Under the Influence with Terry O'Reilly - S5E04 - When Marketers Lie

Episode Date: January 29, 2016

This week, we look at the consequences when marketing companies lie. From the Volkswagen scandal, to a promotion that brought Hoover to its knees, to a company that promised super-charged sexual enhancement, each was a case of fraud with disastrous repercussions. Join us as we explore what happened, and whether those companies could ever regain the trust of their customers. Hosted on Acast. See acast.com/privacy for more information.

Hi, it's Terry O'Reilly. As you may know, we've been producing a lot of bonus episodes while under the influences on hiatus. They're called the Beatleology Interviews, where I talk to people who knew the Beatles, work with them, love them, and the authors who write about them. Well, the Beatleology Interviews have become a hit, so we are spinning it out to be a standalone podcast series. You've already heard conversations with people like actors Mark Hamill, Malcolm McDowell, and Beatles confidant Astrid Kershaw. But coming up, I talk to May Pang, who dated John Lennon in the mid-70s. I talk to double fantasy guitarist Earl Slick, Apple Records creative director John Kosh. I'll be talking to Jan Hayworth,

who designed the Sgt. Pepper album cover. Very cool. And I'll talk to singer Dion, who is one of only five people still alive who were on the Sgt. Pepper cover. And two of those people were Beatles. The stories they tell are amazing. So thank you for making this series such a success. And please, do me a favor, follow the Beatleology interviews on your podcast app. You don't even have to be a huge Beatles fan, you just have to love storytelling. Subscribe now and don't miss a single beat. From the Under the Influence digital box set, this episode is from, noon, noon.

You're not you when you're hungry. You're a good hand with all things. You're under the influence with Terry O'Reilly. William Marston was a Harvard undergraduate studying psychology in 1915. One day, he noticed something interesting about his wife. Namely, whenever she got angry,

her blood pressure rose. That made him wonder if detectable changes in the human body could prove that somebody was lying. Marston started experimenting with systolic blood pressure testing. He would ask people

simple yes or no questions and monitor changes in their readings. He knew that fear was an essential element of deception, meaning a liar had a fear of being detected.

If they lied while answering a question, fear would cause their blood pressure to rise. Marston called his system a lie detector test. Law enforcement became very interested in Marston's system and hired him to conduct the test on various suspects. In the late 1930s, Madison Avenue knocked on Marston's

door and hired him to test people's true preferences to various brands. With that success, Marston co-founded his own advertising agency called Hampton, Weeks, and Marston. His agency tested such things as the brand preferences

of cigarette smokers and to assess the satisfaction of drivers who use Texaco gas instead of a competitive fuel. One day, Marston was hired by Gillette to actually feature his lie detector test in an ad. Men were given two unmarked razors, one from Gillette, the other from a competitor. Then, they were asked to shave one side of their face with each blade and state their

preference, while Marston monitored their blood pressure. The resulting ad ran the headline, Lie Detector Test Tells All. Hundreds of men tested all preferred Gillette. Around the same time, another inventor named John Larson had improved on Marston's system by creating a more sophisticated test called the polygraph. When Gillette moved the campaign to

radio, it invited Larson to replicate Marston's test with his polygraph machine. When Larson did, he found the men showed no preference for Gillette. Marston quietly begged Larson to modify his report and even offered him a portion of his $30,000 fee

to change the results. Larson refused. The inventor of the lie detector had lied. Marston's reputation suffered a big blow, and his blood pressure lie detector tests fell out of favor. But while conducting those tests, he had come to believe that women were more truthful than men, and began writing articles stating the superiority of women.

In 1940, one of his articles attracted the attention of DC Comics publisher Max Gaines, who arranged a meeting. During the discussion, Marston asked him why DC Comics had no female superheroes. Gaines was intrigued and asked Marston to come up with one. He did. Marston named her Wonder Woman. Wonder Woman debuted in 1941, fighting crime with her superhuman powers and an arsenal of weapons,

including one called the Lasso of Truth. Whenever Wonder Woman roped somebody, they couldn't tell a lie. In hindsight, it wasn't surprising that William Marston created the fictional lasso of truth. It was the one invention he could never quite perfect in real life. Today, we hook big brands up to a lie detector and throw the lasso of truth around the marketing industry. We'll look at some of the biggest deceptions perpetrated by some of the world's biggest companies, brands with long-standing reputations that had so much to lose.

