Archive for September 8th, 2008

Books – Predictably Irrational

September 8, 2008


Predictably Irrational: The Hidden Forces That Shape Our Decisions by Dan Ariely, HarperCollins Books, 2008

 

Basic Premise:

“Standard economics assumes that people are rational — that they have all the pertinent information about their decisions, that they can calculate the value of the different options they face, and that they are cognitively unhindered in weighing the ramifications of each potential choice”.  That is, that people are capable of making the right decisions for themselves. But, Ariey — and other behavioral economists — observe that “people are really far less rational than standard economic theory assumes.  Moreover, their irrational behaviors are neither random nor senseless. They are systematic, and often repeated, so they are predictable”. For example:

  1. People tend to overvalue stuff that they own … it’s called the “endowment effect”.
  2. Ownership can be real & full, or virtual & partial (e.g. bidding for items on eBay)
  3. The sense of ownership is enhaced by “sweat equity” … the IKEA effect.
  4. Most people will opt for a mid-priced version of a product (over the high or low priced version) … it’s called “aversion to extremes”.
  5. A higher priced pill is perceived to relieve pain more than a lower priced pill … even when they’re the same pills — real or placebos.
  6. People can’t resist the power of free offers … even when they’re not really free.
  7. Many people will travel 15 minutes to save $10 on a $25 item (say, a DVD), but won’t travel 15 minutes to save the same $10 on a higher priced item (say, a car) … even though the time and savings are the same … it’s called the “relativity effect”.
  8. Many people will do jobs (“favors”) for their friends for free — as long as the task is unrelated to their “day job”.
  9. Many people who do favors for others are insulted if they are offered monetarycompensation, but willingly take small gifts for their efforts.
  10. Most people wouldn’t consider taking a few bucks from the petty cash drawer, but many people think it’s ok to jack a pen from their office.
  11. In experiments, most “tempted students cheated on tests … but there was an upper limit — they only cheated “a little bit”.
  12. Students who sign honor pledges on exams are far less likely to cheat … even if their school doesn’t have an honor code 

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The book is a quick, easy read, and the author has a cool web site:
www.predictablyirrational.com

 

I’ll cite a few of the book’s more interesting examples in subsequent posts.

 

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Posted in Book Summaries, Economics, Mktg - General | Leave a Comment »

Product Innovation: The perils of playing “small ball”

September 8, 2008

Excerpted from Strategy & Business, “The Unique Advantage”, by Alexander Kandybin and Surbhee Grover, Aug. 26, 2008

In mature, slow-growth industries such as food and consumer products … Companies often spend relatively little on R&D, and … their innovation results are marginal.

Much of the problem can be traced to conventional wisdom (that) the secret to growth … is to develop new products based on consumer needs, which are discovered through consumer research and focus groups. And  if a new idea is not great … marketing and advertising can always … turn a so-so concept into a hit.  And the first to market … will capture most of the profits.

This kind of thinking leads to … a long list of line extensions — new flavors of an established soda brand, say — rather than the kind of game-changing innovations that can make a real difference to the bottom line.

New products that stand alone longest in the marketplace, without serious competition, bring in the highest returns.

Meeting consumer needs is a necessary but no longer sufficient condition of sustainable innovation.  Rather than thinking about new products as a way to get customers excited for a little while, companies need to think about their innovation strategy as a way to build a high, hard wall between those customers and their strongest competitors … hifting some investment away from marketing and advertising toward the development of … game-changing new products … that are difficult to copy.  

Higher R&D spending does not guarantee success … (but) a minimum innovation investment is required for breakthrough thinking. Without it, companies tend to fill the pipeline with the “base hits” of line extension … falling into a self-created loop of low investment, low returns, and steady but slow growth … that provides the illusion that the company is succeeding

So, the tendency is for companies to focus on relatively small, often superficial line extensions that can be churned out quickly … but require inflated advertising budgets that reflect a defensive mind-set .. (and divert resources from)  breakthrough innovation … locking companies into a pattern of high marketing spending and a need for endless small launches.

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Mature companies also need a strategy for when difficult to copy ideas are in short supply. Here, we suggest defying conventional wisdom about being first to market. If a product can be copied, it’s often more profitable to be the copier.

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There will always be a place for line extensions backed with big campaigns and for being first to market. It is possible to gain additional benefits by building scale, amplifying the effects of hard-to-copy innovations by spreading them across multiple products.

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It’s even possible to gain scale of a kind with a highly nimble, prolific innovation organization. Launching a steady stream of good ideas, as P&G has done in home products in recent years, can give a brand a reputation for fresh thinking that transcends the individual ideas and translates into market share gains. 

Edit by DAF

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Full article:
http://www.strategy-business.com/press/article/08306?pg=all&tid=230

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Posted in Mktg - Product & Innovation, Uncategorized | Leave a Comment »

Sorry, Pal, but You’re Rich

September 8, 2008

Excerpted from Slate, “The deluded business pundits and Obama critics think $250,000 is a middle-class salary”. by Daniel Gross, Aug. 27, 2008

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Barack Obama’s tax plan …  promises to improve the nation’s fiscal standing by scaling back tax cuts for people making more than $250,000. Since then, the business pundit class has been griping that people who make $250,000 a year aren’t really wealthy, especially if they live in and around New York; San Francisco; or Washington, D.C.

CNBC’s unscientific online poll found that (surprise!) only 35 percent of respondents believed an income of $250,000 qualified a household for elite rich status.

I have bad news for the over-$250,000 crowd.  I regret to inform you that you are indeed rich.

Income data can surely tell us something. And they tell us that $250,000 puts you in pretty fancy company.

The Census Bureau earlier this week reported that the median household income was $50,223 in 2007 …. So a household that earned $250,000 made five times the median. Only2.245 million U.S. households, the top 1.9 percent, had income greater than $250,000 in 2007. (About 20 percent of households make more than $100,000.)

In dealing with aggregate nationwide numbers, we should of course take account of the significant differences in the cost of living from state to state. But even in wealthy states, $250,000 ain’t bad—it’s nearly four times the median income in wealthy states like Maryland and Connecticut.

But people in Georgetown mansions don’t necessarily compare themselves to fellow Washingtonians in Anacostia. Relative income really works at the neighborhood level. As we know from the work of Cornell economist Robert Frank, people rate their well-being not so much based on how much they make and consume, but on how much they make and consume compared to their neighbors.

It is certainly true that in a few ZIP codes and neighborhoods, brandishing a $250,000 salary is like bringing a knife to a gunfight … But the number of places where $250,000 stretches you is small indeed.  Even in the most exclusive communities where the wealthy congregate, $250,000 is still pretty good coin.

So, don’t tell me you’re not rich.

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Full Article URL:
http://www.slate.com/id/2198806/

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Posted in Government & Politics, Uncategorized | 1 Comment »