Unemployed Highway Billboards
Does outdoor advertising pay? It just did!
Anyone who has traveled by automobile in the south, especially the I-35 corridors, has noticed this slogan on a rather large highway billboards. These billboards have a rather high unemployment rate, so this slogan is repeated many times in a long trip. I call them unemployed not because they are blank or empty, but rather the childish “caught you looking” attitude they hope to use to persuade us to purchase their advertising help. But, does your viewing of this billboard indicate success for its patron? Or is the advertising equation more complicated than that? As small businessmen we are offered advertising as varied as billboards to tee shirts with everything in-between. Advertising seems important, but is it?
Why Advertise
Perhaps it would be useful to remind ourselves of the impact our firm type has on our need to advertise and otherwise brand our businesses. As we recall from the discussions of pricing and non-standard pricing, firm type determines many aspects of both pricing and the need for advertising. If the three most common firm types are: competitive (farm), monopoly (utility), and competitive monopoly (restaurant); we can easily see who needs how much advertising. The competitive firm sells exclusively on price, he will sell all he can at the prevailing price, and would not benefit from advertising. The monopoly also will sell all he wants, but at the price he determines; advertising for him is largely unnecessary and largely for improved consumer relations. The competitive monopoly, (I have the market cornered on MY firms drycleaning), will advertise in an effort to have consumers prefer his particular brand of drycleaning, hamburgers or denim jeans….whatever the case may be. The competitive monopoly alone needs to create a belief that their product is different and superior to his competitors. My Dad used to say, “everyone cannot go to the same cleaners, and it’s your job to make your customers feel they go to the best”. Although the advertising major in university today will learn about the different kinds of knowledge, knowledge acquisition and the best ways to put a message into a consumer’s conscious mind, basically, advertising can be summed up as the art of telling your story in a way that will be memorable to the consumer.
Advertising as signaling
Philosophically, advertising has been accused of creating demand for things that may or may not be socially useful, but certainly advertising is not likely to become closely managed by the government so such discussions are not fruitful. However advertising has benefits that cannot be ignored. It could be said that advertising has a signaling effect. Signaling is a Nobel winning concept coined by Michael Spence. Spence reasoned that even if a college education had no “productive” value to make employees more productive, employers might use a degree to demonstrate which employees would be most likely to work hard in the future. In the employment model, the employer (without a signal) would pay all employees an intermediate wage, (halfway between the degreed and non-degreed wage). In this unsignaled model one employee is underpaid, and one if overpaid; in business, the unsignaled firm might fail. Trade associations have been reminding us for years to tell our customers why they should keep trading with us; the alternative could be the demise of any unsignaled business model especially a premium product or one with less easily definable benefits.
Advertising as Rent seeking
Rent, in this context is the surplus that a producer receives from “profitable” operations. Rent seeking is an activity with a more sinister sub-text. Some have defined it more as an activity that uses resources to enable profit, wherein the consumer will never see any improvement in product or service because of the expenditures. For example, lobbying and-or, out and out bribery is considered rent seeking. Although, I concur with many of you that products with little social usefulness have been sold thru the use of clever or timely ad programs; it is a slippery slope indeed to suggest that advertising be limited (by government or whoever) in any way.
If we have come to the conclusion that advertising is a necessary “evil”, then we should do it with as much vigor as we can afford. So, as to the affording part. I have heard different rules of thumb utilized, usually expressed as percentages of sales, as the optimum to purchase for a small business to optimize sales. I won’t repeat these here, as this is not my forte or purpose.
The Calculus of Advertising
As we said in the beginning, we as small business are offered opportunities as varied as there are salesmen. Some offerings are so obtuse as to be obviously in effective at getting out any message or relaying any consumer incentive. These must be construed as public relations at best or out-n-out charity at worst. Also we find ourselves the target of schoolchildren’s (and their parents) fundraising, which might include some kind of recognition; these too should not be considered advertising.
