What we can learn from the traveling salesman?

For those that have worked in the area of operations research, mathematics or computer science the traveling salesman is an intriguing and well known problem. The problem sounds very easy, what is the shortest route traveling from one destination to the next and returning to the place you started. What makes this problem intriguing is that no mathematical algorithm exists that guarantees the shortest route in an acceptable amount of time (to be precise: it’s an NP-Complete problem and as such the most efficient algorithm to date – and probably forever – solves the problem in a time that increases exponentially with the number of cities).  In practice this means that normal CPU’s would need days  or even years to solve problems with a relatively small number of cities (e.g. 100).

Applying marketing data includes many optimizations for which we can prove that no efficient algorithm exists. Examples are television reach optimizers or allocating inventory towards brands. For these problems, as a real optimal solution cannot be guaranteed, mathematicians need to develop heuristic algorithms; an algorithm that tries to get to the best possible solution in a limited amount of time.

And that brings me to the key subject of this blog. The deflation I’ve seen on what it means to optimize. Ten years ago, my clients asked me about how our optimization techniques work; they even got independent mathematicians to audit our methods. Nowadays this doesn’t happen anymore. To have a button in software that says “optimization” seems to be enough to convince prospects. And this is a slippery slope as some optimization routines I’ve seen has moved towards simply users clicking (with some basic information) what they think is best. And let me guarantee, users are not able to optimize as good as good old-fashioned mathematical optimization techniques.

Don’t believe me, please download a little piece of software I wrote many, many years ago. This software allows you to try and find the best route for a traveling salesman before the computer gives it a go. With about 40 cities, on average – in my case – the computer does 8 to 10% better. That’s a lot if it is a 10 mln dollar decision!

And yes, as the computer algorithm cannot guarantee the best solution, you might be able to beat the algorithm. Do let me know (with screenshot!) if you’ve been able to do this.

Is ROI killing creativity?

There are many discussions out there about the future of the agencies and the consensus seems to be that analytics will get a more prominent part in marketing departments and agencies. The discussion than seems to revolve around the tension between ROI and creativity and I remember having done some master classes in Europe with the title “Is ROI killing creativity?”.

I’m obvious happy with more analytics, it’s Pointlogic’s core business. However, as I mentioned in my first blog post, I’ve always specifically enjoyed the tension between numbers and creativity. But my true believe is that these two could and should go hand in hand. If ROI is killing creativity, the only good reason would be if creativity indeed doesn’t deliver a better ROI. I’m guessing most would disagree.

The key problem is, I believe, that most marketers and agencies are comfortable with ROI in a historical sense. How well did this piece of creative perform? How well did this media plan perform? Then the strategic application of the ROI insights are to redo what worked and to stop what didn’t. And yes, this is like glue for creativity as creativity is about new and fresh and not about redoing.

But the solution is relatively straightforward although I know in my daily practice that it is out of the comfort zone of many. But analytical thinking and ROI should be applied in forward looking programs. Demand that analytics provide answers to expected ROI of campaigns before they happen. You might find that it could really transform the way you look at and apply research (with more assessments based on the unknown and more focus on how to monitor and adjust in real time). It’s only then that you’ll find that ROI helps creativity and that creativity helps ROI. And finally, it makes our job as analysts more fun!

Business in the US & Europe, let’s set the score

Nearly five years ago I started Pointlogic in the US, this was after spending my career of more than ten years in Europe. So let’s set the score of comparing the business environment in Europe and the States:

Openness of doing business

This is an absolute no-brainer, the US is by far more open to do business. In Europe there are no legal or political restrictions to do business throughout the continent, the European Union guarantees freedom for any citizen to work anywhere and money may freely flow through the union. However, culturally there are real barriers in doing business. The larger European markets are more closed, meaning that French prefer doing business with the French, the Britons with the Britons, etc. I’ve always appreciated doing business in the US and I never felt any barrier as coming from Europe and representing a Dutch company. So it’s clear, it’s 1-0 for the US!

Competitiveness

There is no doubt that the US is more competitive than Europe. I actually think this is an underappreciated trait of business in the US and it certainly helps leverage the openness of the market. The openness means that if you have a good product, you’re accepted and you win business. The competiveness assures that you need to remain on top of your game as it’s easy come easy go. In the US you have to be good and stay good. This is not true in Europe where relationships matter more. Once you’re in and you whine-and-dine with the client, you’re pretty safe to retain the client even when the product is under delivering. So it’s 2-0 for the US.

Legal

Europe has a very different legal environment than the US (with the exception of the UK – but then even the Britons don’t refer to themselves when they say Europe). The main difference is that the US holds more freedom in writing your own agreements while in Europe there is simply more pre-arranged by the legal framework. Another difference is that, in case of litigation, European judges will consider what’s reasonable and what was the likely intent of the agreement while judges in the US will take the written agreement more literate. The effects are many but although the European system has some disadvantages it does work better. Two main advantages: (1) There is less possibilities for harassment and (2) the legal system would consider the fact that business realities change during the lifetime of an agreement (which changes the intent of the agreement). So the overall score is 2-1 for the US.

NDA’s

During more than ten years in Europe I don’t recall signing any non-disclosure agreement (only non-disclosure paragraphs as part of a larger agreement). In the US, I’ve probably signed about thirty/forty of them. It seems like a small point, but I actually like a formal statement that says “we’re going to do something together but what we share is confidential and you’re not allowed to solicit associates and we’re not yet in business as partners.”. It’s 3-1 for the US.

