Sunday, June 28, 2009

Bubble, Bubble, Toil and Trouble....

Tom Weber puzzles over the mysteries of making money:
Remember when charging $2 for a cup of coffee sounded wacky? When Starbucks arrived in cities across the U.S., it didn’t just bring a better (to some) cup of joe. It also created an environment intended to increase coffee enjoyment—bringing comfy chairs and room to sit. In most of my local Starbucks, those chairs have been replaced by less comfortable, more efficient versions—but the price point of coffee has been moved higher forever.
Well, he's right about the $2 part--high priced coffee was a major inflection point (and let's not even talk about putting on a bit of whipped cream and cinnamon and charging $5.95). But I'm not sure it has anything to do with providing a nice environment, or, indeed, providing anything at all. There had been coffee shops with comfy chairs for years that simply didn't have the balls brass to stick you for half an hours' pay for a cuppa joe. The real genius was the one who realized you could get more money just by asking for it.

There are limits here, of course. If tomatoes are going for a buck a pound at the Farmer's Market, I won't get to go home happy just by charging a buck ten. But there seem (in retrospect!) to be an amazing number of products where, if you say: "how about paying twice, five times, twenty times, what the product is really worth?"--the customer will say "oh--okay."

There's probably an impressive range of stuff for which this turns out to be true. My own pet example is still greeting cards. Children: those things used to sell for pennies--i.e., just about what, on a liberal definition, they are actually worth. Maybe the iconic genius of modern capitalism was former Nixon Treasury Secretary William E. Simon, when turned $330,000 into $66 million in 18 months when he flipped Gibson, an obscure second-tier provider of cardboard and crayoning into a first-class money machine.

The other great example, of course, is executive compensation. How else to explain, e.g., Stan O'Neal walking away from the charred wreckage of Merrill Lynch with a $160 million severance check? I love it: Stan O'Neal as the decaf soy macchiato of the corporate world.

Weber, by the way, doesn't seem to believe his own analysis. A nanosecond after that stuff about chairs, he concedes:
In most of my local Starbucks, those chairs have been replaced by less comfortable, more efficient versions—but the price point of coffee has been moved higher forever.
And in any event, his real topic is not coffee, but the Kindle, Amazon's overpriced and underpowered laptop computer--the question of how, and if, it will succeed. Weber's analysis: the secret is that it is overpriced and underpowered. Go read him for yourelf.

1 comment:

New York Crank said...

Whoa, whoa, whoa Buce! You're confusing two different things: Value Added with Value Extracted.

The difference between the two is that one is intangible — and made of air (mostly hot), froth, and non-nutritious marshmallows. The other is highly tangible. and as hard and cold as hard cold cash.

"Value added" is the intangible, an amorphous substance created out of advertising and graphic design. It's the magic of a brand name.

I mean, what precisely is is that makes a Jaguar worth so much damn money than a Ford Crown Victoria when — at least according to the few people I've known who've owned a Jaguar — it may well refuse to start if the humidity is high, and goes to the shop for repairs with twice the frequency that Michael Jackson went in for plastic surgery?

Well, it's "a beautiful, beautifully made car," or some such intengible non-explanation. A thing that's defined by my own self-serving definition. And the perception (actually a misperception) called Value Added isn't limited to automobiles. It affects soap, Starbucks, perfume and wristwatches, to pluck just a few product categories out of the plethora. Example:

My beautiful girlfriend went out to buy me a watch as a gift. I asked for a chronograph watch (I need it to time the radio and TV commercials I sometimes write) like, oh, a Swiss Army Watch, which sells in the several hundred dollars range. She bought me something from a far more prestigious brand in the $2,000 range. Why? "Because this one's better." Better how?

Value added is how. Value added is a perception injected with psychological steroids which make people part with maybe $1,500 more than an almost-identical looking device that does precisely the same job (and for all I know has precisely the same movement.)

(Starbucks has the chutzpah not only to charge $5+ for some coffee and frothed milk, but also to put out a tip box for the "service" you get when, after 10 minutes of waiting on line, some pimply kid pushes your coffee across a counter to you.)

What Stan O'Neal did, and Bernie Madoff did, and any number of bankers and CEOs do is Value Subtracted. They take something like a corporation, suck the money out of it and into their own pockets via outrageous bonuses, salaries and "incentives" and leave the shareholders holding an empty bag.

Value added vs. value subtracted. Got it? Class dismissed.