Legitimate advertising pedagogy could be as varied as coupon-based advertising, to grocery store shopping cart signs, to the highway billboard example. How do we live within our ad budget and still maximize our impact? The answer is two fold. First we must find what types of advertising are effective in our own area and business nitch. We can find this out by study or networking with others in our industry (easiest solution). Budgetary, we need to learn to do our own math calculations. The billboard salesmen would say that perhaps 10 thousand people per day see a billboard, and he might throw out a number that you might want to pay “per impression”; but this equation is incomplete. We have ignored the function that has the greatest importance, “How likely is the viewer to purchase my product?”. If ten thousand people drive by and cannot exit to purchase our product, then how much are these impressions worth to us? Another factor worth mentioning is: what is the profit we can expect per transaction? The shopping cart advertisement is an excellent one for this example. If the cart viewers are potential customers, and many see the cart, the remaining factor is the ratio of ad cost to total profit potentially realized from the ad. Usually realtors purchase these shopping cart ads because they alone can expect one transaction to pay for the ad. A drycleaner might need several hundred extra (remember marginal?) transactions to pay for such an ad.
I am not putting forth a formula because there are many variables to consider that might change the equation. Potential variables are how big geographically is the market, what is our penetration of the market, how profitable is our operation, how many firms are there in the market…and so on. The important thing is that you alone can know your firms calculus. Don’t let a salesman do the math for you, He’ll choose factors that make the project look like a necessity for you. Do your own math, and stand by it.
Monday, November 17, 2008
Remediation and the Coase Theory
Am-Dc 11/04
“Democracy is the recurrent suspicion
that more than half the people are right
more than half the time”. E.B. White
I am the reason that NPR’s fundraising drives are so long. Public radio stations spend countless hours on requests for support. Sure, I enjoy Prairie Home Companion and the other great programs, but I haven’t called.
This illustrates another economic principle, free riding. Free riding is when consumers can take advantage of a good or service without paying for it, and not necessarily illegally. This is possible because it is hard to charge for certain things-such as a fireworks display, for example.
Free riding also happens the government is called on to remedy or subsidize an industry that’s facing economic hardship or feeds the general public good. A product or service may have a positive externality, or spillover benefit. If the number of people willing to pay for that product is inadequate to pay for the good, it may not be produced, regardless of its value. Thus, it is funded publicly, because it is determined to be that beneficial.
Public goods such as dams and military defense are protected from free riding by government financing. The government imposes a tax and the entire public funds these projects. It can be said that deficit spending and the subsequent inflation serves as a tax an all who hold or use money; and some governments find this just as effective for raising funds for public goods.
However, spillover costs not financed by the government are more difficult to manage. A spillover cost might consist of a factory’s pollution discharge that down stream residents are forced to clean up. An example of a spillover benefit could be a situation in which bees kept to produce honey pollinates local farmers crops boosting yields. After the original publication date of this piece, bee wranglers report that revenue from pollination far exceeds honey revenue.
What these externalities have in common is that they are side effects from someone else’s economic activity. Because the spillover (or side effect) is not reflected in the price of the product, it is not a part of the decision-making for that product. Left to the free market, resources, (scarce resources) will be used inefficiently: if the spillover is a benefit, too few will be produced, if the spillover is a cost, the market will provide too many.
Governments have options in externality issues. If a spillover is a cost, the activity or product can be taxed to pay for it. If the spillover produces a benefit, the government can subsidize the activity.
The most efficient solution to problems associated with externalities is to require that spillover be included in the cost assessments so that those engaged in an economic activity can self regulate. For example if property rights include clean air provisions, owners can sue polluters.
In 1991, Dr. Ronald Coase won a Nobel Prize in economics for studies on the significance of transaction costs and property rights in the efficient functioning of the economy. Coase theorized that it didn’t matter who had ownership, as long as property rights were fully allocated and completely free trade of all rights was possible.
The EPA used this theory to develop emissions trading, now used worldwide and with great results. EPA’s resulting acid-rain program achieved greater results in a shorter time span than any other single pollution control plan in history. It helped reduce emissions 30% more than required with an associated cost of 50% of what was expected.
Nevertheless, unless drycleaners become large generators and begin trading emissions, how can we benefit from the Coase’s theory? The Coase theory is best realized through a close relationship between the consumer of a good and the purchaser of the good, in other words, little separation between these two seemingly attached functions. One way we can keep these functions close is thru participation in a Drycleaner Remediation program, like that in my home state of Texas.
