Netflix Prize 2009:
Neuromarketing Research for Online Shoppers?
On September 21st 2009, a seven-man multinational ensemble named BellKor’s Pragmatic Chaos
was awarded $1 million by Netflix CEO, Reed Hastings (Hastings) as the winners of the Netflix
Prize 2009. Announced 3 years ago by Hastings, the Netflix Prize challenged all the mathematical
“The scary thing is that some websites are telling crazy stories about consumer loyalty, and spending
crazy dollars trying to achieve it. In the end, it’s like herding ants. You can make it very attractive for
them to stay in one place, but it’s not necessarily because that one spot enamors them. Once the tasty
stuff is gone, they’ll scatter again. Some will stick around, but not nearly as many as people would
have expected based on the initial observations of the ants’ behavior.”1
– Peter S. Fader, Professor, Wharton Marketing
“Neuroscience research shows that when you ask someone about how they felt or what they thought
or what they remember about something, in the process of replying their brain actually changes the
original information it recorded. In contrast, when you measure at the subconscious, precognitive level
of the brain, you’re accessing the original information immediately following its reception, before it
can be distorted by all the factors that can influence articulated responses, from cultural and language
differences to education levels and many more.”2
– Dr.A.K. Pradeep, Founder & CEO, Neuro Focus
“Our warehouse employees never interact directly with the customer, so what we focus on instead is
having the Web site be the most personalized Web site in the world.”3
– Reed Hastings, CEO, Netflix
This case study was written by Kumar Gambhiraopet and Saradhi Kumar Gonela under the direction of Dr. Nagendra V Chowdary,
IBSCDC. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of
a management situation. The case was compiled from published sources.
© 2009, IBSCDC.
No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever
without the permission of the copyright owner.
Ref. No.: MM0069
1 “A Matter of Metrics: Using Web Data to Improve Sales Performance”, http://knowledge.wharton.upenn.edu/
article.cfm?articleid=162&CFID=9574910&CFTOKEN=28664383&jsessionid=a83095ba9b53dd278c56201c571e706d2385
2 “Out of Sync, Out of Sales? NeuroFocus Reveals Risks for Advertisers Whose Commercials Bother the Brain”, http://
www.earthtimes.org/articles/show/out-of-sync-out-of,1012990.shtml
3 “What Is Netflix’s Greatest Threat?”,http://www.fool.com/investing/high-growth/2005/02/02/what-is-netflixs-greatestthreat.
aspx
Netflix Prize 2009: Neuromarketing Research for Online Shoppers?
2
geeks across the globe, to enhance the movie recommendation technology used by Netflix by 10%.4
The team with experts in different domain areas joined forces and submitted an algorithm that was
10.05% better than the one Netflix uses to recommend movies to its subscribers. ‘Bellkor’s Pragmatic
Chaos’ is an ensemble of the best talent from different agencies across the globe who shared a
common space under this name, it includes Martin Piotte and Martin Chabbert of Montreal, from
Team Pragmatic Theory; Yehuda Koren, Bob Bell and Chris Volinsky of Bellkor (AT&T Research);
and Andreas Töscher and Michael Jahrer of BigChaos (‘commendo research’) from Team BellKor.5
The contest called for coming up with a unique mathematical algorithm built upon the user
preference like ‘If you like this collection of movies here are the others you’ll definitely admire’.
Sounds to be simple, but to break movie preference notions of the users into essentially mathematical
components and do it even 10% better than Netflix was an incredible task. It was a challenge that
kept the participant’s mental engines chugging for over 3 years to come up with a solution. Above all,
a worth of a million dollar prize, lest it would have appeared an extension to the Amazon.com’s
‘customers who brought this item also bought the following’ and eBay’s ‘Related products’ section.
The team Bellkors had combined other teams and their talent to fend off 40,000 other teams from 186
countries (Exhibit I) to take the grand prize to back to home bases in Austria, Canada, Israel and the US.
Exhibit I
List of the Top 10 Contestants for the Netflix Prize 2009
Source: “Netflix prize contest and the dramatic winner is …” http://www.kdnuggets.com/news/2009/n14/1i.html
4 “Box office boffo for brainiacs: The Netflix Prize”, http://brainstormtech.blogs.fortune.cnn.com/2009/09/21/box-officeboffo-
for-brainiacs-the-netflix-prize/
5 “Winning team join to qualify for $million for Netflix prize”, http://www.wired.com/epicenter/2009/06/winning-teams-jointo-
qualify-for-1-million-netflix-prize/
3
Netflix Prize 2009: Neuromarketing Research for Online Shoppers?
The contest falls in the genre of prize economics, where competitive perks are offered as an
alternative to in-house research and development. Netflix has said that winning a 10% improvement
on its movie recommendation algorithm (Exhibit II) for $1 million would be a tremendous bargain.
Hailed as the key competitive edge in e-commerce these automated recommendation algorithms are
empowering the retailers to guess the types of products and services customers are seeking by
tracking their past buying behaviour. For Netflix, a 10% improvement on its algorithms could help
move substantially higher number of movies and increase customer satisfaction, streamlining the
process areas and dwell in the lore of profits.6
Exhibit II
Working Model of Netflix
Compiled by the authors from “How Netflix Works”, http://electronics.howstuffworks.com/netflix2.htm
Algorithms or Virtual Customer Marketing Engines?
Thus Internet emphasises the fact that it provides a sizeable database of consumer information
that can be analytically structured and optimised to multifold the business horizons. Highly revered in
this perspective is the role of Internet clickstream data7 in customer relationship management. This
data provides a rich source of behavioural information akin to flick-and-mortar marketer’s data on
purchasing patterns of individuals. In both cases the data collected is expected to provide insights
into the likes and dislikes of a customer, which would enable better services
Hitherto, marketing research objectives were complacent with on-the-shelf data available with
the agencies, for instance, Information Resources, Inc., for customer packaged goods, Sound Scan
for the music industry and IMS for pharmaceuticals. The data was focused to provide behavioural
6 “Winning team join to qualify for $ million for Netflix prize”, http://www.wired.com/epicenter/2009/06/winning-teamsjoin-
to-qualify-for-1-million-netflix-prize/
7 The sequence of every web address (URL) that each shopper visits over a period of time, to generate their conclusions about
shopping behaviour.
Netflix Prize 2009: Neuromarketing Research for Online Shoppers?
4
attitudes that culminate in ultimate purchasing activity – when, what and how much consumers buy.
Scientific information on consumer activities such as comparison shopping, purchase behaviour best
suit brick and mortar organisations but consumer loyalty in the online shopping method was languishing
due to lack of data sources. These behaviours may be less visible but create a strong impact on
purchasing decisions of the consumers. While the marketing managers attempt to alter customer
behaviour using advertising techniques and interactive web sites, it’s critical to alter the consumer
behaviour in the initial stage of the funnel.
Against this backdrop, the science of where, when and how an online visitor becomes an online
purchaser has taken on a new mode, when everyone, from corporate managers to managers of
medium-sized physical stores started to hire hotshot website developers. Persuading the customers
to visit an online site is not enough tough anymore. Converting them into purchasers became the
acknowledged endgame. In order to gain a better understanding of the way visitors behave is even
more important on the Internet than in the bricks-and-mortar world. Web designers are in a haste to
create everything that demand the visitor’s click into a sales conversion.
According to New Shop.org – a report conducted by Forrester Research Inc., 42% of online
retailers increased their online visitor-to-order conversion rates (customer’s visit to the website
should convert into a sales order) during the first half of 2009 compared to the same period last year,
to an average conversion rate of 3.4%. However, industry experts opine that the conversion rates
vary (Exhibit III) with the nature of the product, consumer and the matter of time.
Exhibit III
Top Ten Online Retailers based on Conversion Rates
Source: http://www.marketingprofs.com/charts/2009/3119/top-10-online-retailers-september-2009
5
Netflix Prize 2009: Neuromarketing Research for Online Shoppers?
