Y'all know what the Sausage Game is? I've heard it started being taught in Harvard's Business School back in the late '70s, early '80s (and would love a cite that supported or refuted that), but it goes, basically, like this:
1 - Start selling high-quality sausage at the lowest price you can sustain, even operating at a small loss. Develop a loyal following of customers.
2 - Incrementally reduce the quality of the sausage and raise the price, very gradually - so gradually that most of your loyal following does not notice, or is not sufficiently upset about the change to look for a new 'preferred' brand of sausage.
3 - End by selling a low-to-medium quality of sausage at the highest price you can sustain, maximizing profits.
It works, and is used widely enough in the USAian market that anyone familiar with the market can likely list a half-dozen products that used to be great and a bargain, but are now mediocre, and comparably priced with their competition. Consumers savvy enough to realize that the tactic has been used on them greatly outnumber the consumers who are willing to start testing other products, looking for a better option, once they notice the shift in quality - and the consumers who don't even notice the incremental change are by far the largest group.
It isn't quite fraud - nobody has contracted to keep the ingredients consistent in quality, and nobody is obligating the consumers to be loyal customers, though that is their tendency. Since nobody but the manufacturer knows exactly what goes into their sausage, nobody can complain about breach of contract.
As a small-scale producer/seller, I deplore the tactic - my loyal customer base rewards my committment to quality, and I enjoy the process of production more that way, as well. But, recently noting the failure of my $25US faucet cartridge after 16 months of use, I began wondering - is there a stance that Austrian economics takes on this practice? I can't say that I've seen this tactic addressed in any text, though it appears to be widespread.
Danno, wishin' for the old-style "replace a $0.05 washer every year or so" faucets that aren't available any more.
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Danno:3 - End by selling a low-to-medium quality of sausage at the highest price you can sustain, maximizing profits.
The problem with this assumes your customers won't change to another brand with higher quality and/or lower price.
It presumes that we operate our businesses in vacuums.
Market competition handles this under natural conditions. Anyone selling crappy sausage for too much is inviting competitors in.
One could argue that in a competitive market, no one can afford to play the sausage game because the price raising and quality dropoffs would be immediately punished with lower market share. It would be very difficult to afford or rationalize the capital costs of establishing the brand (in a market with multiple brands) if you intended to destroy it later.
Danno:It isn't quite fraud - nobody has contracted to keep the ingredients consistent in quality, and nobody is obligating the consumers to be loyal customers, though that is their tendency. Since nobody but the manufacturer knows exactly what goes into their sausage, nobody can complain about breach of contract.
Just because a weiner had X% of real meat 2 years ago, doesn't mean I should assume the same today. Now if the packaging said, 50% real lips and assholes, then any deviation from that would be fraud. But if they call it a "weiner" and it meets the definition of a "weiner", even on the low side, then no problem there at all.
Danno: But, recently noting the failure of my $25US faucet cartridge after 16 months of use, I began wondering - is there a stance that Austrian economics takes on this practice? I can't say that I've seen this tactic addressed in any text, though it appears to be widespread.
But, recently noting the failure of my $25US faucet cartridge after 16 months of use, I began wondering - is there a stance that Austrian economics takes on this practice? I can't say that I've seen this tactic addressed in any text, though it appears to be widespread.
Not sure that is relevant, unless you were trying to make sausage in your sink.
Danno: Danno, wishin' for the old-style "replace a $0.05 washer every year or so" faucets that aren't available any more.
Danno, discovering an unfulfilled demand.
If you find something evil that wobbles, push it. - Gary North
liberty student: Danno:3 - End by selling a low-to-medium quality of sausage at the highest price you can sustain, maximizing profits. The problem with this assumes your customers won't change to another brand with higher quality and/or lower price.
As I understand it, the theory is that the customers you lose to another brand are outweighed by the customers who continue to buy your sausage at higher profit to you - either from force of habit, or because the change was so gradual that they never noticed.
