Meet Michael Spence, a Canadian-American economist and winner of the Nobel Prize in 2001 for his theory of market signaling.
What is market signaling?
Market signaling occurs when someone with insider knowledge of a market (say, the job or any product market) takes deliberate actions to 'trigger' buying or selling by outsiders, who do not have the same info. The actions of the insider are taken as a clear 'signal' that buying or selling is a good idea – hence the term 'market signaling.'
By saying that dividend payouts will increase significantly, the announcer has sent out signals that market participants will perceive as positive information (+) on the company's future strength and outlook.
In the term 'market signaling' there are two words – market and signaling. Everyone knows what a market is, but what is signaling?
Looking for an answer to this question, I fell down the rabbit hole and discovered that this is one of the most powerful instruments used by large companies, influencers, and marketers to increase sales, build up brands and attract the best of the best talent for less money. All this becomes possible once they use signaling as an instrument to attract an audience.
Let's start diving down the rabbit hole…
What is Signaling?
Signaling is the sending of codified messages, called signals, according to information theory.
You receive millions of signals every day through your five senses: touch, sight, hearing, smell, and taste. These signals are codified messages that your brain decodes, causing millions of responses including trust, inspiration, fear, pleasure, stress, and so on.
For example: say you're walking down the street and hear a dog barking. How will your body react? If you are afraid of dogs, it will cause fear and anxiety, since the bark sends a signal through your ears, which your brain decodes as danger. But if you adore dogs, barking might cause an "Oh, what a cute doggy!" reaction. The dog always sends the same signal when it barks, yet how it is decoded only depends on your five senses and brain.
Signaling is similar to the way radio works. All around you are radio stations called transmitters, your five senses are antennas called receivers (which pick-up signals sent by radio stations), and your brain is the decoder that causes a certain reaction in your body when you hear a song. Look around and you'll notice it.
An interesting thing starts to happen when you want to trigger specific reactions in a specific group of people so you send specific signals.
Let's say you make Nutella and you want people to buy it. How do you do that?
One way is to show people who have children a commercial in which children ages 6-12 eat Nutella for breakfast and then happily walk to school.
What is this commercial signaling?
For parents who are greeted every morning by grumpy children who don't want breakfast and definitely don't want to go to school, the ad signals a very favorable alternative. Give your kids Nutella for breakfast, the ad suggests, and they'll stop being annoying in the morning!
Most likely, though, parents won't even realize this is Signaling at work, yet next time they pass a Nutella stand in the store, their brain will decode it as a "peaceful morning solution" and trigger the "I want to buy it" reaction. There's a very good chance there will be a jar of Nutella at their breakfast table the next day.
But humans were not the first to invent Signaling – it has been evident in the animal kingdom for 500 million years. The big exception, is that animals don't use signaling to sell each other breakfast cereal. They use it to survive.
How Animals Effectively Use Signaling
Most often, animals use Signaling as a mimicry tool to survive. Harmless frogs are geniuses at it.
The first ever predator that chomped down on a brightly colored frog probably didn't consider it dangerous. After all, there had never been a 'bright color' signal that their brains decoded as 'danger'. Yet soon after suffering terrible poisoning, a burning mouth and sore stomach, the Signal was finally implanted – from then on, brightly colored frogs were known by predators to be poisonous and something to be avoided at all costs.
Clever harmless frogs took advantage of this, mimicked the 'bright colors' of the poisonous frogs and avoided being eaten, ensuring their survival.
Frogs on images D, E, and F are very toxic and dangerous frogs, whereas frogs on images A, B, and C are genius imitators and harmless. But predators don't study frogs at university and don't know the difference.
Another great example is when animals use Signaling to become 'invisible' (also called crypsis or camouflage). They mask their bodies, their sounds, and even their smell, signaling to predators "I am not food." Crypsis allows animals to hide in plain sight. Take a look at the lizard below, blending its coloring to signal "I am just grass." Predators decode this signals as "it's just grass, and I eat meat, so I'm not interested" and the lizard survives.
There are tons of examples like this in the animal world. But the human world is even more interesting.
How Brands Effectively Use Signaling
What are the first associations when you hear this word?
For me it's the swoosh, "Just Do It", running, sport, running shoes, motivation, willpower, self-empowerment, move forward, win, self-confidence, and quality sports gear.
But where did my brain (and yours) make these associations?
Nike has been Signaling for almost 50 years in an effort to establish the image of a brand in our minds, using magazine ads, commercials, partnerships with athletes, products, emotions, colors, and so on. All these are Signals.
One of the great examples of signaling was in Nike's "Just Do It" campaign launched in 1988. It featured professional and amateur athletes talking about their accomplishments and the emotions they feel as they exercise.