An insurance style remediation program might handle a claim like this: the drycleaner files a claim, the insurance company or landlord seeks an appraisal, the insurer selects the remediation firm, the state or federal government determines the success of the remediation, insurance pays for the work, and policy holders share the risk.
In a state lead program, the drycleaner files, the state appraises and chooses the remediation firm; the state assesses the success of the remediation and pays for the work. This is the closest that these functions can be in a risk-sharing program. The only way for these relationships to be closer (therefore more efficient), is for the drycleaner to do all functions himself, which eliminates risk sharing.
Economists always seek the efficiencies that a connection between payer and consumer provides. A few years ago, I gave my kids jobs at the plant with the idea that they would begin taking some financial responsibilities such as clothing purchases, upon themselves. One day while browsing Ann Taylor, my daughter asked how a blouse would look on her. Are answer “great-with your money!” made her lose interest in it, illustrating the importance of that connection.
Some of the most contentious issues of modern governance are those that have a “disconnect” between payer and consumer. Healthcare, public education and social security are examples of issues that will remain difficult to manage far into the future. In the case of education, voucher systems have been proposed in many communities and adopted in a few. Despite some good results, most communities are reluctant to adopt such drastic reform.
Nevertheless, drycleaners don’t need to sacrifice much to find a solution to the efficiencies caused by the disconnect between payer and consumer. Sound state-led drycleaner remediation programs are more efficient than any other system, and could be considered an achievement of drycleaning businessmen working with government. At last, an example of sound economic principles, and an industry working on its own behalf.
Am-Dc 11/04
“Democracy is the recurrent suspicion
that more than half the people are right
more than half the time”. E.B. White
I am the reason that NPR’s fundraising drives are so long. Public radio stations spend countless hours on requests for support. Sure, I enjoy Prairie Home Companion and the other great programs, but I haven’t called.
This illustrates another economic principle, free riding. Free riding is when consumers can take advantage of a good or service without paying for it, and not necessarily illegally. This is possible because it is hard to charge for certain things-such as a fireworks display, for example.
Free riding also happens the government is called on to remedy or subsidize an industry that’s facing economic hardship or feeds the general public good. A product or service may have a positive externality, or spillover benefit. If the number of people willing to pay for that product is inadequate to pay for the good, it may not be produced, regardless of its value. Thus, it is funded publicly, because it is determined to be that beneficial.
Public goods such as dams and military defense are protected from free riding by government financing. The government imposes a tax and the entire public funds these projects. It can be said that deficit spending and the subsequent inflation serves as a tax an all who hold or use money; and some governments find this just as effective for raising funds for public goods.
However, spillover costs not financed by the government are more difficult to manage. A spillover cost might consist of a factory’s pollution discharge that down stream residents are forced to clean up. An example of a spillover benefit could be a situation in which bees kept to produce honey pollinates local farmers crops boosting yields. After the original publication date of this piece, bee wranglers report that revenue from pollination far exceeds honey revenue.
What these externalities have in common is that they are side effects from someone else’s economic activity. Because the spillover (or side effect) is not reflected in the price of the product, it is not a part of the decision-making for that product. Left to the free market, resources, (scarce resources) will be used inefficiently: if the spillover is a benefit, too few will be produced, if the spillover is a cost, the market will provide too many.
Governments have options in externality issues. If a spillover is a cost, the activity or product can be taxed to pay for it. If the spillover produces a benefit, the government can subsidize the activity.
The most efficient solution to problems associated with externalities is to require that spillover be included in the cost assessments so that those engaged in an economic activity can self regulate. For example if property rights include clean air provisions, owners can sue polluters.
In 1991, Dr. Ronald Coase won a Nobel Prize in economics for studies on the significance of transaction costs and property rights in the efficient functioning of the economy. Coase theorized that it didn’t matter who had ownership, as long as property rights were fully allocated and completely free trade of all rights was possible.
The EPA used this theory to develop emissions trading, now used worldwide and with great results. EPA’s resulting acid-rain program achieved greater results in a shorter time span than any other single pollution control plan in history. It helped reduce emissions 30% more than required with an associated cost of 50% of what was expected.
