The Birth of Hypothecation Marketing

Motivation gets you started. Commitment keeps you going.

Even before the current crisis, it had been a tough decade for CMOs. A marketer’s world is steeped in the lexicon of relationship management: engagement, trust, loyalty, lapsing. But it’s under-cut with hard-line, complex realities: omni-channel strategy, primary data access, life time value in an era of promiscuity. Marketers and their agencies know less about which publishers are driving conversions, as the big tech companies make moves to consolidate their hold on consumer data and ad spend. Predictability - and loyalty - are increasingly hard to achieve.

The customer, meanwhile, is living in a rapidly evolving world of money, credit and consumption. Pay-tech is in a state of almost revolutionary change: it took 1100 years to go from paper money to plastic; 50 to go from plastic to digital; and 10 years to go from digital, to mobile, to your wrist. E-commerce, automation, instant credit and sophisticated logistics are narrowing the gap from desire to fulfilment to a few clicks. Consumers – especially the young – are seduced by debt offerings to fund the lifestyle inflation they get sold on social media. Unsecured consumer lending was at an all-time high in the UK before the recent crisis.

how brands grow

Amid all the financial-techno turmoil, a single book by an Australian academic made things a whole lot more complex for those in the business of building sustained customer relationships. It is 10 years this month since the publication of Byron Sharp’s ‘How Brands Grow’. Data-driven and empirical, it took a scythe to many of the sacred cows of the industry: brand personality, positioning, customer loyalty, and the whole idea that anyone really cared much about brands at all. The book has too many ideas to do full justice to it here, but some of the most striking are:

  • Most brand choices are routine, habit-driven and low on emotion
  • Loyalty is often a passive activity, it functions mainly as a way of saving time in reviewing your options
  • The real challenge of marketing is availability – in the mind, and in ‘store’
  • Make it easy: ensure the brand is as easy to buy as possible
  • Innovation in distribution channels is as important as product innovation, if it makes access easier
  • Continual presence is more important than campaign bursts – it maintains mental availability
  • Price promoting does not bring in permanent new users and erodes margin. It brings in infrequent buyers, without ‘loyalty’

One thing that seems to have been largely neglected by marketers is creating structures for ‘hypothecation’. Never heard of it before? Hypothecation is a word mostly used in relation to taxes, meaning ‘to pledge (money) by law to a specific purpose’.

What has hypothecation looked like historically? Well, a savings account with a specified time deposit: get more interest for leaving it untouched for 12 months. Or a government or corporate bond, where you commit money for an agreed time period (the longer the better). Savings accounts with withdrawal penalties, used to encourage saving as much as for material gains. And gift cards, of course, are the most widely used form of hypothecation in the world of consumption. The value in gift cards – breakage, over-spend, customer retention, working capital – is very rarely shared with the customer.

Two things are notable here. One, in most of these examples, the value being derived in return for hypothecating money – restricting its use – has been minimal. And secondarily, with the exception of gift cards, most forms of hypothecation have been about committing money for saving, not for spending.

Hypothecation is the shortest, most accurate definition of the fundamental principle behind HyperJar. That is: generating value by specifying in advance how, when and/or where money is going to be spent. Old-fashioned forms of financial hypothecation leave significant amounts of value – financial and social – to go to waste. People are actually more than capable of hypothecating a substantial portion of their money – and not just for long term saving: many of us know where we are going to spend a lot of our monthly outgoings. What if we were able to compensate people for the way they hypothecate their spending commitments? This is the principle behind HyperJar. We’ve built the infrastructure to unlock that value.

HyperJar is a personal financial management tool based on the technology company model: build something with very high consumer utility (financial, social, cultural), give it away for free, and fund it by charging retailers and other businesses to be present there. The account is a visual operating system for monthly money spending, plans and relationships; multiple mini-accounts, visualised as Jars, are created and all run off one payment card. Jars can be shared with other people – and they can also be created with partner businesses.

Users monetize their spending intent, and merchants can incentivise behaviour and talk to them in a contextually relevant place. The flagship award is a 4.8% annual growth rate on funds committed to a merchant (held in escrow until spent). In short, consumers get to ‘invest in their shopping’ at rates much higher than their banks, and get a great digital money management tool for free. Businesses get to mutualise customer acquisition, maintain communication in a contextually relevant way, and make data-rich decisions on marketing spend. HyperJar brokers a useful mutual commitment between customer and retailer.

The app was originally conceived as a working capital solution, but we’ve found some remarkable overlaps with some of Byron Sharp’s core marketing principles: mental availability; make it easy; continual presence; customers buy out of habit; distribution innovation. Imagine a customer who has money committed to your business, linked to a payment card (with a back-up wallet for overflow), a GDPR-permissioned comms channel, all sitting next to their monthly spending account, on their phone, in their pocket. Category choice is pushed upstream and locked in.

It’s early days for us, and we are still learning about how to optimise the awards engine for different categories[1]. But we’ve seen some fairly striking data with our largest merchant partner. Based on 1600 ‘Jars’ with this merchant, £100,000 of hypothecated money, and £67,000 spent:

  • The average first hypothecation is 3.2 x the corporate average transaction value
  • The first spend on HyperJar is 6% higher than the corporate ATV
  • The second spend is 15% higher
  • The third spend is 37% higher

That’s a fairly compelling argument for hypothecation as a huge asset in mental availability. And for a CMO – or indeed CFO – there’s nothing quite as compelling as committed future revenue. It’s cash-collateralised intent.

There’s also an unexpected psychological upside to the mechanics of hypothecation and advance payment.  Prepayment provides the merchant a better customer than one who pays by either credit or cash at the point of sale (covered in depth in the ‘Pay Now, Consume Later’ chapter of the book ‘Happy Money’[2]). This is based not only on reduced indebtedness and reduced regret spend, but also positive anticipation, and purchases feeling ‘free’ because of the time lag between expenditure and consumption.

The dream destination is a ‘positive loop’ via analytics, user self-knowledge, tailored awards. ‘Spider’ profiles based on unique intent data, tracking the journey of money to POS. Planned, happy spending for customers; an increasing share of category for HyperJar merchant partners; sustainable, long-term growth. Watch this space.

[1] We’re working with the Centre for Experimental Social Sciences on understanding incentivisation, language and reward

[2] Dunn and Norton