Austrian economics and the Sausage Game

[emdoub]

@liberty student

@Danno

OTOH, you ducked most of the rest of my questions quite nimbly.

@Danno

You’re not usually this mysterious - having an unhappy day?

Nah. I am just too pooped to respond to long posts with my own long posts.

Fair enough - I’ll wait ‘till you’re less pooped. You’re usually worth listenin’ to.

I think you are wrong about the sausage strategy. Some businesses might do it, but it is a tactical blunder, because there is no upside. They hope to pay for current losses with future profits, but with genuine competition, this sort of arbitrage is very difficult to pull off, and when you are done, you have destroyed your brand.

Unless I’m misrembering horribly, it was being taught as a good tactic. It’s bitten the butts of several firms, but that won’t necessarily prevent it from being taught as A Good Idea in academia. As I explained earlier - if you can do it without much of your customer base rebelling, it can indeed raise profits, especially where the earlier high quality/low price combination was just an investment in consumer goodwill.

We need to keep in mind here that economics =/= business. Economics is an important part of business, but there are other factors, and a good businessman will take them into account.

As an example, I have two people who do counter sales for me at events - basically, sitting behind a display of my products, answering questions, and selling the products. One, who I’ll call Rick, is a personable young man, quite knowledgeable about the products, good at chatting with potential customers. He does a fine job, and gets 5% of gross sales. The other is an attractive young woman with a sparkling smile, a fondness for revealing clothing, and not nearly as much knowledge of my products - mostly, she’s not terribly interested in how they’re made. She gets 10% of gross sales, and I prefer using her - sales are consistently higher when she’s at the table.

Economically, this makes little sense - I’m paying twice as much (as percent of sales - considerably higher in dollar amounts) for less expertise. But from a business perspective, it does make sense - she doesn’t need to answer many questions about the craftsmanship, and my sales are considerably higher.

My customers are getting the exact same product, either way. If they were entirely rational, the sales should be higher with Rick working - more expertise is available. There’s more going on than pure reason at the point of sale.

@Danno

So - what’s it a failure of? Or are you implying that durable goods shouldn’t last longer than 18 months, and my expectations are unrealistic?

I don’t think the failure of your faucet has enough statistical significance to be meaningful. {…}

True. And, as a consumer, I’m just not going to get enough experience of that product for statistical validity. As consumers, most people are so accustomed to decision-making on insufficient evidence that they no longer even notice. This is why marketing is often more important than manufacture in the success or failure of a business.

From a marketing perspective, it’s entirely reasonable to sacrifice early profits in order to achieve a reputation as an excellent value, and then coast on that reputation while maximizing profits. Without the marketing perspective, this looks like it wouldn’t work - but it does work, for reasons that have nothing to do with economic theory of any school.

Danno, who should get back to producing…

[emdoub]

@JonBostwick

@Danno

About 6 years ago, our local brewery, selling a passable but not-great lager, switched from a 30-can case at $9.95US to a 24-can case at $9.95US. Drinking enough beer to make such a change impact my budget, I brought this up to the manager of my local retailler. He claimed that it’d always been a 24-can case, that my memory of a 30-can case was drunken stupor.

If they had kept it 30 cans and rised the price to $12.43 would you have been happy?

If they had, I’d likely still be drinking that brand. I expect prices to go up - it was the deception that lost them a customer.

@Danno

Anyway, it’s been said many times, and some enterpreneurs do eventually learn it - nobody ever went broke because they made their customers happy.

No one has ever made a good but expensive product, only to be outcompeted by an inferior but cheaper product? You’d better reconsider that.

After thinking carefully about it, I can’t recall a single company who went out of business because of cheaper-but-inferior competition. I can cite endless examples of companies who have the highest prices in their field, whose quality keeps them remarkably popular - Glenfiddich, Rolex, BMW, Fender, Ferrari, Mont Blanc - all have competitors whose products perform nearly as well (or better), for half the cost (or less) - yet they remain not merely competitive, but tend to enjoy remarkable economic stability, even when their markets are in a downturn.

I expect that it’s probably happened, somewhere - but I also expect that there was an issue besides being outperformed by the competition that was important to that business failure.

Danno, makin’ do with lesser good, most of the time.

