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Dec 8, 2009 | Comments

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.

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