Junk mail? Sometimes it is worthwhile for the consumer

How can a clever vendor reach his maximum audience when he is marketing exercise machines for the home using junk mail to thousands of potential clients and who can he achieve the potential making the best deal? Game theory serving the retail world.

Dr Ushi Shoham Krausz/ By Dr. Ushi Shoham-Krausz /

I told you in my last column about an exciting course I am preparing; a marketing course using Game Theory and economic behavior.

 

And here it turns out that models of the Game Theory can promote cooperation between sellers and buyers.  That is, they can promote marketing.  And an important word: there is here a not insignificant position of interpretation and the free use of Game Theory.  For good: it is possible to explain interesting things and for the bad there will be people who view this use as inappropriate and not fitting or not accurate to use this theory.

In this column (and the next) we will deal with junk mail, or its formal name “direct marketing via mail”.  This marketing model has long ago passed our record.  In the process of developing digital marketing smarter devices have been released (I will write about them in the future).  Nevertheless, let us begin at the beginning: we will see when it is worthwhile to buy and respond to an electronic offer and when it is worthwhile for the marketer to fish for customers who have had the mail sent to them.

 

Zero Sum Game

Let us return to the early days of the Internet.  Then we didn’t recognize these annoying mails quite so much.  However we learned quite rapidly.  What is necessary is to take a quick look and delete!

What takes place between these two extremes is- Marketer and potential customer- this is what is called in Game Theory “zero sum game”.  The zero sum game is not a game where both sides lose.  It is a game where the gains of a particular side together with the losses or payment of the other side add up to zero.  Tic-tac-toe is such a game.  Here: the winner (as it were) receives a point and the loser loses one.  Minus one plus one equals zero.

 

In such zero sum games, we generally employ a particular strategy in order to win or at least to gain a tie.  Anyone who has ever played tic-tac-toe knows that it is best to begin and how to play in order to block the competitor and at least end the game in a draw.

 

Another feature of such games is the advantage of each side to reach equilibrium in the game; equilibrium that serves the interests of both sides.  What do I mean by this? Take for example the cold war.  This is a most relevant example of the game theory, since the authors of the game theory worked in the US armed services and dealt with the nuclear threat and ways of defending against the Soviets.

 

And so, the US had a store of nuclear weapons that could wipe out the Soviet Union and the Soviet Union had a store of weapons that could wipe out the US. When does each side win? (Note the limitations of the analysis of the game theory) each side wins if it wipes out the other side and remains protected (here, there is a distortion that perhaps the behavioral game theory could correct; this is not necessarily a victory.)

 

And when does each side lose? When it is wiped out.  And how does the mutual equal deterrence work? When there is a balance of mutual potential for destruction each side uses a certain strategy that is good enough for it, even if it is not the best possible one.

 

Remember.  The best thing for the US perhaps would be to get rid of Moscow.  However the US would settle for minimizing its maximum destruction.  That is, it tries to prevent its own destruction. (This would be its maximum loss, the greatest loss).  This action or strategy of the US is called in game theory, the minimax strategy; that is minimum achievement with maximum damage.  Or act in a manner that will minimize the fantastic damage that could be inflicted on you.  And here the Soviets think the same way.  And thus a balanced situation is created in this game.

 

eBay

It turns out that situations of strategic balance minimize damage in sales as well.  The Internet site eBay allows you to enter it to sell and participate in a competition of offers, or you can use the “buy now” button.

When you play this game, you are in effect, playing against the seller a zero sum game.  Not a game that can cause damage or destruction but a game built according to zero sum.  The buyer “loses” 100 Sheqel (-100) and the seller gains them (+100).  And when is there a successful sale? When there is equilibrium.

How does a rational seller behave?  He will offer the maximum price he feels he can get. Obviously he won’t open with the price for which he will settle.  The seller operates in terms of the game theory according to the rule of maximum, he reserves the right to get the maximum possible price relative to his minimum.

And how does the rational buyer behave? He will offer the minimum price he is prepared to pay from the maximum he is prepared to add.  And here we have returned to the strategy of minimax.  Note, the rule of minimax tells us to minimize our losses as much as possible.  And the buyer’s damage will increase so he pays more for the product and thus he presents his minimum.  Confusing? Totally.

