Supply, Demand, Product or Advertising, the Vodafone Super Sim and the Wise Words of Stringer Bell

by

So, with the recession seemingly bearing down on every moment of daily life, ready to swallow up any British institution going, advertising and media budgets are in danger of being seriously scaled back for the foreseeable future. Already ad breaks on ITV are becoming visibly shorter, and magazines are becoming thinner by the month, which will naturally herald some hard months to come for agencies, but on the flip side, what should firms be doing to survive the next few months unscathed? Has the game changed? Is it all about product?

Times have been hard for Stringer since the pit became redundant (trying to avoid spoilers as much as possible, especially for Joel), the supply of muscle dwindled and… Avon’s connect from down south put them onto a weak supply that wasn’t bringing in the customers. Now you couldn’t really call this the effects of a recession, as the problems are confined to his unit, but much like many firms at the moment, Stringer’s operation at this point is facing severe pressure from the outside – serious competition willing to fight hard for territory, customers whose loyalty is waning in the face of increased choices and lack of money, on top of glaring inefficiencies within whose genesis lies in previous years of easy credit and a belief that the good times simply couldn’t end. Times are hard, and something needs to be done, and so the debate begins – Corners or Good Dope? Reputation or Self-confidence? Advertising or Product?

If we follow Stringer’s example, and look at this in terms of supply and demand, what’s going on becomes a bit more clear –

A Fall in Demand

A Fall in Demand

Demand for Stringer’s heroin is falling, much like for most goods and services right now (although in this situation, Stringer is luckier than most as heroin is an extremely inelastic good, but more on that later), which is represented on the graph as a shift of the demand curve to the left from D1 to D2. This results in a shift in the equilibrium price (where demand meets supply), from e to e1, which leads to a loss in total revenue (represented by the area contained within the rectangle created by the dotted lines, which equals Price x Quantity). The fall in demand not only means that you end up selling less, but that the price you get for what you do sell falls too. So in this situation, what do you do?

Well your first option is to try to influence the supply of your good on the market. Increasing how much you release onto the market will shift the supply curve to the right, thereby lowering the price you receive for each unit but increasing the volume you sell. Conversely, by reducing supply, the curve shifts to the left, increasing the equilibrium price but reducing the quantity you will shift. The important thing is that which approach you take should be determined by the good itself and, in particular, its elasticity. Elasticity is represented by the angle of a good’s demand curve – the steeper the angle of the curve, the more inelastic the good, the shallower the curve, the more elastic etc. If a good is elastic, it means that it is generally inessential, and that there are many alternatives to it on the open market (for example, there are many alternatives to a can of Pepsi, and you can always put off buying one, therefore Pepsi is an elastic good). Pepsi’s demand curve will therefore be shallow, meaning that a small decrease in price (spurned by an increase in supply) will lead to a proportionally larger increase in quantity sold and an increase in total revenue –

An elastic good's Demand curve

An elastic good's Demand curve

On the other hand, a good like a carton of cigarettes is a relatively inelastic good. Unlike a can of Pepsi, there are few alternatives to a pack of cigarettes, and they are essential purchases in that they are addictive. Their demand curve will subsequently be steeply pitched, meaning that a small decrease in supply will lead to a proportionately larger increase in price and an increase in total revenue –

An inelastic good's Demand curve

An inelastic good's Demand curve

Now heroin as a whole is an extremely inelastic good, which would suggest that Stringer should reduce his supply onto the market to try and boost price to offset the fall in demand, but a few problems exist with this approach because of the specifics of the situation. Firstly, because drug dealing is so rife in Baltimore, Stringer’s heroin specifically is a pretty elastic good, as the city’s junkies can always go elsewhere. Secondly, because the market is so big, it’s doubtful that reducing his supply would shift the equilibrium price within the entire market by any meaningful amount to increase his total revenue. Lastly, before his connect with Prop Joe, Stringer’s dope itself was of pretty poor quality, meaning that raising price would quickly disillusion those users used to getting a decent high for less money. What this all points towards is that in the face of falling demand, Stringer needed to do two things – firstly, prop up demand from his customers, who aren’t exactly known for their loyalty, and secondly, attempt to convert his fairly elastic heroin into a far more inelastic good, that will react far more favourably to a fall in demand in terms of total revenue. Both of these problems can be solved (and indeed were), by an increase in the quality of his product.

‘We got the best Godamn product so we gonna sell wherever we are right?’

