, plus a 7 or 50 kilowatt charging cable is a car charger. Yeah. Okay? Now, look, the argument here is that, um, you know, looking for different contexts and places where you can sell and sell particularly profitably. An awful lot of luxury retail, okay, exists really through what you might call curation and clever merchandising. In that, when you go into a shop in Bond Street, after a while, you think that a 90-pound t-shirt is a perfectly reasonable t-shirt because of what you've been looking at for the previous 25 minutes. Whereas on the high streets in Rochdale, people will be scandalized and you'll probably have a fight. Yeah. And so, you know, people's readiness to pay for things is massively contextually independent. Okay? Um, and so it makes obvious sense to explore this. Um, because value is in the mind of the customer. This is what the Austrians understood. The Austrians understood that marketing was as much a proper value creation as manufacturing. And modern-day economics, because it's dominated by kind of left-brain reductionist thinkers, is really, well, the reason it's reluctant to acknowledge this is that once you acknowledge psychology, your math goes out of the window. Okay? Yeah. You know, and because actually your career is probably, um, uh, formed in economics by constructing elegant mathematical models that bear very little relation to reality. Okay? That's the last thing they want.

So a lot of what you're talking about is known as nudging. Now, I, I actually think the way you're describing it, I think framing or reframing is a better phrase for it. But nudging sort of shot to prominence, um, through Cass Sunstein and, and the work they did in the US and then in the UK. The book is over there somewhere with, uh, *Inside the Nudge Unit* by Dr. David Halpin, I think his name is. We were back, both at the same college at the same time, actually, when you believe it. Yeah. Brilliant, brilliant. Well, I, I, it's, but when I hear, he was actually the hard-working, diligent, and serious academic, and I was the dinner tante, boozy person. Um, and, and, but I'm a very, I'm a very big admirer of what he's done, actually. Seriously. I wonder when I look at the work that they've done within the governments now, obviously, that is a place run by economists generally, and politicians looking for re-election. But are they framing, are they looking at their nudges on too much of an economic benefit? Because what you're saying is that actually, well, I can't measure everything with a pound sign. This is, okay, this basically comes from the heuristics and the heuristics and biases school. And, um, one of the, I think, one of the areas in which nudging is misused, okay, is, um, people's real behavior clearly deviates here from what conventional economics would predict. Therefore, the economics is right, and the people are wrong. And our job is to nudge them into behaving more like *homo economicus* and less like *homo sapiens*. Now, I'll give you an example of this, which is, I went to a government thing on how do you get younger people to invest in pensions? Because obviously, the payback is significantly higher the earlier you invest. Okay? Now, this is worth doing. I'm, I'm not for a second saying it's not worth doing. And one of the things I said is, the first thing you need to do is redesign the pension so that people can draw it down before they reach 55. Because when you're 25, being 60 is basically, I mean, that's another planet. Right? It's rather like it's about why it's difficult to stop young people smoking, because, you know, uh, you know, the diseases of the relatively elderly are, you know, being elderly is such a remote, you know, they've only had, you know, six percent of their adult life to date. And so they can't. I mean, I, I remember this. I was a copywriter on pension staff when I was in my 20s. I couldn't really understand where anybody put money away rather than going out for a curry. You know, I mean, I was forcing myself into method actor into that mindset. I could really get my head around, to be honest, you know? Um, so the first thing you have to do is you have to redesign and rethink the pension. Maybe you don't even call it a pension, right? You call it "Young Person's Saving Fund," whatever it may be. And it can morph into a pension later in life. So, you know, maybe the word "pension," associated with words like "penschmer," is problematic to begin with. But the fact that you can't, you wave goodbye to this money until you're actually quite old, it's ridiculous because you don't know what the near future, what the, what middle age is going to bring. Okay? You know, so little about your future. But there's also a factor. I said, "Look, I'm really, really happy in lots of ways to help you do this because I think it, I think there are biases against young people saving." Okay? But I said, "At some point, do not expect people to behave as economically rational actors would do for the simple reason." I said, "You know, look, this is Darwin, right? Okay? When you're 25, there are a load of things, okay, which are probably more important to you and your long-term happiness than saving up for a distant future." One of which might be funding a high-quality life partner. Then, no, without stereotyping anybody, there are lots of quite extravagant things you may have to do to find a high-quality life partner. I'm not being stingy, not going Dutch when you go after the first meal. Okay? And I'm fairly confident in saying that among people, I don't go there, I'm married, okay? But, you know, I feel better someone who actually got married before there was Tinder. I feel like someone who just caught the last helicopter out of Saigon. But I wouldn't, I, you know, I wouldn't know how to date nowadays. I wouldn't have a clue. But I'm fairly confident you don't get many people under 30 or under 40 on Tinder boasting about how great their pension is, right? It's not a major pull, right? In fact, it's a bit of a turn-off, actually. Being a tightwad is a bit of a turn-off, you know? And, um, uh, I've learned this the hard way. If ever I buy my wife a present from the Selfridges sale, I never admit it was in the sale, right? Right? That's absolute death, right? And, and so, by the way, I bet there are a load of people over 70 on Tinder who are boasting about how great their pension is, okay? You know, I'm fairly confident that, um, uh, you know, that would be a major pull, you know, if you're in the 70s, over 70s dating market. But there are a load of other priorities that young people have to get their [ __ ] together, you know, um, you know, then down near impossible business of buying a house, perhaps, okay, before they have to worry about long-term saving. And given the path dependency of life, it's absolutely fallacious to believe that what an economist would think is rational is actually optimal or rational in in the real world.