We'll look at the fraud, the fallout, and the toll it extracted when marketers lie. You're under the influence. The press called it a defeat device. It was the technology embedded in Volkswagens by the German car manufacturer that allowed its diesel engines to defeat emission tests. But exactly how Volkswagen got caught is interesting. The International Council on Clean Transportation is an independent non-profit organization founded to provide unbiased

research to environmental regulators. One day, the council, working with West Virginia University, began a routine emissions test of three vehicles, a VW Passat, a VW Jetta, and a BMW X5. The BMW passed the test, but both VW models not only failed, but failed spectacularly, emitting 7 to 25 times the acceptable emission limits of nitrogen oxides. Later, those results were reported at a conference, which got the attention of the U.S. Environmental Protection Agency. The agency then tested more VW vehicles, and the results were consistently over the limit. When the EPA threatened to block sales of VW's 2016 models, it forced Volkswagen to admit it had installed the Deception device. How the device worked is also interesting.

When a vehicle is tested under controlled laboratory conditions, it is usually put on a stationary test rig. In other words, the engine is running at high RPMs, but the car isn't actually moving, there is no air pressure, and the steering wheel isn't turning. The deception device was designed to recognize those conditions and ran the engine below normal performance, thereby altering the findings to improve results.

Once they were put back on the road, the BBC reported that some VWs emitted pollutants up to 40 times above what is allowed. Volkswagen has since admitted over 11 million cars had been fitted with the device,

including vehicles from subsidiaries Porsche and Audi. Let's put aside the fact that, as of this writing, the scandal wiped $33 billion

off VW's market value. Or that the EPA could fine VW up to $35,000 per vehicle, which could total $18 billion. Forget that 8 million of those 11 million vehicles are in Europe, and those fines have yet to be calculated. Add to that the cost of retrofitting millions of vehicles with hardware they weren't designed to take. And the fact VW has to compensate dealers for inventory they now can't sell. And probably offer apology cash to VW owners. Plus the fact it will be the biggest recall in history.

Forget that the U.S. Department of Justice is suing the carmaker. And lawsuits from people who bought diesels under false green pretenses are reigning in. Or that the retrofitting may render some diesel models effectively unaffordable. Forget all that. The real toll is trust and incalculable damage to Volkswagen's reputation. I find this crossroad in VW's history so tragic because Volkswagen's original success

was based on the most honest advertising ever done. The Volkswagen Karmann Ghia is the most economical sports car you can buy. It's just not the most powerful. As I've mentioned many times in the past, the VW advertising of the 60s was the reason I got into advertising. It was smart, funny, and utterly honest. As a matter of fact, VW's advertising embraced all the car's flaws.

It was ugly, but it had personality. It was too small, but it was fuel efficient. It had no power, but it was reliable. It was uncomfortable, but it was personality. It was too small, but it was fuel efficient. It had no power, but it was reliable. It was uncomfortable, but it was cheap. Volkswagen's advertising didn't sell dreams.

It sold the unvarnished truth about a quirky little car from Germany. When people were surveyed right after the BW Diesel scandal was first revealed, they were asked what words came to mind when they thought of Volkswagen. They replied, German, Beetle, Bug, Reliable, Dependable, Small and Affordable. That was very telling, because all of those adjectives were hangovers from the Volkswagen advertising of the 1960s. That campaign was so powerful,

it has survived in people's minds to this day and can still be accessed in the heat of a scandal. Those residual memories may be VW's only hope. If not, the carmaker has thrown away eight decades of trust. It's hard to imagine what VW will look like in five years. If it survives at all. Wired magazine brought up another disturbing point about the VW scandal.

It has shown us that machines can now lie. Software embedded in products can use strategy to cheat. And software updates, and everything gets software updates these days, means cheating can hypothetically stay one step ahead of regulations. As Wired notes, it's one aspect of the Internet of Things nobody wants to contemplate. The auto industry has a long history of deceptive practices. Back in 1990, Volvo released a TV commercial showing a six-ton monster truck driving over three vehicles

with only the Volvo remaining intact. The commercial was demonstrating Volvo's structural integrity with the slogan, Volvo, a car you can believe in. The commercial was filmed in Texas before a crowd of paid extras. And a couple of people in the crowd that day saw something fishy going on.

They noticed the roof of the Volvo being reinforced with steel beams, while the roof pillars on the other vehicles were removed so they could be easily crushed. When word leaked, Volvo was hauled onto the carpet by the Texas Attorney General. The commercials were pulled off the air. Volvo was hauled onto the carpet by the Texas Attorney General. The commercials were pulled off the air, Volvo and its advertising agency were each fined $150,000, and Volvo was forced to run ads in 15 newspapers apologizing for the commercial. It took many years for Volvo to regain the trust of the marketplace.