The report, The State of Retailing Online 2009: Profitability, Economy and Multichannel,
by Sucharita Mulpuru, Forrester’s principal analyst for retail e-business, also notes that retailers in
the study reported an average growth rate of 18% in 2008 web sales over 2007, and that 50% of
online retailers surveyed during the first half of 2009 are in anticipation of sales to be better than
expected in the coming year.8
Leveraging the importance of the website and allied tools (Exhibit IV) which multifold the business
prospects, investments are invariably flowing into these spheres among various business entities. In
July 2007, McKinsey Quarterly surveyed 410 marketing executives across the world representing
the industries such as business services, energy, retail, technology and telecommunications. The
survey revealed that the frequency and effectiveness with which they applied web-based, digital
techniques to five core marketing functions: sales, service, advertising, product development and
pricing is very high and are investing heavily on them. In 2010, respondents expect major sales of
their products and services done through online. A majority of the respondents also expect their
companies to be getting 10% or more of their sales from online channels in 2010, twice as many
companies as have hit that mark today.
8 “42% of e-retailers increased their conversion rates this year, study says”, http://www.internetretailer.com/
dailynews.asp?id=31970
Exhibit IV
Usage and Importance of Digital Tools
Source: “How companies are marketing online: A McKinsey Global Survey”, https://www.mckinseyquarterly.com/
Marketing/How_companies_are_marketing_online_A_McKinsey_Global_Survey_2048?pagenum=2
Netflix Prize 2009: Neuromarketing Research for Online Shoppers?
6
In addition to established online tools such as e-mail, information rich websites and display
advertising, survey respondents show a lot of interest in the interactive and collaborative technologies
collectively known as web 2.0 for advertising, product development and customer service. The other
driving vehicles for the business on the net are Blogs, Online Games, Podcasts, Social networks,
Virtual worlds, Web Services and Wikis. In the survey, in four of the five major areas of marketing,
the experts ratify the significance of online tools and say that two-thirds of companies are using
these tools in all the areas they deem most important.9
The impact of the Internet and web technologies on all the streams of businesses had created neo
age customers, who are techno savvy, empowered by latest gadgets, and purchase the goods by
what is termed as ‘by click of a mouse’! And for the businessmen, to float their own website of their
business had become the order of the day. Besides hypothesis testing on the basis of theory, exploratory
methods have been taken front seat to analyse online visitors’ interests and preferences. Web usage
analysis became an important tool to extract more information on consumer behaviour. Several
authors have suggested user segmentations based on web log analysis. Peter S. Fader (Fader),
professor of Marketing Wharton School of Business and Wendy Moe (Moe) a PhD student of
Maryland differentiated several browsing typologies on retail sites.
In their paper Capturing Evolving Visit Behavior in Clickstream Data, Fader and Moe figure
out that commonly used measures of web store success–such as number of hits, page views, and
average time spent at a site–provide only generalised information about customers, lumping together
everyone from brand-new Internet surfers to serious repeat buyers.10
They are keen about the changing dynamics of consumers’ behaviour–especially in the internet
environment, as they visit repeatedly, the behaviour of site users starts to change. Moe explains, “As
people start learning about a site, they start using internal knowledge to make their decisions: They
don’t need to actually go to the store to access information. As a result, they’ll go to the store less
frequently.”11 Another evolving behaviour to take into account, she says, is that “a lot of people are
hopping on the Web and surfing just out of novelty. But eventually that novelty’s going to wear off,
and people will go to a website only when they need to.”12
Fader, who has been studying grocery-store scanner data for nearly 20 years, is now investigating
web-based data and incorporating it into similar marketing models. He taught a course about Web
Metrics: Making the Most of Your E-Commerce Data, which draws upon his research. The
course empowers the marketing managers to leverage the data available from the internet in devising
unique marketing strategies. Firms tend to measure conversion rates as the number of people who
completed a transaction during a particular period as a proportion of total visitors during that time
span. Investors and managers would flaunt better gain figures, if they knew the probability of each
9 “How companies are marketing online: A McKinsey Global Survey” https://www.mckinseyquarterly.com/Marketing/
How_companies_are_marketing_online_A_McKinsey_Global_Survey_2048?pagenum=2
10 “Hit and Miss: Why High Traffic Streams Need not Lead to More Online Business”, http://knowledge.wharton.upenn.edu/
article.cfm?articleid=206&CFID=9574910&CFTOKEN=28664383&jsessionid=a830300c7985ab3afc2930642f21796f2439
11 Ibid.
12 Ibid.
7
Netflix Prize 2009: Neuromarketing Research for Online Shoppers?
consumer making a purchase during each visit.13 To meet this end, Netflix, has embarked on improving
its movie recommendation for genuine visitors.
Web Analytics – The Holy Grail of Neo Marketing techniques?
Fader, in his research paper co-authored with Moe titled Which Visits Lead to Purchases?:
Dynamic Conversion Behavior at E-Commerce Sites, analyses conversion rates based on visit
and purchase data at Amazon.com. Generating subsequent purchases from an online site is quite
tough as the familiarity levels with the site increase with the shopper. Eventually the buying tendency
of the shopper deteriorates as the sheer novelty of website wears off. This is a surprising – and very
troubling – development for online retailers’.14 Foreseeing this attitude of the visitors Hastings came
up with the idea of movie recommendation algorithm, where every click flashes refreshing
recommendations and giving the customer a new experience everyday.
“Realizing this dynamic, Fader and Moe developed a “conversion model” that breaks down the
buying process into three components: (1) the shopper’s “base rate” of purchasing during his or her
first visit in search of a particular product; (2) the accumulating effects from non-purchase visits
(i.e., browsing sessions) that help drive the customer towards an eventual purchase; and (3) the
threshold of resistance that the customer must overcome before making the commitment to purchase
something at a given site. All three of these behavioural elements vary across customers, and the
latter two also vary over time. Thus, for instance, the purchasing threshold may come down as a
customer commits to additional repeat purchases at one site.”15
How can one track down the visiting behaviour of consumers in such a detail? For their study, the
authors mined Internet clickstream data collected by Media Metrix, a New York-based digital media
measurement company. Media Metrix maintains a panel of over 10,000 participating households
who have installed special software on their personal computers so their Internet behaviour can be
recorded, page view by page view, over time.16 This is is not hunky dory. Despite it’s highly acclaimed
movie recommendation algorithm and the socialising network ‘Friends’ (visitors share immense
information on movies and suggest some flicks to their friends through this network), Netflix has to
spend a lot on its advertising budget (Exhibit V) on the net. This gives a clear insight of quantifying
the consumer behaviour online and offline.
However, Leslie S. Moeller and Edward C. Landry in their article Measuring your way to
Market Insight for Strategy+Business states, there is no ‘silver bullet’ in marketing analysis no
single approach can be the panacea. Some type of analytics comes out with good results whereas
some tend to be more mathematically sophisticated, but when optimally used both can produce
viable results17 .
13 “A Matter of Metrics: Using Web Data to Improve Sales Performance”, http://knowledge.wharton.upenn.edu/
article.cfm?articleid=162&CFID=9574910&CFTOKEN=28664383&jsessionid=a830a1f52b88f66a6bbf5a71725441503a72
14 “Online Conversion Behavior: The New Frontier of Internet Marketing”, http://knowledge.wharton.upenn.edu/
article.cfm?articleid=248&CFID=9574910&CFTOKEN=28664383&jsessionid=a83095ba9b53dd278c56201c571e706d2385,
15 Ibid.
16 “Hit and Miss: Why High Traffic Streams Need not Lead to More Online Business”, op.cit.
17 Moeller H. Leslie and Landry C. Edward, “Measuring Your Way to Market Insight”, http://www.strategy-business.com/article/
09107?gko=cb0c9, February 24th 2009
Netflix Prize 2009: Neuromarketing Research for Online Shoppers?
8
Retailers Ad Impressions
Netflix Inc. 2,367.28
eBay Inc. 1,334.73
Target Corp. 612.14
The Nation Law Firm 587.29
StubHub.com 470.26
Wal-Mart Stores, Inc. 463.52
United Parcel Service, Inc. 451.74
Lowe‘s Companies, Inc. 389.18
DirectBuy 361.59
N & M Cooling and Heating Inc. 257.75
*Data according to Nielsen, in September 2009
Compiled by the authors from http://www.internetretailer.com/dailyNews.asp?id=32172
Exhibit V
The Top 10 Retail Goods and Services Advertisers in Terms of Online Ad
Impressions* (figures in million)
If You Like French Connection, Will You Love Singing in the Rain?