Yeah, so I, I mean, I think we probably agree that economists are the worst people, um, on the planet. Um, I think I think it's about, I think it's abominable. I mean, I'm not quite as extreme as my friend in the same talent who thinks that the discipline shouldn't exist, okay? But it's a fairly extreme position. What I do think about it, though, is that it's, um, uh, Tim Harford, you know, has made a defense that I only pick on economics when it's wrong, okay? A fairly fair criticism that, you know, that I only criticize economics when it's wrong. Okay? My argument to Tim Harford there, I love the guy, by the way, and he's great, and he's also again, one of the people who's open-minded enough to to know both strengths and weaknesses of economics, is that what you've created in economics is a bit like Formula One, where the pit crew is more interesting than the car. You know, in other words, the car is so unreliable that actually the behavior of the pit crew is actually more important. What, what, in other words, the problems are actually more important than the actual solutions. Yeah. And I, I think, um, it's behavioral economics, complexity economics, Austrian school economics, all all the Marxism, actually. And there's quite a lot. I mean, having started off from a sort of standard conservative position that Marxism is bonkers, the guy is like many other people, it's not as terrible at psychology, I think. And I think Marx didn't really understand the whole load of, you know, psychological factors at work. But nonetheless, there's some really interesting stuff there. If you want to understand what's gone wrong with the property market, okay, you might say that the investment value of property has come to dwarf its use value. And in that, you'd be using kind of Marxist language. Okay? I mean, I'm also a Georgist, by the way. I, I won't go into this because it takes explanation and it's impossible to convert anybody to Georgism anyway, so I always feel bloody lost cause. But I mean, the distant economic schools actually have, in a way, more to teach us because they're much richer in counter-intuitive anecdote, insight, surprise. And actually, in business, in the creation of economic value, and actually in science, noticing the anomaly is actually more important in many cases than cataloging the regularities. And I worry, I worry about science in this way, that it, it's with things like P values, it's how confidently can we generalize about something? Okay? Now, actually, in business, you know, asking, "What is everybody else wrong about?" is probably the first question you should ask. What are the assumptions that are absolutely endemic in a category which actually either aren't true or maybe have been rendered no longer true by technology? Yeah. That class. I, I always mention that the Uber map as a piece of psychological genius, which is, let's not worry so much about how quickly cars turn up. Let's indeed, let's instead use GPS plus the mobile smartphone to show people where their car is. And you can obtain the same or greater psychological end, and a tiny fraction of the cost of changing the reality. Yeah. Don't make the car quicker. Let people know where it is. Let people know. And basically, okay, I mean, don't get me wrong. I mean, again, this is where I'd make the pun, the rational argument isn't totally irrelevant. If Uber's took 45 minutes to turn up and it said, "Driver smoking a bang," you're right. Okay, okay. That's not a great car company. What I'm saying is that once you have, um, punctuality within a certain acceptable threshold, further gains in speed of arrival actually may be a disadvantage. Actually, because quite often I want to order an Uber when I'm on the 15th floor of a building, and I still need to have a piss and go and hand back my pass. So I don't necessarily want cars that turn up in four minutes.