By falling in with Prop Joe’s stash, which consisted of far better dope, Stringer increased demand from his customers and simultaneously increased the inelasticity of his heroin, as there was nowhere for a dope-fiend to go in the city to find a better high. And firms in the midst of the recession could, and should, take some heed from his example.

In some cases they are already. For instance, I work part time in a Vodafone store, and recently we have started to heavily push, through indoor posters and vinyls in the windows, Vodafone’s new Super Sim tariff. This deal consists of a 30 day rolling agreement, which includes 100 minutes and 500 texts, for the princely sum of £10 a month. It’s ridiculously cheap, but probably costs Vodafone about the same amount of money to sell as any other contract, the main difference being that they don’t give you a free phone when you sign up (which in effect, you usually subsidise with your proportionately higher line rental). Vodafone have realised that in this time of economic uncertainty, an expensive mobile phone is a fairly inessential good (i.e. an extremely elastic one), but the minutes and texts that you use your phone for are still absolutely essential and incredibly inelastic. By cutting the phone out of the deal, and increasing the number of minutes and texts you get for the same £10 (which was 75 and 500 only last month), which is relatively costless for them anyway as their network will be running comfortably below peak capacity, Vodafone have made their good far more inelastic overnight. And as for shifting demand, more people are asking for Super Sims than pretty much anything else right now, so it’s definitely working.

vodasim

But what about advertising? What about standing on the corner, fighting for territory, broadcasting your message and attracting customers through sheer visibility? Advertising has been proven time and again to be an extremely efficient method of selling, and historically, in previous recessions firms that have continued to advertise have as a whole have emerged in much stronger positions than those who have not. Advertising is a proven method of increasing demand. Slim Charles is right – ‘Our people got to stand somewhere don’t they?’ Well  yes, Stringer says, that’s true, but when he says that the fight for territory is pointless, what he’s really saying is that they need to reduce superfluous spending, inefficiencies that can be ironed out that waste money without leading to any significant rise in revenue (hiring new muscle costs money, the police sniffing around because of dead bodies reduces space available to sell and means dealing can be less open etc.). This type of advertising, simply standing on a corner, in an environment categorised by falling demand, in Stringer’s opinion just isn’t worth it: it is an inefficiency that should be replaced by efforts to improve product. And in this instance, he’s absolutely right. Here’s an example of a recent, pointless turf war –

This is the equivalent of standing on a corner, shouting ‘Microsoft!’ or ‘Apple!’ at passers-by. What’s worse is that Apple, who are usually way above this kind of petty nonsense, are displaying ridiculous hypocrisy, as they could have just as easily used their ad budget for this spot on improving Leopard, which is by no means free of problems. Customers’ falling demand will not be significantly propped up by this kind of advertising, there are just too many outside forces conspiring against it at this point in time.

So what should firms do in terms of advertising? The most important thing, to my mind, is to make sure that advertising not only increases demand through visibility, but also seeks to make their products more inelastic by demonstrating that there are few alternatives to them and that they are, in themselves, essential purchases. This will no doubt be easier if their products are possess USPs in themselves, and offer significant advantages to customers over their equivalents (such as the iPhone, whose advertising, whilst being painfully dull, elucidates exactly why you should want an iPhone over any other mobile – ‘An iPhone does this, this, this and this, oh yeah, and it also makes calls’), but even if they are not, and a product possesses no genuine USPs, advertising can create one, or many, that will decrease elasticity and simultaneously increase demand via the illusion of quality (a good recent example of this would be the recent drench ads featuring Brains from Thunderbirds – ‘Brains perform best when they’re hydrated. Your Brain’s 75% Water. Stay Drenched’ is about the most illusory, defunct, but at the same time genius implication of a USP I’ve seen in a long time).

In the end, what it comes down to is this – ads will need to demonstrate how a product will save customers money, will improve their lives, will be better at what they do than their competitors, to keep firms in good business during the recession – standing on a corner yelling ‘Brand!’ just won’t  cut it. Awareness will still be important, especially as demand certainly will not fall at a uniform rate if people just don’t see your face around, being subject to tipping points as much as the next thing – as Poot rightly says, it’s still going to be paramount not to be seen as a punk ass bitch – but it won’t be able to stand as the one thing any longer, as it seems to have done for the past 5 years.

Adjourn your asses.

Advertisements

Tags: , , , , , , , , , , , , , , , , , , , , , , ,

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: