Nov 20

Economists say that as demand goes up, prices should rise. Why, then, do we end up with elaborate sales and exceptional deals during the holidays?

Economists choose their words carefully.  The need to buy a large number of gifts does not necessarily translate into an increased demand—a willingness to pay higher pricesOne factor here is that there is a tremendous potential for substation among many different gift possibilities.  In some cases, one’s children might have asked for a very specific toy, but in other cases, a DVD, a book, or a shirt may all be suitable gift ideas for a given individual.  For off-holiday shopping, opportunities for substitution are much less.

In addition, there is a fundamental change in the nature of the market during the holidays.  Because of the intense competition among retailers, there is an increasing pressure to focus on volumes of sales rather than margins on each sale.  Given what a retailer expects about the competitive strategy of its competitors, it seems to  be better off making a lot of sales that each carry a small margin rather than attempting to make larger margins on what will likely be very limited volumes.  U.S. public policy strongly favors competition among firms with laws prohibiting sellers from colluding with each other to maintain higher prices.  With the sheer number of competitors in the U.S. retail market, is also doubtful that that collusion could actually be maintained even if not prohibited by law.

The trend toward heavy discounting has further been fueled by the practice of “category killers” such as Best Buy, Stapes, Office Depot, and the Sports Authority to commit early to very large volume purchases from manufacturers in return for very low prices.  This means that the category killers can offer truly exceptional deals on select items.  The customer can get whatever brand and model that he or she wants at a good price, but if he or she is willing to go for one of these “special buys,” a truly exceptional or “killer” deal can often be had.

It should be noted that much of the holiday merchandise will decline dramatically in value after the holidays, further creating an incentive for retailers to heavily discount if sales run behind expectations.

Nov 20

To what extent will online merchants take business away from brick and mortar retailers?

Online shopping is clearly a growing trend, and one benefit for consumers is that the market online changes to a national one as opposed to a local market where fewer merchants compete.  There is a widely mistaken belief that online merchants generally have lower costs than brick-and-mortar stores.  After all, online merchants can locate their distribution centers in areas with low real estate and labor costs.  Some merchants such as Amazon have also used automation to become highly efficient.  Many other online merchants, however, face a very labor intensive process.  When customers go shopping in retail stores, they do a great deal of the work:  They pick up the items desired from different areas of the store, bring them up to the cashier, and haul them away.  These tasks, in the online setting, have to be done by merchant employees.  Thus, in general, online merchants often face higher costs in reality than brick-and-mortar competitors.  Online selling does, however, lend itself well to products that have a high “value-to-bulk” ratio—that is, where a high price is squeezed into a small size—or where there is a high “absolute,” or dollar margin.  That is, the percentage margin does not necessarily have to be large so long as the dollar margin is.  If a $1000 notebook computer carries a ten percent gross margin of $100, that leaves a fair amount of money to handle costs even though the percentage margin is lower than it might be for other, lower priced, products.  Many holiday gifts involve electronic products that fare well under these criteria, making brick-and-mortar merchants vulnerable.  Merchants that operate both retail stores and online sales can benefit from the “bricks-and-clicks” effect whereby certain products can be efficiently shipped to consumers while returns can be made at retail stores.

As more and more online merchants are being forced to collect sales tax on purchases, these merchants are losing a long held advantage.

It should be noted that potentially lower prices are not the only motivation for shopping online.  Some customers value the convenience and potentially greater selection available online.  Another benefit is that stock-outs are less likely as fluctuations in demand that would happen at the store level tend to cancel out each other when a distribution center serves a large area and, by extension, a large number of customers.

Nov 20

With the pre-Thanksgiving and Thanksgiving Day online and retail stores, is “Cyber Monday” still a significant event?

One might have predicted that Cyber Monday would eventually fade away as an event.  It is really a historical remnant from the days when many families did not have high speed Internet access at home, pushing online sales to the Monday when people returned to work.  With online sales starting a week or more before Thanksgiving and lasting through the Thanksgiving week-end, one might have predicted a loss of interest in a Cyber Monday.  Yet, we saw last year that Cyber Monday actually became a major event as it provided an “excuse” for merchants to provide value conscious customers with a new round of deals.  In the long run, Cyber Monday could potentially fade away as consumers develop shopping “fatigue” from more than a week of sales.  This year, retailers which have been less aggressive in scheduling pre-Thanksgiving and Thanksgiving Day sales may need to “compensate” for this with strong Cyber Monday sales.  These could also be promoted as a way to deal with the abbreviated shopping season resulting from the late date of Thanksgiving.

Nov 20

Why are retailers beginning their sales earlier and earlier?

