Curiosity and Current Events (ft. Professor Koen Pauwels)

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Welcome back to the official Data podcast. In this episode we have a very special guest, distinguished Professor Powells. He has graciously agreed to sit down with me to provide a walkthrough of high level quantitative research using one of his own published papers, which winners and losers in a major price war as an example. So, good afternoon, Professor Cowles. Many academics in the marketing field likely know who you are, but would you like to introduce yourself to the listeners who might not be as familiar with your work?

Of course. Thanks, Alisa. So my name is Koen Powells. As you can hear from my accent and my name, I'm not originally from the States, I'm from Belgium where I did the very classic training and I was just fascinated by the whole field of marketing as the perfect combination with social sciences like psychology, sociology, and the more quantitative field of econometrics that I was attracted to. And so I came into the States in 1997 for a PhD in UCLA. So I was right in the start of the whole dot com craze. It was also the first time that I was really kind of out of Europe. So I booked a one way ticket to la, literally. And I was completely bombarded from feeling in the center of the world, right, which LA is at least one of the major centers around the Pacific. And my thesis was long term marketing effectiveness. So I was very interested that when companies do something, whether it's a new product or a price promotion or starting a price war, as in the case of today's discussion, or doing something cool with their advertising or entering a new channel, what is really the reaction from consumers, from competitors and, and what is the net effect basically? So is this an action that you would recommend companies to do? And so for that I really kind of combined insights from psychology with the more quantitative aspects in economics to come up with good estimates and to be able to reliably say to a senior manager, hey, if you're offline and you're adding the online channel, what would be the long term effect of that? Would it be good or bad for your company or is there some kind of an intervention? Is that good or bad for consumers, for their prices, for their welfare? So my whole thinking has really been about long term marketing effectiveness. After my Ph.D. 2001, I joined the Tux School of Business at Dartmouth. So there I taught MBA students. Then I left in 2009 for Istanbul, for Turkey, because there was a startup university. So I was the third faculty member there, which was really cool. So you get to see a university without any Buildings or students and just kind of a core faculty and then we build it out to 5000 number university by the time that I left Turkey. And then so three years ago I came back to New England, which we always loved, to join Northeastern and so basically have been teaching marketing, analytics and related classes ever since.

Wow, it sounds like you're really well traveled then. That must be fun. I saw that you have a blog, Smarter Marketing gets better Results. On one particular post, how to outline a paper for marketing Journals. You kind of break down the components of these types of papers and you mentioned that the research question should really be first presented in the introduction. Where do you find the inspiration for these research questions?

Everywhere. So this is very particular to also kind of, you know, as a student. Right. I'm the kind of person who's interested in a gazillion things. I have a very broad intellectual interest. Why I noticed is because if you research something, it typically takes at least a year if you writing something for a top marketing journal and then the acceptance rate is about 5%. So you're working something for at least a year to make it as good as possible, then you submit it and then there's only a 5% chance you get it. So very often you take years and years to get a paper. And that's just the reality of our academic publishing side. So you can only do that if you're yourself intellectually interested in the problem. There's no other way you can stay motivated. But at the same time, I use managers and nice summaries of what managers and decision makers are interested in to narrow down my own intellectual interests. So one of the things that I constantly use is another great Boston institution, the Marketing Science Institute. So they are Now, I think 55 years old and they really want to bridge the gap. So the Marketing Science Institute is for what they call thoughtful practitioners and practical academics to bring them together. And so every two years they ask their 75 member companies. And so that's all the way from like Procter and Gamble Unilever to Construction to business to business to Google to. They ask their managers every two years what are the most important questions that you can solve right away. So what would you most like to see? Academic researcher that can help you? And so every two years I publish that. And so every two years I find something fascinating within my own intellectual interest that they're like, hey, this is something really nice to do. So there are these summaries about what would, let's say managers like to do. I would love to have that also for consumer organizations, it would be great if Consumer Reports, the US Government that cares for consumers, would bring out, hey, these are some kind of consumption related questions that we would really like to get some more research about. So this is one thing. The other thing is just things that I see happening on the news and that really fascinate me. So the price war that we're going to talk about a bit later is a typical example. So within a country that I know quite well, the Netherlands, there was a major price war and everybody was talking about it when you went there. And so of course you want to figure out what are the long term effects? Why have people done this? I mean, and if I may make the link then, so a week ago I contacted you because United Airlines dropped their change fees. And I'm like, oh, I know what's gonna happen. You know, first of all, why do they do it? Of course, you know, because they want to stimulate airline travel. They drop it. So they're seen as a pioneer. They're the first one to do so, which typically gets you some brownie pounds with consumers. But then Delta and American Airlines, the next day, they decided to match it. So what will happen now? Will people say, first of all, yes, we're going to fly again? Which is a big question mark. Are change fees really that so important this year or maybe later on to kind of get you to commit to fly again? That would be one question. The second one is, will United see a big benefit? Because if all the competitors follow, you know, market share wise, they will typically have a similar thing. So you see things happening in the news, you see things that don't make sense, like you don't really know why a company does what it does. And you do the research because you basically want to answer the question for yourself. And then that leads to some complications, looking for data that can have a wonderful paper.

