Quick Definition: The Cocktail Party Effect says that people focus on the information most relevant to them (like our name, or personal information).
It seems like every company is chasing personalization. In fact, almost 70% of brands surveyed in an Everstring report called it a “top priority.”It could be easy to write personalization off as a shiny object, if not for the financial returns:
- Personalized marketing drives growth: According to McKinsey research, companies that excel at personalization generate 40% more revenue than brands that are just "average" at it.
- The higher the investment, the better the returns: Companies with ROI of 2x or more said personalization made up at least 20% of their marketing budget.
- Personalization drives long-term customer value: Brands that had the highest personalization ROI (3x or more) focused on loyalty as their top KPI. Companies with lower ROI targeted short term measures like average order value.
It’s clear there’s evidence supporting personalization. It compels customers to act, and they’re actively asking for more. In a recent study, McKinsey found that 76% of customers get actively frustrated if their experience isn't personalized.
But why? The answer lies in a psychological principle known as the Cocktail Party Effect.
What is the Cocktail Party Effect?
The Cocktail Party Effect was discovered in the 1950s by a British Cognitive scientist named Colin Cherry. Cherry wanted to understand what people focus on and why. After researching the dynamics of a noisy room, he discovered something interesting. Our brain separates overlapping conversations and background noise into different auditory streams. It can then decide to ignore information that isn’t relevant.
The Cocktail Party Effect says that people focus on the information most relevant to them (like our name, or personal information). According to a study published in the journal Brain Research, a key trigger for “tuning in” is when people hear their name. Given the research, it makes sense that brands start personalization efforts with a customer’s name.
But the Cocktail Party Effect shows if we go deeper, relevant content can drive incredible results.
Beyond a Name: What is "True" Personalization?
Personalization isn’t about getting your customer’s first name right then spamming them with impersonal ads. As Seth Godin says:
“[Personalization] is a chance to differentiate at a human scale, to use behavior as the most important clue about what people want and more important, what they need.”
True personalization is deeply understanding your customer’s journey. Once you know what they need, you can serve them the right message at the right time, and drive business results.
How to Apply the Cocktail Party Effect
1. Get specific about your customer’s world
In a recent study, research firm Elastic found the personalization tactics that have a direct effect on buying behavior:
- 84% of shoppers say personalization already influences their decision to shop with specific brands.
- 68% of online shoppers have purchased an item they didn't initially intend to when product recommendations were personalized.
- 88% of customers are more likely to continue shopping on a website that offers a personalized experience.
In this email from Monica Vinader, the brand uses customer data in a smart way. They’ve not only customized Kim’s name in the email (“Made for You Kim”). They’ve also used images of “K” monogrammed jewelry, and shown a necklace based on Kim’s past purchases.
2. Personalize your marketing’s visuals, copy, and message
In their 2018 Ecommerce Quarterly Report, Monetate discovered that just three pages of personalized content can double conversion rates.
Monetate also found that the value of personalization compounds with each experience. As you can see from the data below, true personalization does more than increase purchases. It gets people to add items to their cart more often and drives down cart abandonment rates.
3. Go deeper with data — and be transparent
Your ability to personalize effectively is directly tied to the state of your brand’s data. And if the data is there, but it isn’t in shape, getting to the right insights might mean digging a little deeper. Further research could take the form of progressive profiling, marketing automation, or just asking your customers if the marketing they’re getting is right for them.
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The Cocktail Party Effect in action: EasyJet
EasyJet, a British low-cost airline, made a company milestone relevant for their customers. Instead of making their 20th anniversary about the brand, EasyJet focused on the consumer. They transformed people’s data into a celebration of their travels with EasyJet.
The Bottom Line
Personalization might be a top priority for brands, but most haven’t achieved their ambitions. And that’s a problem because, according to Gartner, the stakes are high. In a recent survey, they discovered brands are at risk of losing 38% of their customers because of poor personalization.
There’s no magic button you can press to become immediately personalized. It’s a tough process that requires marketers to work closely with IT, operations, and digital teams. But at the end of the day, the potential for revenue generation is huge. The science supports it, and customers are asking for it.
So instead of asking if you should focus on personalization, the better question is, “How can we prioritize it?”
If you enjoyed this article, check out my podcast episode about the Cocktail Party Effect: