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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Forgive me for multi-replying here - I'm gettin' busier than I'd expected.
Jayjay: 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)...
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)...
You can't blame it all on red tape. The investment to develop a workable recipe, the equipment to produce the product, the advertising, the wages while you're waiting to make a profit - all add up to pretty large money. True, it's higher than it needs to be - but even without gov't intervention, it'd be a major investment to break into a very competitive market. Far cheaper and more likely of success to start making plumbing fixtures that are reliable - there's a crying need, there.
Juan: 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. Hi Danno,
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.
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.
Hi Danno,
Hi, Juan! <waves>
Maybe a general explanation is inflation/intervention. The money used 25 years ago would purchase better quality products than current money. Today there's more taxation/devalued money and regulation so the quality of the goods produced and purchased suffers.
This is, of course, possible. But the money used 25 years ago to buy a gallon of gasoline would, after adjusting for inflation, buy a gallon of gasoline now. And there are some industries in which quality has not suffered - in some places, it's improved. (Try buying a car that you could expect more than 100,000 miles from, at any price, 25 years ago!)
Partly, I suspect the Business Schools that are teaching this as a good tactic, and partly I suspect that, once one has a widespread reputation for quality, it pays to reduce costs as far as possible, and to heck with quality. Good economics requires that one follows effective business practices - good business does not necessarily require that one follow good economic practices. There are other factors that are relevant, and that's easy for an economist to overlook.
For example - a good economist would point out that if there were no plunder in my area, the lack of crime would improve conditions for everyone. If I could manage to get away with it, taking over the houses to the north and south of me would be quite profitable to me personally, regardless of how much the ammunition cost me. Economics often overlooks the profit available in plunder, and pretending that it's not there won't make it go away.
Danno, who, surprisingly enough, gets along fine with his neighbors.
Jayjay: 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.
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.
Congrats to the Aussies for catching it.
About 6 years ago, our local brewery, selling a passable but not-great lager, switched from a 30-can case at $9.95US to a 24-can case at $9.95US. Drinking enough beer to make such a change impact my budget, I brought this up to the manager of my local retailler. He claimed that it'd always been a 24-can case, that my memory of a 30-can case was drunken stupor.
Having been a regular customer for years, I came back with an empty 30-can case, and hunted that manager down - then called for the owner. Confronted with the ruse, the owner confessed that it'd been his idea to deny the change, and that, yes - they were trying to fly under the radar. Being fond of that lager and that shop, I continued to buy there. About 6 months later, I ran into the owner in the shop, and he recognized me. He thanked me for remaining a customer, and informed me that I'd been the only customer to complain about the switch.
As I use empty cases to schlep empty cans down to the basement for crushing/recycling, the loss of 6 cans of capacity per case has been non-trivial - thank goodness that I still have some 30-can cases that I reuse regularly.
I don't buy that brand any more - I've found a better, locally-produced lager. But I hold that shop in higher regard because the owner stopped lying to me quickly - and that's hard to find. Besides, they do have the lowest prices on what they carry that I drink.
Anyway, it's been said many times, and some enterpreneurs do eventually learn it - nobody ever went broke because they made their customers happy.
OTOH, as referenced before in this thread - does anyone know any happy Microsoft customers?
Danno, contemplatin' one more salty dog.....
Danno: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.
And in that time other alternative fast food companies have risen to the challenge, offering some new products of their own. I can at least tell you that Arby's got its ass handed soundedly by both local/regional and national fast food chains due its quality reduction.
Danno: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.
Not at all correct, the boiling frog situation is equivalent as it's an attempt to change conditions in a manner that is not perceptible to the intended target. Thus, acclimatizing them to these changes. The point is though, if the changes are inperceptible even when stacked up with each other, then they're irrelevant. But if they're perceptible as a whole, then you have an argument, which was my point.
Danno: Reducing quality isn't always a Bad Idea, as customers have values other than price/quality.
Yet people still dicker on price vs some values to be fulfilled (subjective and/or objective). Quality isn't just an isolated value on its own, it's the 'gestalt' of the whole set of 'features' one's product or service offers, which can include "Made in America."
Danno:Reputation is nowhere near as durable or important as some of us would like it to be.
