Price is a bad thing in recessions

I’ve mentioned the Laptop Hunter ads before. And, if you haven’t gathered, I think it is the first smart campaign from Microsoft in a long time. The reasoning is that portraying Mac owners as “style over substance” and “too cool” hits the right polarizing note during tough economic times.

Sure it’s offensive and not always true, but you have to give them props for being clever.

It is possible, however, to go too far.

What’s wrong with the Laptop Hunter campaign? Well there are arguments about “the facts” (low resolution, slower RAM, etc), but it’s hard to ding Microsoft for that and not say that similar over-simplifications don’t occur in Apple’s Get A Mac campaign. There’s also the issue that the ads seem more about selling HP products, than Microsoft ones. But it’s their money. 🙂

Besides, television advertising has never been about the facts, it’s basically an appeal to emotion.

Instead, the weakness of the campaign centers around a disturbing trend among these ads: they focus on cost, not value.

Business lessons from economic downturns

This article about business churn during recessions is well worth a read.

The surprising observation of the article is that most churn in business occur during economic downturns. Large companies scale back during downturns offering opportunities for more aggressive companies to establish themselves—increasing spending in areas such as PR, advertising, R&D, and acquisitions allow companies to leave a downturn with a clear leadership position (Kelloggs over Post), re-establish them among the top (Chrysler passing Ford), or reach market leadership (Texas Instruments with the transistor radio, Apple with the iPod).

One reason this happens is, in a declining market for advertising, spending money on advertising actually gives more bang for the buck. A similar argument can be made for PR, R&D, acquisitions, and the like.

The other reason is that large companies naturally scale back during these times. Why? Surowieki writes:

The answer has something to do with a famous distinction that the economist Frank Knight made between risk and uncertainty. Risk describes a situation where you have a sense of the range and likelihood of possible outcomes. Uncertainty describes a situation where it’s not even clear what might happen, let alone how likely the possible outcomes are. Uncertainty is always a part of business, but in a recession it dominates everything else: no one’s sure how long the downturn will last, how shoppers will react, whether we’ll go back to the way things were before or see permanent changes in consumer behavior.

Established companies, because of their size, are good at managing risk, but all companies are bad at managing uncertainty. In a recession, there is a lot of uncertainty.

Applying value to cost

In the same way,David Surowieki notes a distinction between risk and uncertainty, I believe it is important to note a distinction between cost and value.

Let’s take the first example above—Kellogg’s outspending Post in advertising and marketing during the Great Depression. During such a time, advertising represents a better value, not cost. Sure it “cost” less in monetary terms, but in real terms the cost is actually much higher—it’s easier for a large company to spend more money in advertising when times are good, than keep that spending or increase it when times are bad!

As individuals, I believe during a downturn, we do not seek things that cost less, but those things that provide more value.

How Apple fares

Because of the downturn many people were predicting Apple, a high-margin company, to be negatively impacted. This conventional wisdom sounds reasonable, since their products clearly cost more.

“If previous earnings debacles weren’t already embarrassing enough for the analysts, then [Q1 2009] should be one for the books.”
Blogger, Andy Zaky, comparing Wall Street analysts to bloggers edstimates of earnings.

Look how wrong they were:

What’s immediately apparent is the sharp difference in sentiment. The bloggers tend to be bullish, the Street — at least on Apple — tends to bearishness. And on the number that matters most to investors — earnings per share — the bloggers were right on the money, missing the actual EPS by only a few pennies. The Street, by contrast, underestimated Apple’s earnings by 40 cents a share — a stunning 22.5%.

Consider this paradox: Apple has high margins in all categoires and an 80% marketshare on music players and only the highest of high-end cell phone offerings. If we are cost-conscience, then shouldn’t these take a devastating hit? The traditional argument that Apple is only for the rich should not apply to markets where your products are 80% and 30% of their markets respectively. Instead the iPod and iPhone comprise the bulk of Apple’s profits, and grew almost 40% in overall market share on in the high-end category.

The answer comes from the anecdotal. How many people do you know bought some generic music player on a monthly or yearly basis before buying an iPod which they than rave about and keep for years. In my office alone, I see iPod mini’s that are two generations old side-by-side with the latest generation iPhones. I know many unemployed people with an iPod and I don’t see them, eBaying their iPods and purchasing a Dell DJ Ditty, Creative Zen, or the iPod Shoplift instead.

It seems to me, Apple still sells because, in spite of the higher cost, they continue to offer strong value.

The argument as it applies to Microsoft’s ads

My fundamental issue with the direction the new Laptop Hunter ads are going is not one of showing the value of Microsoft products, but the cost of Apple’s products.

When times are good, it’s easy to make a bad purchase, go to Wal*Mart and make another bad one two months later.

When times are bad, who really cares how cheap low the opening price point is or how much crap I can buy from China, if it doesn’t add real value to my life? Heck, at the rate things are going, people are going to start to realize that if you ignore those openers, Wal*Mart makes outrageously large margins off the consumer!

In the last recession, we got “out” of it with a housing bubble and massive consumer spending. Selling cheap crap works well with that strategy.

This time around, the consumer debt is so high, we’re not going to spend our way out of it. People are looking at value, not necessarily cost.

Watching these newer Laptop Hunter ads only serve as a reminder of the good value I got in purchasing and using a MacBook Pro to power my six-figure salary job.

The moral

If you focus on value, then you might find that lean economic times give a wealth of opportunity to change the direction of your company or introduce the Next Thing™ that provides value to the world. You can more easily achieve those goals because your message and ideas aren’t drown out by the noise of plenty, but the silence of scarcity.

If all you’re focusing is on cost, then you’ll naturally scale back on things like PR, advertising, R&D, and acquisitions—and maybe you’ll pass that cost savings on to the consumer.

But then you just might be Post to someone else’s Kelloggs.

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tychay

light writing, word loving, ❤ coding

3 thoughts on “Price is a bad thing in recessions”

  1. People who already have a Mac are exceedingly unlikely to switch to Windows. Microsoft’s target audience is people who have been using Windows and are considering the Mac, based on buzz, word-of-mouth (hence the importance of negating the coolness advantage), or most of all due to the utter fiasco of Vista. In other words, Microsoft is trying to reduce the churn and limit defections until Windows 7 is ready. From that point of view this ad campaign is probably a good approach.

    The elephant in the room, of course, is Linux, which beats Windows handily on either cost or value (as long as you are not a gamer). Linux is probably more of a threat to Microsoft than Apple, just as Toyota is more of a threat to GM than BMW.

    The problem with this positioning of Windows as an “inferior good” in economics parlance is that it could backfire spectacularly when the economy comes back, because Microsoft is essentially admitting theirs is the lesser product. In marketing, symbolism matters.

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