Retail Exclusivity and Brand Marketing

Polo Ralph Lauren is a luxury retail brand that designs and markets men’s and women’s clothing, accessories, and home furnishings. Their collared shirts and shorts are the poster-style of clothing choice for many fraternities here at the University of Texas at Austin. I am not a part of a fraternity but I do, on occasion, wear luxury retail brands. Wal-Mart and Target have been known to sell clothing that is very similar to the clothing that luxury brands sell, however, without the beloved logo. Has American materialism gotten so bad that we’d rather pay $100 for a shirt with a logo rather than pay $15 for almost the exact same shirt, without the logo? Mark Twain once noted about Tom Sawyer, “Tom had discovered a great law of human action, namely, that in order to make a man covet a thing, it is only necessary to make the thing difficult to attain." Is the exclusivity and difficulty to obtain certain retail items the reason us Americans buy these products? I am going to dig down and explore what exactly has driven us to purchase luxury and overpriced products.

During the 1970s, an Italian diamond dealer, Salvador Assael, and a Frenchman, Jean-Claude Brouillet went into the black pearl business . Assael’s initial marketing efforts failed because of the lack of demand for black pearls. However, rather than lowering the prices for the pearls, he took them to an old friend, Harry Winston, the legendary gemstone dealer. Winston then put them in the window of his store on Fifth Avenue, with an extremely high price tag. Assael topped off this new marketing plan with a full page advertisement that ran in some of the more upscale magazines. The black pearls eventually made it throughout Manhattan, hanging around the necks of the city’s elite.

How was Assael able to persuade the people of Manhattan that these black pearls were now luxurious and fashionable? First, we shall look into the anchoring effect and how it affects the way we purchase things.

The anchoring effect occurs when people consider a particular value for an unknown quantity before estimating that quantity. It all stems from the idea of imprinting; that is, we are initially imprinted to a certain price or exclusivity, and from then on we are anchored to that specific price or exclusiveness. In the case of Assael, he anchored his pearls to the finest gems in the world (with the large price tag), and then the prices followed forever after. The full-page advertisements in the upscale magazines were enough to convince the people of Manhattan that the black pearls were exclusive; they were then anchored to this exclusivity and the price tag then felt appropriate.

This idea of anchoring is what happens to us when we buy luxury retail; we assume that the price tag is appropriate for the product and we are imprinted with it. Many people are guilty of buying into companies exaggerating marketing schemes and don’t even know it. An appropriate quote would be this one from Daniel Kahneman,” You are always aware of the anchor and may even pay attention to it, but you do not know how it guides and constrains your thinking, because you cannot imagine how you would have thought if the anchor had been different."

There’s a cornucopia of brands and products that are marketed in such a way that is meant to display a type of exclusivity. Modern brands such as Apple, Polo Ralph Lauren, Louis Vuitton, and Mercedes are the first that come to mind; but companies have been using this type of marketing scheme for centuries.

In the eighteenth century, a man by the name of Josiah Wedgwood began selling luxurious pottery in Great Britain. Wedgwood understood that in the emerging consumer society, marketing was as important as manufacturing. He was an innovator who sought a new way of creating and sustaining customer loyalty by building his brand systematically. Seeking exclusivity by using brand marketing had been unheard of up to this point. In the latter part of the eighteenth century, he began impressing his own name in the unfired clay; now every piece advertised the Wedgwood name.

The Industrial Revolution brought many new manufacturing processes and the working class now had more money to spend on luxury goods. Wedgwood understood that much of the spending was the result of social emulation. The term ‘social emulation’ describes the idea that whenever people buy something in a manner to attract attention; they do it to keep up with their peers.[1] This concept is basically ‘keeping up with the Joneses.’ Eighteenth century Britons were much like modern consumers in that they spent like the rich did even though the Industrial Revolution did not distribute this income equally. Middle-class Britons aspired to be like the rich and their aspirations went into the luxury retail they bought.

Another tactic that Wedgwood used to market his brand was celebrity endorsements; a tactic that is constantly used by modern companies. He had traveling salesmen carry samples of goods endorsed by aristocrats along with a sales manual with specific marketing guidelines. Even with prices that were well above the industry average, he continued to generate high revenue.

