Another leading theorist, former Harvard Business School Professor Theodore Levitt, wrote an article in 1960 titled “Marketing myopia” that is perhaps the most influential single article on marketing ever published. Levitt claims that the railroads went out of business “not because the need [for passenger and freight transportation] was filled by others … but because it was not filled by the railroads themselves. They let others take customers away from them because they assumed themselves to be in the railroad business rather than in the transportation business.”8 In other words, the railroads failed because they did not know how to create and keep customers; they were not marketing‐oriented. Where would makers of buggy whips be today if they had decided they were in the vehicle acceleration business or in the transportation accessory business instead of being in the buggy whip business?
As a result of the customer‐focused, marketing approach espoused by Drucker, Levitt and other leading management and marketing theorists, in the 1960s, 1970s, and 1980s many companies asked themselves the question, “What business are we in?” and subsequently changed their direction to focus more on marketing and customers rather than on products. After the Internet became widely adopted by consumers in the late 1990s, entrepreneurs such as Larry Page and Sergey Brin (Google), Mark Zuckerberg (Facebook), and Jeff Bezos (Amazon) asked “What business do our customers want us to be in?”. Existing businesses that survived after the Internet disruption had a heightened sensitivity to customers and changed the old‐fashioned outlook of, “Let’s produce this product because we’ve discovered how to make it.” The Internet opened the door to a new digital age in human history, and from a business perspective, successful businesses and entrepreneurs in the digital age put the preferences, wants, and needs of customers and consumers first as these customer‐first businesses shot past traditional companies in market value.
In today’s digital‐age economy consumers rule because the availability of information on the web has switched the information asymmetry that existed in favor of marketers prior to the Internet to be in favor of consumers in the post‐Internet, digital era. Before the Internet and search, someone who wanted to buy a car had to depend on car dealers and their salespeople to provide information about a car’s features, benefits, condition, and price. The information asymmetry favored the salesperson.
Today, consumers can search for the information about the make, model, features, benefits, condition, and price of a car on the Internet and can be armed with thorough information before walking into a dealership, often with more information than a dealer salesperson has. Therefore the information asymmetry has switched to the consumer in the digital era. Any company that does not recognize that customers now rule and put them on a pedestal, wow them, and delight them with an excellent experience will disappear from the business landscape.9
The Internet and Ad Words: Disrupting Marketing and Advertising
The Internet completely disrupted marketing. It switched the focus of marketing from mass marketing in the mass media to marketing to one individual at a time in customized, personalized, and fragmented media. In addition, the Internet allowed marketers to appeal to a narrow market of just one person out at the end of the long tail; to sell less of more, as Chris Anderson writes in The Long Tail.10
Not only did the Internet allow marketing to be more precise and more highly targeted, it also allowed consumers to discover a new product or service, to get more information about the product in the moment, without going to a retail store or dealership, and, probably most important, it allowed consumers to purchase a product online without going to a retail checkout counter. Thus, elements in the old value chain were upended; distribution costs and transaction costs were reduced to virtually zero – an enormous disruption.
Figure 1.1 The value chain
Let’s look at the steps in the value chain that companies had to go through in order to be successful:
The top step in each box (in gray, no parentheses) is the original one identified by Michael Porter in his 1998 book Competitive Advantage.11 Porter’s value chain obviously refers to a manufacturing or retail company, not a media or Internet company. The steps in the value chain that are in parentheses are more familiar and helpful in understanding the value chain process as it exists today, especially in companies such as Google, Facebook, and Amazon.
Before the advent of the Internet, large companies that were vertically integrated could control the three creation steps in the value chain (supply, production, and distribution) and could gain monopoly‐like market power, charge higher prices, and, therefore, achieve huge profit margins. For example, newspapers that controlled the scarce supply of news (skilled reporters who wrote news stories), owned expensive printing presses and delivery trucks and, thus, controlled production and distribution; therefore, they often gained monopoly‐pricing control over advertising. Newspapers, because they had an elastic supply of advertising inventory (they could add pages if demand for advertising went up), charged a fixed, non‐negotiable price and gave volume discounts to large advertisers. In other words, newspaper pricing strategy rewarded advertisers for buying more advertising lineage and buying it more frequently, and the newspapers could just add pages as demand went up. This pricing strategy was extremely profitable for newspapers, and also favored large advertisers, such as department stores that could buy advertising more cheaply than small retailers because of volume discounts. Thus, it was an advantage to be a large advertiser; the small corner dry cleaner couldn’t afford to advertise in a major newspaper and had to find other ways to market its business, such as advertising in Yellow Pages.
Another example of pre‐Internet advertising pricing strategies was how television networks determined pricing. Television programming had an inelastic supply of advertising inventory because programs were formatted for a fixed amount of advertising. Thus, a half‐hour news program was formatted for eight minutes of commercial time. Because of the inelastic supply of advertising slots and because there was high demand for a limited supply of television ad inventory, prices were not fixed and were determined by demand. The market determined prices, and thus each television commercial schedule was negotiated anew at the time an advertising campaign was placed. It was a pricing model based on scarcity and demand.
The prices for all media advertising were based on some version of a cost‐per‐thousand (CPM) model in which advertisers paid on the basis of having the opportunity to capture readers’, viewers’, or listeners’ attention. Advertisers purchased the opportunity for exposure, not based on whether anyone read, watched, or listened to an ad. Mass media advertising was, in a sense, a gamble that someone would see and respond to an ad immediately or sometime in the future.
John Wanamaker, a Philadelphia department store owner, famously said in the early 1900s, “I know that half my advertising is wasted. The problem is I don’t know which half.” So Wanamaker and other advertisers doubled down on advertising hoping that at least half of it would work.
Therefore, newspaper readers and television viewers were inundated with advertising