In previous posts, I’ve discussed the randomness of success. It’s easy to attribute failure to poor marketing or success to an awesome product, but we forget about the role of luck. A marketer may congratulate himself for a high response rate, but factors unknown to him could have played a significant role.
I’ve been reading the Black Swan by Nassim Taleb, and he adds mind-blowing layers to this idea of serendipitous success[1]. One such idea is the “tournament effect.” It’s a bit difficult to explain, so here’s Taleb’s passage first:
Someone who is marginally better can easily win an entire pot, leaving the others with nothing…people prefer to pay $10.99 for a recording featuring Horowitz to $9.99 for a struggling pianist. Would you rather read Kundera for $13.99 or some unknown author for $1? So it looks like a tournament, where the winner grabs the whole thing–and he does not have to win by much.
In short, Taleb writes that small differences create immensely different outcomes. In a simple case, suppose you have two similar products vying for customers in a supermarket. If one brand decreases its price by 10 cents, the result is not merely a 10% increase in sales. It’s a winner-take-all result, owning 100% of sales.
It explains why one brand can dominate a marketplace, even if actual differences among competitors are very small. Small advantages in brand equity, awareness, packaging, location, or technology produce a similar tournament-like result. It’s why there’s such inequality in markets, where one product is a clear leader, distantly followed by second and third.
For me, the tournament effect suggests an explanation of market dynamics and customer behavior. It helps explain the head of the long-tail, where a few products represent a large portion of sales. But what’s missing is the role that randomness plays in these marginal differences, something Taleb later covers. A small lead in awareness or brand equity is not the result of some carefully crafted marketing plan, but unpredictable events. More on this in later posts.
Something to think about: Is domination of a competitor needed? Small incremental advantages can reap disproportionate results.
[1] I’ve been captivated by the Black Swan by Nassim Nicholas Taleb. I recommend it for anyone that can bearably read non-fiction.