Some of the BellKor team’s algorithms examined movies as bunch of elements. These elements
might include genre, a specific actor, and then drill down into more detail – blood but no car chases,
or car chases but no gunfights. Touted to be the million-dollar winner, Bellkor’s Pragmatic Chaos
couldn’t answer the critically savaged Sandra Bullock starrer, Miss Congeniality, which is the most
rated movie on the Netflix. This calls for analysing various factors involved in consumer buying
decisions. The film had been released long back and received a tepid response from the critics as
well as viewers. How come the movie tops the viewer’s ratings despite their lukewarm response at
its release point of time? Experts of Neuromarketing say that decisions are made in split seconds in
the subconscious state of our minds. Our decisions are guided by the state of our mood, timings and
many other factors.
Highlighting this concept to another level, Herb Sorensen (Sorensen) founder of ‘TNS Sorensen
Consulting’, the world’s largest retailers and brand manufacturers for over 35 years, emphasises this
fact in his latest book Inside the Mind of the Shopper – The Science of Retailing. He opines that,
95% of our cognitive processing is subconscious, which means we’re pretty poor at telling others
what we like or don’t like, and why we feel that way.18 There are numerous other factors that have
18 “Retail Customer Experience: Why customer satisfaction surveys don’t work”, http://www.retailwire.com/Discussions/
Sngl_Discussion.cfm/13916
9
Netflix Prize 2009: Neuromarketing Research for Online Shoppers?
to be considered when devising an algorithm based on the consumer preferences and tastes. In this
perspective, Netflix declared another contest to incorporate all these attributes in order to come up
with the best scientific algorithmic model.
The announcement of Netflix new contest on the day of the presentation by Hastings can give
more insights into this. In this contest, teams will use anonymised demographic and behavioural data,
including ages, gender, ZIP codes, previously chosen movies (although genre ratings are included).
Contestants have to predict movies that these customers would like. There’s no accuracy target.
Netflix will instead award half a million dollars to the leader after 6 months, and another half million
dollars to the leader at 18 months.19 Industry pundits cite the new announcement of Netflix as an
example that manifests growing importance for analysis of online behaviour is better coordinated by
the consumer’s offline behaviour too.
The Conundrum of Consumer Behaviour@ Online and Offline
Consumer’s buying decisions may not be the same when they visit a physical store and an online
store. How far the offline touch points come in aid to track the behavioural patterns of the consumers
towards online businesses? Excerpts of the interview with Fader and Moe, featured in Sorensen’s
Inside the Mind of the Shopper, answers this question. Fader opines that, according to Sorensen,
shoppers tend to look to the left and more to the left, counterclockwise as they move through the
physical store. Well, where would be the shopping cart located on every online site? Obviously on
the right side. How can one attribute this notion of the consumer’s when designing a website?
Retailers experiment with absolutely everything in designing their website with colour, content and
design. But shopping cart is always on the right side. They have no idea why should they test the cart
on the left? Looking at a screen is totally different from pushing the cart in the aisles.20
In a retail store, shoppers only spend 20% of their time selecting purchases, and 80% in transit.
While most retail stores are designed for large stock-up shopping trips, most shopping trips and a
third of dollar sales are ‘quick trips’ for only a few items21 enthuses Sorenson. He further ratifies
this fact as sometimes these navigation follies rakes up angst, discomfort on the shopper’s mindset.
Each block of the store may evoke different notion in the mindset of the consumer (Exhibit VI) and
these are the very few touch points where the retailers should be cautious about. In contrast, on the
online retailing one can engage the shopper with all these touch points with a hassle free navigation
process for more of a time. The old canard that ‘eye level is buy level’ may be simply untrue for the
retail outlets but can be true for the online retailers.
This might be the reason; Hastings says “our warehouse employees never interact directly with
the customer, so what we focus on instead is having the Web site be the most personalised Web site
in the world”. Giving another insight in the consumer mindset, Sorensen says “While retailers typically
19 “The week in Geek September 24 2009: Netflix $1 million Research Bargain”, http://www.gallaugher.com/page/2/
20 Sorenson Herb, “Inside the mind of the shopper – The science of Retailing”, Wharton School Publishing, (ISBN-13: 978-
013-712685-9), 2009
21 http://www.herbsorensen.com/herbsorensenauthor.html
Netflix Prize 2009: Neuromarketing Research for Online Shoppers?
10
Exhibit VI
Connecting with Shopper’s Emotional Mindset
Source: Sorenson Herb, “Inside the mind of the shopper – The science of Retailing”, Wharton School Publishing, (ISBN-
13: 978-013-712685-9), 2009
offer 30,000–50,000 items in their stores, most households buy 300–400 distinct items a year. Many
retailers sacrifice the big head to the clutter of the long tail” says Sorensen. Proper store design and
precision tracking of consumers is not new – but its technical implementation on the web, its lowered
cost, its ubiquity and its comprehensiveness on the web are new.22
“Working for packaged-goods days is using behavioral data—really mining the wealth of
transactional data we have about how people are spending their time online and trying to marry that
data with attitudinal data obtained from ethnographic studies or consumer interviews. This is pretty
new. It’s hard to find people who are very good at it. But I think that’s where the most powerful
insights can really come from”23 opines Cammie Dunaway former chief marketing officer of Yahoo!
She further emphasises that, “it’s a fascinating time to be a marketer, as one must really understand
each consumer as an individual. Yahoo! has 500 million consumers, and I have to understand what
each of those 500 million individuals needs from the Yahoo! brand, as well as how and when to best
reach them.”24
On the contrary, a new study sponsored by iProspect and conducted by Jupiter Research The
Post-Holiday Online Shopping Study in February 2006, revealed that 53% of respondents purchasing
22 Sial Shailendra, “Online consumer behaviour”, http://ezinearticles.com/?Online-Consumer-Behavior&id=1947357
23 “Confronting proliferation ... in online media: An interview with Yahoo!’s senior marketer”, https://www.mckinseyquarterly.com/
ghost.aspx?ID=/Media_Entertainment/Confronting_proliferation__in_online_media_An_interview_with_
Yahoo!s_senior_marketer_2018
24 Ibid.
11
Netflix Prize 2009: Neuromarketing Research for Online Shoppers?
history was online and search engine based. The study emphasised that the Internet is not seen as
just a vendor, but also as a reliable research tool. Nearly 63% of survey revealed that respondents
researched products at online merchant sites, while 62% of Internet shoppers relied on search
engines such as Google and Yahoo! for product information, choices and merchants. Giving new
dimension to the concept, the iProspect study confirmed that a majority of shoppers go online to
research products, but nearly half still favour offline purchases at bricks-and-mortar retailers.’25
This is the point, where Netflix see an opportunity. It gives immense choice in the list of the movies
and it is backed by a robust distributing system with free shipping and no late fee! Given this scenario,
marketing models designed to help companies’ manage and optimise their spending in new media are
emerging on the firmament of marketing.
For instance, Yahoo Inc. has teamed up with AC Neilsen (A division of Nielsen company) to form
Yahoo Consumer Direct, a service that offers marketers a way to reach narrow customer segments
online and to measure responses on the basis of actual purchases. The premise is that consumer
buying decisions are made in split seconds in the subconscious, emotional part of the brain and that
by understanding what we like, don’t like, want, fear, are bored by, etc., as indicated by our brain’s
reactions to brand stimuli, marketers can design products and communications to better meet “unmet”
market needs, connect and drive the buy.”26
For a new and growing tribe of experts in the field of marketing, this vague explanation is perfectly
clear. For this is a set that probes for a deeper meaning using medical technologies like the functional
Magnetic Resonance Imaging (fMRI), to explore last minute changes in consumer behaviour. Called
‘Neuromarketing’, it’s the new, advanced, marketing technique that is catching on like forest fire. To
put it simply, neuromarketing studies the marketing stimuli among consumers using techniques that
are perfected not in business schools, but in medical universities — sensory, motor, cognitive, affective
response and so on.27
The Buyology of Neuromarketing
It’s been an open secret that Pepsi is the most preferred in the cola market, but it has always
been the Coke that majority of the people buy, kudos to the Pepsi Challenge and its surprising
findings.28 When consumers avoid the brand in question, a Neuromarketer could conduct an fMRI29
analysis to understand the influential spots of aversive as well as buying behaviour. Or it can identify
certain genetic codes that separate the risk takers from the conservatives and help companies design
campaigns that trigger the risk takers to take action and prefer their brand over the competition.