Sales process

This is a tough one. I’ve found it easier in the US to get the appropriate meetings and having a sense of your products being genuinely considered. On the other hand, a first sales meeting in the US is quite often for a complete commission and they expect a sales pitch. In Europe a first meeting is, in most cases, an hour that you get acquainted with the representative of the company with more of a discussion where needs and capabilities are shared. This is not yet the sales meeting and the second, real sales meeting, can be much more customized towards the needs and requirements of the prospect. So both get a point for this: 4-2.

Employment

In Europe it can be very hard to ‘let people go’ and there is no such thing as at-will employment. Severance payments are normally automatically ruled at two months for every year of employment and, as such, if someone had worked for you for six years it takes one year of salary to let them go. This is a real burden to businesses and in the end I also don’t believe this is beneficial for (especially young) employees. The automatic severance leads to a hurdle of leaving a job, even if you’re unhappy and as such it stops some of following new dreams. I also believe, quite controversially, that the difficulties of letting people go is very harmful for those that are unemployed. With employment rotation being low it’s much harder to get into a job and it gets worse, getting fired in Europe is such a big deal that employers would be very careful to hire someone that was laid off (it must have been really bad). As such it’s 5-2 for the US.

Fun of business travel

Perhaps not the most important point for business but I do want to give Europe another point! I remember the days of having a one to two hour flight with on-board service and then landing in a different world, different culture, language, food, etc. There is simply no comparison between the fun of doing business in places like Prague, Madrid, Moscow, Istanbul, etc and to compare this with Houston, LA, Dallas and Detroit.  The final score is 5-3!

To summarize, I do believe the US has a better business environment than Europe and that this environment spurs innovation, growth and flexibility. The good news for Europe is that some of the barriers of doing business are being closely looked at and legislation is slowly changing to adapt. Perhaps, in a couple of years, Europe can draw.

True ROI Accountability: Media or Creative?

One of the tensions in marketing these days is the fact that the creative execution has the biggest impact in the ROI of an advertising campaign but the money is spent in media. As business’ follow the money, the question of accountability has fallen on those responsible for buying media.

I was thinking about this again after looking at a presentation from a competitor (yes, I do sometimes get competitors work on my desk) with sheet after sheet about the contribution of television, outdoor, print, etc. No mention at all of the contribution of the creative material.

First let me be clear: I totally disagree with accountability looking at media in a silo. One needs to manage the creative and media simultaneously and look holistically at the successes and failures of marketing campaigns. It is never the media buy that is solely responsible for the failure of a marketing campaign.

Obviously, this is happening for a reason. It’s much more difficult to take the creative into account and understanding norms for the effectiveness of media is certainly useful. However, the industry needs to push this step further. We’ve moved past looking at only reach and frequency, and we’re creating accountability for media plans that show what is actually being delivered for the brands. The next step is to boldly put R&D budgets into understanding the interaction between creative and media in a way that we can predict the effectiveness of campaigns considering creative and media as one and the same.

Posted by Peter Kloprogge, Co-Founder

Agent Based Modelling

People sometimes ask me what I think about “agent based modeling”. As a mathematician it’s actually somewhat confusing that during my studies I learned about Markov processes, simulating queuing processes, Bayesian statistics. But it seems that the good old world of mathematics has caught up with the world of branding: genetic algorithms, neural networks, agent based modeling, etc.

So let’s put agent based modeling in the box it belongs. It’s nothing more (or less) than simulation. I’ve studies queuing processes by applying simulation models. People would come into the process, each would determine which queue to select and the time it takes to serve a person was based on some random distribution. Without me knowing it, I was applying agent based modeling.

For marketing purposes, simulation I do believe has great potential. We can research individual behavior and decision rules but a system to aggregate these individual characteristics and to allow for scenario planning based on such an aggregation would be far too complex to execute without a simulation model. But with a simulation we could have ‘agents’ seeing ads, using the internet, going shopping, etc. If current researched behavior leads to current brand outcomes, it seems like a credible step to change the environment of these agents and to see how they would react. It’s like creating a virtual environment where you can give virtual consumers stimuli and to see what and when they’ll purchase.

So what’s next? Consumers learn and change their behavior and decision rules based on historical stimuli. This means that in our simulation model we would need to allow our agents to learn. So the next big thing is “agent based artificial intelligence”! Just googled this and very disappointed to see this already gets 62,000 hits. At least I do believe I can claim to be the first to bring this idea to the marketing community.

By the way, even though I’ve studied queuing process, I too always elect the wrong queue!

Case-study: The Toyota Recall

Agencies and Performance Based Incentives

Welcome

Here I am, sitting on a train between Schiphol airport and Rotterdam, on my way to our annual strategy meetings. Outside it’s dark and grey and as this seems like a perfect timing to buckle down and write my first blog post. I decided to start a blog a couple of days ago with the promise to myself to write something every week. Will I keep this promise? Only the future will tell.

In 1993, Sjoerd Mostert and I started Pointlogic (then called PLS which stood for Point Logic Systems) with the business plan being applying software and mathematical techniques to help board room decisions. We’ve actually been very true to our first mission; our business still revolves around this core principle with the only addition being that our applications are mostly in the area of optimizing marketing ROI. So, that defines me in business and that is what I’ll be blogging about: mathematics, software and marketing ROI.

My personal background is in mathematics.  I’ve always been intrigued by the tension between math and advertising, hard numbers versus creativity, rational versus empirical. I will use this blog to talk with you about these subjects and to reflect on the future role of mathematics and technology to optimize marketing decisions.

I hope you’ll enjoy it and to spark some lively discussions.

Posted by Peter Kloprogge, Co-Founder