PeppercomBlog

Path of Least Resistance

By Milos Sugovic 

Competitive differentiation is about survival. Your success depends on how your business is positioned vis-à-vis its competition, and rests on your ability to answer one simple question: “Why are you better?” Most companies struggle with communicating their niche and opt for the easy way out by taking their competitors head on.  

But why do businesses readily forget about the easiest route of all - or as it’s know in physics - the path of least resistance? What’s interesting about the path of least resistance is that it describes why an object or entity takes a given path, usually a motion forward through a system, as a result of resistance levels in its environment. As a metaphor for personal effort, it implies least confrontation - a person taking the path of least resistance avoids conflict in order to survive.  

Lack of Confidence in Consumer Confidence

Posted by Milos Sugovic

U.S. consumer sentiment rose in early September, according to the Reuters/University of Michigan Survey, with index values increasing from 65.7 in August to 70.2 in September. Hallelujah! Consumers are finally optimistic, they’ll start spending, and the economy will recover in a jiffy. Oh wait, there’s one caveat: the change in index values is statistically insignificant and therefore useless. 

Here’s why: it’s called “margin of error.” 

If you haven’t heard of it, here’s a good place to start. The Reuters/University of Michigan Survey is based on a relatively small sample size of roughly 500 respondents. So if the sentiment of these 500 respondents is projected onto the U.S. population, that gives us a margin of error of +/- 3.3 index points. 

That means in August, we were 95% confident that the actual or “true” population index value was between 62.4 and 69. In September, the confidence interval was between 66.9 and 73.5. Note the overlap.  

What is a “price point,” really?

Posted by Milos Sugovic

There’s a faddish bit of marketing jargon that’s overused and makes absolutely no sense to me: the infamous “price point.” To the users of such lingo, I sincerely ask: what does it mean and how is it any different from that other short word that frequently does the trick - price?

You see, what puzzles me most about “price point” is the following: I’ve studied economics for the past seven years (and counting) and have been exposed to a whole range of topics at four different universities, one of which happens to be the London School of Economics. Never, and I repeat never, have I heard a professor of economics juxtapose the words “price” and “point.” And you know why? Because it’s meaningless.

Trustbusters and Troublemakers

Posted by Milos Sugovic

Giants have every reason to dread the perception of price-fixing and the actions of their “competition,” at least until June 23 of this year when the most effective cartel-fighting tool expires. Tech titans, or Googlopolies, are already on the radar as the Obama administration revs up its fight on predatory pricing and price-fixing. It seems the feds are increasingly turning their attention to the latter, and will continue to rely on none other than the prisoner’s dilemma framework.

The prisoner’s dilemma has helped antitrust authorities protect consumers and fight cartels via a section of the Antitrust Criminal Penalty Enhancement and Reform Act of 2004. It worked thus far by providing tempting offers to crooked companies and letting them off the hook for ratting out fellow price-fixers. Giving a break to tattletales is nothing new; it’s the age old prisoner’s dilemma game which can result in and preserve sub-optimal market outcomes, or, if used strategically, can ensure market outcomes that improve the welfare for all.

How is the latter achieved in antitrust legislation? By tempting squealers. 

Caveat blogger: Posting on others' blogs can be dangerous to your health

Posted by Milos Sugovic 

Blogging is a popularity contest and those that adhere to reciprocity norms get people to pay attention. Say something interesting along the way and you may rouse curiosity and encourage click-through. So, PR firms advise their clients to actively participate in online discussions. It’s a no brainer. 

But the “evidence” till now has been anecdotal and experiential. Do higher levels of content production and proactive engagement really translate into higher readership?  

Turns out for the most part that’s true, and here’s the empirical evidence: A study by Gaudeul et al. (2009) examines the relationships among bloggers to identify the statistically significant variables that determine blog readership. If you look under the hood, you’ll find the following nuts and bolts of their research: 

• A one percent increase in the number of entries per day is associated with a 0.6 percent increase in number of readers. 
  
• A one percent increase in the number of comments received is associated with a 0.8 percent increase in number of readers 
  
• Membership in online communities has a very small effect on readership, while “seniority” - the age of the blog - is associated positively with the number of readers. 
  
• The most surprising finding is that posting comments on other blogs is negatively related with the number of readers, all else equal. 
  

The first three findings support the blogosphere rules of engagement. But what does the last bullet mean? Will posting on other blogs reduce your readership? Is the failure to reciprocate “sanctioned” with higher popularity? This seems to defy intuition.

Pet Airways for Aristocats

Posted by Milos Sugovic 

Just when I started believing in the credit crunch, along came funding for a stupid idea – a pet-only airline offering first class pet travel. Now this might not be the most ridiculous service offering ever, but it’s definitely top-tier and belongs with the Snuggie and these Chindogu Japanese products mocked on Freakonomics. It turns out I was wrong: stupid ideas can make you money if you can connect with the right consumer. And that’s how Pet Airways, among other capitalist ingenuities, will “take off” on July 14th this year.  