25 “Tracking Online and Offline Consumer Behaviour”, http://www.kosmoscentral.com/seo-articles/online-offline-consumerbehavior.
php
26 Randall Kevin, “Neuromarketing Hope and Hype: 5 Brands Conducting Brain Research”, http://www.fastcompany.com/blog/
kevin-randall/integrated-branding/neuromarketing-hope-and-hype-5-brands-conducting-brain-resear, September 15th 2009
27 “Neuromarketing in the era of hyperactive competition” http://economictimes.indiatimes.com/Features/Brand-Equity/
Neuromarketing-in-the-era-of-hyperactive-competition/articleshow/4342155.cms, April 1st 2009
28 Edwin Colyler, “The Science of Branding”, http://www.brandchannel.com/features_effect.asp?pf_id=201
29 functional Magnetic Resonance Imaging (FMRI) – A form of magnetic resonance imaging of the brain that registers blood
flow to functioning areas of the brain.
Netflix Prize 2009: Neuromarketing Research for Online Shoppers?
12
“Most marketers don’t take a single class in psychology. A lot of the current communications
projects we see are based on research from the ’70s”, says Justine Meaux, a scientist at Atlanta’s
Bright House Neurostrategies Group, one of the first and largest neurosciences consulting firms.30
Martin Lindstrom (Lindstrom) a marketing expert, who advises senior executives at Fortune
100 companies, partnered with Oxford University researchers and launched a major neuromarketing
study. Lindstrom revealed the results of the study and its impact on the future of marketing and
advertising in his new book Buyology: Truth and Lies About Why We Buy. During a recent AMA
Radio Show, Lindstrom explained “nearly 90% of consumer purchasing decisions take place at the
unconscious level. Neuromarketing aims to understand what directs consumers buying decisions by
examining their brain responses”31 (Exhibit VII). If this is the case, Netflix is embarking on the
benefits of neuromarketing techniques, in persuading the customer to watch the movies from the
recommended list. When flooded with number of movie recommendations, (matching the taste of
the customer by tracking his/her previous watched movie lists and their ratings for other movies), in
the split of the seconds, the customer has to press the buying button.
30 Carmichael Mary, “Neuromarketing is it coming to the lab near you”, http://www.pbs.org/wgbh/pages/frontline/shows/persuaders/
etc/neuro.html, November 9th 2004
31 Nancy Pekala, “Why Buy? The Role of Neuromarketing in Understanding Consumer Behavior”, http://
www.marketingpower.com/ResourceLibrary/Pages/Marketing%20Matters/marketingmattersnewsletter.02.27.09/
Role_of_Neuromarketing_in_Understanding_Consumer_Behavior.aspx
Exhibit VII
Behavioural Model
Source: Sangameshwaran Prasad, “Neuromarketing In The Era of Hyperactive Competition”, Brand Equity, The Economic
Times, April 1st 2009, page 1
13
Netflix Prize 2009: Neuromarketing Research for Online Shoppers?
Lindstrom foresees that companies will vehemently embrace neuromarketing to gain in-depth
knowledge of consumer’s perceptions towards their products. He substantiates his statement by
citing the example of Microsoft. Microsoft is all set to use EEGs32 to record the electrical activity in
people’s brains to see what emotions they experience as they interact with their computers. Another
major player who extended its marketing tryst with neurological perception-based techniques is
Unilever. Its results say that, using brain-scanning technology, Unilever discovered not only why
consumers enjoyed their best-selling Eskimo ice cream bars, but also that for all the consumers, who
relish the ice cream itself is a greater visceral pleasure than eating a chocolate or yogurt. Various
companies (Exhibit VIII) already started to extend their neuromarketing research to mine for insights
to their increasing roster of marketing challenges.33
32 An Electroencephalogram (EEG) is a test that measures and records the electrical activity of your brain. Special sensors are
attached to your head and hooked by wires to a computer. The computer records your brain’s electrical activity on the screen
or on paper as wavy lines. Certain conditions, such as seizures, can be seen by the changes in the normal pattern of the brain’s
electrical activity.
33 “Why Buy? The Role of Neuromarketing in Understanding Consumer Behavior”, op.cit.
Exhibit VIII
Companies that have Embraced Neuromarketing Techniques
Microsoft is now mining EEG data to understand users’ interactions with computers including their
feelings of “surprise, satisfaction and frustration”.
Frito-Lay has been studying female brains to learn how to better appeal to women. Findings showed
the company should avoid pitches related to “guilt” and guilt-free and play up “healthy” associations.
Google made some waves when it partnered with Media Vest on a “biometrics” study to measure
the effectiveness of You Tube overlays versus pre-rolls. Result: Overlays were much more effective
with subjects.
Daimler employed fMRI research to inform a campaign featuring car headlights to suggest human
faces which tied to the reward center of the brain.
The Weather Channel used EEG, eye-tracking and skin response techniques to measure viewer
reactions to three different promotional pitches for a popular series.
Source: http://www.fastcompany.com/blog/kevin-randall/integrated-branding/neuromarketing-hope-and-hype-5-brandsconducting-
brain-research
At another level, the science of Neuromarketing comes in aid to track down the best possible
marketing channel strategy, reaction of consumers towards different pack sizes and price points at
various points, which distribution strategy works better in triggering the positive response, which
distribution mechanism sends confusing codes to the brain and so on. The same consumer may buy
a product at one retail point, but choose the competitor at another retail destination. This can happen
Netflix Prize 2009: Neuromarketing Research for Online Shoppers?
14
34 “Neuromarketing in the era of hyperactive competition”, op.cit.
35 “Why Buy? The Role of Neuromarketing in Understanding Consumer Behavior”, op.cit..
36 “Neuromarketing in the era of hyperactive competition”, op.cit.
37 Ruskin Gary, “Commercial Alert Asks Senate Commerce Committee to Investigate Neuromarketing”, http://
www.commercialalert.org/issues/culture/neuromarketing/commercial-alert-asks-senate-commerce-committee-to-investigateneuromarketing,
July 12th 2004
despite the space allocated to the brand remaining the same. That’s because different retail chains
can have a different influence on the perception and evaluation of the product.34
Other factors that influence the decision making process include the brain retrieving the episodic
memory, past experience with the brand, sensory memory (memory that is stimulated through the
senses) and so on. The analysis done by neuromarketers help in establishing which parts of the brain
show the maximum activity while selecting or rejecting a brand.35 This is further emphasised by the
art of framing the information for a typical neuromarketing exercise.
Prof. A.L. Foo of Lancester Business School, Daytona, gives an account of surprising results
when the marketing departments framed the information in a unique way. He emphasises that “the
way information is presented to consumers can have a lasting impact on the way consumers look at
your brand. For example, two companies offered entertainment subscriptions for an annual cost of
$100 per year. But the marketing message from one company highlighted the fact that you could get
24 hours of entertainment for a cost of 30 pence a day - equivalent to the minimum fare of a public
bus ticket. Another company advertised with the blurb ‘$100 only’. In this case, the 30 pence promise
managed to get 45% more subscribers in its initial month of launch. This was because consumers
exhibited a clear judgment bias when they were evaluating the attractiveness of both the offerings.
One of the methods used by marketers to measure this is the susceptibility index”36 . Neuromarketing
perse had already garnered enough space in the field of new age marketing, but experts opine that it
may show an adverse effect on the consumers when tried to various products related to fast food,
tobacco, alcohol, etc. The ethical issues of neruomarketing are out and claiming enough media
space.
According to Commercial Alert, a non-profit organisation that works on issues such as
commercialism, consumerism, product placement, ad-creep and privacy Neuromarketing has more
dark shades than the positive ones. To contain the menace of these neo research techniques, it has
alarmed the senate committee on Commerce, Science and Transportation, requesting an investigation
of neuromarketing, the prospect of potent advertising and its implications for politics and public
health. According to them, in the coming days, Neuromarketing raises several large problems, all of
which fall squarely under the jurisdiction—and responsibility —of the Committee on Commerce,
Science and Transportation. They even alarmed the people about the increased incidence of
marketing-related diseases like obesity; type 2 diabetes, alcoholism, smoking and eating disorders.
The use of neuromarketing by companies that produce tobacco, alcohol, junk food or fast food could
be damaging to public health. For example, what if neuromarketing helped tobacco companies to
increase the effectiveness of their marketing by a mere 2%?37
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Neuromarketing Research for Online Shoppers?