For a car built on the premise of safety and integrity, Volvo had squandered its precious reputation. In the end, Volvo was skewered by its own tagline. It wasn't a car you could believe in. And we'll be right back.

If you're enjoying this episode, why not dip into our archives? Available wherever you download your pods. Go to terryoreilly.ca for a master episode list. Back in 2014, Hyundai and subsidiary Kia paid penalties totaling $300 million for overstating fuel economy statistics for over 1 million vehicles sold in the U.S. That was on top of an estimated $400 million to resolve class action lawsuits. That same year, Toyota paid a $1.2 billion fine for misleading consumers about a sticking accelerator problem, saying it was fixed when it really wasn't. The Attorney General called Toyota's conduct shameful.

It was the largest criminal penalty in automotive history. Recently, GM has agreed to pay a $900 million fine over a defective ignition switch. The ignition problem unexpectedly turned cars off, disabling the brakes and steering while cutting power to the airbags, resulting in over 100 deaths. GM will spend an additional $600 million to settle civil suits. 26 million cars were recalled in 2014. The reason the penalty was so large

was because it was revealed GM knew about the defective switch for more than a decade. It's interesting to note that when huge financial penalties are imposed on companies for deceitful practices, the CEOs are rarely fined. Most don't go to jail. Some are fired, but they exit with multi-million dollar severance packages. In the end, it's the shareholders who pay the fine. The newest move in fitness is tying your shoelaces. Because once my Skechers shape-ups are on snug and comfy, I'm toning my muscles, strengthening my core, burning calories. Why? Because shape-ups really work, no matter what I do.

Back in 2011, celebrity Brooke Burke endorsed toning shoes from footwear company Skechers. Skechers shape us. Step into your new body. A year later, the Federal Trade Commission, or FTC, charged Skechers with making unfounded claims regarding the shoes. Skechers claimed shape-ups would help people lose weight and tone their legs, buttocks, and abdominal muscles, quote, without ever setting foot in a gym. Get in shape without setting foot in a gym with shape-ups from Skechers. I already feel a difference in the way my jeans fit. The shape-up ads also came with an endorsement from a Dr. Stephen Gautreaux,

who recommended the shoes based on an independent clinical study he had conducted. As the FTC revealed, Gautreaux was married to a Skechers marketing executive, the study did not produce the results claimed in the ad, and Skechers had paid Gautreaux to do the study. Skechers denied the allegations, but agreed to pay a $40 million penalty, which was among the FTC's largest settlements to date. Customers who bought the shoes were eligible for refunds, and Skechers was barred from making any further health-related claims about toning shoes.

Between 2009 and 2011, Reebok also sold a product called Easy Tone Shoes, claiming many of the same weight loss benefits. The FTC said the claims were also deceptive. Like Skechers, Reebok denied all allegations but agreed to pay a $25 million settlement. The FTC summed it up best. Either shape up your substantiation or tone down your claims. Hoover has been a trusted name in home appliances since 1908. When it established a major presence in the UK, it came to dominate the vacuum cleaner market there.

As a matter of fact, Hoover became a verb, as in... Oh, just Hoover a bit before tea. Things went well for Hoover for decades. Then in 1992, competition increased, sales slumped, and the company had a 10 million pound deficit. So it came up with the following promotional idea to stimulate sales. When you spent 100 pounds on a Hoover product, you received two free return airline tickets to key cities in Europe.

It seemed too good to be true. But Hoover had a plan. It bet most customers wouldn't take advantage of the tickets due to slippage. That's the industry term for the percentage of people who buy products but don't get around to taking advantage of promotional offers. And although Hoover vacuum cleaners only cost half of what the airline tickets were worth, dealers could upsell the customers with accessories and more expensive models to make additional revenue. Hoover was correct on one aspect of the promotion. It sold a ton of product. As a matter of fact,

so many people raced to buy a vacuum cleaner to claim the free tickets, Hoover had to put increased factory staff on overtime. Sensing a sure-fire marketing victory, Hoover did a follow-up promotion. Spend over £100 on any Hoover product and we'll give you two return flight seats to either New York or Florida. Two return flight seats. Unbelievable. It certainly was unbelievable. When people bought vacuum cleaners for 100 pounds, Hoover gave them airline tickets to the U.S. worth 600

pounds. The math made no sense. But again, Hoover was counting on slippage. Only this time, the free return airfare to the U.S. was just too good to pass up. People

started buying multiple Hoover vacuums to secure multiple tickets. Newly married couples were getting six to eight Hoover vacuums as wedding gifts because people were offloading them just to get the plane tickets. Thousands of Hoover vacuums still in their boxes were put up for sale in classified ads. Now, you may think this is good news for Hoover. Even if people weren't using their vacuums, they still had to buy them, right? But the U.S. ticket offer brought in thousands of customers who weren't put off by the fine print demanding their tickets. It also awakened the first wave of customers who hadn't redeemed their European tickets.