So you already started mentioning your paper, Winners and losers in a major Price War. Why don't you walk me through what the paper is about and some of your findings.

So I think in the paper we do kind of paint the picture of the context, right? So this, this is, you know, a few years ago, let me put it that way, not, not sound too old. So in the Netherlands we had, we had the, really the legacy about 30, 35% market share grocery store, which was Albert Heine and they had been suffering for years for the declining price image. So as you may know specifically in grocery stores, people do care about prices because you have the same national brands, you know, Coke, Pepsi, that you can buy anywhere. And so, and Dutch people are very price sensitive, as you know, going Dutch is a phrase for a reason. And so Albert Hein, it was known as this kind of legacy player. Very good service, beautiful stores, but had been suffering from, hey, you know, you know, you pay a higher price than at some other places. And so their competition was both from supermarkets that are similar to them, also high service. And of course they were very concerned with the hard discounters. So in America, hard discounters are typically like a Walmart coming in with lower prices. In Europe, it's mostly the German discounters Aldi and Lidl, who are now also in the States, by the way. So they enter every European country with a much lower price and which a much kind of smaller store also. So you get in and out very quickly. As a student, I love that as a college student, because they don't hide the milk at the back. You can find the milk exactly where you want to. And they keep the prices down because most of what they sell is what we call the private label. So they also do sell a few national brands. You can find Coke there, for instance. But most of the stuff they sell is from suppliers that don't put their brand on, so it's branded by the store. And so they can keep prices very low because these brands don't advertise and so forth. So Albertin was really kind of afraid for its market share. And so at all the studies, because we have very nice survey things from the Netherlands that are in the paper showed that people said, well, Albert hen is fantastic service, fantastic quality, but they really have a bad price value relationship. And so why is it important? Because in the Netherlands, and I always find this an interesting point to put out to people from different cultures, right? People, really, even very rich people, they pride themselves on finding the very best deals. So in the Netherlands, you know, you know, even if you can afford it, if you buy something for a higher price, unnecessary, you're seen as, you know, stupid. And it's really, you don't want to, you don't want to confess about something. Everybody's always looking for the straight deal. And so in that kind of. Because in other countries, and I know this because I've lived in some in other countries, a high price really kind of indicates a high quality. And you get, you get great compliments for your friends and family because you can afford such an expensive thing. In the Netherlands, it's almost the opposite. People would laugh with you if you buy something for a higher price than they think it should be. So that was kind of the situation. And so what they did overnight was to say, look, we're gonna completely cut the prices permanently. And it was a huge price reduction. It was, you know, 10, 20% on a thousand items. So not just on a few things. They committed to do that permanently. So it was not a price promotion. And they specifically said that their objective was to become average priced in the markets in a place where right now there were the highest price ones. So that was the kind of, the major kind of shock. And then within two days, other retailers followed and we saw prices going down for years to come. It was a huge kind of. It was very, very well discussed in the press and in society because to get that, the retailers would squeeze their suppliers. So if you were making, you know, a fantastic brand of cookies, for instance, Albert Heim would come to you and say, hey, you know, I want to pay you 20% less because I'm charging my consumers 20% less. So huge problems there. And if you said no, they said, okay, then we'll just get you out of our stores and we'll make our own private label. So negotiations were really harsh. Some people lost their jobs, right? So it had this huge society impact. That was fascinating to me. And then finally, and as I found very interesting, so lots of retailers were actually selling items below costs. In my country of Belgium, that's illegal. So you're not allowed to sell something below the cost. In the Netherlands, that's completely legal. And so the European Union is about half. Half. It's fascinating. But the Netherlands allows you to sell things without cost. So for retailers were selling things below what they paid their suppliers for. And so there was a big discussion on is this sustainable? You know, is this, you know, price war? What is it good for? How I originally called this particular paper. And so it was, it was really, I was fascinating to see. You know, how did consumers react? Do consumers actually respond to the prices or do they just respond to the price image, Right. So if you drop your price, I drop my price too. So our relative price is the same. But maybe I can now kind of rationalize again, coming to you, because I don't feel stupid anymore coming to Alpenheim, Right. So that's all related to image and these things. And then of course, you know, how did the competitors react and how did consumers adopt their spending and everything they do? So it was a major shock to kind of a very typically stable category, right, Buying grocery shopping. And so I was just fascinated by how important that was. And how little people actually could, could see the consequences of it.