It presumes that we operate our businesses in vacuums. Market competition handles this under natural conditions. Anyone selling crappy sausage for too much is inviting competitors in.
I take it that you're implying that this is a non-functional tactic - perhaps an urban myth? I wish it were so. I fear that you're falling prey to the myth of the rational consumer.
Many consumers are, indeed, rational - but a significant number buy irrationally. To see this in action for yourself, spend a few minutes in the dairy section of your local grocery store, and watch people select milk for purchase. In my local area, there are two well-known, highly-advertised brands of milk, and most grocery stores also offer a store or generic brand. 98% of the consumers cannot taste the difference between the three brands, and I strongly suspect that a chemical analysis would show little significant difference. Yet, a significant percentage of the consumers buy the more expensive, highly-advertised brands. There's more going on than selection based upon a careful examination of the relative quality and price. The professor that started teaching this business tactic is simply expanding on that observation - at least, as I recall a magazine article I read over 20 years ago. (Nor can I recall the article well, or find it - anyone with more/better information would earn my gratitude by sharing it.)
If you do not take into account the irrational consumer and the consumer who chooses carefully, but then stands by that choice in the face of incremental change in product, that makes perfect sense. If you do take those consumers into account, however, the Sausage Game is a wise business tactic - particularly with an eye to next quarter's earnings.
Danno:It isn't quite fraud - nobody has contracted to keep the ingredients consistent in quality, and nobody is obligating the consumers to be loyal customers, though that is their tendency. Since nobody but the manufacturer knows exactly what goes into their sausage, nobody can complain about breach of contract. Just because a weiner had X% of real meat 2 years ago, doesn't mean I should assume the same today. Now if the packaging said, 50% real lips and assholes, then any deviation from that would be fraud. But if they call it a "weiner" and it meets the definition of a "weiner", even on the low side, then no problem there at all.
Certainly there's no fraud (as I pointed out in my quote, above). As a consumer who tries to balance good value against the effort and expense of comparison shopping/testing on an ongoing basis, I'm not quite willing to go to the point of agreeing that there's no problem at all.
Danno: But, recently noting the failure of my $25US faucet cartridge after 16 months of use, I began wondering - is there a stance that Austrian economics takes on this practice? I can't say that I've seen this tactic addressed in any text, though it appears to be widespread. Not sure that is relevant, unless you were trying to make sausage in your sink.
I'm sorry I was unclear. The manufacturer of that faucet did, indeed, enjoy a reputation for high quality and value for many years. I was disappointed to find evidence that they no longer rate that reputation. It'll cost me more in labor to replace that shower faucet than it'll cost me for another cartridge.
For what it's worth, I've another example of a company who built a reputation for quality that now seems to be coasting on that reputation. I've got two lamps that use rotary, pull-chain type switches - one, purchased 4 years ago, another I'd picked up used about 25 years ago. I've checked - the older lamp's switch was made by the same manufacturer whose replacement switches I can find. The new lamp has had its switch replaced 3 times - they break. Both lamps get about the same amount of use - the switches are cycled about twice a day. Again, my labor to replace the switch is worth more than the new switch will cost, which does become rather vexing.
Let me make it clear that I do not consider this a failure of the market, but a failure of my co-consumers to demand higher quality.
Danno: Danno, wishin' for the old-style "replace a $0.05 washer every year or so" faucets that aren't available any more. Danno, discovering an unfulfilled demand.
An unfulfilled demand that I'm in no position to fulfill - I have neither the time or money to invest in learning a new trade (or that much interest in manufacturing plumbing components).
You make a valid point, but I'm still unsure of just what your answer meant. Did you mean to say that the Sausage Game, being self-defeating, is a self-correcting problem, or that, not being actual fraud, is an expected feature of economics, and not a problem at all, or both?
If I seem to be blaming this problem on a free market, I'm making an impression I did not intend. I understand economics well enough to know that I'm just not going to get all of my desires fulfilled, and blaming anyone besides myself for the ones that I don't get is pointless. I was mostly seeking to satisfy my curiosity by asking the people more familiar with Austrian economics than I am if it's addressed in the available literature - my resources are limited, and there's a lot of books that I haven't read yet.
