Never Let a Good Crisis Go to Waste

April 21, 2020

Dimo Kostopoulos, SVP/GM, Client Partner

Sir Winston Churchill once said, “Never let a good crisis go to waste.” He said it in the mid-1940s as we were approaching the end of World War ll. I’ve always been a big fan of natural experiments [and Winston Churchill]. Natural experiments are most useful when there has been a clearly defined exposure involving a segment of people which is known as treatment as well as the absence of exposure in a similar segment which is known as control. Any observed change in the outcome between treatment and control is attributed to the exposure. If companies recognize when natural experiments occur, they can learn from them at little or no additional expense.

Natural experiments have a long history in public health research, the most famous being John Snow’s 1853 study of cholera in Londoners supplied with drinking water by companies upstream and downstream the city’s sewage outflows. Snow had a causal theory that cholera is spread by contaminated water. He identified a natural experiment, set out to collect appropriate data and then analyzed it. Another recent example of natural experiment comes from the retail sector i.e. for years, Amazon and other online retailers maintained a price advantage over brick-and-mortar retailers by not collecting sales tax at the time of sale. Recently, several states have required that Amazon collects sales tax during checkout. This seemingly random assignment of states i.e. consumers to different groups provided a unique opportunity for economists to measure the effect of sales tax on online sales and determine how that effect varies across different customer segments, product categories, and channels.

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In today’s terms there is no doubt that COVID-19 is reshaping consumer behavior and shopping habits. Being required to stay at home has resulted in significant changes on how people work, shop or entertain themselves. Approaching this as a natural experiment can help us provide answers to questions such as:

(a) how effective is home-schooling versus face-to-face class?

(b) What effect does the lack of daily contact have on the psychology of students?

(c) How does it affect their grades, performance on exams and overall productivity?

(d) What is the long-term effect of lockdowns on people’s behavior e.g. will people be giving up going to movie theaters or would they rather stay at home and stream TV a lot?

Here is another example of how we can leverage Google’s mobility data and measure long term effects of social distancing. Google announced on April 3rd that the company will help public health officials use its vast storage of data to track people’s movements amid the coronavirus pandemic, in what the company called an effort to assist in unprecedented times. What if we leverage Google’s unique dataset to exploit exogenous variation in social distancing between regions and measure the effect of social distancing on people’s psychological state of mind and then estimate impact on their TV streaming or digital media consumption preferences? That would be a gold mine of information for media publishers and TV content streamers.

Last week, New York Times published an interesting article on shifting consumer behavior as a result of exposure to COVID-19. They reported that visitor activity on websites such as Facebook, Netflix, and YouTube increased whereas viewership on sports related sites has dropped significantly. The number of daily users who engage with online applications such as Zoom, Google Classroom also increased. Lots of users spend considerable amount on internet gaming. They also reported increases in spending on online grocers, food delivery, meal kits, alcohol, home improvement, and general merchandise and ecommerce as well as declines in many travel-related categories, including cruises, airlines, and lodging.

All this sounds very intriguing however I am still wondering whether exposure to COVID-19 will eventually lead to permanent changes in people’s behavior. How will businesses keep up with all these changes? What would be the impact on retail, media economy as well as other industries? On the corporate decision-making front, when would be the right moment in time for executives to re-assess variable marketing investments and figure out where to shift fixed advertising such as TV & OOH spend? In this new landscape, how do they attract new customers or retain the best ones given the fact that historical customer RFM data becomes irrelevant? How do they predict next best action and determine market baskets? Moreover, on the supply side, given the fact that consumer needs don’t change as radically as their behavior, I am wondering what would be the impact of this new reality on retailers’ middle and last mile network infrastructure, fulfillment, high/low velocity product assortment and inventory? My gut feeling says whoever figures out this new grande schema of behavioral norms will be able to take advantage of enormous opportunities in the consumer space. One approach would be to start leveraging this massive amount of data created as a result of this natural experiment and determine new ways of delivering value to our customers. Based on this information we could then refine our customer value proposition and determine those operational tenets that will help us optimize our profit margin formula.