Actually, yeah, it needs to be a bit long, yeah. So, it is the problem because I think lots of things you talk about, we, we know that we have to, because of the way funding works, whether it's in businesses or government, things do have to, to generate a return. So, what we've ended up looking for is the safest way to generate a return, instead of the best. Yeah.

Two, you're absolutely right. The safest way, and secondly, the most provable way. Yes. Okay. So, for example, uh, it's always easier to quantify costs than it is to quantify opportunity costs. So, that causes a disproportionate focus on cost cutting rather than opportunity hunting. Yeah. Okay.

And this, by the way, what's quite interesting, is the advertising industry, with its obsession with digital performance marketing, um, and measurement, uh, actually exemplifies this problem in microcosm. Because, um, effectively, people would rather spend money, quite a lot of performance marketing, I think, is getting people who would have bought the product anyway, and already customers of the retail site, to buy something they would have bought anyway, a bit sooner, for a discount. Okay. I'm not suggesting, by the way, that, you know, conversion of that kind, or just overcoming inertia, isn't a valuable role in marketing. But there's another, more crucial role in marketing, which is getting people who didn't know about you, and didn't think they wanted what you have to sell, to buy what you have to buy, at full price. Okay.

Now, the money from those two transactions might look quite similar, and it's much more expensive to obtain the second than the first. But the second is ultimately measured over the long term, more valuable. And if you can't account for that incremental value, you will concentrate too much of your expenditure, not on things that are necessarily valuable, but on things that are easy to prove aren't wasteful. And it's a framing exercise again, isn't it? Because performance marketing looks, by its nature, over a short-term attribution window, 28 days, whatever. I was lucky, I was at a conference the other week, and, um, a guy from RingSide, a data platform, looked at data over from millions of transactions for the number of people who use it. And they find that people who make their first purchase at a discount are worth, over three years, are worth about 30 percent less than a person who makes their first purchase at full price. That strikes me is highly plausible. Yeah. Yeah.

I don't want to listen, I've been invested in that product. As soon as I heard that, I was like, this is brilliant. So, but no, that's, that's exactly my point, which is that actually short-term transactional value is, doesn't necessarily reliably correlate with long-term customer lifetime value. Also, there are a lot of things you can do in marketing which are valuable, which are impossible to quantify. Okay.