One of the first television spots of the campaign featured a video of 80-year-old marathoner Walt Stack who explains to viewers how he runs 17 miles every morning.
What is this commercial signaling?
I decoded the following signals as motivation, inspiration, running, moving forward, "it's never too late to reach your goals," "if this person can do it, why can't I?" and, of course, Nike.
That's it, those words combined together saved in my head after the first viewing. But they will also leave quickly if Nike doesn't keep reaffirming the signals, constantly reminding me of all the things that Nike represents. And as we know, Nike has been this effectively for the last few decades.
When you send the right signals for an extended period of time, the brand is the first thing people will think about when they need something. When someone needs to buy a pair of running shoes, their first thought, in most cases, will be Nike.
But a more interesting thing is happening when another brand is on the market also signaling "I'm about running, sport, and running shoes." Let's name it Rike. And let's imagine that Rike is almost identical to Nike: same running shoes, quality and price, except for one thing. Their core signal is "run at your own pace, you don't need to be the first." And in all their commercials, we see normal people who don't run to compete: they run around town and local parks, they run for themselves; they love running and they like, even more, to simply run at their own pace." It's the opposite of Nike's "you can do it, be the first and the best one."
Now, an interesting question. Which brand would you choose when you want to buy a new pair of shoes?
Personally, I'd go for Nike.
I have been involved in sports my entire life, and am an avid competitor. Also, I'm generally always striving to improve in all aspects of my life, so Nike's "you can do it, be the first one" signal speaks to my heart more than Rike's "run at your own pace, you don't need to be the first one". Nike attracts me more. I chose Nike.
How does your brain decode the signals sent by this image?
My decoder reads it as Apple, Steve Jobs, "think different", excitement, simplicity, authenticity, creativity, quality, tech, AirPods, MacBook.
One person, to whom I gave this image to decode it, told me Apple, luxury, authenticity, white, Steve Jobs, iPhone. Same signal, different decoder. And like Nike, Apple has been sending these signals for decades. That's why we immediately think of precise associations.
One of the greatest signals Apple ever sent was their "Think Different" campaign, which ran from 1997-2002. Two strategies were implemented: a TV commercial and a print campaign. The TV ad was a 60-second black and white video called the 'crazy ones', which displayed over a dozen inspiring revolutionaries, including Albert Einstein, Martin Luther King, Jr., Dali Lama, Richard Branson, Thomas Edison, Mahatma Gandhi and Pablo Picasso. No speech was audible other than a narrated manifesto:
"Here's to the crazy ones. The misfits. The rebels. The troublemakers. The round pegs in the square holes. The ones who see things differently. They're not fond of rules. And they have no respect for the status quo. You can quote them, disagree with them, glorify or vilify them. About the only thing you can't do is ignore them. Because they change things. They push the human race forward. And while some may see them as the crazy ones, we see genius. Because the people who are crazy enough to think they can change the world, are the ones who do."
Print advertisements from the campaign were posters, billboards, and magazine ads. Each ad included a black and white portrait of one historical figure, a small colored Apple logo, and the words "Think Different" in one corner.
How do you decode signals sent by this marketing campaign?
For me, Apple is about revolution, not being like everyone else, creativity, different, future, new, genius. If I think of the people these words remind me of, it would be artists, illustrators, designers, students who valued their own creativity and who viewed themselves as being somewhat outside the mainstream. This is precisely the core market that Apple hoped to appeal to in 1997 by signaling them "we make products specifically for you."
The results of the campaign were interesting. In April 1998 Apple reported its second straight profitable quarter after nearly two years and $2 billion in losses. Apple attributed the increasing sales to the ''Think Different'' campaign.
Another great example of Signaling was when Apple launched the "Get a Mac" campaign. This campaign started in 2006 and lasted for about three years. The ads juxtaposed Macs with PCs in such a way that the actors played computers. Each commercial began with Justin Long saying, "Hello, I'm a Mac." After that, the PC (played by John Hodgman) would say, "And I'm a PC." Clear signals from the first seconds.
The two then act out a short skit comparing the capabilities and attributes of the Mac and the PC, with the PC being characterized as formal and somewhat polite, but uninterested and overly concerned with work, often frustrated by the laid-back capabilities of the Mac. The Mac was always well-dressed and self-assured. The PC always gave off an air of uncertainty, discomfort, and foolhardiness. Again, clear signals.
Much like the 'Think Different' campaign, the "Get a Mac" campaign was a massive success for Apple and greatly increased sales.
How People Effectively Use Signaling
Gary Vaynerchuk is an entrepreneur, author, speaker, multimillionaire, and online personality with more than 9 million followers on Instagram, 2.5 million on YouTube, 2.3 million on Twitter – he's also one of the best examples of effective usage of Signaling.
