11 economic phenomena necessary for planning and promotion

Introduction: Starting from the essence and finding the end point

A strategist’s weapon is thinking , and economics is a discipline that studies the worldview. Economics will not change the world, but it will change the way you see the world.

Economics finds the development relationship between people and the world from human behavior itself, thereby summarizing general laws and then demonstrating the core operating logic of "economic man".

Based on my interest in advertising and marketing and economics, I will share some economic phenomena related to advertising and marketing.

01. Lipstick effect

When the economy is bad , lipstick sales actually increase.

Because in times of economic downturn, people still have a strong desire to consume and turn to buying "cheap luxury goods."

Lipstick is a product with a low absolute price (its own price) but high relative significance (high relative price and certain significance attributes), and therefore it is sought after by people when consumption is insufficient.

From another perspective, categories that meet the lipstick effect conditions will grow against the trend when the economy is down. There are two conditions for them to meet:

(1) In addition to practical value, it should also have meaning;

(2) The absolute price should be low, but the relative value should be high.

02. Scale effect

Economies of scale are also known as economies of scale . As production reaches a certain scale, the average cost of the enterprise decreases, thereby increasing product profits or creating room for price cuts.

So why do economies of scale reduce costs?

• To spread the fixed costs, the more output, the lower the fixed costs allocated to each product;
• Lower raw material prices and larger-volume purchases create room for high discount negotiations.

Some companies will adopt a strategic loss logic based on the market of their products. There are many examples of this in the Internet industry, and there are also many in fast-moving consumer goods. The core premise is that the market for this category is large enough to leverage economies of scale to spread the initial cost expenditures.

03. Price discrimination

Price discrimination is essentially a price difference , which means selling the same product to different consumers at different prices.

For example, the prices during the National Day Golden Week, which is the peak period for air ticket purchases, are inconsistent with those during other periods. This will effectively utilize market mechanisms and make full use of idle passenger capacity in civil aviation, so that fewer people buy during peak hours and more people travel during off-peak hours.

Another example is Taobao’s hidden coupons. Setting certain coupons for certain channels and groups will lead to price discrimination against those who do not receive the coupons.

04. Sunk Costs

Sunk costs are costs that occurred in the past but are irrelevant to current decisions .

From the perspective of decision-making , the costs incurred in the past are only a very small factor in the formation of the current situation, and current decisions do not need to take into account the costs incurred in the past.

Sunk costs come from clinging to past investments and using them to convince yourself. It also acts on the psychological factors of people, and the psychological cost awareness is greater than the economic cost paid.

05. Marginal Cost

The increase in cost that occurs when adding one unit of output is called marginal cost.

For example, if you sell pancakes, the cost of frying one pancake will include the cost of materials, cart fees, labor costs, etc., so the cost is relatively high. But if you fry 100 pancakes, the cost will be much lower because your fixed costs and variable costs are amortized.

06. Opportunity Cost

Opportunity cost refers to the cost of choosing one opportunity over other opportunities.

That is to say, if you do A, you have to give up B. The possible benefit of B is the opportunity cost of your choice A.

For example, if you choose to raise cattle or goats, if you choose to raise cattle, then the income generated by raising sheep is your opportunity cost. Because when you can only choose one of the two, the two become your opportunity cost.

07. Matthew Effect

Refers to a two-polarization phenomenon in which the strong become stronger and the weak become weaker .

It comes from a parable in the New Testament of the Bible, Matthew: "For whoever has, to him shall be doubled, and he shall have an abundance; but whoever does not have, even what he has shall be taken away from him."

There are many such phenomena in life. People with strong abilities will continue to expand their income and circle, leading to exponential growth in income. People with weak abilities will always linger under a certain ceiling because it is difficult to shake the boundaries.

08. Bad money drives out good money

Bad money drives out good money, also known as Gresham's Law .