But the example, I don't know why I always give this example, I have to think of a new one because it's probably getting a bit boring. But, you know, if you're the chief executive of Rolls-Royce Aero Engines, right? Or the chief executive of Boeing, right? You can ring practically anybody on the planet, in business or politics, and they'll return your call. Okay. That's not true of, you know, the chief executive of, you know, to take those Amazon imaginary brands, you know, so-and-so, whatever. Okay. Right. Do you know why those, why those are there, those ludicrous sort of, uh, lyrics brands on Amazon that look like Scrabble tiles? Is that because we love brands? As a, no, no. It's actually weird. It's because Amazon gives great preference to brands that are registered in the US. Unfortunately, it takes, if you want to call yourself something cool, it takes much, much longer to register the brand and get approval from, uh, because of the problem of other people who have similar names. Whereas if you give yourself a totally ridiculous name, you can get registered overnight. Right. So, it's, it arises from the gaming of a system, in a way. There you go. Uh, they go. Which was fascinating because I couldn't understand. I thought, you know, because, you know, I mean, you know, someone in China, if you've get, you know, gave me a tenor and a pint, I'd come up with a reasonable name for them. Okay. You know, but anyway. Um, uh, the, but, but anyway, I, I think this is so interesting because what we're doing now, don't get me wrong. I, I, I cut my teeth and, you know, anybody in marketing who gets a chance to work for American Express, to do so, because you learn everything in American Express. And I work on American Express as a direct marketing copywriter. And it's got everything. It's a premium brand. It uses a lot of direct marketing. It has now got a lot of digital activity. It has member-get-member. It has a points program, a loyalty program. You know, there's nothing that you, you know, that you couldn't learn about marketing that you can't learn working for American Express. Um, uh, it's a glorious brand, actually. I sound kind of idolize them a little bit. Um, and actually, one, one, but one thing, by the way, they answer the phone, right? Okay. Right. Okay. A unique among financial services providers. Amazing. Amazing. Um, the, um, uh, the, the interesting thing there was that, don't get me wrong, the conversion bit's important. Okay. Because American Express built back in the day, this fantastic prestige brand, which I think most prospective card members thought they couldn't afford, or that they'd get turned down if they applied for it. Now, I think you needed to write to people to encourage them to apply. Because the fact that you wrote to people in direct mail said, uh, you know, we know about you, and you're the kind of person who carries this card. Uh, you know, I don't think the brand would have worked on its own without the direct marketing. Yeah. Yeah. In fact, well, I think it would have been a very strong brand with not many card members, in the same way that Versace is a very strong brand with not many customers, you know? Yeah. Um, and, you know, you need scale as a financial provider. And so, I think, you know, the, the fact that you do both is really important. And, you know, and getting people over the last mile is sometimes the toughest challenge, after all. And, you know, and I'd also say that getting your conversion rate is probably the first thing you should focus on, because there's not much point in optimizing things further up the funnel if this, if the spout of the funnel is ridiculously narrow or clogged. You have to eat while you dream, don't you? That's absolutely right. Absolutely right. And yet, what did worry me about the only problem in direct marketing is that the wonderful thing was, you could measure the value of everything you did to the penny, albeit the short-term value. Okay. They did actually probably have a good idea of the, I never knew what it was, but the lifetime value of a card member. In fact, they probably had a reasonably good model for that. But, okay, you're never allowed to do anything that you couldn't measure. And that's dangerous. Because, as I said, you know, what's it worth? The chief executive of Rolls-Royce can call anybody on the planet and get them to return his call. When people worth millions, in a sense, okay, in certain circumstances, right? But it's impossible to put an absolutely finite, clear dollar value on that. Um, an awful lot of marketing is really not in pursuit of a predefined objective, although we like to think it is. It's actually opportunity maximization. All right. If I make myself famous, okay. If, if you're a bit famous. Um, well, I noticed this because I do quite a lot of public speaking. I'm stupid. Yeah. I pay all my public speaking fees to Ogilvy in an arrangement I made about four years ago, where I made less money from public speaking. But bro, but public speaking, if you're quite famous, you will get invitations to speak from businesses you didn't even know existed, at conferences you didn't even know took place. Okay. If you're quite famous as a business, you will get customers, employees, opportunities, partnerships brought to you that your own imagination would never have actually conjured up. Okay. But which other people's awareness of you then creates. Now, if you simply say the only role of marketing is that we define what success looks like in advance, very narrowly, and the only successful component of marketing is the extent to which it obtains and achieves objectives we have defined in advance, then you're massively undervaluing marketing.