Danno, pondering Tesla - a brilliant inventor who failed miserably at everything but invention - mostly because he never understood economics or business.
Im not sure if its quite whats on your mind but Reisman has a section in his book Capitalism about the 'Planned obsolescence' charge/fallacy
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This reminds me of the "downsizing" of package contents for the same price. The biggest one of those was about tampons, and women went to other brands rather than pay the same price for fewer items. The company relented soon.
Danno:I take it that you're implying that this is a non-functional tactic - perhaps an urban myth? I wish it were so. I fear that you're falling prey to the myth of the rational consumer.
I approach almost all of these scenarios from the perspective of the entrepreneur. We have plenty of consumer opinions on this forum.
Danno:Let me make it clear that I do not consider this a failure of the market, but a failure of my co-consumers to demand higher quality.
It's neither.
The sausage game argument seems to bear a similar pattern to the "boiling a frog to death" scenerio, which has in my opinion a few problems. First, everyone does notice changes, that's part of the nature of our "right brain", it takes in information whether our conscious self is aware or not. Second, the sausage game argument also seems to speak out both sides of it mouth as it were. One side says the changes are disfavorable and the other side magically states they're inperceptible. Which is it? Are they disfavorable, thus having some perceptible qualities that make it so or are they irrelevant/inperceptible to the consumer?
Anyways, I think there are several cases in history one can use to show the sausage game is more of a pure gamble than it is a decent strategy to be employed by entrepreneurs. For me, I can think of at least one case: Windows Vista. Which really did blow up in the face of the company, even though the bottom line of Microsoft was never truly harmed by that snafu, but it still took a major hit in reputation and did lose some significant consumers in the business world (some simply went Debian/Ubuntu on their machines, some simply didn't care if the support packages weren't supplied for XP...). So, I don't see the real advantage in trying to jerk around consumers from a business perspective. I can see reasons to refactor products or services to make them sustainable (profitable), but beyond that, dropping the fundamental quality of a product or service seems dumb as it's a risk to take a hit on reputation, which is hard to recover.
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I'm sure the artifically high costs of competing with them thanks to all of the red tape and bureocracy involved in entering the sausage selling industry would delay the involvement of other entrepreneurs somewhat (and allow them to get away with it for longer than they would in a free market)...
Danno:I've got two lamps that use rotary, pull-chain type switches - one, purchased 4 years ago, another I'd picked up used about 25 years ago. I've checked - the older lamp's switch was made by the same manufacturer whose replacement switches I can find. The new lamp has had its switch replaced 3 times - they break.
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nirgrahamUK: Im not sure if its quite whats on your mind but Reisman has a section in his book Capitalism about the 'Planned obsolescence' charge/fallacy
Danno, contemplating the regrettable need to build more bookcases.....
Knight_of_BAAWA: This reminds me of the "downsizing" of package contents for the same price. The biggest one of those was about tampons, and women went to other brands rather than pay the same price for fewer items. The company relented soon.
That tactic did, however, work for vendors of coffee and sugar - at least in the USA. What was, once, a 5# bag of sugar is now a 4# bag - and economy dictates that larger packages (using less packaging material per pound) are less expensive to produce. The demise of the 5# can of coffee is a mixed blessing - the quicker the package is finished, the less stale it gets, even if price per unit goes up.
Conversely, upsizing of individual-serving bottles of soda pop works the other way - what were once 8 and 12-oz bottles are now 16oz, 18oz, or 22oz (.75 liter, I think). That the cost of the contents is so small makes this a worthwhile marketing tactic.
Danno, not drinkin' pop. Salty dog = red grapefruit juice, vodka, and salt = delicious - highly recommended as a thirst quencher.
This reminds me of something that happened in Australia recently with beer sizes.