Over the last several years, more and more retailers have started to open up during Thanksgiving Day itself—either all day or starting in the evening.  Starting last year, a number of online merchants started their online sales either on or before Thanksgiving Day.

These developments are part of a trend of an increasingly competitive retail market.  Over the last three decades, “category killers” such as Best Buy and “mega” merchants such as Wal-Mart have taken over an increasing share of the retail market.  This means that price competition will be intense.  It also means that consumers have a lot of choice as to where they are going to go to shop.  However, because of the crowding on Black Friday, parking lot congestion, and the long lines—both to get into stores and to check out—customers can only “hit” a few stores at this time.  Historically, the objective was for retailers to get consumers into their stores at this time to “preempt” shopping that might otherwise have been done with competitors.  This limitation has made it difficult for certain stores to compete for the customers’ time on Black Friday, creating a pressure to start sales earlier.  A lot of people get bored on Thanksgiving, and with families getting together at this time, tension will develop in some cases.  Shopping is a way to relieve this boredom and tension, whether done online or in retail stores.

Pre-Black Friday and online sales also provide an opportunity for people to avoid having to get up very early the day after Thanksgiving, allowing this to be a more relaxed and less stressful event.

Nov 20

What’s the big deal about the late Thanksgiving this year?

Retailers tend to get very worried when, as it does this year, Thanksgiving occurs later than in most years, thus reducing the length of the holiday shopping season that has traditionally started on Black Friday, the day after Thanksgiving.  But, with almost a month left until Christmas, will consumers really be all that limited in their opportunities to shop?  Is this really an occasion for great stress as consumers struggle to squeeze in time for their purchases?

The problem here is not that shoppers will not be able to squeeze gift shopping schedules into their schedules before the earlier “deadline” this year.  With the pressure of Christmas arriving, most customers will buy gifts for their closer relatives even if they procrastinate until a day or two before the event.  The problem, instead, is that some shoppers may end up buying fewer gifts for these same people than they might have bought if they had been given more time.  Also, because they will not have as much time to do research and find good deals on higher end purchases, some shoppers may end up buying less elaborate gifts.  Another issue is that many Americans have ended up giving smaller gifts to a large number of people such as neighbors, coworkers, and more casual friends.  Such gifts might get skipped under greater time pressure.  Retail is a very heavily volume dependent business due to fixed costs and season-specific inventory.  If sales go down by few percent, profits will go down by much more.

An especially large number of shoppers may end up relying on express delivery this year.  More gifts are also likely to arrive late.

With time pressure, more consumers may turn to gift cards as a way to ensure that the recipient will end up with something that is desired.  Although these bring in immediate revenue, the sale may not be recognized for accounting purposes until the card is redeemed.

Feb 14

It Must Be Love! (or Non-Specific Arousal)

Don Williams’ hit single “It Must Be Love” (also recorded by Alan Jackson) features the lyrics

First I get cold then hot
Think I’m on fire but I’m not
Oh, what a pain I’ve got
It must be love [...]
It must be love, it must be love
I fall like a sparrow, fly like a dove
You must be the dream, I’ve been dreamin’ of
Oh, what a feeling, it must be love

Around Valentine’s Day, I advise those of my students who looking to get a special someone to fall in love to try to get this individual to go along on a roller coaster ride.  It turns out that the brain often has some difficulty in determining the apparent cause of arousal–is it because of fear or because of love?  The brain has to make an interpretation that may or may not be correct.  Many individuals have found themselves to be particularly vulnerable to falling in love during periods of stress. Students experience this at finals’ week; a colleague of mine reported that this would happen to him when he was at academic conferences to present a paper in front of his colleagues.   It turns out that, in trying to make sense of the arousal experienced, the mind may conclude one is in love–why else would one be experiencing this feeling?

In 1962, the psychologists Stanley Schachter and Jerome E. Singer conducted an experiment that today would be considered patently unethical.  Male volunteers were asked to participate in a study ostensibly on the impact of vitamins on vision.  Thus, each participant received an injection.  It turned out, however, that in half the cases, the injection actually consisted of epinephrine (adrenaline), triggering arousal and “fight or flight” responses.  The other half of the participants, the control group, received a saline solution as a placebo.  As an ostensible part of the experiment, the participants then waited for twenty minutes in room in which a confederate acted in one of two different ways:  “euphoric” or “angry.”  There was actually an additional manipulation by which some subjects were made aware of a potential “side effect” of arousal–thus knowing what to expect–while others were either given no information or were actively misled with expectations of alternative, non-existent side effects.  Those subjects who received the epinephrine injection and were either given no information or were actually misled were significantly more likely experience the ostensible feelings of the confederate.

