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Edward Nevraumont
The Swedish strategy
In response to the COVID-19 crisis, governments around the world have implemented stay-at-home restrictions. A few regions have attracted criticism for their refusal to impose lockdowns or strict limitations. In the US, you can see a general correlation between (1) willingness to keep businesses open, and (2) conservative ideology (eight states never mandated residents to stay home: Arkansas, Iowa, Nebraska, North Dakota, Oklahoma, South Dakota, Utah and Wyoming).
There is one striking exception to the idea that “life as (mostly) normal” strategies are favored by jurisdictions with conservative and individualistic traditions: Sweden, a country currently governed by a coalition of the Social Democrats, Greens, and the Left Party.
An April 28 report from CNN provides some details about Sweden’s approach:
Sweden has been an outlier during the coronavirus outbreak. The country has not joined many of its European neighbors in imposing strict limits on citizens’ lives, and images of people heading to work on busy streets, or chatting at cafes and bars have raised eyebrows.
Last week, California-based journalist Erik Augustin Palm wrote about his experience returning to his native Sweden. His article in Slate emphasizes his complete shock about people’s lack of concern about the pandemic:
What I quickly noticed during the ride to my Stockholm apartment was how things seemed exactly normal for this time of year. Spring, when the Swede wakes up from his winter depression and goes outside to manically face the sun with closed eyes, was the same as it ever was. No one I could see was minding social distance. Cafés were full to the brim, and people were picnicking in parks, on the same blanket. And within the first few hours back in Stockholm, I saw more handshakes and hugs in public than I had seen in two months in Los Angeles, where I had seen none.
Unlike governments who treat scientific evidence with suspicion (like Georgia Governor Brian Kemp), Sweden recognizes the dangers of the pandemic. Their strategy, though, attempts to balance public safety with reality. As Anders Tegnell — Sweden’s chief epidemiologist — explained, “It is important to have a policy that can be sustained over a longer period, meaning staying home if you are sick. Locking people up at home won’t work in the longer term. Sooner or later people are going to go out anyway.”
So far, Sweden HAS managed to avoid outbreaks on the scale of northern Italy, New York City, and the Basque region of Spain. But critics have expressed concern that Sweden’s relatively laid-back strategy has been far less successful than the stricter rules imposed by other Nordic countries.
Look at Worldometer’s comparison of COVID-related deaths, both total and per million people (as of May 4):
Defenders of Sweden’s plan assert that every country’s conditions are unique, reducing the usefulness of simplistic comparisons between nations. In terms of population, for example, Sweden (10 million) is much larger than Denmark (5.7 million), Finland (5.6 million), and Norway (5.5 million).
Although Sweden’s “number of deaths per million people” ranks in the top 10 globally, proponents of the government’s response note that their fatality rates are not growing on an exponential scale. In fact, the total number of deaths per day has been relatively flat since mid-April.
If we accept that a COVID vaccine might be multiple years away (as suggested by the New York Times), then — unless we stay in a full lockdown for an indefinite period of time — the amount of deaths is likely to remain constant. The only question is when those deaths will occur. Does the Swedish strategy just move the timeline of those deaths a little earlier? And without nearly the economic damage and social anxiety caused by strict lockdowns?
The truth is we just don’t know. We have no idea if Sweden’s plan is prudent or disastrous. We still lack the information to understand why NYC was hit so hard, while Florida — with limited social distancing — seems to have avoided a mass outbreak (at least for now).
There is a large gap in our ability to think about complicated issues: the feedback cycle.
Measuring causes
Although strategies differ, every government shares the same hope: reduce the number of COVID-related deaths. Alas, by the time many patients, especially those with pre-existing conditions, enter the hospital, it is too late for action — from both the medical team to provide treatment and from the government to enact policy.
