The Economics of Losing, Cheating, and Lying

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Lance Armstrong. Ben Johnson. “Shoeless” Joe Jackson…the list goes on. They’re all athletes who decided that the end goal was to be achieved, what ever the cost, and the cost was their and their sport’s integrity. But why cheat?

The easy answer is money, but it is too easy, simply a number put on an achievement. The money, or fame, is intricately tied to the psychology of sports as a business. All things considered, an athlete has very little “real” use. They serve to entertain the masses, an actor in an intricately plotted play. But with this definition, they earn salaries out-of-proportion with their “usefulness.”

However, demand (and continual seat price hike and television exposure) has determined that that is the price the businesses/sports teams will pay, for a limited time. These athletes are the best of the best, but they can only earn wages doing what they have trained for for a short period of time. Cheating becomes the easy way to capitalize on this time frame, and as long as the fans still come, industry tolerates it.

Why Customer Service is actually important

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You’ve probably had this happen: you’re standing around an item you have a question about, looking for a salesperson. You then walk around, but are still unsuccessful. If you finally get one, they’re rude and unhelpful, and you walk out the store feeling much worse than when you can in.

Luxury brands have long understood the benefits of good customer service (it’s partially what you’re paying for), but recent high-profile cases have taken traditional “middle-market,” not known for its customer service, and changed the rules. One of these, is of course Zappos, the online shoe retailer.

But if you’re still curious as to how it translates to business,  I can offer first-hand experience. For two years I worked for an upscale sportswear and sporting goods company in Toronto, who’s main mantra was customer service. In a crowded market, with Holt Renfrew squeezing from the top and Sport Chek from the bottom, customer service was really the point of difference, and they had extra training for employees to ensure this. They always tell the story of the day they took back a toaster (they have NEVER sold toasters). I had many customers tell me explicitly that customer service was one of the reasons they kept coming back.

A Response to Michaels and Knappenberger and natural disasters

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When considering the aftermath of a natural disaster, like the typhoon that recently hit the Philippines, two costs must be considered: the human and the economic. The human cost is often the one of the one that receive the most attention, and deservedly so, but the economic cost (which includes environmental), is also important.

A year after Hurricane Katrina, the insurance industry estimated $60 billion in insured losses, although several times that are likely closer to the true cost. Even Hurricane Hazel, the storm that hit Toronto in the 50s, cost the country $1 billion (adjusted for inflation).

Forbes bloggers Patrick Michaels and Paul Knappenberger writes about this issue, and the lots of uproar and little fact surrounding Supertyphoon Haiyan. He argues for more emergency preparedness, since the nature of natural disasters are still unpredictable, but can be protected against.

I agree with him, but I disagree that the free-market will be able to prepare against it without government interference. Governments compile huge amounts of data, and can offer assistance and pass laws, such as in earthquake-prone areas, where buildings are specially reinforced. The fact is that the storms are likely to get worse, and we have to be better prepared.

Worth more dead than alive

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Imagine you were worth 160 million dollars. No? Can’t picture it? Now think about this: Michael Jackson is the top-earning dead celebrity, “making” 160 million dollars, four years after his death, earns MORE than Madonna, the highest-earning living celebrity, pulling in a paltry $125 million.

What?

It may seem counterintuitive, since the celebrity can no longer produce the goods (music, art, ect.) or appearances, but much of it is due to personality rights. Technically, Jackson’s estate (and by extension his family) is earning the money, which comes from the Cirque de Soleil and album sales, until the 70-year copyright law expires.

It speaks to an (unhealthy?) fascination with dead celebrities, which when combined with business makes and interesting conversation. On the 50th anniversary of his death, and 16 years after hers, John F. Kennedy and Princess Diana, are more alive (and profitable) than they ever were. Many of a person’s faults are ignored after their death, and this makes consumers more likely to buy memorabilia. The media also indirectly earns more from a celebrity’s death, since viewership and readership increase whenever the celebrity is mentioned.

And don’t even start of the Forbes Fictional 15 (Smaug, $62 Billion).

A Response to Shomas Mah and Coca-Cola

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Sponsorship is tricky business. It’s essentially a PR move, a way to connect your business with concepts that are not normally associated with a physical product, like goodwill, happiness, etc.

My classmate Shomas Mah put this into context of Coca-Cola’s sponsorship of the 2014 Olympics in Sochi, Russia, where members of the LGBT community are being denied their rights. He argues that Coca-Cola, whose company values explicitly “do not condone human rights abuses, intolerance, or discrimination of any kind anywhere in the world,” should take a stand regardless of losses. I agree with him, but the politics surrounding the issue is tricky. Coca-Cola has been the longest serving sponsor of the Olympics (since 1928!) but it wouldn’t matter if the company wasn’t one the the biggest in the world.

From a CSR perspective,using it’s clout is a no-brainer. However, Coca-Cola pays an estimated 100 million dollars for four years to have exclusive rights, and likely spends several times more in using the Olympic brand. This issue does have precedent in Canada, where hockey arena sponsors spoke out for player safety (when the ad board behind the concussed player happened to be the company’s). As much as I would love for Coca-Cola to use their influence for serious, political good, too much money is at stake.

 

The true cost of your clothes

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“What a cute shirt! Where did you get it?”

“Joe Fresh! For only 4.99$”

While these may not be the exact words out of your mouth, I can guarantee you’ve said something similar, especially after finding something so cheaply. However, the true cost of the clothes, especially those out of Bangladesh, India, Sri Lanka and other places, is not in the price tag.