BEER drinkers are hailing a victory against a brewing giant which downsized their favourite stubby - but failed to pass on a price reduction.A contrite sales manager from the Fosters-owned Cascade Brewery in Hobart today admitted "we got it wrong''.Cascade was accused in March of making a stealthy grab for more profits when it reduced the size of its 375ml twist-top Premium Lager stubby by 45ml to a sleeker "European-style'' 330ml bottle without changing the price."
"We got it wrong, which is something we regret, and now were fixing it,'' he said. The move to reduce the stubby size - yet maintain the same price - resulted in a massive drop in sales with some outlets reporting a 50 per cent drop off in sales. Several website protests sprung up in outrage.
One with more than 1200 contributors appeared on Facebook. Beer activists were today jubilant. "Tell your friends, tell your enemies, never in the history of Australia has an issue been so important - WE HAVE A WIN!!,'' the site roared. Other posts on the site captured the mood with "Rejoice...!!!'', "Huzzar!'' Yay! Great news all around''.
liberty student: Danno:I take it that you're implying that this is a non-functional tactic - perhaps an urban myth? I wish it were so. I fear that you're falling prey to the myth of the rational consumer. I approach almost all of these scenarios from the perspective of the entrepreneur. We have plenty of consumer opinions on this forum.
I challenge you to find me anyone who is not on the public dole who is not both entrepreneur and consumer. Stated in another way - good luck finding any entrepreneur that isn't a consumer. Even one. As everyone is a consumer, that leaves two categories for everyone to fall into - makers and takers. I didn't expect to find the 'taker' mindset well-represented here.
IME, the happiest free-market transactions, all around, happen when the seller and the buyer also share mindset - each glad that the other is there, each aware that the other's satisfaction with the bargain enriches themselves, in the long run. That's how I try to keep things between myself and my customers, and I've viewed that perspective as an essential element of my success.
OTOH, you ducked most of the rest of my questions quite nimbly.
Danno:Let me make it clear that I do not consider this a failure of the market, but a failure of my co-consumers to demand higher quality. It's neither.
You're not usually this mysterious - having an unhappy day?
While I could, indeed, go to the expense of learning metallurgy, plumbing design, and metallic manufacture, and get good-quality fixtures to my specifications, the per-unit price would be more than I'd be willing to pay. Without that option, I have a wide variety of plumbing fixtures on the market, at a wide variety of prices. Unfortunately, most of that price variance reflects design (style) and finish - function and quality may be sexy, but they're hard for a non-expert to know, and have little effect on sales decisions.
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 dunno - it could be me having an off day. I usually understand what you're saying with less effort on my part.
Danno, bracing for unavoidable disappointment when he remodels the bathroom.
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.
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.
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. I find that if you look online and see bad reps for a company, that can be misleading because people go online to complain, not to praise. One way to check out the disposition of a business would be to grab their prospectus and look at how their business is running. If they don't have one, ask for opinions from qualified professionals.
I'm not saying you are wrong, I am just saying it seems that if you are right, it's not based on a scientific analysis.
Danno:I challenge you to find me anyone who is not on the public dole who is not both entrepreneur and consumer.
That's not really relevant. I didn't say people weren't both.
I approach almost all of these scenarios from the perspective of the entrepreneur.
There are a lot of people on this board who are consuming without necessarily producing. Young people. Students. And then the ones who produce, many are employees, not employers. If I am starting a sausage firm, I am shooting for the highest quality at the lowest price. It is the only way to guarantee competitiveness and longeivity.
ladyattis: The sausage game argument seems to bear a similar pattern to the "boiling a frog to death" scenerio, which has in my opinion a few problems. First, everyone does notice changes, that's part of the nature of our "right brain", it takes in information whether our conscious self is aware or not. Second, the sausage game argument also seems to speak out both sides of it mouth as it were. One side says the changes are disfavorable and the other side magically states they're inperceptible. Which is it? Are they disfavorable, thus having some perceptible qualities that make it so or are they irrelevant/inperceptible to the consumer?