As I discussed a few weeks ago in a post about cohorts, the fate of that terminal patient was determined weeks earlier, when they first contracted COVID-19. On a society level, we need to look back even earlier to trace the community spread. For an outbreak of 1000 new cases, public health officials might discover that most of those people were infected two weeks ago by only 100 (socially active) people who, in turn, caught COVID-19 the week earlier from a single “super spreader” who entered the city a full four weeks before the outbreak. When a region decides to “lock down,” it can, at best, hope to slow down future spread. Sadly, the new restrictions will not reduce the number of fatalities for at least two weeks.
The delay between action and impact is not just a macro phenomenon; we can see how specific choices shape our own lives. For example, we might do something today (take a woman you like to dinner, major in physics, run a television ad), but we won’t experience the outcome of that decision for an indeterminate time into the future (get married in two years, become a hedge fund trader in four years, build a billion-dollar brand in six years).
In 2006, California Governor Arnold Schwarzenegger tried to plan ahead. He led the creation of a $200 million pandemic response program for the state. A recent article in the California Globe includes the key details:
Following a SARS outbreak in 2003 and a bird flu outbreak in 2005, then-Governor Schwarzenegger started to create a stockpile of pandemic supplies including three 200-bed mobile hospitals that could be rapidly deployed, 21,000 additional patient beds, 2,400 portable ventilators, and 50 million N95 respirators. Schwarzenegger admitted that he was concerned over California’s preparedness for a widespread outbreak.
So how effective was California’s preparedness plan? We’ll never know — the program was shuttered in 2011. For nine years, the lack of negative feedback made it appear like the cancellation of the program’s funding was a prudent decision. Until it wasn’t.
Humans are very, very good at responding to “fast feedback.” This tendency explains why many of us love playing board games and video games. Within a short period of time, you discover if your choices led to success or failure. Immediate feedback is not only satisfying, but also helpful for boosting your skills. I had a friend who ran a chess program for elementary school students. He believed that chess demonstrated a valuable lesson for the kids: “if you learn something new, you can apply it and improve.”
You could argue that the biggest difference between successful and unsuccessful people is their ability and confidence to make long-term investments with unclear payoffs.
Marketers are sometimes no different.
Facebook and Google
Both Facebook and Google held earnings calls last week. Facebook announced a positive outlook for the future, as noted by CFO Dave Wehner:
Direct response [has] for many years, driven our business, it continues to drive our business. And I would say, if anything, COVID has accentuated the importance of people who are bidding for online conversions.
And what about Google? The most memorable line from their call was the description of the last three months as the “tale of two quarters” — the first two months produced excellent results, but then things slowed down dramatically in March.
Not everything slowed down, though. Here’s what Alphabet CFO Ruth Porat had to say about YouTube:
Significant YouTube revenue growth persisted until late in the first quarter with different performance trajectories for the brand and direct response components. Direct response continued to have substantial year-on-year growth throughout the entire quarter. Brand advertising growth accelerated in the first 2 months of the quarter, but began to experience a headwind in mid-March. [Emphasis mine]
Sundar Pichai, Alphabet’s new CEO, provided additional details:
...the good thing about search ads and direct response on YouTube as well, but Search primarily is that, it’s an extraordinarily effective system, it’s a transparent system, you have a very clear sense of ROI [return on investment], it’s very measurable, highly cost-effective and so we have always seen and we saw this in 2008 as well, people respond in the short-term, but the recovery is also fast when it comes back and so it tends to work.
In the marketing world, there are really two big categories of ad spend: “brand spend” and “direct response” spend. Both of these categories, when done well, are ROI-positive and drive business growth. But “brand spend” has a long and opaque feedback cycle, whereas direct response has a short and transparent feedback cycle.
If you cut your direct response marketing budget, you will see decreased sales immediately. In contrast, if you cut your brand budget, then you will NOT observe any immediate impact. You can imagine how many companies deal with a crisis — they adjust their direct response budgets to make sure they are still ROI-positive (which they can measure because the feedback is fast). Additionally, the economic uncertainty pushes many companies to slash their brand budgets, because they do not need to worry about immediate (and negative) impacts.