Imagine a high-energy, authentic, self-made multimillionaire who shares his knowledge and experience of making money by saying "harsh" truths?
"Love your family, work super hard, live your passion."
"If you fail and people laugh at you, they're not worth your time. Ignore them."
"Life shrinks and expands on the proportion of your willingness to take risks and try new things."
"People aren't willing to sacrifice for what they want."
"Nobody owes you shit."
Have an image of such a person in your head? Now, let's think who this image can attract. Or, even better, for whom these signals are attractive.
Probably entrepreneurs and high achievers, those who want to succeed in life, whose motto is "work hard, play hard" and anyone who wants to become this person in some way, or has similar views on life.
Now imagine that person sending these signals for 10 years, probably long enough to attract a lot of people and build a multimillion-dollar personal brand on social media. This person is Gary Vaynerchuk and he did exactly that. Sent strong and clear signals for a long time.
Another master of signaling is Elon Musk.
Elon doesn't use social media to sell books on how to become a millionaire by building rockets - he uses it in more interesting ways, one of which is "cheap hiring" the best talent in the world.
Elon founded a company called SpaceX that launches rockets in space. Elon also founded a company called Tesla that builds electric cars and which market cap tops the 9 largest automakers combined. Elon has a net worth of $186 billion dollars; he was the inspiration for Tony Stark in Ironman and sometimes does funny and awkward things. Elon is known for working 80+ hours per week to ensure all of his businesses succeed. Elon also loves posting memes on Twitter. When Elon changed the bio of his Twitter account to "#bitcoin", the cryptocurrency rose from $32,000 to more than $38,000. Seems like a great resume to me.
From these facts alone, you imagine a super-influential-badass-billionaire-visionary who works on cool things and moves humanity forward. It's easy to imagine how many smart and ambitious engineers this image can attract and even easier to imagine a hypothetical situation where one such engineer with two identical offers and positions from SpaceX and Nasa, chooses SpaceX.
As a Musk company, the person will project part of Elon's signals as a SpaceX signal. Thus, it would signal a super-cool innovative company with an interesting project, while Nasa signals government, tradition, bureaucracy, and whatever else you associate with government. So if the person likes Elon, he or she will be more inclined to work on SpaceX rather than Nasa. Elon won't only hire the best talent and outcompete other offers, he also will hire the right talent that shares his vision. Why does it matter? Because they will fit in easier with the culture, they'll communicate better and will have more interest in reaching company goals. And all this because of the signals sent by Elon. I think even if SpaceX offered much lower pay and higher working hours, many engineers would still choose to work there – that's just the kind of pull Elon Musk commands.
How to Use Signaling Effectively
We just saw a lot of great examples of Signaling. Let's define how to use it for ourselves.
To effectively use Signaling, you need to answer these three questions:
- Why do I want to send signals?
- Who do I want to send signals to?
- What signals do I need to send?
Let's take as an example: I want to create a newsletter with the latest cryptocurrency news. And, to make it interesting, I'll state that I'm not an expert in the crypto field and can't define my audience and signals very accurately – but let's try.
- Why do I want to send signals? To attract an audience to my newsletter with the latest cryptocurrency news.
- Who do I want to send signals to? People on Twitter who want to know the latest crypto news.
- What signals do I need to send? Crypto, "I'm an expert in the crypto field," revolution, finance, future, old vs new, entrepreneurship, financial freedom.
Why these signals?
From what I see, there are two big communities in the crypto field:
People who want to leverage crypto and become filthy rich and/or gain status.
People who want to leverage crypto and make our future better.
I'm interested in attracting both, so I'll send signals to both. The only problem will be if these two communities don't like each other very much. By attempting to attract both, I may attract neither one. So, I'll need to figure it out before sending signals.
Examples of signals I will send to attract both audiences:
Signaling finance, old vs new, and future.
Signaling crypto, evolution, finance, future, and financial freedom.
Signaling crypto, "I'm an expert in the crypto field," revolution, finance, future, and old vs new.
This is roughly what I would do if I decided to create my crypto newsletter and attract an audience to it. Don't steal it yet. Maybe one day I'll start this newsletter.
Where to Use Signaling
From what I can see, signaling can be used effectively in these cases:
- Build an audience
- Create a product positioning
- Build a brand/personal brand
- Build a company culture
- Win a Great Online Game
This is a very powerful and amazing tool, but one thing you must remember, sending wrong signals can mean attracting the wrong audience. No matter where you use it, use it wisely.
Inspired by Market Signaling, Seth Godin takes on symbols in "This is Marketing" and Julian Lehr "Signaling as a Service."
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