The Economics of Giving

I read a paper on The Economics Lives of Poor by two MIT professors of economics. I have mixed feelings. I understand the arguments at the end but I cannot roll with it.

What Worked For Coke Will Not Work For Dr.Pepper

A product without the messaging does not have a market. But the two are not different and interchangeable. You can't lift a successful messaging that worked for one product and apply to another. For messaging to be successful it has to start at product inception and should evolve with it.

The New York Times talks about Republicans applying the messaging that worked for Bush reelection campaign to McCain 09 campaign. The two products are basically different. A former strategist for McCain perfectly described the move to employ the previous successful team and messaging, in this way:

“It could be the Coca-Cola strategy of marketing that they’re trying to apply to Dr Pepper,”

Picking A MindMapping Tool

Over the past few weeks I used Windows version of MindJet and web based MindMeister.
My recommendation is to go with MindMeister.

Crocs Valuations Wearing Out Faster Than The Sandals

For $6, you can buy a pair of sandals that looks identical to Crocs which retails for $30. You can now buy a share of CROX stock for less than $5.

There may be differences in how these two feel, but it is  not easy to find the differences in the look. How can Crocs expect to retain its market share at such price premium? It can't.

No one can expect to defend their price premium when close substitutions are available. Add to this, the current tough economic conditions. Crocs is not going to find it easy to convince customers that value-add from its resin technology is worth the high price.

Crocs pre-warned that it will barely break even for this quarter and the outlook isn't positive for the rest of the year.  It reduced its earnings forecast from 43 cents to 3 to 7  cents, at almost the same revenue levels of $220 million.  Its profits are expected to drop 93% while its revenues are expected to be down only 10%.

Crocs is obviously reeling under high cost of goods sold from high oil prices and high cost of sales and marketing. But these two alone are not enough to justify such a lopsided change in operating margin. There is more hidden in its books, and this makes the stock unattractive even though it is trading close to its book value (assets less liabilities).



As I wrote last time, there are serious red flags in its accounting. It is much better off to look for other investments. In the words of Benjamin Graham, buying shares of Crocs now is not investment, it is speculation.

Influencing Consumer Decision With Deliberate Versioning

Thanks to my friend Helen I learned about a lever for nudging consumer behavior  called  Asymmetric Dominance Effect also known as the Decoy Effect.

Joel Huber, a marketing professor at Duke, explanined this effect in a Washington Post article (via Wikipedia entry):

What the decoy effect basically shows is that when people cannot decide between two front-runners, they use the third candidate as a sort of measuring stick. If one front-runner looks much better than the third candidate, people gravitate toward that front-runner. Third candidates, in other words, can make a complicated decision feel simple.

In fact if you release two versions, 1 and 2,  of a product, it would help you to position these two in such a way that you capture market share in respective segments. In addition to these two versions, a marketer should introduce two more versions, 3 and 4,  each one unattractive by themselves but will make both version 1 and 2 attractive to the respective segments.

Books On Bart This Week

Murder at Bertram's Bower
Monster - a biography of LA murderer
Mrs Perfect
Unaccostomed Earth - Jhumpa Lahiri
Musicophilia
Reconstructing Clothes for Dummies
The Scream
Safe and Sustainable World
The Yellow Rose Trilogy
You Can Heal Your Life
Rich Dad Poor Dad
Intuition
The Judas Strain
The 13th Juror
Devils Web
The Connection
Mortgage Free For Life
Fade Away
The Tenth Circle
Bhagavad Gita
No Ordinary Time
San Francisco Tenderloin
The Da Vinci Code
Calculus
Decision Theory
Selling All
Accounting
System Design
Stalking The Vampire
Stronghold - Melanie Rawn
Sex,Drugs and Cocoa Puffs
Race of the Century
Beautiful Lies
Matters - Iain M Banks
An Irish Country Doctor
Speaker for the Dead
Women of Magdalene
Under the Banner of Heaven
Michael Cabon. The Yiddish Policemen's Guide
Precalculus - Sullivan
Jazz Masters of the Fifties
Sleep No More
Interpreter of Maladies
Aloha Mr. Lucky

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Deliver now! Improve iteratively!
www.IterativePath.com

The Gap

What happened to all the speculators driving up oil prices?

Speculators were an easy target for the Congress that wanted to show the people that they are doing something about the oil prices.  A simple explanation of demand and supply was not enough, it was too complex for most to comprehend.

Every story needs a villain, a damsel in distress and a knight in shining armor.  Arguably, the speculator are the real knights but they are not up for reelection nor are they good at pitching their side. So the lawmakers took the opportunity to pitch the plausible story of oil speculators driving up prices.

But as the demand fell due to consumers adjusting their behavior, the oil prices fell back 13% from its highs.  The Nightly Business Report's Suzanne Pratt said this nicely:

PRATT: So what happened to all the speculators that were supposedly driving up prices and ignoring fundamentals? Today, futures regulators said an inter-agency task force has found that supply-demand fundamentals are the best explanation for the recent run-up in oil prices, not excessive speculation, as some lawmakers believe. Many economists and analysts agree that fundamentals, mostly strong demand from India and China, have been the primary price driver, as well as stagnant supplies. But those fundamentals may be changing. Economist Carey Leahy says investors are waking up to the idea that slowing U.S. growth and other global factors could result in a big drop in demand.

Of course there is enough room in this for lawmakers to tell a different story, the mere mention of curbing speculation was enough to slay the dragon.

NYTimes Reports Increase in Online Shopping

Greg Manikw, the author of my favorite Macroeconomics book, writes in his blog a series on Cross-Price Elasticity of Demand.

The New York Times reports that shoppers are doing more online shopping than driving to the stores. While the demand for the products has not shifted to their substitutions, the channels through which people buy has.

Online shopping is gaining at a time when simply filling up a gas tank to head to the mall can seem like a spending spree.

A number of retailers — including Gap, Victoria’s Secret and J. C. Penney — are experiencing double-digit sales growth at their shopping Web sites, creating a surprising bright spot during an otherwise gloomy time for sales in brick-and-mortar stores.

Down the line this means drop in incentives to the employees who work in the shops and it is bound to cause shift in their consuming patterns.

If I can make predictions about other economic and consumer behavior changes we should expect in the future, these are in my short list:

1. People brown-bagging lunch
2. Product unbundling in restaurants. No more free bread, chips-salsa or worse no more free napkins or water.
3. 4 day work week, with 10 hours a day
4. US Mail stopping Saturday delivery
5. Newspapers adding a higher delivery surcharge, causing a shift to their online version.

Judging the Book just by the reviews

I am less inclined these days to buy the recent crop of books despite their compelling case for remarkable concepts. There are many books on business, economics, and marketing topics written for the general public. A common pattern is that they take a seemingly plausible concept and fill the book with examples and experiments in which the concept was found to be true. The concept is also repeated many times in the 200-300 page books that is also filled with references that are seem to add credibility.

When considering buying these books you not only look at the price you pay to buy the book, you also the opportunity cost of time spent reading the book. In fact, after you buy the book it is sunk cost and you need to reevaluate the decision between reading it fully vs doing something else. People feel guilty just for spending $25 on the book and hence spend more (by way of opportunity cost) to read the whole book.

In general you may be better off not buying the book and instead reading the reviews from trusted sources. You will be better off than buying the book and reading it in full.

I have said a few times that everyone should read the book Predictably Irrational. You can instead read this excellent review of this book and two others like it from Federal Reserve Bank of Minnesota.