Cafe Hayek - Latest Comments in Spin

Re: Spin

Dave Eaton — Sun, 09 Apr 2006 18:45:33 -0000

Concerning the comment about detergent above- as a chemist, I am in awe of the amount of technology (including molecular biology, in the case of cold-water enzymes used to destroy protein stains) in detergent. Vast improvements in the ability of detergent to adapt to water hardness, to be less polluting, etc have occurred. Chemistry is responsible for a lot of relatively silent, unsung advances in everyday products that are never directly advertised, but undoubtedly make the products better. Many of us are old enough to remember 'plastic' being used as a term of derision for products fabricated thereof; now, it is indispensible and superior to most alternatives in many applications, and usually goes without comment.

I agree with Half Sigma's point, if I understand it- what we generally encounter are steadily improving products and materials, with marketing making distinctions between reasonably similar offerings. I usually look at as many reviews as possible before buying stuff these days.

Re: Spin

JohnDewey — Sat, 08 Apr 2006 17:41:14 -0000

Henri,

I think we agree, then. Advertising is not always required, and often a waste of money. But for certain products in certain situations it may be critical to maximizing profits.

Re: Spin

Henri Hein — Sat, 08 Apr 2006 09:08:45 -0000

John,

"A firm can create a superior product, but how will customers know it even exists without some form of marketing?"

It happens. Word-of-mouth may be faster than you think. Even *before* the Internet age, rumors were known to spread super fast; product reputations travel almost as fast.

Take the Google example again: They grew to millions of customers in months, not years. I've never seen numbers in a formal study, but I would suspect such customer growth would look something like a Fibonacci curve.

Point taken on the Volvo example; I do think this is a good example of a company using advertising to differentiate their product. I also think it would not work if Volvo didn't have the product features to back it up.

Re: Spin

JohnDewey — Fri, 07 Apr 2006 20:48:26 -0000

Henri Hein,

I understand your argument. But I think advertising has its place.

A firm could could save advertsing expenses and depend on word of mouth to spread its message. But why give up millions of revenue waiting for that to happen? A firm can create a superior product, but how will customers know it even exists without some form of marketing?

Consider once again the example of Volvo. The company may spend hundreds of millions adding safety features to its vehicles. Should it depend solely on Motor Trend and Car and Driver to get the message out? It just makes sense to spend a few million letting the public know why they should stop in at a Volvo dealership. Could they do that effectively without advertising?

Re: Spin

Henri Hein — Fri, 07 Apr 2006 17:51:02 -0000

Advertising is overrated.

The most potent advertising is word-of-mouth. (See my post above for a couple of examples). That's why marketers nowadays are all excited about "viral marketing," which is just attempting to formalise word-of-mouth.

A firm cannot compensate poor quality with advertising. Name a single instance where that worked.

The only place where marketing works is to differentiate interchangable products, such as Coke and Pepsi.

Re: Spin

Henri Hein — Fri, 07 Apr 2006 17:42:32 -0000

"Sell for the same price a higher quality product, through the savings of not wasting money on marketing. Watch the profits roll in as everyone clamors to get said product."

In the event, that's actually a pretty good business model.

I once spoke with the founders of AlphaSmart, a limited computer system used in classrooms. They grew to a $20 million business, without ever spending a buck on advertising.

Another more prominent example is Google. They grew huge without ever advertising, with lots of competing search engines with installed bases.

Re: Spin

Chance — Fri, 07 Apr 2006 09:45:43 -0000

That music you are listening to isn't nearly as good as it sounds.

Re: Spin

Noah Yetter — Fri, 07 Apr 2006 08:02:51 -0000

Once a consumer has a product in his or her hands, ex post reality displaces ex ante perception. You could potentially argue that a firm that sells goods that consumers buy only once, and never tell their friends about, could succeed in this way. But any firm that relies on repeat business, or that relies to any extent on word-of-mouth "advertising", cannot.

I know that Lipton makes better iced tea than Luzianne because I've tried them both. I know that an 01 Subaru Legacy is better than the 94 model because I own the latter and my father owned the former. I know that T-Mobile gives cruddy reception in Golden, CO because my phone has zero bars just now. I know that Kitchen Aid makes the best stand mixers because I've had one for about 15 years. The best advertising in the universe cannot fool me about a single one of those things.

Re: Spin

Half Sigma — Fri, 07 Apr 2006 04:44:09 -0000

"Sony's brand name does not command a premium (solely) because of advertising but because Sony has established a reputation of quality by long years of producing quality products."

Let's look at the track record:

Sony notebook computer: stopped working after two years.