Modern day advertisements are smothered with our favorite celebrities and athletes endorsing all varieties of products. When selecting a celebrity endorser, a company might consider the physical appearance, intellectual capabilities, lifestyle, and compatibility between the brand and celebrity. Many people thrive to find some way to relate to these celebrities; even if it means spending more money than they should.

With the advances in social media, it is now easier than ever for companies to market their brand using celebrity endorsements. Images of our favorite superstars endorsing products are all over Twitter, Facebook, and many other social media sites.

Tom Sawyer had consumers all figured out more than a century ago. For hundreds of years, our favorite companies have used price anchors, brand exclusivity, and celebrity endorsements to get consumers to stray away from rationality; which ultimately leads them to pull a little more money out of their wallet than they would have if they were behaving rationally. The underlying agenda of these marketing schemes has been to convince consumers to purchase products that they might not have wanted if such anchors or advertisements had been different (or not have existed).


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[1] Katie Whitford, Conspicuous Consumption, Social Emulation and the Consumer Revolution (http://newhistories.group.shef.ac.uk/wordpress/wordpress/?p=1338), 1/24/13.

Old Mark Cuban blog

This is an interesting read from the world's greatest NBA franchise owner (of course, this is subjective).  Mark Cuban, the owner of the Dallas Mavericks, posted this old blog from 2004 on Twitter.

Mark Cuban discusses how he came to realize that markets were inefficient after selling his company Microsolutions in 1990.  Immediately after selling his company, he became aware that he could profit from his inside information about technology. 

For the next few years Cuban profited from a few other business expenditures and eventually bought a majority stake of the Dallas Mavericks. 

Read blog post now!

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Good Reads

Here are a few interesting essays (via WSJ.com) that I thought some bright minds would appreciate. Each of the following essays were among the most-read this year.

Why We Lie - http://online.wsj.com/article/SB10001424052702304840904577422090013997320.html

What's Wrong With the Teenage Mind? - http://online.wsj.com/article/SB10001424052970203806504577181351486558984.html

Why The World Needs America - http://online.wsj.com/article/SB10001424052970203646004577213262856669448.html

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Mass Incarceration in America

Over the last few decades mass incarceration has become a very cost-ineffective way of keeping our streets safer. Critics have even suggested that mass incarceration promotes crime rather than suppressing it.

Since the 1980s, the percentage of Americans behind bars has gone through the roof.  Our country has the highest rate of incarceration of any country: about one in 100 adults are either in jail or prison (nearly 2.3 million). 

Three decades ago, the state of California spent 10% of its budget on higher education and about 3% on prisons. Today, the percentage spent on higher education has fallen below 8% and the prison share has risen to above 10%. The university administrators in California are actually increasing tuition to cover the deficits that they have incurred and many citizens are complaining that the state spends much more on each prisoner (roughly $50,000 each year) than they do on each student.

Some researchers agree that the increase in incarceration benefited the community initially, but they also agree that as prison sentences lengthened, the percentage of nonviolent criminals in prison increased. Half a million Americans are now in prison or jail for drug related offenses. This is a ten-fold increase since the number in 1980. In all, about 1.3 million people, more than half of those behind bars, are in prison or jail for crimes that are nonviolent.  

James Q. Wilson, a conservative social scientist who worked in the 1970s to help inspire tougher policies on prison, several years ago recommended sending more nonviolent drug offenders from prisons to treatment programs. If implemented, this could decrease the density in overpopulated prisons all over the country. 

A group called Right on Crime has an interesting opinion about nonviolent Americans who are sentenced to long prison sentences; their opinion is that long prison sentences have the unintended consequence of hardening nonviolent, low risk offenders.  I believe this opinion nails it right on head given that prison is portrayed as a violent place where one must constantly defend themselves; a prisoner would then most likely carry that newly acquired "toughness" with them into society. Also, following a long prison sentence, it's apparent that one would find much difficulty in finding a good job given their record and this might in turn cause them to seek other expenditures to make money, in ways that are most likely illegal.

Another aspect of prison incarceration that I wanted to touch on is life sentences without parole. Most countries around the world do not impose life sentences without parole, and those that do generally reserve it for very heinous crimes (mass murders, treason, terrorism, etc.). In England, there are 41 prisoners serving life sentences without parole, whereas here in the United States, some 41,000 Americans are. 