On September 21st 2009, a seven-man multinational ensemble named BellKor’s Pragmatic Chaos
was awarded $1 million by Netflix CEO, Reed Hastings (Hastings) as the winners of the Netflix
Prize 2009. Announced 3 years ago by Hastings, the Netflix Prize challenged all the mathematical
“The scary thing is that some websites are telling crazy stories about consumer loyalty, and spending
crazy dollars trying to achieve it. In the end, it’s like herding ants. You can make it very attractive for
them to stay in one place, but it’s not necessarily because that one spot enamors them. Once the tasty
stuff is gone, they’ll scatter again. Some will stick around, but not nearly as many as people would
have expected based on the initial observations of the ants’ behavior.”1
– Peter S. Fader, Professor, Wharton Marketing
“Neuroscience research shows that when you ask someone about how they felt or what they thought
or what they remember about something, in the process of replying their brain actually changes the
original information it recorded. In contrast, when you measure at the subconscious, precognitive level
of the brain, you’re accessing the original information immediately following its reception, before it
can be distorted by all the factors that can influence articulated responses, from cultural and language
differences to education levels and many more.”2
– Dr.A.K. Pradeep, Founder & CEO, Neuro Focus
“Our warehouse employees never interact directly with the customer, so what we focus on instead is
having the Web site be the most personalized Web site in the world.”3
– Reed Hastings, CEO, Netflix
This case study was written by Kumar Gambhiraopet and Saradhi Kumar Gonela under the direction of Dr. Nagendra V Chowdary,
IBSCDC. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of
a management situation. The case was compiled from published sources.
© 2009, IBSCDC.
No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever
without the permission of the copyright owner.
Ref. No.: MM0069
1 “A Matter of Metrics: Using Web Data to Improve Sales Performance”, http://knowledge.wharton.upenn.edu/
article.cfm?articleid=162&CFID=9574910&CFTOKEN=28664383&jsessionid=a83095ba9b53dd278c56201c571e706d2385
2 “Out of Sync, Out of Sales? NeuroFocus Reveals Risks for Advertisers Whose Commercials Bother the Brain”, http://
www.earthtimes.org/articles/show/out-of-sync-out-of,1012990.shtml
3 “What Is Netflix’s Greatest Threat?”,http://www.fool.com/investing/high-growth/2005/02/02/what-is-netflixs-greatestthreat.
aspx
Netflix Prize 2009: Neuromarketing Research for Online Shoppers?
2
geeks across the globe, to enhance the movie recommendation technology used by Netflix by 10%.4
The team with experts in different domain areas joined forces and submitted an algorithm that was
10.05% better than the one Netflix uses to recommend movies to its subscribers. ‘Bellkor’s Pragmatic
Chaos’ is an ensemble of the best talent from different agencies across the globe who shared a
common space under this name, it includes Martin Piotte and Martin Chabbert of Montreal, from
Team Pragmatic Theory; Yehuda Koren, Bob Bell and Chris Volinsky of Bellkor (AT&T Research);
and Andreas Töscher and Michael Jahrer of BigChaos (‘commendo research’) from Team BellKor.5
The contest called for coming up with a unique mathematical algorithm built upon the user
preference like ‘If you like this collection of movies here are the others you’ll definitely admire’.
Sounds to be simple, but to break movie preference notions of the users into essentially mathematical
components and do it even 10% better than Netflix was an incredible task. It was a challenge that
kept the participant’s mental engines chugging for over 3 years to come up with a solution. Above all,
a worth of a million dollar prize, lest it would have appeared an extension to the Amazon.com’s
‘customers who brought this item also bought the following’ and eBay’s ‘Related products’ section.
The team Bellkors had combined other teams and their talent to fend off 40,000 other teams from 186
countries (Exhibit I) to take the grand prize to back to home bases in Austria, Canada, Israel and the US.
Exhibit I
List of the Top 10 Contestants for the Netflix Prize 2009
Source: “Netflix prize contest and the dramatic winner is …” http://www.kdnuggets.com/news/2009/n14/1i.html
4 “Box office boffo for brainiacs: The Netflix Prize”, http://brainstormtech.blogs.fortune.cnn.com/2009/09/21/box-officeboffo-
for-brainiacs-the-netflix-prize/
5 “Winning team join to qualify for $million for Netflix prize”, http://www.wired.com/epicenter/2009/06/winning-teams-jointo-
qualify-for-1-million-netflix-prize/
3
Netflix Prize 2009: Neuromarketing Research for Online Shoppers?
The contest falls in the genre of prize economics, where competitive perks are offered as an
alternative to in-house research and development. Netflix has said that winning a 10% improvement
on its movie recommendation algorithm (Exhibit II) for $1 million would be a tremendous bargain.
Hailed as the key competitive edge in e-commerce these automated recommendation algorithms are
empowering the retailers to guess the types of products and services customers are seeking by
tracking their past buying behaviour. For Netflix, a 10% improvement on its algorithms could help
move substantially higher number of movies and increase customer satisfaction, streamlining the
process areas and dwell in the lore of profits.6
Exhibit II
Working Model of Netflix
Compiled by the authors from “How Netflix Works”, http://electronics.howstuffworks.com/netflix2.htm
Algorithms or Virtual Customer Marketing Engines?
Thus Internet emphasises the fact that it provides a sizeable database of consumer information
that can be analytically structured and optimised to multifold the business horizons. Highly revered in
this perspective is the role of Internet clickstream data7 in customer relationship management. This
data provides a rich source of behavioural information akin to flick-and-mortar marketer’s data on
purchasing patterns of individuals. In both cases the data collected is expected to provide insights
into the likes and dislikes of a customer, which would enable better services
Hitherto, marketing research objectives were complacent with on-the-shelf data available with
the agencies, for instance, Information Resources, Inc., for customer packaged goods, Sound Scan
for the music industry and IMS for pharmaceuticals. The data was focused to provide behavioural
6 “Winning team join to qualify for $ million for Netflix prize”, http://www.wired.com/epicenter/2009/06/winning-teamsjoin-
to-qualify-for-1-million-netflix-prize/
7 The sequence of every web address (URL) that each shopper visits over a period of time, to generate their conclusions about
shopping behaviour.
Netflix Prize 2009: Neuromarketing Research for Online Shoppers?
4
attitudes that culminate in ultimate purchasing activity – when, what and how much consumers buy.
Scientific information on consumer activities such as comparison shopping, purchase behaviour best
suit brick and mortar organisations but consumer loyalty in the online shopping method was languishing
due to lack of data sources. These behaviours may be less visible but create a strong impact on
purchasing decisions of the consumers. While the marketing managers attempt to alter customer
behaviour using advertising techniques and interactive web sites, it’s critical to alter the consumer
behaviour in the initial stage of the funnel.
Against this backdrop, the science of where, when and how an online visitor becomes an online
purchaser has taken on a new mode, when everyone, from corporate managers to managers of
medium-sized physical stores started to hire hotshot website developers. Persuading the customers
to visit an online site is not enough tough anymore. Converting them into purchasers became the
acknowledged endgame. In order to gain a better understanding of the way visitors behave is even
more important on the Internet than in the bricks-and-mortar world. Web designers are in a haste to
create everything that demand the visitor’s click into a sales conversion.
According to New Shop.org – a report conducted by Forrester Research Inc., 42% of online
retailers increased their online visitor-to-order conversion rates (customer’s visit to the website
should convert into a sales order) during the first half of 2009 compared to the same period last year,
to an average conversion rate of 3.4%. However, industry experts opine that the conversion rates
vary (Exhibit III) with the nature of the product, consumer and the matter of time.
Exhibit III
Top Ten Online Retailers based on Conversion Rates
Source: http://www.marketingprofs.com/charts/2009/3119/top-10-online-retailers-september-2009
5
Netflix Prize 2009: Neuromarketing Research for Online Shoppers?