But, as I explained in last week’s post, just because you can’t SEE the immediate effect of your brand spend, that doesn’t make the impact any less real. And since everyone else is pulling back on overall ad spend, your effective cost per impression on brand spend should be dramatically lower than it was a few short months ago.
For direct response, the ROI per impression will, in many cases, be getting worse (because consumers are less likely to buy in the short term). But for brand spend the story is different. Brand marketing, by definition, impacts customers over the long term. If you believe the world will eventually go back to something approaching normal (and your company avoids liquidation), the ROI per impression on brand spend should remain relatively unchanged. If the cost per impression is much lower, brand spend should generally provide better ROI than it did before the crisis.
And yet, how many companies, even the ones without any risk of going out of business, are maintaining or increasing their brand spend? Google — a company with more than $121 billion in cash on hand — recently decided to chop their marketing budget by as much as half. In the same way that California cancelled their pandemic response program back in 2011, Google is cutting long-term investments because those cuts will not be visible — they won’t have any short-term feedback.
What else is out there?
From the end of 2019 into the beginning of 2020, I closely followed the news about the Wuhan epidemic. In mid-February, my family started preparing for a coronavirus outbreak in the US. We built up a supply of basic necessities (including toilet paper and wipes) to last 8 weeks or so. We sold all of our equity holdings. We spoke with our parents about the possible health risks (especially for themselves and their elderly friends). We even researched data on ICU bed counts in Seattle and discussed plans for leaving the state in favor of somewhere safer.
I am not sure that I believed something as radical as a pandemic-related lockdown would ever happen, but I thought it might happen. And if so, we wanted to be ready. But as late as the second week of March, some of my friends still mocked my preparations.
I’m not surprised. Most people find it very difficult to act on a problem without having already received feedback. One potential reason that Asian countries seem to have responded to the COVID crisis more effectively than North America and Europe? Asian countries were most deeply affected by the SARS outbreak of 2003; as such, they received visceral feedback about the level of danger. Without clear and immediate feedback, people struggle to understand what is possible.
Likewise, most brand marketing budgets do not consider the likelihood of unexpected impacts or events. Instead, many companies just make some adjustments to the previous year’s budget. We lack the imagination to anticipate radical departures from the norm.
In the past few years, we have seen another issue defined by “long-term impact with limited feedback problem” — the world is facing climate change. And as you might expect for an issue with no short-term feedback, our response has been lacking. Instead of a widespread recognition of the problem, climate change captured headlines because it turned into a political football. Republicans have appealed to their base by denying climate change’s existence and Democrats have used the looming concerns as a lever to push (short-term impact) policies like higher minimum wage and housing subsidies.
Meanwhile, other potential “long-term impact without short-term feedback” issues are ignored entirely, whether that is the risk of asteroids or whatever is responsible for this mystery. Alex Tabarrok, an economist at George Mason University and co-author of the Marginal Revolution blog, suggests that government should have “Pandemic trust funds.” Rather than trying to annually revisit the decision on whether to fund long-term preparations, he argues that governments should make one giant payment upfront, invest that payment in bonds, and then use the interest each year to pay for required supplies and relief actions. Politicians could still find ways to kill programs like this, but it would take far more effort and face far more opposition. Perhaps Governor Schwarzenegger’s California plan would have survived had it been designed as a pandemic trust fund. Maybe there is a similar way to protect brand spend in your organization?
Hopefully, the COVID-19 crisis will teach us some important lessons, including the concept that we need to improve our ability to understand that even if some actions do not provide fast feedback, they can still impact us in very real ways. Try and find a way to maintain your brand spend and keep an open mind on what the next crisis might be. The truth is out there.
Keep it simple and stay safe,
Edward
If you enjoyed this article, I invite you to subscribe to Marketing BS — the weekly newsletters feature bonus content, including follow-ups from the previous week, commentary on topical marketing news, and information about unlisted career opportunities.
Edward Nevraumont is a Senior Advisor with Warburg Pincus. The former CMO of General Assembly and A Place for Mom, Edward previously worked at Expedia and McKinsey & Company. For more information, including details about his latest book, check out Marketing BS.
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