“If we all go for the blonde and block each other, not a single one of us is going to get her. So then we go for her friends, but they will all give us the cold shoulder because no one likes to be second choice. But what if none of us goes for the blonde? We won't get in each other's way and we won't insult the other girls. It's the only way to win. “

Russell Crowe as John Nash, A Beautiful Mind (2001)

Back in 2001, Russell Crowe played mathematician John Nash in the film A Beautiful Mind. Nash was a great mathematician whose life made a fascinating story and who won a Nobel Prize in Economics for his pioneering work on Game Theory, which is pretty much what it sounds like: the theory of how games play out. There are a whole range of uses for game theory, from increasing your chances of success with blondes in bars to helping Greece negotiate their way out of bankruptcy. In particular, there are a number of lessons from game theory that can be applied to marketing.

Lesson 1: Think Like A Nigerian Prince

Scam emails have a very low success rate; at the same time scamming is an industry worth billions of dollars. These statements are seemingly contradictory, so how can they both be true?

A researcher at Microsoft found that scammers maximise their profits by finding the most gullible people they can as quickly as possible and ignoring the rest. It’s a classic piece of game theory sometimes called “growing a self-weeding garden”.

The most famous scam on the internet is the Nigerian prince who has access to millions of dollars but who can’t access the money because of corrupt officials; if you send your bank account details he can bribe those officials, access the funds, and to thank you will give you a portion. You would think that because it’s so famous the scammers would have moved on by now, but in fact it’s the fame of this scam that keeps it so successful.

Every reply the scammer gets from a not-so-gullible person is a waste. Sooner or later the responder is going to work out the trick and the scammer will have spent his time without return. Using a famous, obvious scam means that he only gets responses from the people most likely to give him their account details. His prospects - the people he is spamming - sort themselves out so he can focus on those who are really likely to convert.

In the same way, every time you respond to a half-hearted lead that is unlikely to - but might, just might - convert one day in the distant future you’re not spending that time finding leads who really will convert, soon.

Many successful companies find an action that their customers take that lets them know those customers are really interested; their equivalent of a scammer getting a response from a spam email. This is what some people call this the customer’s “aha” moment: the moment you know your customer is hooked. Some great examples of companies successfully finding their “aha” moment are:

  • Twitter realising that people who follow 5-10 other people in their first day of using the service were much more likely to become long-term users, so they changed their on-boarding process to encourage this behaviour
  • Zynga finding that people who came back the day after they have played a game for the first time are much more likely to stick around, so focusing on what they call “day one retention” when launching new games
  • Hubspot learning that prospects who get their immediate problems solved by the company are more likely to become customers. They now focus everything they can on doing this, to the extent that even their sales calls start with Hubspot giving valuable advice instead of actually selling

The success of email scammers and the businesses that have learned from them tells us that you should find your company or product’s “aha” moment, find the people who reach it, then spend as much of your time and money on those people as you can. They’re the ones who will bring in the big returns. Ignore those who don’t experience an “aha” moment, because they won’t.

Lesson 2: Slashing Prices Is A Lose-Lose Strategy

If you’re finding competition tough one easy way to get more sales is to slash your prices. People always go for the cheapest option, right? Well, kind of. You’ll get more sales today, but you’ll reduce the size of tomorrow’s market for both your competitors and yourself.

Retailers are experiencing this at the minute: seasonal sales are getting earlier and more frequent and new price slashing days like Black Friday and Cyber Monday are appearing. Customers now expect these deep price cuts, so leave their shopping until the days with the biggest discounts. All of this means more stuff gets sold but for less money, which is bad for everybody in the retail business.

It’s just like Russell and his friends competing for that blonde at the bar: if you block each other out - by failed seduction or unsustainable price discounts - it’s bad for all of you, if nobody goes for the blonde then everybody win. So how do retailers find a way to sell more without tanking the industry?

This question is actually a piece of classic game theory known as “the prisoner’s dilemma”. Two suspects are being interrogated about a crime but there’s not enough evidence to convict either unless somebody confesses. If both confess they both get lenient sentences; if one confesses and the other doesn’t he’ll get released immediately and the other will get a long sentence; if they both confess they’ll do some time but less than if only one confesses. They both know the score but can’t to confer. What should they do?