However, with the recent factory collapse in Bangladesh cheap has a new meaning. In North America, the cost of labour is so high, especially for specialized jobs like sewing. Companies like Canada Goose, which has its factory in Toronto (near my house!), has a high wages, while many others prefer using machines. In places like those named above, labour is so cheap because so many people are looking for work (law of supply and demand).

Since many of the governments do not have the resources (through their economy or rampant corruption) to have committed oversight, I offer a few tips for companies using outsourcing:

1. In places where outside oversight is allowed (not China), hire an independent inspector to regularly inspect factories, including surprise visits. This small cost could prevent another Savar

2. NO CHILD LABOUR. The benefit of building a school near the factory where worker’s children can attend will benefit the company in the future, who will have skilled, educated workers, who will be more loyal to the company

 

A Response to Catherine Chang and PSLs

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http://drinks.seriouseats.com/images/2013/09/20130929-268003-starbucks-vs-mcdonalds-pumpkin-spice-latte-pirmary.jpg

You open your eyes and see not one, but FIVE pumpkin spice lattes, all from different companies. But what is the difference in consumers’ minds and how do these companies use that to their advantage?

In her article, my classmate Catherine Chang wrote about the market for pumpkin spice lattes, and seasonal drinks in general. She found that MacDonald’s was offering a comparative product at half the price as Starbuck’s, the traditional PSL maker. Tim Hortons, Krispy Kreme and Dunkin’ Donuts have also jumped on the trend. She asks whether the trend will continue, and what consumers will choose.

My response is that there are two issue as play: Economic profit, and Point of Difference. Starbucks had a stranglehold on the PSL market, but the other firms could see that it was making economic profit and joined in. The PoD is what will make the consumer decide. Starbucks prices their product higher, to seem more exclusive, while the other four look to the bottom of the market. As their margins are getting squeezed, traditional fast-food companies are moving into the “high-quality” fast-food market (ex. Chipotle) because it has greater profit. Starbucks has strong brand-loyalty, but the PSL has been around for 10 years, so maybe its time to try something new.

Marketing Sports Cars to Women

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http://www.ottawacitizen.com/cms/binary/5273704.jpg

Why is it that most sports car companies are overlooking or deliberately avoiding women as a potential customer?

While the exact statistics are unknown, approximately 90% of sports cars are purchased by men. This would seem to give sports car manufacturers a reasonable excuse for not marketing to women (“they’re not interested” or “they’re not our target market”), however I believe that that is simply coping out on their part, and sports car companies are missing an important market.

What these companies need to change is their approach. In my research, I found that 65% of new cars (generally) are bought by women, and even for traditionally masculine cars purchased by men, 20% cited a compromise with their wife or girlfriend as an influence.

Women tend to be more practical-minded, being more interested in a car that can be used daily, and they also tend to be more cautious drivers. Therefore sports car companies should promote features such as comfort in addition to the car’s 0-60 mph time. Mercedes noted that the majority of its SLK class (a convertible) customers were women, usually young professionals with purchasing power and no serious attachments. Sports car manufactures shouldn’t patronize women, but they should be aware that their concerns are different.

Is doing good profitable?

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http://en.wikipedia.org/wiki/Gordon_Gekko

“Greed, for lack of a better word, is good.”

-Gordon Gekko, Wall Street

No other quote sums up the view (based in fact) by the general population of major corporations. This is why whenever a company does something positive, like taking the role of a non-profit, it is taken with a grain of salt. However, certain companies have recently appeared to take positive steps in being responsible corporate citizens. A recent article by Leah Eichler in the Globe and Mail talks about this concept, and how to be profitable while being responsible. This is the idea of the “Triple Bottom Line,” or how to merge the economic, social and environmental aspects of running a business.

 

http://en.wikipedia.org/wiki/Triple_bottom_line

In the article, Phillip Haid, CEO of Public Inc., cites Toms shoes as an example, which donates a pair of shoes for every shoe sold, but  has a comfortable casual walking shoes as its core product. I think using a triple bottom line is incredibly important for a company, because even though the company its self does not have a responsibility to maintain good practices (how can it, it’s not a person), but the people working for it do. Gordon Gekko might not agree, but the consequences of not behaving ethically can and will have severe repercussions.

Why you should care about Gareth Bale (even if you hate sports)

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Gareth Bale transferred to Real Madrid. Now you’re probably asking who is Gareth Bale, what is Real Madrid, and most importantly, why should I care?

Gareth Bale

 

http://www.theguardian.com/world/2013/sep/02/gareth-bale-real-madrid-spain

Gareth Bale is a Welsh soccer player who recently transferred from an English team, Tottenham Hotspur, to the Spanish giants Real Madrid, for the record-breaking fee of 140 million dollars. Yes – 140,000,000$. While it may seem easy to dismiss this fee as another example of the debauchery of modern soccer, the economics of the deal have serious repercussions on the sport as a whole.

 

Modern professional sport, especially a game like soccer, makes a large amount of its money off TV rights, sponsorship deals, and seats. Real Madrid, a team noted for breaking the transfer record numerous times, have benefitted greatly from this system, but are $687 million in debt, like many other teams including its greatest rivals, Barcelona. Transfer fees and players wages have inflated vastly since the 1990s, meaning only a small group of teams can “afford” (usually with enormous debt) to buy these players, while their smaller competitors remain shut out. This has led to an oligopoly of sorts in modern soccer, as well as a rising concern to the sustainability of such spending.