Nevertheless, unless drycleaners become large generators and begin trading emissions, how can we benefit from the Coase’s theory? The Coase theory is best realized through a close relationship between the consumer of a good and the purchaser of the good, in other words, little separation between these two seemingly attached functions. One way we can keep these functions close is thru participation in a Drycleaner Remediation program, like that in my home state of Texas.
An insurance style remediation program might handle a claim like this: the drycleaner files a claim, the insurance company or landlord seeks an appraisal, the insurer selects the remediation firm, the state or federal government determines the success of the remediation, insurance pays for the work, and policy holders share the risk.
In a state lead program, the drycleaner files, the state appraises and chooses the remediation firm; the state assesses the success of the remediation and pays for the work. This is the closest that these functions can be in a risk-sharing program. The only way for these relationships to be closer (therefore more efficient), is for the drycleaner to do all functions himself, which eliminates risk sharing.
Economists always seek the efficiencies that a connection between payer and consumer provides. A few years ago, I gave my kids jobs at the plant with the idea that they would begin taking some financial responsibilities such as clothing purchases, upon themselves. One day while browsing Ann Taylor, my daughter asked how a blouse would look on her. Are answer “great-with your money!” made her lose interest in it, illustrating the importance of that connection.
Some of the most contentious issues of modern governance are those that have a “disconnect” between payer and consumer. Healthcare, public education and social security are examples of issues that will remain difficult to manage far into the future. In the case of education, voucher systems have been proposed in many communities and adopted in a few. Despite some good results, most communities are reluctant to adopt such drastic reform.
Nevertheless, drycleaners don’t need to sacrifice much to find a solution to the efficiencies caused by the disconnect between payer and consumer. Sound state-led drycleaner remediation programs are more efficient than any other system, and could be considered an achievement of drycleaning businessmen working with government. At last, an example of sound economic principles, and an industry working on its own behalf.
Friday, November 07, 2008
The Graveyard spiral, the market for Lemons and cheap suedes.
Economists often employ stories to test and teach concepts. The “Market for Lemons” by George Akerlof was both a Nobel Prize winning example in addition to being a simple and easy to understand story. The following compares a couple of concepts, as they seem to apply to the suede processing sub-contractor to the drycleaner. This is particularly applicable when the cleaner, for cost or geographical reasons has two processors.
Recently I paid a claim on a Chico’s red suede jacket. Now, I don’t have to be reminded about red, or pigskin for that matter, I have heard it before. My intent has always been not to have to think about subcontracted products at the cleaners. However, in talking to the customer about expectations and how many cleaners claimed not to accept any leathers, I have been thinking.
Inexpensive suedes can be had at various places, most notably Costco and Sams club, often the purchase price is equal to traditional processing prices. A new set of consumers can purchase at this new lower price point, but do not necessarily have diminished expectations of product quality. The less expensive garments often mean skins may be mismatched or haphazardly dyed. The less reliable garments may not clean well, resulting in higher “go backs”, and ultimately higher process costs.
In Ackerlof’s story about the sale of used cars, “lemons” (slang for a car often in need of repair) demonstrated that if consumer preference (or a negative preference) was combined with the lack of information about which cars were in the best condition, could reduce the price for a that same kind of used car. The rational current owner of said car (if individual car was excellent) would be unwilling to sell at this low price. This negative price pressure causes the seller of the “excellent” used car to withhold his from the market. If this excellent car is not sold, the consumer’s negative preference is re-enforced. This cycle of asymmetrical information cycle/condition feeds on itself and is considered a market failure.
In Aviation, the graveyard spiral describes a piloting error that can result in serious loss of altitude or worse. The essence of this problem is one of timing and instinct. Prior to the start of a turn, slight back pressure on the “stick” must be initiated. If this pressure comes too late, the back pressure on the stick only hastens the progress of the downward spiral. Instinct tells the pilot that if too close to the ground….pull harder on the stick. This process to, also feeds on itself, both perpetuates and exacerbates itself.