Not according to historical analysis of white collar crime. You screw around as a stock broker, commit fraud and get convicted, you won't find work in the field ever again most likely. I've even heard some can't even find work in the blue collar bracket due to being over qualified. For a company, this may not translate 1-to-1, but the hit of reputation often makes it harder to gain new customers (even if you can hold on to your current ones). Look at how it took a good decade for Apple to gain a 10% desktop PC share in the market. That was due to the flimsy hardware and flimsier software that garnered a well earned bad reputation for Apple. And it only improved *after* the fact that they changed their hardware and software practices. And even then some hardware is still considered crap in the industry (which is why they don't have a server market share of any significance). So, don't discount the power of a bad/good name.
"The power of liberty going forward is in decentralization. Not in leaders, but in decentralized activism. In a market process." -- liberty student
The free market ain't not no utopia but it's a hell of a lot better than central planning. I'll take the overpriced sausage over the poverty, gulags, and sausage shortages.
Danno:About 6 years ago, our local brewery, selling a passable but not-great lager, switched from a 30-can case at $9.95US to a 24-can case at $9.95US. Drinking enough beer to make such a change impact my budget, I brought this up to the manager of my local retailler. He claimed that it'd always been a 24-can case, that my memory of a 30-can case was drunken stupor.
If they had kept it 30 cans and rised the price to $12.43 would you have been happy?
You live in an inflationary economy, the prices of things go up.
Danno:Anyway, it's been said many times, and some enterpreneurs do eventually learn it - nobody ever went broke because they made their customers happy.
No one has ever made a good but expensive product, only to be outcompeted by an inferior but cheaper product? You'd better reconsider that.
liberty student: 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.
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.
Fair enough - I'll wait 'till you're less pooped. You're usually worth listenin' to.
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.
Unless I'm misrembering horribly, it was being taught as a good tactic. It's bitten the butts of several firms, but that won't necessarily prevent it from being taught as A Good Idea in academia. As I explained earlier - if you can do it without much of your customer base rebelling, it can indeed raise profits, especially where the earlier high quality/low price combination was just an investment in consumer goodwill.
We need to keep in mind here that economics =/= business. Economics is an important part of business, but there are other factors, and a good businessman will take them into account.
As an example, I have two people who do counter sales for me at events - basically, sitting behind a display of my products, answering questions, and selling the products. One, who I'll call Rick, is a personable young man, quite knowledgeable about the products, good at chatting with potential customers. He does a fine job, and gets 5% of gross sales. The other is an attractive young woman with a sparkling smile, a fondness for revealing clothing, and not nearly as much knowledge of my products - mostly, she's not terribly interested in how they're made. She gets 10% of gross sales, and I prefer using her - sales are consistently higher when she's at the table.
Economically, this makes little sense - I'm paying twice as much (as percent of sales - considerably higher in dollar amounts) for less expertise. But from a business perspective, it does make sense - she doesn't need to answer many questions about the craftsmanship, and my sales are considerably higher.
My customers are getting the exact same product, either way. If they were entirely rational, the sales should be higher with Rick working - more expertise is available. There's more going on than pure reason at the point of sale.
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. {...}
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. {...}
True. And, as a consumer, I'm just not going to get enough experience of that product for statistical validity. As consumers, most people are so accustomed to decision-making on insufficient evidence that they no longer even notice. This is why marketing is often more important than manufacture in the success or failure of a business.
From a marketing perspective, it's entirely reasonable to sacrifice early profits in order to achieve a reputation as an excellent value, and then coast on that reputation while maximizing profits. Without the marketing perspective, this looks like it wouldn't work - but it does work, for reasons that have nothing to do with economic theory of any school.
Danno, who should get back to producing...
JonBostwick: Danno:About 6 years ago, our local brewery, selling a passable but not-great lager, switched from a 30-can case at $9.95US to a 24-can case at $9.95US. Drinking enough beer to make such a change impact my budget, I brought this up to the manager of my local retailler. He claimed that it'd always been a 24-can case, that my memory of a 30-can case was drunken stupor. If they had kept it 30 cans and rised the price to $12.43 would you have been happy?
If they had, I'd likely still be drinking that brand. I expect prices to go up - it was the deception that lost them a customer.
Danno:Anyway, it's been said many times, and some enterpreneurs do eventually learn it - nobody ever went broke because they made their customers happy. No one has ever made a good but expensive product, only to be outcompeted by an inferior but cheaper product? You'd better reconsider that.