My apologies - I seem to continue to be unclear. Let me bore you with overmuch detail.
In the very early 1980s, I read an interview/article in a men's magazine - very probably Playboy or Penthouse. The author of the article had interviewed a Business School (Econ?) Professor who was teaching at (Harvard?), in whose classes the Sausage Game was taught as a Nifty Business Tactic. After a Q&A session with the professor in question, the author did some editorializing, but it was largely a "see what they're doing there?" piece. I cannot find any reference to this article, or similar ones, and wish I could lay hands on that magazine. I am certain that I read it between 1980 and 1986 (I recall discussing it with the woman I was partnered with at the time), and my impression is that it was a fairly recent edition at the time I discussed it.
I can demonstrate,(to fellow USAians, at least,) that this tactic does appear in corporate behavior. If they're as old as I am, or have early childhood memories of higher-quality fast food. I was trying to avoid using any company names, but here's the example that most USAians of my age group will be able to verify for themselves.
One of the early alternatives to the hamburger in fast food vendors was Arby's - you'd go in, order a roast beef or turkey sandwich, watch them throw the chunk of meat onto the slicer, slice off enough thin slices to satisfy the scale, and assemble your sandwich. They were a treat, and well worth the (usually long) wait in line to get some.
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.
It's not a theory - it's a practice, and unless my memory is not flawless (heh), was taught at Harvard Business School as a good practice.
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.
Anyways, I think there are several cases in history one can use to show the sausage game is more of a pure gamble than it is a decent strategy to be employed by entrepreneurs.
Every business practice is a gamble. Come to think of it, I consider any reliance on academia to reflect the non-academic world conditions accurately to be a gamble - but some call me a cynic.
For me, I can think of at least one case: Windows Vista. Which really did blow up in the face of the company, even though the bottom line of Microsoft was never truly harmed by that snafu, but it still took a major hit in reputation and did lose some significant consumers in the business world (some simply went Debian/Ubuntu on their machines, some simply didn't care if the support packages weren't supplied for XP...). So, I don't see the real advantage in trying to jerk around consumers from a business perspective. I can see reasons to refactor products or services to make them sustainable (profitable), but beyond that, dropping the fundamental quality of a product or service seems dumb as it's a risk to take a hit on reputation, which is hard to recover.
That's not a terribly valid example, for several reasons. First - by no stretch of the imagination was Vista a small, easily-overlooked, incremental change. Second - it wasn't MickeySquish's first bad OS - remember Win98ME? DOS 4.0? What they don't have is any real competition. While Linux is an alternative for many (I like Mandrivel, myself), if you need to run Windoze applications, you've gotta have Windoze - and you can only get that from one supplier.
Jerking customers around is not a good idea - but keeping 90% of your customers, while reducing your per-unit cost by 50%, and raising your wholesale price by 10%, is some very pretty math. Reducing quality isn't always a Bad Idea, as customers have values other than price/quality. I know people who won't buy a car that wasn't made in Detroit, regardless of other issues. There are people who will go well out of their way to buy Union-made, regardless of other issues. Consumers, as a whole, have other, less-rational yardsticks by which they decide who they'll buy from. (I was given horrid customer service by an assistant manager at a Red Lobster in 1978. Ten years and 5 states away, it took my new fiancee 2 hours to convince me to give them a second try. They were pretty good, second time around.)
As far reputation being hard to recover - a year or two ago, they made a movie about how wonderful a person/President Jimmy Carter is/was. _The Man From Plains_ is the title. Even Nixon got good press when he died. Reputation is nowhere near as durable or important as some of us would like it to be.
Danno, who preferred DOS to Windoze, anyway - but doesn't have a computer in the house that runs it. Win2K, XP, Mandrool, and a Ubuntu box for me. My kid (on the same network, if not page), runs MAC OSX and XP. Maybe I should track down a hack that'd let a DOS 5.1 box talk SAMBA with the network, just for giggles.....
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