The answer was discovered by John Nash, the mathematician played by Russell Crowe: whatever one suspect does the other is better off confessing. The best mutual outcome is to both serve a lenient sentence, a is slightly less desirable in the short term for one individual but one that in the long term is better for both.

The US motor industry faced a similar problem in the 1990s to retail today. Demand was shrinking and customers had become used to large, regular rebates. The whole industry saw profits tumble. To overcome this General Motors (GM) engaged in a bit of “blue sky thinking” - the phrase was all the rage in those days - got rid of their discounts and released a credit card. This let cardholders apply 5% of their charges toward paying for a new GM car.

Why would a car company release a credit card? To build market share by taking customers away from rivals. That’s nothing new, it’s a traditional win-lose strategy that’s the equivalent of one suspect defecting while the other confesses. What’s more subtle is that even when GM’s competitors introduced credit cards, notably Ford, the strategy became win-win. Now that both companies were offering easy ways to save money on their car they can stop discounting, driving up profits. This raised prices that a non-cardholder, a Ford buyer for example, would pay for a GM car, allowing Ford to raise their prices without losing customers. That in turn meant GM could raise their prices to match. This made the industry more profitable and GM more profitable at the same time.

The lesson here for marketers is that doing something that benefits you in the short term but is not sustainable and can easily be copied by your competition - like a price cut - could actually harm not just your company but the whole industry. Instead of going down the obvious route that turns into a lose-lose situation try to think of solutions to problems that result in a long-term win for your niche: you’ll be better off in the long run.

Lesson 3: It Pays To Be Different

Lots of us like to do the same things as our competitors: they start spending more on marketing, so we start spending more; or they have success with an approach to technology, so we adopt it. Game theory says that nearness to our competitors can be a great idea, which is why restaurants and estate agents open up shop next to each other. But it also tells us that being different can have a phenomenal effect.

Starbucks, for example, became a large, successful organisation by not spending much on marketing. It’s an odd thing to condone in a post about marketing but when you look at that decision from a game theory perspective it starts to make sense: keeping up the same marketing spend as your competitors is the prisoner’s dilemma all over again. Because all of your competitors are spending money on marketing the best thing for you to do is to reduce profit by increasing marketing spend. From a profit point of view that’s the same as you both confessing to your crime with both of you getting some time in prison. But what if there was a way to escape the dilemma?

Charles Shultz, the founder of Starbucks, decided there was. He decided to spend his marketing money on training, gaining a competitive advantage and encouraging word-of-mouth marketing by their customers. The result was an experience that caused people to walk past competitors’ coffee shops to get to his. Shultz realised that growing a business is more than pouring money into marketing and so changed the game and as a result Starbucks grew from a mid-sized chain into a global giant.

Apple did something similar in 2007. Before then the big phone makers - Nokia, Motorola and RIM of Blackberry fame - thought of their products as gadgets: they built toy features like flip screens or went the same way as other gadgets and shrank. Apple took unexpected action, stunning the world by announcing the iPhone not by talking about gadgety hardware - there wasn’t even a camera - but by offering people mobile internet. In 2007 people had rudimentary web access - remember WAP? - but nothing like they had on their PCs. Seeing Apple’s user interface and new web browser people were amazed - they had not contemplated these kinds of advances. Instead of competing with Nokia and others, Apple had changed the game.

Rather than spending money on keeping up with your competitors, how could you change the game? If you stopped going to trade shows because that’s what people expect, could you be the sole sponsor of a different event? If all your competitors write regular, high quality blog posts, could you create in-depth reports instead? Sometimes the best way out of the prisoner’s dilemma is not to get caught up in it.

Extra Credit (and a conclusion)

Russell Crowe’s portrayal of John Nash in A Beautiful Mind shows how game theory applies to a number of situations in daily life. For marketers, it offers strategies, tactics and options that can benefit us hugely. We can think like Nigerian princes - or ‘80s rock band Van Halen with their dislike of brown M&M’s - and hugely improve our efficiency; we can think like GM in the 1990s and Henry Ford in 1900 to overcome the prisoner’s dilemma enforced on us by conventional thinking; or we can think like Apple, Starbucks, or those who call themselves Guerilla Marketers and escape the dilemma altogether.

In all of these cases game theory gives marketers a different lens to see the world through and is a powerful tool in our kit.