The report, The State of Retailing Online 2009: Profitability, Economy and Multichannel,
by Sucharita Mulpuru, Forrester’s principal analyst for retail e-business, also notes that retailers in
the study reported an average growth rate of 18% in 2008 web sales over 2007, and that 50% of
online retailers surveyed during the first half of 2009 are in anticipation of sales to be better than
expected in the coming year.8
Leveraging the importance of the website and allied tools (Exhibit IV) which multifold the business
prospects, investments are invariably flowing into these spheres among various business entities. In
July 2007, McKinsey Quarterly surveyed 410 marketing executives across the world representing
the industries such as business services, energy, retail, technology and telecommunications. The
survey revealed that the frequency and effectiveness with which they applied web-based, digital
techniques to five core marketing functions: sales, service, advertising, product development and
pricing is very high and are investing heavily on them. In 2010, respondents expect major sales of
their products and services done through online. A majority of the respondents also expect their
companies to be getting 10% or more of their sales from online channels in 2010, twice as many
companies as have hit that mark today.
8 “42% of e-retailers increased their conversion rates this year, study says”, http://www.internetretailer.com/
dailynews.asp?id=31970
Exhibit IV
Usage and Importance of Digital Tools
Source: “How companies are marketing online: A McKinsey Global Survey”, https://www.mckinseyquarterly.com/
Marketing/How_companies_are_marketing_online_A_McKinsey_Global_Survey_2048?pagenum=2
Netflix Prize 2009: Neuromarketing Research for Online Shoppers?
6
In addition to established online tools such as e-mail, information rich websites and display
advertising, survey respondents show a lot of interest in the interactive and collaborative technologies
collectively known as web 2.0 for advertising, product development and customer service. The other
driving vehicles for the business on the net are Blogs, Online Games, Podcasts, Social networks,
Virtual worlds, Web Services and Wikis. In the survey, in four of the five major areas of marketing,
the experts ratify the significance of online tools and say that two-thirds of companies are using
these tools in all the areas they deem most important.9
The impact of the Internet and web technologies on all the streams of businesses had created neo
age customers, who are techno savvy, empowered by latest gadgets, and purchase the goods by
what is termed as ‘by click of a mouse’! And for the businessmen, to float their own website of their
business had become the order of the day. Besides hypothesis testing on the basis of theory, exploratory
methods have been taken front seat to analyse online visitors’ interests and preferences. Web usage
analysis became an important tool to extract more information on consumer behaviour. Several
authors have suggested user segmentations based on web log analysis. Peter S. Fader (Fader),
professor of Marketing Wharton School of Business and Wendy Moe (Moe) a PhD student of
Maryland differentiated several browsing typologies on retail sites.
In their paper Capturing Evolving Visit Behavior in Clickstream Data, Fader and Moe figure
out that commonly used measures of web store success–such as number of hits, page views, and
average time spent at a site–provide only generalised information about customers, lumping together
everyone from brand-new Internet surfers to serious repeat buyers.10
They are keen about the changing dynamics of consumers’ behaviour–especially in the internet
environment, as they visit repeatedly, the behaviour of site users starts to change. Moe explains, “As
people start learning about a site, they start using internal knowledge to make their decisions: They
don’t need to actually go to the store to access information. As a result, they’ll go to the store less
frequently.”11 Another evolving behaviour to take into account, she says, is that “a lot of people are
hopping on the Web and surfing just out of novelty. But eventually that novelty’s going to wear off,
and people will go to a website only when they need to.”12
Fader, who has been studying grocery-store scanner data for nearly 20 years, is now investigating
web-based data and incorporating it into similar marketing models. He taught a course about Web
Metrics: Making the Most of Your E-Commerce Data, which draws upon his research. The
course empowers the marketing managers to leverage the data available from the internet in devising
unique marketing strategies. Firms tend to measure conversion rates as the number of people who
completed a transaction during a particular period as a proportion of total visitors during that time
span. Investors and managers would flaunt better gain figures, if they knew the probability of each
9 “How companies are marketing online: A McKinsey Global Survey” https://www.mckinseyquarterly.com/Marketing/
How_companies_are_marketing_online_A_McKinsey_Global_Survey_2048?pagenum=2
10 “Hit and Miss: Why High Traffic Streams Need not Lead to More Online Business”, http://knowledge.wharton.upenn.edu/
article.cfm?articleid=206&CFID=9574910&CFTOKEN=28664383&jsessionid=a830300c7985ab3afc2930642f21796f2439
11 Ibid.
12 Ibid.
7
Netflix Prize 2009: Neuromarketing Research for Online Shoppers?
consumer making a purchase during each visit.13 To meet this end, Netflix, has embarked on improving
its movie recommendation for genuine visitors.
Web Analytics – The Holy Grail of Neo Marketing techniques?
Fader, in his research paper co-authored with Moe titled Which Visits Lead to Purchases?:
Dynamic Conversion Behavior at E-Commerce Sites, analyses conversion rates based on visit
and purchase data at Amazon.com. Generating subsequent purchases from an online site is quite
tough as the familiarity levels with the site increase with the shopper. Eventually the buying tendency
of the shopper deteriorates as the sheer novelty of website wears off. This is a surprising – and very
troubling – development for online retailers’.14 Foreseeing this attitude of the visitors Hastings came
up with the idea of movie recommendation algorithm, where every click flashes refreshing
recommendations and giving the customer a new experience everyday.
“Realizing this dynamic, Fader and Moe developed a “conversion model” that breaks down the
buying process into three components: (1) the shopper’s “base rate” of purchasing during his or her
first visit in search of a particular product; (2) the accumulating effects from non-purchase visits
(i.e., browsing sessions) that help drive the customer towards an eventual purchase; and (3) the
threshold of resistance that the customer must overcome before making the commitment to purchase
something at a given site. All three of these behavioural elements vary across customers, and the
latter two also vary over time. Thus, for instance, the purchasing threshold may come down as a
customer commits to additional repeat purchases at one site.”15
How can one track down the visiting behaviour of consumers in such a detail? For their study, the
authors mined Internet clickstream data collected by Media Metrix, a New York-based digital media
measurement company. Media Metrix maintains a panel of over 10,000 participating households
who have installed special software on their personal computers so their Internet behaviour can be
recorded, page view by page view, over time.16 This is is not hunky dory. Despite it’s highly acclaimed
movie recommendation algorithm and the socialising network ‘Friends’ (visitors share immense
information on movies and suggest some flicks to their friends through this network), Netflix has to
spend a lot on its advertising budget (Exhibit V) on the net. This gives a clear insight of quantifying
the consumer behaviour online and offline.
However, Leslie S. Moeller and Edward C. Landry in their article Measuring your way to
Market Insight for Strategy+Business states, there is no ‘silver bullet’ in marketing analysis no
single approach can be the panacea. Some type of analytics comes out with good results whereas
some tend to be more mathematically sophisticated, but when optimally used both can produce
viable results17 .
13 “A Matter of Metrics: Using Web Data to Improve Sales Performance”, http://knowledge.wharton.upenn.edu/
article.cfm?articleid=162&CFID=9574910&CFTOKEN=28664383&jsessionid=a830a1f52b88f66a6bbf5a71725441503a72
14 “Online Conversion Behavior: The New Frontier of Internet Marketing”, http://knowledge.wharton.upenn.edu/
article.cfm?articleid=248&CFID=9574910&CFTOKEN=28664383&jsessionid=a83095ba9b53dd278c56201c571e706d2385,
15 Ibid.
16 “Hit and Miss: Why High Traffic Streams Need not Lead to More Online Business”, op.cit.
17 Moeller H. Leslie and Landry C. Edward, “Measuring Your Way to Market Insight”, http://www.strategy-business.com/article/
09107?gko=cb0c9, February 24th 2009
Netflix Prize 2009: Neuromarketing Research for Online Shoppers?
8
Retailers Ad Impressions
Netflix Inc. 2,367.28
eBay Inc. 1,334.73
Target Corp. 612.14
The Nation Law Firm 587.29
StubHub.com 470.26
Wal-Mart Stores, Inc. 463.52
United Parcel Service, Inc. 451.74
Lowe‘s Companies, Inc. 389.18
DirectBuy 361.59
N & M Cooling and Heating Inc. 257.75
*Data according to Nielsen, in September 2009
Compiled by the authors from http://www.internetretailer.com/dailyNews.asp?id=32172
Exhibit V
The Top 10 Retail Goods and Services Advertisers in Terms of Online Ad
Impressions* (figures in million)
If You Like French Connection, Will You Love Singing in the Rain?
