In the near future there may be a reliable predictor of how an ad campaign or new product will do in the marketplace: Check the stock price.
Masterfoods, Best Buy, Google, Nokia, Samsung and Microsoft, among others, have recently tested internal stock markets that are used to predict looming events and assess ideas.
The mechanisms, called predictive markets, don’t always exactly mirror the stock market, but they basically work like this: Employees and consultants bet money on possible outcomes. The outcome that most people bet on is considered the most accurate.
Such predictive markets appeal to companies that have embraced crowdsourcing and books like James Surowiecki’s The Wisdom of Crowds. The idea is that large groups of people tend to be more intelligent than small groups acting alone. The Pentagon even used a predictive market, in this case a stock exchange, to gauge the viability of various terrorist threats. But complaints by Democratic senators, most notably California’s Barbara Boxer (who called it “sick”), prompted the Pentagon to kill it in 2003.
Many in the business world have embraced the concept, though, and some are applying it to marketing and advertising. Consensus Point, a Nashville, Tenn., firm that works with Best Buy, General Electric, Nokia and Samsung, has been offering such predictive market software for about 13 years, but company president Dave Perry said there’s been a big spike in demand over the past two. “There’s really been an inflection point,” he said. “The momentum is just amazing.”
Masterfoods, meanwhile, used a predictive market for a pet food launch last year, said Emile Servan-Schreiber, CEO of NewsFutures, a Baltimore predictive market software firm. Servan-Schreiber said employees were shown videos of prospective campaigns and were asked to estimate the impact on sales. Those that came closest got a prize. “It’s at least as accurate as a panel and much cheaper and much more reliable,” said Servan-Schreiber. Reps from Masterfoods could not be reached. NewsFutures’ other clients include Pfizer, Lilly and Dentsu, the Japanese ad holding company.
Justin Wolfers, assistant professor of business and public policy at the University of Pennsylvania’s Wharton School in Philadelphia, said last year some of his students worked with Gap in a predictive market program in which the students tried to pick clothing items they thought would sell the best. Wolfers said the issue isn’t that predictive markets are so clever, but that, “What firms use otherwise is so stupid.”
One key difference between a predictive market and a focus group, Wolfers said, is that people in the former are betting on what they think will sell while those in the latter are usually asked about what they like. He added that predictive market programs do “surprisingly well” with fake money.
Best Buy has used predictive markets with fake money over the past six months and found them accurate. For instance, the company’s internal stock market managed to predict when the chain’s first China store would open (Dec. 28, 2006). Employees who wagered correctly won gift cards. Barry Judge, CMO of Best Buy, said he can “see a day” when the company could use the stock market to judge how new ad campaigns will fare, but that hasn’t happened yet.
Hewlett-Packard is considered an innovator in predictive markets and has used the technology since the mid-’90s. HP doesn’t use predictive markets to evaluate ad campaigns or new products, but HP rep David Berman said they could be used to do that in the future. Berman said the prize is usually a “nominal fee” like $100. Said Berman: “If you put any kind of money on the table, people take the game a lot more seriously.”