After thinking carefully about it, I can't recall a single company who went out of business because of cheaper-but-inferior competition. I can cite endless examples of companies who have the highest prices in their field, whose quality keeps them remarkably popular - Glenfiddich, Rolex, BMW, Fender, Ferrari, Mont Blanc - all have competitors whose products perform nearly as well (or better), for half the cost (or less) - yet they remain not merely competitive, but tend to enjoy remarkable economic stability, even when their markets are in a downturn.
I expect that it's probably happened, somewhere - but I also expect that there was an issue besides being outperformed by the competition that was important to that business failure.
Danno, makin' do with lesser good, most of the time.
ladyattis: Danno: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. And in that time other alternative fast food companies have risen to the challenge, offering some new products of their own. I can at least tell you that Arby's got its ass handed soundedly by both local/regional and national fast food chains due its quality reduction.
Yup - they played that game badly, with a too-drastic reduction in quality.
Danno: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. Not at all correct, the boiling frog situation is equivalent as it's an attempt to change conditions in a manner that is not perceptible to the intended target. Thus, acclimatizing them to these changes. The point is though, if the changes are inperceptible even when stacked up with each other, then they're irrelevant. But if they're perceptible as a whole, then you have an argument, which was my point.
A side-by-side taste test of Wellknown Sausage, with samples from 1980 and 2009, could show startling changes - but I don't know that anyone could perform such a taste test. There's a reason that sausage was picked as the example - changes can be remarkably incremental, and it's very difficult to compare the sausage you bought last week with the sausage you bought a year ago.
Danno:Reputation is nowhere near as durable or important as some of us would like it to be. Not according to historical analysis of white collar crime. You screw around as a stock broker, commit fraud and get convicted, you won't find work in the field ever again most likely. I've even heard some can't even find work in the blue collar bracket due to being over qualified. For a company, this may not translate 1-to-1, but the hit of reputation often makes it harder to gain new customers (even if you can hold on to your current ones).
Not according to historical analysis of white collar crime. You screw around as a stock broker, commit fraud and get convicted, you won't find work in the field ever again most likely. I've even heard some can't even find work in the blue collar bracket due to being over qualified. For a company, this may not translate 1-to-1, but the hit of reputation often makes it harder to gain new customers (even if you can hold on to your current ones).
Is it even legal to work as a stockbroker if you've been convicted of fraud? I see the point you're trying to make, and I'll agree - some companies have taken such a shot to their reputation that they were doomed, no matter what they tried in an effort to recover their reputation.
Look at how it took a good decade for Apple to gain a 10% desktop PC share in the market. That was due to the flimsy hardware and flimsier software that garnered a well earned bad reputation for Apple. And it only improved *after* the fact that they changed their hardware and software practices. And even then some hardware is still considered crap in the industry (which is why they don't have a server market share of any significance). So, don't discount the power of a bad/good name.
{blink} That's not at all how I recall that, and I was working in the field, pre-Windoze. Apple's Macintosh had a reputation for very high quality, and the uber-geeks were largely in agreement - the Motorola processor was superior to Intel's product. The reason for their poor performance was their closed architecture - they refused to allow other manufacturers to make add-on components, and they were designed in such a fashion as to make it very difficult for anyone but a factory-certified technician to even open the case. The PC design was available to the open market, bringing in many clone manufacturers, add-on designers, etc. The resulting competition in the PC world brought performance up as it brought prices down, attracting software developers, who added their own value to the mix. Anyone could develop/market software for the PC - it was impossible to do so for Apple's products without buying a license from Apple. Without such competition, Apple's software was usually considered inferior - but I never heard anyone complain about the quality of their hardware. Their Lisa was, hands down, the best computer you could buy at the time in the desktop market. It wasn't quality that killed that - it was the near-total lack of companies developing software for it, and the impressively high sticker price.
It was the clearest side-by-side comparison between an open market and a closed market that I can think of, and open market won, hands-down.
They lack server marketshare because, while their OSX is linux-based (and thus has excellent server software available), most people who run servers decline to pay extra for the "user-friendly" interface that they don't need or want.
But, no - I'm not discounting the power of a good name. According to the Sausage Game, a good name will keep you in business even after your quality has gone downhill - if you can make that downhill slope gentle enough.
Danno - off to cut corners. (Well, round edges and ease corners, anyway. In this case, it adds to perception of quality. Later, I'll dye. Leatherwork is amusing.)
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