Some of the BellKor team’s algorithms examined movies as bunch of elements. These elements
might include genre, a specific actor, and then drill down into more detail – blood but no car chases,
or car chases but no gunfights. Touted to be the million-dollar winner, Bellkor’s Pragmatic Chaos
couldn’t answer the critically savaged Sandra Bullock starrer, Miss Congeniality, which is the most
rated movie on the Netflix. This calls for analysing various factors involved in consumer buying
decisions. The film had been released long back and received a tepid response from the critics as
well as viewers. How come the movie tops the viewer’s ratings despite their lukewarm response at
its release point of time? Experts of Neuromarketing say that decisions are made in split seconds in
the subconscious state of our minds. Our decisions are guided by the state of our mood, timings and
many other factors.
Highlighting this concept to another level, Herb Sorensen (Sorensen) founder of ‘TNS Sorensen
Consulting’, the world’s largest retailers and brand manufacturers for over 35 years, emphasises this
fact in his latest book Inside the Mind of the Shopper – The Science of Retailing. He opines that,
95% of our cognitive processing is subconscious, which means we’re pretty poor at telling others
what we like or don’t like, and why we feel that way.18 There are numerous other factors that have
18 “Retail Customer Experience: Why customer satisfaction surveys don’t work”, http://www.retailwire.com/Discussions/
Sngl_Discussion.cfm/13916
9
Netflix Prize 2009: Neuromarketing Research for Online Shoppers?
to be considered when devising an algorithm based on the consumer preferences and tastes. In this
perspective, Netflix declared another contest to incorporate all these attributes in order to come up
with the best scientific algorithmic model.
The announcement of Netflix new contest on the day of the presentation by Hastings can give
more insights into this. In this contest, teams will use anonymised demographic and behavioural data,
including ages, gender, ZIP codes, previously chosen movies (although genre ratings are included).
Contestants have to predict movies that these customers would like. There’s no accuracy target.
Netflix will instead award half a million dollars to the leader after 6 months, and another half million
dollars to the leader at 18 months.19 Industry pundits cite the new announcement of Netflix as an
example that manifests growing importance for analysis of online behaviour is better coordinated by
the consumer’s offline behaviour too.
The Conundrum of Consumer Behaviour@ Online and Offline
Consumer’s buying decisions may not be the same when they visit a physical store and an online
store. How far the offline touch points come in aid to track the behavioural patterns of the consumers
towards online businesses? Excerpts of the interview with Fader and Moe, featured in Sorensen’s
Inside the Mind of the Shopper, answers this question. Fader opines that, according to Sorensen,
shoppers tend to look to the left and more to the left, counterclockwise as they move through the
physical store. Well, where would be the shopping cart located on every online site? Obviously on
the right side. How can one attribute this notion of the consumer’s when designing a website?
Retailers experiment with absolutely everything in designing their website with colour, content and
design. But shopping cart is always on the right side. They have no idea why should they test the cart
on the left? Looking at a screen is totally different from pushing the cart in the aisles.20
In a retail store, shoppers only spend 20% of their time selecting purchases, and 80% in transit.
While most retail stores are designed for large stock-up shopping trips, most shopping trips and a
third of dollar sales are ‘quick trips’ for only a few items21 enthuses Sorenson. He further ratifies
this fact as sometimes these navigation follies rakes up angst, discomfort on the shopper’s mindset.
Each block of the store may evoke different notion in the mindset of the consumer (Exhibit VI) and
these are the very few touch points where the retailers should be cautious about. In contrast, on the
online retailing one can engage the shopper with all these touch points with a hassle free navigation
process for more of a time. The old canard that ‘eye level is buy level’ may be simply untrue for the
retail outlets but can be true for the online retailers.
This might be the reason; Hastings says “our warehouse employees never interact directly with
the customer, so what we focus on instead is having the Web site be the most personalised Web site
in the world”. Giving another insight in the consumer mindset, Sorensen says “While retailers typically
19 “The week in Geek September 24 2009: Netflix $1 million Research Bargain”, http://www.gallaugher.com/page/2/
20 Sorenson Herb, “Inside the mind of the shopper – The science of Retailing”, Wharton School Publishing, (ISBN-13: 978-
013-712685-9), 2009
21 http://www.herbsorensen.com/herbsorensenauthor.html
Netflix Prize 2009: Neuromarketing Research for Online Shoppers?
10
Exhibit VI
Connecting with Shopper’s Emotional Mindset
Source: Sorenson Herb, “Inside the mind of the shopper – The science of Retailing”, Wharton School Publishing, (ISBN-
13: 978-013-712685-9), 2009
offer 30,000–50,000 items in their stores, most households buy 300–400 distinct items a year. Many
retailers sacrifice the big head to the clutter of the long tail” says Sorensen. Proper store design and
precision tracking of consumers is not new – but its technical implementation on the web, its lowered
cost, its ubiquity and its comprehensiveness on the web are new.22
“Working for packaged-goods days is using behavioral data—really mining the wealth of
transactional data we have about how people are spending their time online and trying to marry that
data with attitudinal data obtained from ethnographic studies or consumer interviews. This is pretty
new. It’s hard to find people who are very good at it. But I think that’s where the most powerful
insights can really come from”23 opines Cammie Dunaway former chief marketing officer of Yahoo!
She further emphasises that, “it’s a fascinating time to be a marketer, as one must really understand
each consumer as an individual. Yahoo! has 500 million consumers, and I have to understand what
each of those 500 million individuals needs from the Yahoo! brand, as well as how and when to best
reach them.”24
On the contrary, a new study sponsored by iProspect and conducted by Jupiter Research The
Post-Holiday Online Shopping Study in February 2006, revealed that 53% of respondents purchasing
22 Sial Shailendra, “Online consumer behaviour”, http://ezinearticles.com/?Online-Consumer-Behavior&id=1947357
23 “Confronting proliferation ... in online media: An interview with Yahoo!’s senior marketer”, https://www.mckinseyquarterly.com/
ghost.aspx?ID=/Media_Entertainment/Confronting_proliferation__in_online_media_An_interview_with_
Yahoo!s_senior_marketer_2018
24 Ibid.
11
Netflix Prize 2009: Neuromarketing Research for Online Shoppers?
history was online and search engine based. The study emphasised that the Internet is not seen as
just a vendor, but also as a reliable research tool. Nearly 63% of survey revealed that respondents
researched products at online merchant sites, while 62% of Internet shoppers relied on search
engines such as Google and Yahoo! for product information, choices and merchants. Giving new
dimension to the concept, the iProspect study confirmed that a majority of shoppers go online to
research products, but nearly half still favour offline purchases at bricks-and-mortar retailers.’25
This is the point, where Netflix see an opportunity. It gives immense choice in the list of the movies
and it is backed by a robust distributing system with free shipping and no late fee! Given this scenario,
marketing models designed to help companies’ manage and optimise their spending in new media are
emerging on the firmament of marketing.
For instance, Yahoo Inc. has teamed up with AC Neilsen (A division of Nielsen company) to form
Yahoo Consumer Direct, a service that offers marketers a way to reach narrow customer segments
online and to measure responses on the basis of actual purchases. The premise is that consumer
buying decisions are made in split seconds in the subconscious, emotional part of the brain and that
by understanding what we like, don’t like, want, fear, are bored by, etc., as indicated by our brain’s
reactions to brand stimuli, marketers can design products and communications to better meet “unmet”
market needs, connect and drive the buy.”26
For a new and growing tribe of experts in the field of marketing, this vague explanation is perfectly
clear. For this is a set that probes for a deeper meaning using medical technologies like the functional
Magnetic Resonance Imaging (fMRI), to explore last minute changes in consumer behaviour. Called
‘Neuromarketing’, it’s the new, advanced, marketing technique that is catching on like forest fire. To
put it simply, neuromarketing studies the marketing stimuli among consumers using techniques that
are perfected not in business schools, but in medical universities — sensory, motor, cognitive, affective
response and so on.27
The Buyology of Neuromarketing
It’s been an open secret that Pepsi is the most preferred in the cola market, but it has always
been the Coke that majority of the people buy, kudos to the Pepsi Challenge and its surprising
findings.28 When consumers avoid the brand in question, a Neuromarketer could conduct an fMRI29
analysis to understand the influential spots of aversive as well as buying behaviour. Or it can identify
certain genetic codes that separate the risk takers from the conservatives and help companies design
campaigns that trigger the risk takers to take action and prefer their brand over the competition.