Sony desktop stereo (cost me $300): stopped ejecting CDs after two years.

Sony Wega TV: wavy picture, not exactly what I'd call premium quality

Sony digital camera: returned to Sony repair, came back with different stuff broken, sent back again.

Why do I keep buying this Sony junk? They must have brainwashed me somehow.

Re: Spin

Abu el Banat — Fri, 07 Apr 2006 04:34:31 -0000

I think there is some confusion between advertising and brand identity. With premium brands, e.g., Sony, consumers are willing to pay more for the brand name because the company has established the brand name as a signal of quality. Sony's brand name does not command a premium (solely) because of advertising but because Sony has established a reputation of quality by long years of producing quality products.

Consumers buy Sony exactly because they are unable to independently judge individual product quality before purchase, and they know they are unable to judge individual product quality. The brand name serves as a bond with consumers. Sony has invested a lot in its brand and is unlikely to risk that valuable brand by producing inferior products.

Re: Spin

Mike — Fri, 07 Apr 2006 04:20:28 -0000

My understanding, in addition to much of what was said above, is that companies spend substantial sums on advertising to overcome agency problems. In other words, the reason Monster.com might spend $2 million for a Super Bowl ad signals to potential customers that they are a serious player - that they will not take the money and run. In order to make the $2 million a wise investment, the company must be around for a considerable period of time to earn a reasonable return.

No fly by night company would spend that sort of money on advertising, which is why I tend to stay away from those sorts of places in general.

-Mike

Re: Spin

widmerpoool — Fri, 07 Apr 2006 01:19:07 -0000

My wife is in charge of marketing for a large Japanese company in the CIS. Research they did last year found that less than 10% of people buying their consumer goods in Russia could recall ever seeing an advertisement for any of their goods. Their decision was based mainly on three factors: looks, price, and what the saleman said.

It is a constant debate in her company whether it is worth advertising at all, and she knows for a fact that in the CIS they spend less than a fifth of what the Korean companies spend on marketing, while still enjoying higher sales.

I've spent a considerable amount of time with people in advertising and marketing, as most of my wife's friends are, and I have noticed that most of their work seems to be aimed primarily at impressing other people in advertising and marketing, and that when asked outright what impact their work has on sales they can't answer.

Re: Spin

JohnDewey — Thu, 06 Apr 2006 23:32:21 -0000

Steven Donegal asks:

"Do we really think that today's Tide gets clothes noticeably cleaner than 20 years ago?"

Perhaps that single product does not noticeably clean better, but that's not the only measure of laundry detergent quality.

Procter and Gamble has developed new detergent products the past 20 years. They also continue to research and test their existing ones.

Here's a short passage from a 2005 Business Week article on how P&G maintains leadership position of their brands:

"Why would P&G tinker with Tide? Long the detergent leader, Tide would seem best left alone, a profitable annuity on years of mass-market flogging in the '60s, '70s, and '80s. But P&G has tinkered nonetheless, combining strong technology and consumer research to push sales up 2.6% over the last year in a category that is growing less than 1%."

One recent innovation was Tide Coldwater, their detergent developed to clean especially well in cold water. They've determined that the average household can save $63 per year in energy costs by switching to Tide Coldwater. This "innovation" may simply match recent products by other companies. But for Tide, it still represents an improvement.

Quality gains are not limited to just the detergent itself. Laundry detergent packaging also continues to improve. Liquid laundry detergents now come with no-drip spouts and well-designed carrying handles that didn't exist 20 years ago.

Re: Spin

JohnDewey — Thu, 06 Apr 2006 22:45:44 -0000

John Pertz,

I don't understand what you mean by "advertising is a function of weakness". Consider the example of Volvo I offerred above. If they continue to spend billions engineering an increasingly safe automobile, doesn't it just make sense to continue informing the public? Where is the weakness? Their surveys may show consumers already regard their cars are the safest. Even so, they should still defend their strong position.

Am I completely misunderstanding the meaning of your post?

Re: Spin

Russell Nelson — Thu, 06 Apr 2006 22:18:06 -0000

The perception of WHATEVER the only thing that can drive us to act, since we have absolutely no awareness of that which we cannot perceive. Thus it is sophomorically thoughtful for Half Sigma to say "it's the perception which drives the sale, not the actual quality."

Re: Spin

blake — Thu, 06 Apr 2006 22:16:58 -0000

As Mises wrote in human action, advertising (business propaganda) can indeed succeed in getting the consumer to buy a certain product.

but if that product is no good, or of relatively lesser quality, then the consumer will not CONTINUE to buy it, effectively dooming that company.