The airline’s mission is to guarantee “Pawsengers” with safety and comfort when flying, promising that pets are cared for by a trained crew of pet attendants.  Each time your loved one moves from the Pet Lounge to the limo or makes a transfer, the owner can track and trace their progress. Oh, and in case you’re curious, there’s a frequent flyer club called MyPAWS which comes with perks such as discounts at their online store, pet-friendly hotels, as well as at 1-800-PetMeds.  There’s no question about it: Say goodbye to Double Happiness Travel, I’m flying to Washington D.C. using Pet Airways!

Can Search Trends Predict Economic Activity?

Posted by Milos Sugovic

You bet. A new piece of research by Choi and Varian (2009) shows that search query data is correlated with the level of economic activity in a given industry, and thus may help in predicting the subsequent sales data release. Or, put in layman’s terms: more searches translate into more sales. Now some might be thinking “so what?” Isn’t it obvious that if people seek out a product in cyberspace, they’re more likely to purchase it? Yes, but look at the bigger picture.

This sort of analysis can be extended to several industries, and it’s only a matter of time before marketing and sales departments start paying even more attention to Yahoo! Buzz and Google trend indices. (Full disclosure: Yahoo! is a Peppercom client.) So when Ford’s marketing department sees a one percent decrease in searches, they can expect a 0.5 percent decrease in sales, as the article shows. Perhaps then they’ll start paying attention to the correlation with keywords like “hybrids” and “bailout” as well. So it’s only natural for search trend data to creep its way into sales models.

Till then, it’s important to keep an eye on the digital movements specific to you and your industry. Economists, investors and journalists will increasingly be looking for data releases with a shorter time lag, and digital data is proving it’s a good complement, if not replacement, for traditional measures. And for those of us in PR, it’s important to stay on top of this thing called the “cyberspace”. You never know what the next Google, Yahoo! or MSN Live search might uncover for your client.

The Paradox of Saving

Posted by Milos Sugovic

For years we were told that if consumers don’t save more it will destroy the economy. Now we’re told that if consumers do save more it will destroy the economy.  Are economists bad at communicating or just plain old stupid? 

They’ve advocated again and again for an increase in the savings rate, and now they have it. So shouldn’t they be delighted that consumers are finally, after all that happened on Wall Street, saving more? Turns out, they’re not--and rightfully so.

In layman’s terms, GDP is comprised of consumption, investment, government spending, and net exports. It’s the aggregate income of all of us and there’s an important caveat in its components: investment is a function of saving. So lower consumption (higher saving) means more capital investments, assuming all else being equal, which translates into higher productivity, more jobs, more output, more income, and more consumption. So saving today generates consumption tomorrow: it’s a long term goal.

The Green (Re)Allocation

Posted by Milos Sugovic

Many Americans have already taken important steps to make their homes energy efficient while those that are dropping the ball would pick up their slack if financial resources permit, according to a recent national survey conducted by Yale and George Mason University. There’s no surprise: Americans are willing and ready for energy efficiency and pollution reduction, especially if it saves them money in the long-run and improves the quality of their lives. 

The most intriguing finding of the survey is that consumers face a natural barrier to going green – the significant upfront financial cost. A reduction in this barrier requires a new set of market instruments, perhaps one where upfront costs are diffused over time like the cost of a cellphone that’s covered via monthly fees (and let’s not forget the government subsidy option either). But assuming this barrier to sustainable consumer behavior is done away with, will the U.S. of A. pollute less? Will CO2 emissions drop to 1990 levels? Probably not.

The consumer wants to reduce emissions demand given the push that’s coming from the new administration, energy prices and declining incomes. But here’s the paradox: an environmentally friendly consumer base reduces a supplier’s pollution level, which creates room for other polluters to “make up” for the reduction and keep national emissions constant. So effectively, nothing really changes.

Being Sensitive to the Price Paradox

Posted by Milos Sugovic

During a recession, firms face a decrease in demand for their goods and services. To compensate for this drop they can charge more and maintain revenues, right? Wrong. If that were the case, we’d see a significant increase in the CPI and PPI over the last few quarters, indicating a 1970s-style stagflation. But the data point to a deflation instead.  

So why don’t prices increase? In layman’s terms: firms can’t charge more because consumers can’t afford more – they’re increasingly sensitive to price changes. But let’s not forget the multitude of microeconomic forces at play behind this simplistic and somewhat incorrect statement.

Yes, the income effect plays an important role. If people are losing jobs or watching their real wage decline, their consumption patterns will change. Usually, and I do mean usually, they’ll demand less of a particular good. But that’s not true for all goods, because the responsiveness of the quantity demanded to a change in income (also called income elasticity of demand) comes into play. For some goods, like instant ramen and spam (even rat meat, according to Freakonomics), demand increases as income decreases, so producers can get away with raising prices. So what was once cheap becomes relatively more expensive. A 99-cent bag of ramen is suddenly $1.09. Counter-intuitive, isn’t it?