One last statistic: the United States, with less than 5% of the world's population, has nearly 25% of the world's prisoners.

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Correlation and Causation

Gullible and uneducated America is always falling victim to misleading headlines that suggest that correlation implies causation.  Two synchronized variables definitely do not imply any sort of relationship between the two.

A recent study out of Australia had the headline "Earlier Bedtimes Keep Children Slimmer."  This study showed that children who go to bed early and wake up early are less likely to be obese. Could this be true? How would you explain this?  You could quickly jump to the conclusion that the reason many kids are obese is because of the amount of sleep they're getting.  Let's examine this study a little more.

This study recorded the sleeping habits of 2,200 Australian children, ranging from ages of 9 to 16, and compared their weights and uses of free time for a little less than a week.  Each kid got roughly the same amount of sleep but the kids who went to bed late and got up late were 1.5 times more likely to become obese than the kids who went to bed early. 

Now let's consideration some possible lurking variables in the study.  What could a kid between the ages of 9 to 16 be doing late in the evening/night?  Your average kid probably won't be playing sports or doing any kind of physical activity after dinner.  So what else is there to do?  We're in the age of online gaming and social networks so one could assume that a kid could be engaging in these sedentary activities late at night.  

Hopefully I've got you thinking a little bit and you could probably think of other lurking variables that could contribute to the obesity in children that were in the study.  My conclusion: early bedtimes do not imply causation of obesity in children; rather, it is the sedentary activity late at night that causes the obesity.  

Another poor assumption about correlation and causality is polio a century ago.  It was a horrible mystery that was claiming a lot of lives, especially in children.  At the time, there was a strong line of research that suggested that ice cream was causing polio in children.  The reason for this was because polio spiked in the summer time, for reasons unknown, and ice cream sales also spiked during the summer.  Researchers saw that when more ice cream was being consumed, more kids were getting polio.  This started  an ice cream persecution trying to stop polio.  This may sound ridiculous but you see it all the time now when people are against or trying to build up something that they are sure is connected to something else but turns out it isn't. 

Last but not least; rain and umbrellas are almost always found together (they are correlated), does that mean that the umbrellas are causing rain (causation)?  No, umbrellas do not cause rain. Quite a discovery!

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Fun Fact:

In 1925, if you would have invested $1 in small-company stocks, the investment would have grown to almost $16,000 by 2006. Even the risk-averse would have gotten a decent return with bonds and Treasury bills.

Insider trading: Is it worth it?

Insider trading is the act of trading stock or other securities based on information that has not yet been released to the public.  This non-public information can allow individuals to either profit or avoid a potential loss. For example, if a publicly traded pharmaceutical company has given early warning to a hedge fund that a drug trial has failed and the fund sells all their shares, that's insider trading.

The United States is generally viewed as the country with the strictest laws on insider trading in order insure that every American has a fair shot at making profits. Depending on the severity of the case, punishments usually result in a monetary penalty and jail time.

In 2001, according to the SEC (Securities and Exchange Commission, not the overrated football conference), Martha Stewart avoided a loss of a little under $50,000 by selling all 3,928 shares of her ImClone Systems stock, after receiving material, nonpublic information from Peter Bacanovic, who was Stewart's broker.  The day following Martha's trades, the stock plummeted 16%.

In 2003, Stewart was indicted by the government on nine counts, including charges of securities fraud and obstruction of justice. She was sentenced to serve a five-month term in a federal correctional facility and a two-year period of supervised release.

Others, such as Jess Skilling, the former president of Enron, served longer imprisonments. In 2006, Jeff was convicted of multiple federal felony charges relating to Enron's financial collapse, and is now serving a 24-year prison sentence. 

Just how common is insider trading?

"Insider trading has been increasing in recent years, in part because of the aggressiveness of hedge funds seeking out opportunities," says Robert Prentice, professor of business law and ethics at McCombs School of Business.

The problem with insider trading is that it hurts people's confidence in the markets and hurts economic growth. However, with the recent conviction of Raj Rajaratnam, founder of the Galleon Group hedge fund management firm, it appears that this problem is finally getting under control (even though some may argue that the punishments do not fit the crime).

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