Advertising may help get a product sold the first time, but quality, not perception, is what satisfies consumers and keeps them coming back.

Re: Spin

John Pertz — Thu, 06 Apr 2006 21:36:17 -0000

Advertising is a funciton of weakness. The fact that McDy's still takes the time to start "pound one" campaigns about the double quarter pounder is a good sign. The day that corporations stop advertising is the day that I say that advertising is the primary funcition of demand.

Re: Spin

Nico — Thu, 06 Apr 2006 21:21:21 -0000

Well, you'd still at least have to let people know about it- which means marketing of some sort.

I think it's important to understand that quality is a relative thing- the quality of a product is based on how well it serves whatever purpose you intend it to have.

Part of what most people consider to be quality in clothing is the image that it conveys to people (many, especially anti-capitalism types, might deny this, but everyone does it).

One purpose of marketing clothing and other style stuff, I think, is to convey a certain image to many people at once, so that a person buying that product has an idea of how others will view it.

It's clearly not the case, though, that marketing is everything. A lot of heavily marketed products sell poorly. One falacy of anti-capitalist thinking is that producers simply generate demand by manipulating people through marketing. I suspect, rather, that marketers are constantly trying to tap into existing cultural norms.

Re: Spin

cm — Thu, 06 Apr 2006 20:03:57 -0000

If people are so smart that they cannot be duped by Madison Ave as Don implies, then why do these corporations bother to spend any money on marketing in the first place?

According to this belief, the higher quality product will always win out, regardless of attempts to manipulate people's perceptions.

So here is a sure fire way to get very rich:

Sell for the same price a higher quality product, through the savings of not wasting money on marketing. Watch the profits roll in as everyone clamors to get said product.

Re: Spin

Mickey Klein — Thu, 06 Apr 2006 19:51:47 -0000

Or, better put, the increase of disposable income towards such items should be a sign of prosperity instead instead of peril. Marginal spending edges towards luxuries as people gain income.

Re: Spin

Mickey Klein — Thu, 06 Apr 2006 19:04:24 -0000

Advertising that creates a cultural cache can actually add some value because with many items how other people percieve that item purchase is part of the utility.

Say that your goal is appear more fashionable, you may very well gain more utility from a product from cultural allure created by the advertisers.

But this is nothing new, it just that 50 years ago such rampant purchasing of items was reserved for the very few.

Re: Spin

Varangy — Thu, 06 Apr 2006 17:45:14 -0000

Naomi Klein's point was about branding. Does this not cause people to buy one product over another identical product? Someone could buy a Nike quality shoe without the swoosh for $5, but most people instead pay $50 for the one with the swoosh.

Naomi Klein (as do you) mistakenly assumes that Nike and some anonymous brand shoes are identical.

Hardly.

Let us assume that is the case -- and the shoes are physically/structurally identical -- a consumer-teenager may still rationally choose to buy the Nikes at $50. vs. some anonymous brand at $5. --- he/she (probably correctly) assumes the head-turning factor of the Nikes is probably greater than 10x that of the head-turning factor of some anonymous brand and as such, factors that into his/her decison-making process.

Re: Spin

True_Liberal — Thu, 06 Apr 2006 17:09:42 -0000

A dramatic example:

50-60 years ago it was downright difficult and expensive for airline crewmembers to get life insurance. Even though their health was excellent (and thoroughly checked

twice a year), the risk of accidental death was higher than the general population.

Today, they get discounts because their occupational risk is so low.

Today, airliner engine reliability is so high the average pilot will fly an entire career without ever experiencing a genuine failure -- but they still train over and over to handle such an event.

And to top all, fares have decreased 70 to 90% in real terms.

Re: Spin

Brad — Thu, 06 Apr 2006 16:59:38 -0000

I prefer to use Virginia Postrel's thesis about style rather than Klein's rant about branding, but... One example I can point to is pet products. Go into Petsmart or Petco and notice how things are packaged to appeal to the pet's owner in the store! Here's a very specific example... "Greenies".... A tub of Greenies ($33) used to have the chews enclosed in a sealed ziploc bag for "freshness". I guess that didn't make a difference because now the tub (same price) has no inner bag. I didn't get the point of the freshness bag anyway. These are for my dogs and they'd eat the Greenies if they cam fresh from a hole outside. Of course, I'm spending more than $1/unit on dog treats -- old socks are probably more cost effective!

Re: Spin

cm — Thu, 06 Apr 2006 15:43:08 -0000

Since America doesn't manufacture much anymore, most of the value an American company earns on a consumer product comes from the perception.

How much ad spending goes to explaining the high quality of the product? Sometimes you can't even tell from the ad what the product actually is.