That's actually really interesting that they were selling it below cost, because I feel like that wouldn't be very sustainable in the long run.

It isn't. Right. And so one of the things and previous Lichten talked about, why on earth would anybody want to enter a price war? So if you can foresee that if you drop your price, your competitor drops too, you'll have about the same market share. You just have less money. So typically people have looked at it when the only reason it really makes rational sense. If you can hurt your competitors more than yourself, meaning if you have deeper pockets, then getting into price war is good if your competitor goes out of business. So you have that a lot when people talk about price wars. And airlines, airlines constantly have price wars, at least before 9, 11. And the reason is the price war is very likely to happen when most of your costs are fixed costs. So if I'm United and I have decided to fly from Boston to LA on a given day and I only have 80% of my seats filled, I want to offer the last seats to you at a very, very, very low price because the cost that I have to fly you, right, I have already paid for the plane, for my fuel is minimal. It's. What is it, a few peanuts, right? Literally. So if you give me kind of any price, 30, 40 bucks, I'm in a temptation to say yes to you and to get you into, into my plane. But of course, that cuts the whole price for everybody. And so in an industry with lots of fixed cost, you always see these price wars coming on to the field.

I did a little bit of research, and between June 2019 and May 2024, US airlines held over two thirds of the domestic market share. So these four companies were Delta, American, Southwest and United. And when I dug a little bit deeper, I found out that even before the pandemic, Southwest did not charge ticket change fees. Why do you think these three companies decided to implement such a similar change now as opposed to following suit with Southwest earlier?

That's a great point. Right. So again, a lot of them, it's about psychology, right? Not everybody knows that Southwest doesn't charge it. Right? The reason they do it now, obviously. So at the time that Southwest either came up without it or did away with it, I don't know which of the two is the case. You know, the legacy players didn't think it was in their best interest to follow. And this is just a revenue calculation, right? So every time that you can Change the price. You try to estimate the price sensitivity of your customers. And that's why quantification is so important in this field, because it's all about numbers. Right. So if Northeastern kind of increases the price of education by 10%, if it has the same demand, it has 10% more revenues. Yeah. So if you think about it just from a short term optimization, demand would have to fall by more than 10% to make a price increase. Wrong for our revenues. Similar the other way around too. If you give a 10% discount, suppose Northeastern cuts the price by 10%. Our revenues would go down unless we increase demand by more than 10%. And so this is where the price elasticity of the market comes in. And this is absolutely fascinating. So if people are very price sensitive, right. You drop your price by 10%, they increase their buying with 20%, which happens in most categories by the way. Then it always about thinking about ways to make price cuts. You're trying to make price cuts because it will stimulate demand a lot if demand is not elastic. So if you have a 10% price cut and demand only goes up by 5%, that means that price cuts are not in your revenue. Interest revenues always go down with the price because it's very interesting. So in those situations, company constantly think about, hey, how can I increase my prices and get away with it without. Without hurting people's psychology. So if you think in airline travel, there's the consumer segment and the business segment. So business people typically have to fly at a certain time. You know, I want to get in and out as soon as possible, but because I want to get back to my family, I don't want to see the town, I don't have alternatives because the alternatives like bus, train, driving myself take more time. And I'm very time sensitive. So the business segment is typically not sensitive price plus somebody else is paying for me, right. I'm not paying out of my own pocket. So these are all situations where as a company you try to find all the ways to increase prices because your market is not very price sensitive. But in consumer travel, you know, you can just go to a competitor, right. But you can also just postpone travel. You can travel in another way. There's so many kind of different, and you're paying out of your own pocket, so you're going to be much more price sensitive. So for instance, airlines typically you have the subsidy model, right? So they want to get their planes flying with as much as economy people as possible. And the way you get economic people is at the low price. But Then they want to make that up for the margin in their business segments where they have increased prices, because those customers don't care much about it.