25 “Tracking Online and Offline Consumer Behaviour”, http://www.kosmoscentral.com/seo-articles/online-offline-consumerbehavior.
php
26 Randall Kevin, “Neuromarketing Hope and Hype: 5 Brands Conducting Brain Research”, http://www.fastcompany.com/blog/
kevin-randall/integrated-branding/neuromarketing-hope-and-hype-5-brands-conducting-brain-resear, September 15th 2009
27 “Neuromarketing in the era of hyperactive competition” http://economictimes.indiatimes.com/Features/Brand-Equity/
Neuromarketing-in-the-era-of-hyperactive-competition/articleshow/4342155.cms, April 1st 2009
28 Edwin Colyler, “The Science of Branding”, http://www.brandchannel.com/features_effect.asp?pf_id=201
29 functional Magnetic Resonance Imaging (FMRI) – A form of magnetic resonance imaging of the brain that registers blood
flow to functioning areas of the brain.
Netflix Prize 2009: Neuromarketing Research for Online Shoppers?
12
“Most marketers don’t take a single class in psychology. A lot of the current communications
projects we see are based on research from the ’70s”, says Justine Meaux, a scientist at Atlanta’s
Bright House Neurostrategies Group, one of the first and largest neurosciences consulting firms.30
Martin Lindstrom (Lindstrom) a marketing expert, who advises senior executives at Fortune
100 companies, partnered with Oxford University researchers and launched a major neuromarketing
study. Lindstrom revealed the results of the study and its impact on the future of marketing and
advertising in his new book Buyology: Truth and Lies About Why We Buy. During a recent AMA
Radio Show, Lindstrom explained “nearly 90% of consumer purchasing decisions take place at the
unconscious level. Neuromarketing aims to understand what directs consumers buying decisions by
examining their brain responses”31 (Exhibit VII). If this is the case, Netflix is embarking on the
benefits of neuromarketing techniques, in persuading the customer to watch the movies from the
recommended list. When flooded with number of movie recommendations, (matching the taste of
the customer by tracking his/her previous watched movie lists and their ratings for other movies), in
the split of the seconds, the customer has to press the buying button.
30 Carmichael Mary, “Neuromarketing is it coming to the lab near you”, http://www.pbs.org/wgbh/pages/frontline/shows/persuaders/
etc/neuro.html, November 9th 2004
31 Nancy Pekala, “Why Buy? The Role of Neuromarketing in Understanding Consumer Behavior”, http://
www.marketingpower.com/ResourceLibrary/Pages/Marketing%20Matters/marketingmattersnewsletter.02.27.09/
Role_of_Neuromarketing_in_Understanding_Consumer_Behavior.aspx
Exhibit VII
Behavioural Model
Source: Sangameshwaran Prasad, “Neuromarketing In The Era of Hyperactive Competition”, Brand Equity, The Economic
Times, April 1st 2009, page 1
13
Netflix Prize 2009: Neuromarketing Research for Online Shoppers?
Lindstrom foresees that companies will vehemently embrace neuromarketing to gain in-depth
knowledge of consumer’s perceptions towards their products. He substantiates his statement by
citing the example of Microsoft. Microsoft is all set to use EEGs32 to record the electrical activity in
people’s brains to see what emotions they experience as they interact with their computers. Another
major player who extended its marketing tryst with neurological perception-based techniques is
Unilever. Its results say that, using brain-scanning technology, Unilever discovered not only why
consumers enjoyed their best-selling Eskimo ice cream bars, but also that for all the consumers, who
relish the ice cream itself is a greater visceral pleasure than eating a chocolate or yogurt. Various
companies (Exhibit VIII) already started to extend their neuromarketing research to mine for insights
to their increasing roster of marketing challenges.33
32 An Electroencephalogram (EEG) is a test that measures and records the electrical activity of your brain. Special sensors are
attached to your head and hooked by wires to a computer. The computer records your brain’s electrical activity on the screen
or on paper as wavy lines. Certain conditions, such as seizures, can be seen by the changes in the normal pattern of the brain’s
electrical activity.
33 “Why Buy? The Role of Neuromarketing in Understanding Consumer Behavior”, op.cit.
Exhibit VIII
Companies that have Embraced Neuromarketing Techniques
Microsoft is now mining EEG data to understand users’ interactions with computers including their
feelings of “surprise, satisfaction and frustration”.
Frito-Lay has been studying female brains to learn how to better appeal to women. Findings showed
the company should avoid pitches related to “guilt” and guilt-free and play up “healthy” associations.
Google made some waves when it partnered with Media Vest on a “biometrics” study to measure
the effectiveness of You Tube overlays versus pre-rolls. Result: Overlays were much more effective
with subjects.
Daimler employed fMRI research to inform a campaign featuring car headlights to suggest human
faces which tied to the reward center of the brain.
The Weather Channel used EEG, eye-tracking and skin response techniques to measure viewer
reactions to three different promotional pitches for a popular series.
Source: http://www.fastcompany.com/blog/kevin-randall/integrated-branding/neuromarketing-hope-and-hype-5-brandsconducting-
brain-research
At another level, the science of Neuromarketing comes in aid to track down the best possible
marketing channel strategy, reaction of consumers towards different pack sizes and price points at
various points, which distribution strategy works better in triggering the positive response, which
distribution mechanism sends confusing codes to the brain and so on. The same consumer may buy
a product at one retail point, but choose the competitor at another retail destination. This can happen
Netflix Prize 2009: Neuromarketing Research for Online Shoppers?
14
34 “Neuromarketing in the era of hyperactive competition”, op.cit.
35 “Why Buy? The Role of Neuromarketing in Understanding Consumer Behavior”, op.cit..
36 “Neuromarketing in the era of hyperactive competition”, op.cit.
37 Ruskin Gary, “Commercial Alert Asks Senate Commerce Committee to Investigate Neuromarketing”, http://
www.commercialalert.org/issues/culture/neuromarketing/commercial-alert-asks-senate-commerce-committee-to-investigateneuromarketing,
July 12th 2004
despite the space allocated to the brand remaining the same. That’s because different retail chains
can have a different influence on the perception and evaluation of the product.34
Other factors that influence the decision making process include the brain retrieving the episodic
memory, past experience with the brand, sensory memory (memory that is stimulated through the
senses) and so on. The analysis done by neuromarketers help in establishing which parts of the brain
show the maximum activity while selecting or rejecting a brand.35 This is further emphasised by the
art of framing the information for a typical neuromarketing exercise.
Prof. A.L. Foo of Lancester Business School, Daytona, gives an account of surprising results
when the marketing departments framed the information in a unique way. He emphasises that “the
way information is presented to consumers can have a lasting impact on the way consumers look at
your brand. For example, two companies offered entertainment subscriptions for an annual cost of
$100 per year. But the marketing message from one company highlighted the fact that you could get
24 hours of entertainment for a cost of 30 pence a day - equivalent to the minimum fare of a public
bus ticket. Another company advertised with the blurb ‘$100 only’. In this case, the 30 pence promise
managed to get 45% more subscribers in its initial month of launch. This was because consumers
exhibited a clear judgment bias when they were evaluating the attractiveness of both the offerings.
One of the methods used by marketers to measure this is the susceptibility index”36 . Neuromarketing
perse had already garnered enough space in the field of new age marketing, but experts opine that it
may show an adverse effect on the consumers when tried to various products related to fast food,
tobacco, alcohol, etc. The ethical issues of neruomarketing are out and claiming enough media
space.
According to Commercial Alert, a non-profit organisation that works on issues such as
commercialism, consumerism, product placement, ad-creep and privacy Neuromarketing has more
dark shades than the positive ones. To contain the menace of these neo research techniques, it has
alarmed the senate committee on Commerce, Science and Transportation, requesting an investigation
of neuromarketing, the prospect of potent advertising and its implications for politics and public
health. According to them, in the coming days, Neuromarketing raises several large problems, all of
which fall squarely under the jurisdiction—and responsibility —of the Committee on Commerce,
Science and Transportation. They even alarmed the people about the increased incidence of
marketing-related diseases like obesity; type 2 diabetes, alcoholism, smoking and eating disorders.
The use of neuromarketing by companies that produce tobacco, alcohol, junk food or fast food could
be damaging to public health. For example, what if neuromarketing helped tobacco companies to
increase the effectiveness of their marketing by a mere 2%?37
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