Apply Prisoners' Dilemma to Marketing Efforts

You may remember the classic story of two prisoners accused of the same crime. Each has two choices: do nothing or accuse the other suspect. If they both do nothing, they both will serve a small sentence, say, a year. If they both accuse, they both will serve a longer sentence, say, four years. But if one accuses and the other does nothing, then the one who accuses will go free while the other will serve an even longer sentence.

If each prisoner is thinking rationally, they will accuse the other of the crime, resulting in the worst possible collective decision. This is because regardless of the choice of the other prisoner, it always will be better to accuse. The equilibrium will be for both prisoners to accuse, resulting in a dilemma.

The prisoners’ dilemma has served as a basis for much of game theory, and it illustrates a larger problem. The challenge lies in how the interests of individuals can be reconciled against the interests of the group. How can non-zero-sum games such as this be solved?

Let’s attempt to answer this problem in the context of direct marketing campaigns. Instead of prisoners, the two players are campaign managers from the same organization, each aiming to increase the response rate and profitability of their own campaign. They have the choice of designing campaigns targeting one of two segments – segment 1, made up of lower-value customers, and segment 2, which includes higher-value, more profitable customers.

Each manager acting individually likely will design campaigns targeting segment 2. They may even devise competing offers coming from the same brand. The customer gets both campaigns, resulting in neither being successful – or worse, the customer has a negative experience and goes to a competitor. The solution lies in cooperation and incentives.

Cooperation. The above hypothetical example assumes that the two marketers are siloed and that neither knows of each other’s actions. Though this may be extreme, it is not unrealistic to think that marketing organizations don’t always have perfect lines of communication across product lines and initiatives.

The prisoners’ dilemma can be solved only through cooperation – if the marketers collaborate and decide they will not pursue the same market. If they can cooperate, one marketer will go after segment 1 and the other after segment 2, thus yielding the highest possible combination for the organization. But who gets the more profitable segment 2?

Incentives. If the goals of the marketers are not aligned, the situation can reoccur. One marketer inevitably will feel slighted by getting the lesser of the two segments. This raises a larger organizational challenge to reward the campaign managers on the performance of not just their own product or campaign. In this example, each marketer needs to be rewarded with $75 (a compromise between $50 and $100) regardless of the performance of their individual campaign.

Part of the challenge to overcome is the question of whether a marketing organization is customer-centric or product-centric. What drives marketing – the importance of the product or the relevance of what is important for the customer? This may constitute a larger problem than can be addressed here but it should be noted that this change can be considerable.

Contact policy. Another issue that marketers commonly grapple with is how often they should communicate with customers. This question has many dimensions that can be divided into several categories.

Recency relates to how long it has been since the last communication. Too long may cause a loss of mindshare but too soon may result in fatigue by the customer. Frequency relates to how many touches should occur in a given time. Again, pay careful attention to how many and what types of communications are sent so as not to erode a brand.

One of the most offensive communications to customers can be competing offers or sweeter deals being sent after the customer already signed up for the more expensive plan. This policy can be of a conditional nature: if A, not B, etc. All of this is similar to a game that is played by the marketer with the customer. In game theory, strategies are developed that dictate such decisions: if A happens, then don’t do B; if B happens, wait three moves and then do C.

From game theory to optimization. Games such as the prisoners’ dilemma can be applied in various ways. Game theory also was the foundation for operations research. This is a discipline of mathematics that solves problems involving limited resources and the many decisions that affect those resources.

Marketers face the challenge of constrained resources such as budget, channel capacity or volumes of a campaign. They also face the problem of how frequently to contact customers without diluting the effectiveness of the message. Marketing optimization software lets marketers plan and prioritize all outbound customer communications in order to maximize effectiveness while balancing the organization’s capacity to deliver and the likelihood that customers will respond.

With this method marketers can create effective, profitable and relevant campaigns with no dilemmas.

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