If you want to imagine that you are a decision maker at United Airlines for just one second, and you can take your time with this response, but what would your response be to Delta and American? More specifically, what is your plan of action now that two of your competitors have essentially copied your business strategy?

So good and bad news, I always say competitors are also good news. And so the bad news is we're fighting for market shares. Obviously, competitors are also fantastic for you in the sense that the objective here of United is obviously to stimulate air traffic overall. And lots of other people they have loyalty cards with American or Delta. So the fact that your competitors are doing something too means that there's a lot more press attention to it and a lot more likelihood that the consumers will actually learn about this. No change fee. And so if your main objective is to stimulate air traffic overall and you basically, you're happy with your market share, you just want the market to go up, the competitors following is a fantastic idea. So when it's not a good idea, if the market is limited, it can't really expand and you're really fighting for market share. And so compare ad traffic with grocery shopping. Right. Which is what the paper is about. In ad travel, there's lots of ways to expand. Especially now there's a lot of trips that you had planned that you probably can take. Yeah. So there's a huge kind of if the airlines can convince you it's safe, you know, just for your health, you know, psychologically, I think it's really smart. And so, and so United is really hoping that competitors will follow actually and that it will increase overall demand for air travel. So in Albertan case, that's the opposite because you can't eat that much more groceries. So if there's a price in grocery between retailers, in the beginning, you may eat a lot more of your favorite snack, but in the long term, there's not that much more you can eat or drink. So in that situation, a priceware is much more devastating because, you know, there's only so much you can increase demand for, but a few percentages that people, you know, eat a bit more because it's cheaper. But it's not like you're gonna completely change their habits. And so unless you can actually gain market share, it's gonna be really tough. So if I was United, I would say, well, why am I really doing this? Number one? Number two, what can I predict reasonably, that my competitors will do? And then if they do that, is the action still a good idea? For me, in this case, I think it would be because the objective is to increase overall air travel. Having the major competitors follow will just kind of get more attention to this one. There is a slippery slope argument. So you could say, well, you know, United Airlines was the pioneer. Delta and American followed because I don't want to lose market share. They maybe they will now take the first step, the initiative, in reducing something else. And then it becomes more dangerous because if you cut away all the fees and if you drop regular prices, then you can end up in a scenario where the consumer is pretty happy because they fly for cheap, but every airline is losing money. And that situation has happened several times. So if you go all the way back, and this is before 2001, I must say so I'm not sure what you remember from that time, but I do. So before 2001, what consumers cared about was just price and leaving times and arrival times. So the airlines were super competing with each other. So there was a flight From Boston to LA at 7:59am, 88018 or 2. All the airlines wanted to be at exactly around the times that people wanted to fly, for instance, for business. And the only thing they had to compete with about was price and was kind of loyalty card and perks. That completely changed after September 11th because suddenly people started to also care about something else, which was safety. And because there was such a huge line to get through this, the security control people were much more willing to say, okay, maybe I will fly at 10am instead of 8am so the price wars in the airlines actually were highly diminished after 2001 because you were stuck in the airport anyway for several hours with security control and price and so forth were less important than, hey, the flight will get me there on time and I will be secure. So people kind of criteria change over time. A price war is very kind of reasonable to start when people really care about price. When your price image is bad so you really want to increase it, and you say, well, even if everybody follows, which is what happens, I'll still get a better price image than before. And so this is something probably United is hoping for because they started it. And that was also what Albert Han was hoping for when they started their price war.

I found that published research kind of has a tendency to be very rich and some would say dense in information. So how would you. How would you recommend people who are simply looking to get a Better understanding of a particular topic to approach reading such a long article.