Soon, Hoover was overwhelmed with ticket requests. When a BBC consumer affairs reporter went undercover and got a job with Hoover to process all the ticket applications, it was revealed that Hoover was deliberately designing the fine print to make it almost impossible for people to redeem their tickets. When that deception was made public, the government investigated. As a result, the Hoover Board of Directors was fired, the royal family withdrew the royal warrant it had once granted Hoover,

and the company was forced to honor 220,000 airline tickets, which cost Hoover over $100 million. The fallout continued for years. The appliance company had lost the trust of its customers, and eventually the once-mighty Hoover UK was sold off, ending its 50-year history. Hoover had spent millions destroying its own reputation. As a marketing idea, It sucked. In case nobody's told you, weight loss goes beyond the old just eat less and move more narrative,

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Enzyte was a natural male enhancement pill. In other words, it claimed to add not only sexual stamina, but inches to your ruler. Enzyte began marketing in men's magazines in 2001, promising to make you, quote, harder than Chinese arithmetic. Late night television commercials showed a happy Insight user dressed as Santa

Claus at a company Christmas party. The ad opens up with him sitting beside a sign that says the North Pole. This is Bob. Seems to be a lot of rumors going North Pole. This is Bob. Seems to be a lot of rumors going around about this chubby Santa. That's because Bob made a call to Enzyte about natural male enhancement. And what did he get?

Why, a sleigh full of confidence, a sack full of pride, and the one thing that every lady likes, the joy of a gift that keeps on giving. Call or go online now to find out how to get a 30-day sample. Enzyte, the once daily tablet for natural nail enhancement. In 2001, Warshack's company employed 15 people. Four years later, it had 1,500 employees, a 24-hour call center, and sold $250 million worth of products. At its peak, the call center fielded 65,000 calls a day.

Then Warshak made two fateful mistakes. He started fabricating customer testimonials, then put customers swayed by those testimonials on an automatic renewal program without their consent, charging their credit cards $70 every two months. When people complained, the call center responded by offering them other supplements instead of refunds. If people pushed back, Enzite had another strategy ready. It insisted customers produce a notarized document

stating they had experienced no size increase. It was diabolically ingenious because Enzite knew very few men, if any, would be willing to get a legal document proving their North Pole was still small. Embarrassment would keep customers from demanding refunds, and the money kept rolling in. Until the government and the FTC rolled up to Warshak's door.

After a six-week federal trial, the judge called Warshak's door. After a six-week federal trial, the judge called Warshak's company a massive, fraudulent undertaking. It was ordered to surrender $459 million in proceeds, another $44 million for money laundering, $24 million was set aside to repay Enzeit victims, and founder Stephen Warshak was convicted on 93 of 112 counts of fraud and obstruction of justice. He expected 24 months in jail.

He was sentenced to 25 years. It was one of the stiffest white-collar crime sentences ever handed out. There is an irony that underpins every story we told today, and that is, a company has to be trusted before it can deceive, or else no one will believe the lie. When Volkswagen stated the incredible performance of its diesel engines while promising to adhere to emissions regulations, people believed, because it was coming from Volkswagen. When Hoover promised plane tickets in return for a vacuum cleaner purchase,

people responded, because it was Hoover. When Enzyte used testimonials to promise sexual results, people believed. When they stopped believing, the company used their customers' embarrassment to continue fleecing them. Most companies pay a hefty price when they break our trust. Since the 1960s, Volkswagen has clearly articulated what it stands for, saying it was a reliable and utterly honest automobile. The violation of that long-standing promise may destroy the company. Whereas, GM has really made no promise to us over the years

and will probably survive its scandal with ease. When a person tells a lie, they have to deal with the consequences in their own life. But when a marketer lies, it discredits the entire advertising industry, throwing shade on hardworking and honest companies who value their customers' trust. They understand that while a reputation is built on the past, it's the only ticket to the future when you're under the influence. I'm Terry O'Reilly. This episode brought to you by Enzyme.

It keeps going and going. Under the Influence was recorded at Pirate Toronto. Series producer, Debbie O'Reilly. Sound engineer, Keith Oman. Theme music by Ari Posner and Ian Lefevre. Research, James Gangl. Follow me on Twitter at Terry O Influence. Download the

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you. Go to terryoreilly.ca slash shop. See you next week.