 

Jan 19

Why is it so difficult to get viewers to Oprah’s OWN Channel?

The Wall Street Journal reports that Oprah Winfrey’s much publicized interview with Lance Armstrong drew a live audience of only 3.2 million.  Although this is the second highest audience reach on Oprah’s OWN network so far, it is significantly below what high profile events get on the major networks–some one fifth, for example, of recent American Idol Viewership and a very far cry from the 48.5 million viewers who watched Barbara Walters’ 1990s interview with Monica Lewinsky.  OK, for all the sensation that goes with Armstrong’s belated admissions, is not, of course, in league with the Lewinsky scandal in terms of its Juiciness Quotient (JQ), but Oprah’s interview was still a major event.

As one would expect, a large number of viewers later caught the interview on the Internet, but this audience is much less likely to become long term viewers.

This difficulty in gaining critical mass could result in a vicious cycle.  With disappointing viewership, celebrities will be more reluctant to choose this outlet for major appearances, in turn making it more difficult to attract and sustain a sufficient viewership.

Apparently, one reason for low ratings is that many cable and satellite subscribers find it difficult to locate Oprah’s channel on their boxes.  With the large number of channels now available, ambiguously named channels such as this one often get lost among what can amount to over one hundred choices (in addition to music and other limited function channels).  In retrospect when one thinks about it, it makes perfect sense that OWN stands for the “Oprah Winfrey Network,” but that may be less obvious to many viewers when they attempt to make their way through a long list of obscure three letter codes in their cable listings.  Those who have access to a Tivo or another DVR system can, of course, search for key phrases such as “Oprah” or “Lance Armstrong” if they plan to record in advance, but that requires advance planning.  Further, such ad hoc recording may not be conducive to viewing of the network’s subsequent programming.

This difficulty for viewers in getting to lesser known channels makes it difficult to understand why Al Jazeera was willing to pay a reported $500 million for the Currents channel founded by Al Gore in 2005.  This channel, too has had limited viewership. Yes, the New York Times reports that Gore lobbied cable service providers, suggesting that balking at carrying Al Jazeera might come across as buying into stereotypes of the Arab world.  Although there is relatively abundant space available with today’s cable carriers, had Al Jazeera approached the networks on its own with a “new channel,” resistance might have been greater.  Still, what good is a network going to do with a limited viewership?  It is not as though limited number of Americans who want to watch an English language edition of Al Jazeera can’t get this on the Internet as things were.  Perhaps Al Jazeera–which was historically not operated for profit–hopes to be perceived as a more mainstream alternative if it is available on U.S. cable networks, but the price still seems rather high.

By now, a number of specialized cable channels do receive a fair viewership.  One thing that many of these networks have going for them is that they have common, or at least overlapping, ownership, making it more cost effective to promote upcoming programs on “sister” channels.  Although the OWN network could, in principle, exchange such program promotions with other networks, it is unlikely that these competitors would be eager to promote events on a network that could, if it gained more habitual viewers, gradually siphon off more and more of their audience.

Dec 19

FTC augments rules on collecting online data on children

The New York Times reports that the Federal Trade Commission (FTC) has broadened its rules on online data collection on children to better accommodate new portable technologies such as cell phones and tablets.  Generally, online sites must obtain permission from parents before collecting information about their children.  Existing regulations already require parental consent before information that can be used to “identify, locate or contact” a child–e.g., a photo or video–can be collected.  A significant addition in the new regulation, however, is that “persistent identification systems”–tools such a cookies that do not reveal the specific identity of a visitor but tracks visits by the same person across time–are now covered as identifying information.  Since online advertising is often based on prior activity–e.g., an individualized advertisement in an online article for a product for which a person has searched on a site such as Staples.com–is a rapidly growing area, this is a major limitation.

The protection and privacy of children are clearly important and the potential loss of some online content for children that it may no longer be cost effective to provide may be warranted.  An interesting question, however, is the extent to which children under thirteen who sign up for online accounts actually answer truthfully when asked about age.  There are also questions about children on both sides of this age limit.  Are safeguards that might be adequate for children aged 11-13, for example, sufficient for those under 10, an increasing number of whom by now have smartphones?  Further, although children over thirteen may be better able to make judgments about their own more theoretical privacy protection, does this age cutoff send the message about the types of content and offers that might be sent those over thirteen who are subject to extensive protection and close supervision in other parts of their lives such as school and extra-curricular programs?

Is this type of regulation merely a “feel good” measure or does it offer significant practical protection for children?  The answer is not clear.