[emdoub]

@ladyattis

@Danno

Arby’s roast beef is now from pressed loaf, not an actual roast - it’s cheaper. Turkey is no longer on the menu. There is almost never a wait at the counter, and they’re troubled, financially - but along the way, they did drastically reduce the quality of their ingredients , after they’d established their customer base. To all appearances, their customer base is more fickle than they’d wished - they’re not doing well. Personally, I hope that they revert to higher quality in an attempt to win back the customer base, but I consider it unlikely.

And in that time other alternative fast food companies have risen to the challenge, offering some new products of their own. I can at least tell you that Arby’s got its ass handed soundedly by both local/regional and national fast food chains due its quality reduction.

Yup - they played that game badly, with a too-drastic reduction in quality.

@Danno

As far as the boiling the frog simile, that’s not invalid. One may notice small changes - if they’re small enough, they’re tolerable. This is the method by which the people who only wanted cigarette smoking banned on portions of airplanes and grocery stores got them banned in almost all commercial venues - by small, incremental steps. The USA didn’t go from “some states may depart if they wish” to “Patriot Act” in one step - but it went there.

Not at all correct, the boiling frog situation is equivalent as it’s an attempt to change conditions in a manner that is not perceptible to the intended target. Thus, acclimatizing them to these changes. The point is though, if the changes are inperceptible even when stacked up with each other, then they’re irrelevant. But if they’re perceptible as a whole, then you have an argument, which was my point.

A side-by-side taste test of Wellknown Sausage, with samples from 1980 and 2009, could show startling changes - but I don’t know that anyone could perform such a taste test. There’s a reason that sausage was picked as the example - changes can be remarkably incremental, and it’s very difficult to compare the sausage you bought last week with the sausage you bought a year ago.

@Danno

Reputation is nowhere near as durable or important as some of us would like it to be.

Not according to historical analysis of white collar crime. You screw around as a stock broker, commit fraud and get convicted, you won’t find work in the field ever again most likely. I’ve even heard some can’t even find work in the blue collar bracket due to being over qualified. For a company, this may not translate 1-to-1, but the hit of reputation often makes it harder to gain new customers (even if you can hold on to your current ones).

Is it even legal to work as a stockbroker if you’ve been convicted of fraud? I see the point you’re trying to make, and I’ll agree - some companies have taken such a shot to their reputation that they were doomed, no matter what they tried in an effort to recover their reputation.

Look at how it took a good decade for Apple to gain a 10% desktop PC share in the market. That was due to the flimsy hardware and flimsier software that garnered a well earned bad reputation for Apple. And it only improved after the fact that they changed their hardware and software practices. And even then some hardware is still considered crap in the industry (which is why they don’t have a server market share of any significance). So, don’t discount the power of a bad/good name.

{blink} That’s not at all how I recall that, and I was working in the field, pre-Windoze. Apple’s Macintosh had a reputation for very high quality, and the uber-geeks were largely in agreement - the Motorola processor was superior to Intel’s product. The reason for their poor performance was their closed architecture - they refused to allow other manufacturers to make add-on components, and they were designed in such a fashion as to make it very difficult for anyone but a factory-certified technician to even open the case. The PC design was available to the open market, bringing in many clone manufacturers, add-on designers, etc. The resulting competition in the PC world brought performance up as it brought prices down, attracting software developers, who added their own value to the mix. Anyone could develop/market software for the PC - it was impossible to do so for Apple’s products without buying a license from Apple. Without such competition, Apple’s software was usually considered inferior - but I never heard anyone complain about the quality of their hardware. Their Lisa was, hands down, the best computer you could buy at the time in the desktop market. It wasn’t quality that killed that - it was the near-total lack of companies developing software for it, and the impressively high sticker price.

It was the clearest side-by-side comparison between an open market and a closed market that I can think of, and open market won, hands-down.

They lack server marketshare because, while their OSX is linux-based (and thus has excellent server software available), most people who run servers decline to pay extra for the “user-friendly” interface that they don’t need or want.

But, no - I’m not discounting the power of a good name. According to the Sausage Game, a good name will keep you in business even after your quality has gone downhill - if you can make that downhill slope gentle enough.

Danno - off to cut corners. (Well, round edges and ease corners, anyway. In this case, it adds to perception of quality. Later, I’ll dye. Leatherwork is amusing.)