Tuesday, September 11, 2007

Hedging in Marketing

Hedge Funds have become under tremendous pressure over the last weeks of stock market turmoil and subprime mortgage problems. But I continue to be intrigued by the idea of hedging, especially when applied to our marketing discipline. Wikipedia explains Hedging:

“In finance, a hedge is an investment that is taken out specifically to reduce or cancel out the risk in another investment. Hedging is a strategy designed to minimize exposure to an unwanted business risk, while still allowing the business to profit from an investment activity. Typically, a hedger might invest in a security that he believes is under-priced relative to its "fair value", and combine this with a short sale of a related security or securities. Thus the hedger is indifferent to the movements of the market as a whole, and is interested only in the performance of the 'under-priced' security relative to the hedge.”

Isn’t there something beautiful in distributing your risk by betting on one outcome while simultaneously betting on a different outcome which has low probability to occur with the first outcome? It seems to me that marketing could learn from the principles of hedging. Here are a few suggested hedging applications:
  • While a brand is betting on being successful with one segment (e.g. young people), the brand should develop an alternative marketing solution for the “opposite” segment (e.g. older people). Success with a younger segment seem to be almost diagonal of success with an older segment but hedging one’s marketing approach could lead to very different brand applications.
  • While betting on the successful impact of one marketing channel (e.g. TV), a brand should work on deploying a very different channel approach that is on the other extreme of media (e.g. outdoor events). The real hedging is happening when one books both media events at the exact same time. Most People can’t be watching TV and be at on outdoor event at the same time.
  • While betting on selling a lot of high priced goods in a highly developed market (e.g. price points of over $1,000 in the US), a firm should find a way to sell a significantly lower priced good in one of the BRIC countries (e.g. lower than $100 price point in India).

Most firms might not incorporate hedging elements in their marketing strategy but thinking through what hedging would mean for a particular brand can be an incredible insightful intellectual exercise. One argument against hedging is its understanding as the opposite of focus. I believe that hedging and focus don’t have to be mutually exclusive. Hedging is the data and insight driven decision of focusing primarily on one bet while ensuring the spread of risk and including another potential outcome in conscious and thoughtful manner. To include hedging in one’s marketing might trigger the disappearance of unique and extraordinary success but it could increase the average success rates of marketing efforts over a longer period of time. That’s what hedging is all about.

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