It refers to the situation where two currencies with different actual values ​​but similar nominal values ​​are in circulation at the same time, and the currency with higher actual value, that is, good currency (high purity, i.e., high heavy metal content), is withdrawn from circulation because it is collected, melted or exported abroad. Currency with low actual value, that is, bad money (low purity or low heavy metal content) will flood the market.

Extended to work and life, those who cut in line get seats, while those who queue in an orderly manner have no seats. People who flatter and fawn on others get promoted, while those who are very capable and reliable are marginalized.

09. Ratchet effect

The ratchet effect , also known as the braking effect , refers to the irreversibility of people's consumption habits after they are formed, that is, it is easy to adjust upward but difficult to adjust downward.

Why is it called the ratchet effect? ​​Because the ratchet is a one-way gear that can only rotate in one direction. If it rotates in the other direction, the teeth on it will act as a brake.

“It is easy to go from frugality to extravagance, but it is difficult to go from extravagance to frugality” is a saying from “Zizhi Tongjian”, which means: It is easy for our living habits to change from frugality to extravagance, but it is difficult to change from extravagance to frugality.

10. Transaction Utility

Transaction utility = reference price of goods - actual price of goods (difference utility). The larger the difference, the more likely consumers are to make a purchase. This theory was first proposed by Professor Richard Thaler of the University of Chicago.

The reference price of a commodity is mainly reflected in two aspects:

(1) Purchase scenario (environment) reference : For example, if the same T-shirt is sold for 200 yuan in a high-end shopping mall and even for 50 yuan in a small stall, most people will choose the one sold in a high-end shopping mall because your psychological price range in different scenarios is different.

(2) Product original price reference : For example, if you sell a T-shirt with an original price of RMB 300 and a 50% discount for RMB 150, and another T-shirt with an original price of RMB 200 and a 25% discount for RMB 150, most people will choose the former. This is because you believe that the former product is of higher value and has a bigger discount, which is equivalent to "earning" more.

11. Prospect Theory

Prospect theory holds that people usually do not consider issues from the perspective of specific wealth gains , but rather from the perspective of wins and losses based on different reference points , and are concerned about the amount of gains and losses.

Some scholars also call "prospect theory" "expectation theory" . Under different risk expectation conditions, people's behavioral tendencies are predictable.

Prospect theory can be divided into the following four basic conclusions:

1. Most people are risk-averse when faced with a chance to make a profit (certainty effect)

The certainty effect means that between certain benefits and uncertain benefits, people will choose the former even if the former benefits are lower than the latter.

For example:

A. Give you a salary of 10,000 yuan;

B. You have an 80% chance of getting a salary of 15,000 yuan, but there is a 20% chance of getting nothing.

Most people would choose the former, even though the latter has a chance of earning an extra 5,000 yuan. Because when there is a certain return and the difference between the two is not very huge, you will definitely choose the certain return.

2. Most people are risk-seeking when faced with losses (reflex effect)

For example:

A. You will definitely lose 10,000 yuan;

B. There is an 80% chance that you will lose 15,000 yuan, and a 20% chance that you will not lose any money.

Most people would choose the latter. First of all, they don’t think they will definitely lose money, so they take a chance. After all, there is still a 20% chance of not losing money.

3. Most people tend to judge gains and losses based on reference points (reference dependence)

For example:

A. Earn 15,000 yuan a month;

B. Earn 10,000 yuan a month, but everyone in the world only earns 8,000 yuan.

Most people would choose the latter, because the amount of income can be obtained through comparison and reference.

4. Most people are more sensitive to losses than gains (the loss effect)

For example:

For example, if you picked up 100 yuan today, you would be very happy, after all, it’s a lucky break.

But if you lost 100 yuan today, you would definitely be very angry, and the degree of anger would be far greater than the degree of happiness. After all, the money in your pocket is gone, the cooked duck has flown away, how can you not be angry?

This is the end of version 1.0, and we will update version 2.0 next.

Author: Self-cultivation of a strategic person

Source: Self-cultivation of Strategists (ID: clrdzwxy)