That's a great question, Alice. So first of all it has to be dense because the journals forces to put everything in 25 pages of double spaced. For academics, that's a limitation. I know lots of students that like oh my God, I have to write 25 pages. So that's number one. We are restricted to a very small part. Also journals care a lot about the methodology. So you will see a lot of kind of methodology and what we call robustness checks. So there's probably a huge section about, okay, we estimated 10 different models and we came up with the same results. So that's typically not what you are most interested in. So what I recommend people to do is to scan the abstract first. I say what the problem is, what we did and what the interesting findings are, right? So if you like the abstract, then you read on. And then I always say read the introduction and read the conclusion. That's it. So the introduction says my first paragraph is always what I recommend and how to outline an article. My first paragraph is always this is the problem in the real world. So this is why somebody outside academia should care about this research. You know, there's that there's a managerial problem, we don't know what's going to happen, the consumers don't know what's going to happen and all of that stuff. Then the second paragraph is about why the current literature is not enough to address the problem. So if you were interested, right, and you had the patience and the time to read all the academic literature before this paper, wouldn't you find the answer there? And so there we basically say no because people looked at this, people looked at that, but they didn't really look at the combination of that one. And so the introduction is basically two, two and a half pages that tells you everything. And then I basically give a summary of my findings. So I get two and a half pages and you're done. Because what comes later, it's typically kind of the theory. And so what we expect the hypothesis that we form. Then comes a whole bunch about the exact data that we have and then comes the methodology and then comes a detailed finding. So I would only go into the data method if you find something is too surprising, right? Sometimes you read something and you're like, this just can't be true. So if something doesn't seem right to you, I would always go to the data and the methodology to say, hey, is there something that the authors did that shouldn't be justified?

So My final question, kind of big picture. What has been your favorite paper from your kind of extensive catalog that you have either co authored or authored?

This is such a cool question. I think my favorite one, and it was just published after seven years, I think my favorite paper was the following. So this is Google that came to me and this is now 2012. So Google comes to me and says, look, you know, online everything is different. We always look at the customer journey. So if I want to sell you something new, like the book behind me or the Powell's Bank, I won't be able to do that right away. I first have to get you aware of my new bank. Then I have you to get you to consider it, to like it. You know, they have the intention and so forth. So there's this whole kind of customer journey or funnel, purchase funnel that people have analyzed for, you know, even before I was born. And so Google comes to me and say, well, this is completely unnecessary because we typically got it with surveys. So we basically ask a representative sample of Americans, do you know Walmart? Right? Do you consider Walmart? And so this is typically done by survey research. So then Google comes along and says, well, this is complete, completely outdated because now people are online and they're searching for stuff and basically you don't have to be known, people can just stumble upon you. Right? And also kind of asking people is completely superfluous because we have what you do online, we know your online activity, we know what you searched for, we know how you know which websites you go to, we know how long, how much time you spend there. So we know so much about what you do online. And that is very unobtrusive. I don't have to stop you and say, hey, you know, Alisa, are you aware of Northeastern? I can just see because you went to the website that you're probably aware. So their claim was that these online behavior metrics, what you do online, makes the survey methods completely superfluous. I don't have to ask you what you love or like. I can just see your behavior online. So that was the premise. And we're like, well this is such a fascinating hypothesis, so let's test that. And we basically went and got the wonderful data over time for 35 brands in 15 completely different categories. So this one for cars and travel insurance to fast moving consumer goods. And so it was, it was a lot more variation than in any of my data sets before. And so for each of the brands we had everything that with marketing we had all of the survey metrics. By week. So how many people say they know the brand, they're considering it, they like it. And then we have all of their kind of how many web visits that they had, how much time spent there? What did they say on social media? And we say, well, let's see what happens there. Right. And so this is probably my most interesting research because it's still going on, right? We still have this mixture between online and offline, and. And we still have this question about, well, the things you do online, do they really capture everything there is to know? And of course, you know, preview of that one is, of course they don't. So the online activity is fantastic on what and when. When are people in the mood for searching for, you know, shoes and things like that, and of course, and what and so forth. But that typically doesn't answer the why question. And so I basically showed that, at least for some categories, that why question was still very important and that there was still a very big benefit of asking people also about the brands and that the online behavior, what you do online, doesn't give the full picture of what's happening.

Thanks for all the insights and opinions, Professor. You are more than welcome to come back at any time for another episode in the future, but that's all we have for today. And if any of you at home are interested in reading papers that we discussed, they'll be linked in the podcast notes and see you guys next time.

Thank you so much, Elisa. Thanks, guys. Sam.