 

Let us give an example.  I sell a book.  It is worth my while to sell it even at 500 shekels; however I won’t begin to ask this price.  I believe that I have a chance to get 800, and so I will ask for 800.  Here, the maximum I can get relative to my minimum (in my opinion) and I acted according to the rule of minimax.  And the buyer?  He can pay up to 1000 shekels, however as a smart person, he will offer the least (minimize the damage of the money expended).  Assume 200 Sheqel.

 

And what happens in this example?  If we are referring to one chance of an offer and a counter offer, there would be no sale! The buyer offers 200 his minimum, while the seller asks for 800.  No go.

However on eBay this does not usually happen.  Why? Because everything is out in the open.  Everyone can get a history of sales on the site.  Including the present seller and, in general, to be familiar with the market. And so when there is a genuine interest to buy and sell, the seller will ask for a reasonable and fair price and the buyer will offer one.

And when is there a sale? When the maximum of the seller is the same as the minmax of the buyer.  That is, when the seller receives the most he can and the buyer pays the least he can or wishes to pay.

Junk mail or “direct marketing via mail”.

Here too we have a zero sum game.  The seller sends out 100 thousand mails, and his interest or success is based on the number of responses he gets from those who take the trouble to get back to him and buy at the highest price.  This is his interest.  The interest of the buyer is to buy at the lowest price (or not to buy anything) without troubling him with annoying mails.

And when, nevertheless there is a purchase? When some type of equilibrium is reached. When the seller succeeds in obtaining the maximum price relative to the minimum price at which it is still worthwhile to sell (rule of maximum) and this price is the minimax of the buyer, that is thdamage (lowest rice) the minimum of his maximum damage that might befall him (that is, to pay a “sucker” price).  Confusing?

And how does this work in reality? Here I use an example taken from the exciting book I am using to help me: Social Media; Marketing written by the American sociologist Eric Anderson.

Let us assume that I am the distributor of exercise equipment for the home and I operate by means of the distribution of junk mail.  The cost price of the exercise machine is $1000.  I send out mail to 100, 000 people and offer it to them at a price of $2, 000.  Out of these I get responses from 10 people, which means I earned $1, 000 for each piece of equipment which, for the ten I sold is a profit or $10, 000.

A month goes by and I continue with my strategy of flexible sales.  I offer the same piece of equipment to the same 100, 000 mail addresses but not I offer a discount of $400, that is I sell it for $1, 600 and make a $600 profit on every machine I sell. (Remember? The equipment cost me from the manufacturer $1, 000).  Since this is a more attractive offer, I now get 20 responses and I earn from 20 machines $12, 000 which is worthwhile for me.

Another month goes by and I continue to send out the same mail to the same database with the following offer: buy now at an $800 discount, i.e. pay only $1, 200 dollars.  In this case I earn only $200 for each machine.  However this attractive offer brings me 30 buyers.  Selling these 30 machines earns me $200 each and my profit this time is $6, 000.

 

So what is worthwhile for me to do? And when is it worthwhile to buy and sell?  Let us continue to get mixed up. For the seller the best scenario in this situation is to sell at $1, 600 which is his minimax position. Minimum damage.  Minimum damage in the first case where there are few buyers (at the full price he sells only 20 devices), and the minimum damage of the crazy discount (where he earns $6, 000).

 

We could say that this could be the maximum position of the buyer: he gets the maximum discount from among the minimum discount he could get. (Don’t forget that he doesn’t know that there will be a third offer.). And here is the point of equilibrium.

 

But one moment! Doesn’t the potential buyer know that there will be another discount?  He really doesn’t know? Any slightly experienced buyer has become familiar with the market.  Every slightly experienced buyer enters the name of the company and of the product into Google and immediately finds the minimum price.  He discovers an activity printout.  He discovers that the company offering the devices operates in a manner of flexible pricing and he can expect that the price will be decreased yet again.  And he waits.  He doesn’t buy even if he is interested in doing so. And here again we have reached an equilibrium that connects the interested buyer with the marketer.  And here all I have written above is worthless.

And nevertheless, even in such a boring zero sum game, of direct junk mail marketing has a possibility.  There is a better strategy the seller can use.  A strategy that will work for the benefit of both sides and achieve true equilibrium.  The next column will elaborate on this.

 

 

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About the Author

- Dr. Ushi Shoham is an economic philosopher, an academic lecturer and the author of the book "The Hole in the Bagel- a Friendly Introduction to Philosophy" Dr. Shoham writes a regular column in YNET the most widely read Internet newspaper in Israel which has brought him an avid audience of readers. We are pleased to announce that he is joining our newspaper.

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