Anti-Capitalist Sentiment (with some morality)

[MadMojoMonkey]

It seems that only a complete idiot of a businessman would assume they will retain their current level of customer loyalty if they reduce the quality of their product w/o a commensurate reduction in price.

All of your points, CoccoBill, must be addressed by any business on a relatively constant basis for the business to thrive and grow.

There are good schools and bad schools. There are wealthy neighborhoods and poor neighborhoods. Some people don't care about much. Other people care more about their work than anything else. Your attempt to pigion-hole all schools as identical actors in their economic climate is fatally flawed in this assumption.

Just as Banana's "Let's assume we can remove survivorship bias" statement. Sure, I agree with what follows, but how can we possibly accomplish that assumption?

[CoccoBill]

Your attempt to pigion-hole all schools as identical actors in their economic climate is fatally flawed in this assumption.

Forget schools for a bit, I'm not talking about them or what any school should or does do in any given situation. What I'm trying to say is that it looks like the economic incentives are not in line with consumer benefit. If you're in a competitive market and need to do something to compete, you have several options. Doesn't it make sense to pick the option that gives you the best bang-for-buck, the most +EV? Improving the product seems to be last on that list which I find, as a consumer, less than optimal. In fact, out of the 4 options identified:

1. increase prices - same product with higher price, consumer gets shafted
2. cut costs - worse product for same price, consumer gets shafted (or in best case no effect, when just trimming excess from the company)
3. invest in marketing - same product with higher price, consumer gets shafted
4. invest in product - better product with same price, consumer benefits

Now I'm not (yet) saying anything about what's the right way to run a school or a business, or whether for-profit or not-nor-profit is better, just talking about this dynamic. Yes, there are obviously a million other variables in play on top of the incentives, but it's hard for me to think they're irrelevant unless someone proves they are.

[BananaStand]

I thought you weren't trying to appeal to morality. Stop using words like "shafted"

Also, your entire analysis assumes that the school administrator has no idea WHY he's unprofitable. Usually analysis of a problem helps determine the best solution. Your whole premise assumes that management is totally blind, and is just throwing the highest +EV darts they can pull out of their asses.

Here on planet earth, it works differently.

1. increase prices - same product with higher price, consumer gets shafted

Why should consumers be totally insulated from price increases? Why is it a "shafting" if a business passes its higher costs on to its customers. Who is doing the shafting here?

2. cut costs - worse product for same price, consumer gets shafted (or in best case no effect, when just trimming excess from the company)

If the cost cuts are targeted at fraud, waste, and abuse, then how does the product get worse? Why is the best case 'no effect'? Is it possible that a more streamlined and efficient business could provide better service?

Maybe I lay off a long-tenured teacher who has accumulated decades worth of salary increases, and then replace him with two entry-level teachers. Two teachers for the price of one would certainly NOT result in shafting of the customer.

In a macro sense, the threat of this practice may motivate more experienced teachers to continuously enhance their skills and increase their value, thus justifying their higher price. In other words, teachers are forced to get better if they wish to continue to prosper.

That's the opposite of shafting the consumer.

3. invest in marketing - same product with higher price, consumer gets shafted

This presumes that the marketing efforts are fruitless. Maybe the marketing attracts new customers. That additional revenue improves profits. The quality of the product, and the price to the individual consumer remain unchanged. Who's getting shafted?

4. invest in product - better product with same price, consumer benefits

In what fucked up reality does a business add costs (invest in product) and not pass that cost on to the consumer? In order for the price to stay the same, the improvements need to attract new customers. If you are willing to stipulate that as a possibility, why won't you recognize that possibility in #3???

How are you assuming that #3 will result in a higher price, but #4 wont. They're both investments that increase costs.

Also, if you add costs, and offer the same price, how are you addressing the profitability problem that caused this debate in the first place?

[MadMojoMonkey]

@Cocco: Whether or not its a school is beside the point, I agree.

1) You're stipulating that increasing prices (and shafting consumers) increases revenue, but that is not a given.
Shafted consumers tend to lose customer loyalty.

2) You're stipulating that selling a worse product for the same price will increase revenue, but that is also not a given.
(see above)

3) is really a corollary of 1) and 2), and could mitigate some lost customer loyalty if the ad campaign is successful, but again, if unsuccessful, then it will not increase revenue.
(Do you like my implicit definition of "successful" in terms of a marketing campaign?)

4) You're stipulating that if your customers like product A, then they will like product A+, and will pay the additional price for it. Again, this is not a given. Better is subjective and the changes you make to your products may not appeal to all of your customers. Furthermore, your customers may simply love your improvements, but cannot afford the additional costs associated with those improvements. They may well decide that their current product is "good enough."