I'll give you a classic example of this, which is from my own experience, okay? Which is, if you'd said to me, okay, we need to target readers for the book Alchemy. I would have said, well, we've been working in marketing, people in psychology, you know, there may be some people in the investment community who might be interested in this as a kind of, you know, distant way of looking at companies and company value or potential or whatever. But, you know, by and large, I would have defined core target audiences in one way or another. And then one day, a few years ago, I'm at Cannes, and Chris Evans decides to do his Virgin Breakfast Show on Virgin Radio from the Cannes Advertising Festival. And one of his underlings had read Alchemy and said, this guy's probably in Cannes, he works in advertising, why don't you interview him about his book? So I turn up, do the interview on Chris Evans's Breakfast Show. Okay. One million listeners. Um, and, uh, it goes quite well. And, um, Chris has obviously skim-read the book. I didn't expect him to read the whole damn thing because he'd only heard about the book a few hours beforehand. But then he spends the next day, the, the rest of the day reading the book on the beach. I didn't know this. Okay. Okay. And the following day, on Chris Evans's Breakfast Show, he was quoting and citing little details from the book and mentioning the book quite frequently. Okay. Yeah. Meanwhile, unbeknownst, because obviously I'm not listening to Virgin Radio while I'm in France, okay? Unbeknownst to me, I'm sitting in a hotel room and I can't understand what's going on because the sales of my book on Amazon are just insane. Okay. I mean, I was, I was outselling all of JK Rowling. Okay. I never beat, I never managed to, I beat the Highway Code, which when you think about it, is compulsory to buy it. Okay. I never beat the Little Book of Calm, and I never beat The Hungry Little [ __ ] Caterpillar. Okay. And there are about six other, most of them cookery books, I think, in one footballer's biography, which I couldn't beat. But I was number eight on Amazon of all books. Right. Now, every, not every single person, 94 percent of the people who bought that book on that day would have laid outside the. Now, what's the value of it? Well, actually, maybe they like the book and they buy another copy for their friends. So, that's another aspect of the sale, which is actually impossible to quantify. And so this business of quantification bars comes from physics. And it comes from physics because in Newtonian physics, okay, you have all the numbers you need to produce a single demonstrably correct prediction. Okay. Moreover, the laws of physics don't change. The laws of psychology and behavior do. Gate fashion is one example of the laws of psychology changing. Um, the, so the really interesting thing there is that this urge for certainty looks like it's being scientific, but it's actually a massive constraint on discovery. I mean, okay, never mind business. Okay. Most, I think most business, really major business breakthroughs happen kind of creatively, or accidentally, or through someone noticing a freak thing that they can't explain. Okay. Um, all through actual insanity, in the case of Dyson. You know, I mean, I would have advised him about against making an 800 pound vacuum cleaner. Okay. Turns out there is a market for those things. Who knew? Right. Now, those that actually, when we delve deep enough, that's also how most scientific progress happens. The idea that we should actually decide what is important to investigate in advance. Um, science is just as bad as government and business in actually predicting where you should explore. And therefore, in many ways, when you're a bit random, yes, your chance of failure is probably higher, your chances of success is lower, but your chance of absolutely transformational success is might well make up for that at that problem. The fact that when you use it, when weird succeeds, it really, really succeeds. Back to the realms of penicillin, then, aren't we? In terms of things, not just penicillin, but the Wolves Viennetta. There's Fleming getting all the credit. The Wolves Viennetta happened because there was a wonky conveyor belt, and what should have been a slab of ice cream turned into scroll work. Get out of town. Yeah. Oh, well, there you go. Yeah. And Christmas has never been the same since in Jarvis's household, anyway. Absolutely.

So tell me, I've just spotted the time. Roaring, I'm really excited. We've gone over the top of the hour. But can I ask you one more question? I want to throw. Of course, of course. Um, if you are a marketer, a brand manager, head of marketing, that type of, uh, person, sat in your company, listening to this, going, damn it, I agree with everything Rory's saying. Absolutely. You go into work tomorrow morning, and what, what do you do? Because you know that they, the board are probably too busy looking at the kind of rational McKinsey Isaacs projections of what success looks like. So what do you do?

I have, I have one example so far. I'm trying to come up with more, obviously. Uh, which is that you explain the statistical and other biases involved that essentially make companies too cautious. And you argue for the ring-fencing a small amount of what you might call psychological R&D money. Which is, and this, this is actually mathematical. This is called the explore-exploit trade-off. It happens in algorithms, it happens in animal foraging, in all kinds of places. And you just go, are, whatever the ratio is between exploiting what we already know and exploring what we don't, it's patently obvious that we don't know everything, least of all about the future. And therefore, some for the long-term profitability is survival and growth of a company, some degree of exploration and experimentation is necessary in the marketing space, just as it is in the R&D space. Which brings me full circle to the point I made at the very beginning. But we haven't even talked about trains. So I'd like to do a follow-up session, if that's okay.

Hey, listen, I am, I'm, do you have to go? Because if you don't have to, I do. Unfortunately, I do. That's okay. Well, listen, trends are especially have a special place in my heart. So we will get you back another time, Rory, to talk about trains. I absolutely promise that. I'm flexible. Working under Mudfest as well. Non-stop. 7th of July. By the way, nudstock.com. nudstock.com. All the details are in the show notes. And if you can be there, do be there, because you're in for an absolute treat. Um, Rory Sutherland, thank you very much. Enjoy the rest of your day. It's been an absolute hoot. Thank you. Likewise. Thank you so much. Bye-bye. [Music]