How Game Theory Saves Marketing Strategy
Olympic Research and Strategy
Data with purpose. Strategy with impact.
Imagine you are responsible for the marketing strategies of a makeup brand gearing up for the holiday season. You're debating whether to launch a limited-edition eyeshadow palette and how to price it so stands out in a crowded market. Will a luxury price tag position your product as exclusive, or will a more competitive price attract greater sales volume? How will your competitors react, and what will your customers ultimately decide to buy? Game Theory offers a structured market research approach to unravel such questions, giving you a clear decision path to make key strategic product/price/promotion decisions.
Game Theory provides a structured framework by analyzing how different players (think of these as your different competitors) make decisions (how each competitor varies its offering's product, price, promotion, and placement elements) and how all these individual decisions impact one another when taken together in the mind of the ultimate buyer. It involves identifying the key players (competitors), mapping out for each of their possible (marketing) choices, and predicting the ultimate buyers' decisions based on their likely response to the whole competitive marketplace. Much like a game of chess.
The Basics of Game Theory in Marketing
There are many terms that one might need to learn with Game Theory, but it can be simplified by being structured into three main components: Players, Strategies, and Payoffs.
Players are you (the brand), your competitors, and your customers.
Strategies are your (and competitor's) options, like pricing, product launches, or advertising campaigns.
Payoffs are the results of these decisions, such as increased market share, customer loyalty or higher profits.
Anticipating Your Customer Responses
Now, let's use our initial example of you being responsible for a makeup brand. You are considering releasing a limited-edition holiday eyeshadow palette. Given that it is the festive season, how will your customers react? Using Game Theory can help you think through scenarios like this:
If you price it at $80, will customers see it as a must-have splurge or hesitate because they believe it's too expensive? How will your product's $80 fair in buyers’ minds if all competitive offerings are around $120? How about if they are around $30?
If you offer a buy-one-get-one-free deal on lipsticks alongside the palette, will it boost overall sales or just cut into your profits? Do exclusive sales or bundling draw more people to buy or cheapen the product image/value and turn people away?
When you understand how customers weigh their options, you can create campaigns that generate excitement while giving them confidence in their decisions.
Two Steps Ahead of The Competition
Now, what about competition? Imagine your biggest rival is actively rolling out their holiday product launch right now. Game Theory helps you anticipate how their moves will impact overall category sales and plan accordingly.
If they drop the prices on their existing products, will you gain more sales/profits if you follow suit or if you emphasize your palette's exclusivity?
If they focus heavily on social media influencers, should you compete for the same influencers or shift your budget toward a different channel, like in-store experiences?
Studying these scenarios helps you by staying proactive rather than reactive to market changes, giving you an edge in controlling your sales/profits.
Game Theory in Real Life
In short, game theory offers a clear framework for strategic decision-making in a real-world environment. It involves identifying the players, such as customers and competitors, exploring the impact of competitors' potential strategies, and predicting the outcomes based on customers’ likely responses. This process helps businesses navigate complex scenarios with more confidence. However, this process can be extremely complex given all the interaction between multiple competitor's product, price, promotion and place marketing strategies. Let's explore how a couple of these strategies' goals might translate into real business scenarios:
Pricing Strategies: Makeup brands often use dynamic pricing or promotional discounts, balancing competitive pricing with customer demand to drive sales without sacrificing brand value.
Promotion Launch Timing Strategies: Deciding when to release a product can be tricky. Release too early, and you might miss the holiday buzz. However, releasing too late, and your competitors might be the star of the show leaving your products in the background. But also, releasing at the same time may drown out your message and lead to poor sales.
Place Advertising Battles: Competing for ad space or influencer partnerships requires strategic thinking. You have to anticipate your competitors' moves and choose whether to counteract them directly or create your own unique campaign to capture the most attention.
Conclusion
Game theory provides marketers with a roadmap to navigate the competitive landscape. At Olympic Research and Strategy (ORS), we provide a holistic research approach needed to build strategic game theory frameworks, ensuring businesses have the key insights required to craft smarter marketing strategies. By integrating methodologies and analysis that blend strategic decision making with psychological insights, ORS helps businesses anticipate outcomes and adapt with confidence.
Thinking back to our makeup brand example, ORS might recommend using trade-off or forced choice research techniques, done across a set of real-world circumstances, to simulate how customers will respond to a variety of your product's price points, product offerings, and promotional messages, all while factoring in the appeal of your competitors and their pricing points. These insights are then used to create a market simulator, enabling you to forecast sales, evaluate brand equity, and find the pricing sweet spot that customers are okay with.
Similarly, when deciding whether to focus your marketing budget on influencer campaigns or in-store experiences, ORS might recommend "empathy mapping" techniques to help uncover which channels resonate most with your audience. Are customers swayed by the authenticity of influencers, or do flashy store displays and product try-ons have a stronger impact? Social listening and competitive advertising tools build on this foundation by identifying which brands are dominating these channels, revealing potential opportunities for your brand to stand out.
ORS also uses perception maps and decision tree modeling to add even more depth, visually positioning your brand against competitors and projecting the outcomes of each strategic choice. For instance, perception maps might show that your brand occupies a premium space in the market, but decision tree modeling could reveal that bundling products increases appeal among price sensitive customers without compromising brand value. These layered insights, refined through white-space analysis, help you decide whether to compete in highly trafficked channels or pursue less crowded spaces with lower competition.
By combining tools like trade-off research, empathy maps, perception maps, and decision tree modeling, ORS ensure your strategies are impactful and backed by accurate data.
Stay tuned for our upcoming article where we will dive deeper into empathy mapping and its potential to refine your marketing strategies.