Nov 28

Scroogled? Microsoft Attacks Google on “Shopping” Search Results

An article in the Washington Post reports that Microsoft is launching an attack on Google, gleefully warning searchers that this previously trusted information source has changed the algorithm for the “Shopping” search feature results such that only those firms that pay to be listed show up.  Although paid search and “sponsored” search results show up on the right side and in a shaded region at the top of ordinary search results, Google prides itself on the objectivity with which its “organic” (merit based) search listings are determined.

For many years, Microsoft has attempted to take share away from Google in the search engine market.  Despite the tremendous resources that Microsoft has available, its Bing search engine has very limited traffic relative to Google.  Some people may end up with Bing as their default search engine when they buy a new computer where this setting is made in Internet Explorer, but otherwise, few searchers seem to make the move to Bing despite its touted advantages.  Getting people to try out Bing out of fear that Google search results in the “Shopping” section may be “manipulated” could be a powerful way gain trial among consumers who may be vaguely aware of Bing but never took the time to try it out.  Realistically speaking, most searchers probably will not feel much difference between the two search engines.  Some people may turn out to prefer Bing for idiosyncratic reasons and may stay.  Others may find Bing interesting as way of getting variety.  Some may stay with Bing in protest.

In its newly created web site Scroogled, Microsoft chastises Google:  “In the beginning, Google preached, “Don’t be evil“—but that changed on May 31, 2012. That’s when Google Shopping announced a new initiative. Simply put, all of their shopping results are now paid ads.”  Google founders Sergey Brin and Larry Page are quoted saying that “Furthermore, advertising income often provides an incentive to provide poor quality search results” to underscore the ominicity of Google’s policy.

The reality is that only a minority of shoppers actually use the “Shopping” feature of Google.  Most consumers, even when they are looking to buy, tend to use the ordinary Google search.  The “Shopping” feature does not even show up on the first level menu on Google; you have to click on “More” to get that as a search option.  This will, of course, bring up paid search results along with the merit based listings, but that is nothing new and is not different from a Bing search.

Although screen layout is subject to constant change, at the moment, the Google “Shopping” page does not appear to acknowledge the paid nature of search results.  However, in sharp contrast to the “clean” look of the general Google search page, the search screen does look a lot more “commercial” and cluttered.  Thus, although consumers may or may not infer that the search results are paid, the consumer may nevertheless get the impression that this may somehow be a less “pure” search.

Nov 21

An early Thanksgiving means an early Black Friday

Historically, the Friday after Thanksgiving marked the “official” start of the holiday shopping season.  The day was so named because this was the day on which the balance sheets of many retailers would turn from “red” into black as the stores had sold enough to cover their fixed costs.  Any margins after that were profit.  (Today, with greater competition and lower margins in the retail industry, the actual turning point may come a bit later–especially when consumers are still weary of the economy.)

Even when Thanksgiving falls on November 28–the latest date on which the fourth Thursday in November can fall–one would hardly think that people would be truly strapped for shopping days.  Yet, the reality is that holiday shopping is, for many consumers, not a particularly disciplined and well planned process.  Many people procrastinate.  Although few people would entirely neglect to buy presents for their close family members, the quantity of overall gifts bought will depend heavily on the number of days available to shop.

Up until 1941, Thanksgiving was generally held on the last Thursday of November.  In 1939, in response to concerns expressed by retailers that Thanksgiving would have fallen on November 30 that year, President Franklin D. Roosevelt moved up Thanksgiving one week.  Retailers at the time feared that consumers would find it unseemly if holiday gift merchandise were displayed prior to Thanksgiving.  This rescheduling was apparently a rather unpopular move with the public, and the date became known derisively as “Franksgiving.”  However, soon afterward, Congress passed legislation fixing the date of Thanksgiving at the fourth Thursday in November.

Historically, Black Friday was not so much a day of great sales as it was a genuine start on holiday shopping.  The real sales happenedafter Christmas as the retailers had to liquidate leftover merchandise that now longer held the same relevance.  Today, however, Black Friday has become a much more significant event in and of itself due to dramatic sales offered by many retailers which often open at what might traditionally have been seen as “unseemly early” hours.

It is certainly a positive factor for overall holiday sales that Black Friday falls early this year.  However, as consumers may see more days ahead before Christmas and as more and more shoppers become tired of the long lines and early lines on the day after Thanksgiving, it is very possible that the early timing of Black Friday itself will put a bit of a damper on the actual sales that day.  That, of course, would leave more bargains for those who are prepared to dare the crowds and darkness in the early morning hours.