[CoccoBill]

1) You're stipulating that increasing prices (and shafting consumers) increases revenue, but that is not a given.
Shafted consumers tend to lose customer loyalty.

No, I'm just saying that increasing prices is one of the 4 available options a business has when facing competition. I put it at number 1 because, well, you just (theoretically) increase the price and that's it, immediately more money coming in. Clearly you can't just keep doing that, but economically, this option is as good as printing money.

2) You're stipulating that selling a worse product for the same price will increase revenue, but that is also not a given.
(see above)

I'm saying cutting production costs, be it labor, manufacturing, marketing, materials etc. is the 2nd easiest option in the arsenal, and guaranteed profits as long as your product does NOT decrease in quality, and no major extra costs are required to go through with it, such as lengthy company reorgs etc.

3) is really a corollary of 1) and 2), and could mitigate some lost customer loyalty if the ad campaign is successful, but again, if unsuccessful, then it will not increase revenue.
(Do you like my implicit definition of "successful" in terms of a marketing campaign?)

Yup, but I'd say it's the 3rd best option, if just raising prices or cutting costs are no longer an option. Marketing can cost significant amounts of money, take a long time and in no way guarantee you get results. Done right, though, it can be massive.

4) You're stipulating that if your customers like product A, then they will like product A+, and will pay the additional price for it. Again, this is not a given. Better is subjective and the changes you make to your products may not appeal to all of your customers. Furthermore, your customers may simply love your improvements, but cannot afford the additional costs associated with those improvements. They may well decide that their current product is "good enough."

You're of course right about everything you say. Making a better product is typically the most expensive option to increase profits. I would argue that it makes the least sense business-wise, since the other options above are faster, easier, cheaper and less risky. And unfortunately, it also seems to be the only option that actually benefits the customer.

Am I really this bad at explaining, does anyone get what I'm getting at? I do know I hate explaining myself and spelling things out, but I figured the text coming out of my face would at least be intelligible.

[MadMojoMonkey]

No, I'm just saying that increasing prices is one of the 4 available options a business has when facing competition. I put it at number 1 because, well, you just (theoretically) increase the price and that's it, immediately more money coming in. Clearly you can't just keep doing that, but economically, this option is as good as printing money.



I'm saying cutting production costs, be it labor, manufacturing, marketing, materials etc. is the 2nd easiest option in the arsenal, and guaranteed profits as long as your product does NOT decrease in quality, and no major extra costs are required to go through with it, such as lengthy company reorgs etc.

@ first bold: You're still assuming that the businesses' customers are either too stupid to notice that their value is reduced or too loyal to search for other businesses' solutions.

@ second bold: The stipulation that "product does not decrease in quality" is a shift in position from your original stipulation.
If a business can cut costs while maintaining or improving product quality, then that's likely to be win-win. It's not a sure thing, though.
Just because something is an improvement, doesn't mean it's a move to optimal. Competition means that someone else may be able to achieve a more optimal solution than you, even though you've improved.

Am I really this bad at explaining, does anyone get what I'm getting at? I do know I hate explaining myself and spelling things out, but I figured the text coming out of my face would at least be intelligible.

I think we get what you're saying, but you've made too many or too strong of stipulations, which separate your thesis from realistic business scenarios.

[CoccoBill]

@ first bold: You're still assuming that the businesses' customers are either too stupid to notice that their value is reduced or too loyal to search for other businesses' solutions.

No no not at all. I'm only saying that IF a company wants to increase profits and IF they decide to do it by raising prices and IF that actually works and they get more profits, it's basically free money, effortless and requires 0 investment. I'm saying nothing about when or how it would or would not work, just saying it's a theoretical option. It can work and if it does, sweeet free money! If it doesn't, time to try the other 3 strategies.

@ second bold: The stipulation that "product does not decrease in quality" is a shift in position from your original stipulation.
If a business can cut costs while maintaining or improving product quality, then that's likely to be win-win. It's not a sure thing, though.
Just because something is an improvement, doesn't mean it's a move to optimal. Competition means that someone else may be able to achieve a more optimal solution than you, even though you've improved.

We agree this is generally a worse (considering cost, time, risk etc) option to increase profits than the first one, in cases where that one works? Yet, it's probably most of the time better than the following two options (marketing and improving product quality)? Then we're on the same page.

I think we get what you're saying, but you've made too many or too strong of stipulations, which separate your thesis from realistic business scenarios.

Maybe they are strong stipulations. I can think of scenarios where marketing may be better than cutting costs, or even improving a product being a better one, but overall my gut seems to think that that's the order of preference for those 4 tactics.