Price theory is capitalism in its truest form and largely a derivative of the supply and demand model. When goods become scarcer, the price rises, indicating to the buyer the need to reevaluate his/her purchase decision; and conversely the producer may reevaluate his production decision. Without this mechanism, shortages, over supply and waste will result. Every time the messenger of the price is prevented from teaching the scarcity message, other methods of education will be used, either by deliberate action or otherwise. Those of us of a certain age my recall the President Carter’s jab at fuel prices. His freeze on prices caused shortages, which in turn caused lines, rationing, and the creation of black markets. A more recent example might be the California electricity shortages, where certainly the insulation of the consumer from the cost spikes largely prevented them from adjusting their behavior to more conservative consumption levels.
As with all market failures, when price is not allowed to aid the purchaser of the scarcity of the good; the need for rationing is the result. Also asymmetrical information about the quality of a skin and its dye, make early estimation of outcome more dubious. Leather processors have asked us for years to be very active at the counter in the acceptance of leathers and suede’s. I think the proliferation of cheap suede’s in the marketplace will necessitate rejection of certain skins in order to preserve the remainder of the business, most especially in a dual sub-contractor strategy. The lesson learned could be applied to others of us, if price or specialty forces us into an awkward market nitch.
Economists often employ stories to test and teach concepts. The “Market for Lemons” by George Akerlof was both a Nobel Prize winning example in addition to being a simple and easy to understand story. The following compares a couple of concepts, as they seem to apply to the suede processing sub-contractor to the drycleaner. This is particularly applicable when the cleaner, for cost or geographical reasons has two processors.
Recently I paid a claim on a Chico’s red suede jacket. Now, I don’t have to be reminded about red, or pigskin for that matter, I have heard it before. My intent has always been not to have to think about subcontracted products at the cleaners. However, in talking to the customer about expectations and how many cleaners claimed not to accept any leathers, I have been thinking.
Inexpensive suedes can be had at various places, most notably Costco and Sams club, often the purchase price is equal to traditional processing prices. A new set of consumers can purchase at this new lower price point, but do not necessarily have diminished expectations of product quality. The less expensive garments often mean skins may be mismatched or haphazardly dyed. The less reliable garments may not clean well, resulting in higher “go backs”, and ultimately higher process costs.
In Ackerlof’s story about the sale of used cars, “lemons” (slang for a car often in need of repair) demonstrated that if consumer preference (or a negative preference) was combined with the lack of information about which cars were in the best condition, could reduce the price for a that same kind of used car. The rational current owner of said car (if individual car was excellent) would be unwilling to sell at this low price. This negative price pressure causes the seller of the “excellent” used car to withhold his from the market. If this excellent car is not sold, the consumer’s negative preference is re-enforced. This cycle of asymmetrical information cycle/condition feeds on itself and is considered a market failure.
In Aviation, the graveyard spiral describes a piloting error that can result in serious loss of altitude or worse. The essence of this problem is one of timing and instinct. Prior to the start of a turn, slight back pressure on the “stick” must be initiated. If this pressure comes too late, the back pressure on the stick only hastens the progress of the downward spiral. Instinct tells the pilot that if too close to the ground….pull harder on the stick. This process to, also feeds on itself, both perpetuates and exacerbates itself.
Price theory is capitalism in its truest form and largely a derivative of the supply and demand model. When goods become scarcer, the price rises, indicating to the buyer the need to reevaluate his/her purchase decision; and conversely the producer may reevaluate his production decision. Without this mechanism, shortages, over supply and waste will result. Every time the messenger of the price is prevented from teaching the scarcity message, other methods of education will be used, either by deliberate action or otherwise. Those of us of a certain age my recall the President Carter’s jab at fuel prices. His freeze on prices caused shortages, which in turn caused lines, rationing, and the creation of black markets. A more recent example might be the California electricity shortages, where certainly the insulation of the consumer from the cost spikes largely prevented them from adjusting their behavior to more conservative consumption levels.
As with all market failures, when price is not allowed to aid the purchaser of the scarcity of the good; the need for rationing is the result. Also asymmetrical information about the quality of a skin and its dye, make early estimation of outcome more dubious. Leather processors have asked us for years to be very active at the counter in the acceptance of leathers and suede’s. I think the proliferation of cheap suede’s in the marketplace will necessitate rejection of certain skins in order to preserve the remainder of the business, most especially in a dual sub-contractor strategy. The lesson learned could be applied to others of us, if price or specialty forces us into an awkward market nitch.
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