Even if you haven’t been to business school, at its base, business is pretty simple.
Step 1: Buy a widget for a dollar and sell it for a dollar ten.
Now it starts getting technical.
Step 2: If you sell more widgets, you make more money.
As a business owner, selling more products is better than selling less. Wow, so far this is making my head spin.
So, how can you get people to buy more widgets?
Step 3: The obvious way to get people to buy more widgets is to lower the price of your widget. You can do this by employing Mexican or Uzbek children in your factories, or by instigating a war and capturing the necessary raw materials.
But at some point, the widget is as cheap as it is going to get. Walmart came up with an interesting business strategy. Every other company in the world was trying to increase profit margins (the difference between your cost and the price you sell at). Walmart, on the other hand, was trying to decrease this number. The idea was to strip the costs down to nothing, then keep reducing the profit percentage, but increase the number of widgets sold.
Selling a million widgets, with a 2% profit makes you more money than selling 100,000 widgets with a 3% profit.
This method worked for a while, and the US consumer market just kept growing and growing.
Super stores, warehouse marts, and large box stores were popping up everywhere. When I was living in Europe I tried to buy a five pound box of my favorite breakfast cereal, “Chocolate Super Bombs.” The clerk looked at me and said, “But you are only one person. Why do you need five pounds of cereal?”
Americans owned significantly more products than people in other developed countries. When my sister told her European boyfriend she was going shoe shopping, he answered, “But you already have shoes.”
When I was teaching English overseas, students often asked me, “Teacher, on TV we see many American movies, and there are always monsters in the basement. What is a basement?”
“It is a place to store things you purchased but never use.” I answered.
The follow up question would inevitably be. “In some movies, the monster is in the attic. What is an attic?”
“An attic is also a place to store things we bought but don’t use. But an attic is above the house, instead of under it.”
Did buying a lot of products increase the frequency of monsters?
“Teacher, in American movies, when people want to commit suicide they drive their car in the garage and turn on the car engine. What is a garage?”
“It is a place where you store one of your automobiles.”
“But some garages look so messy, and some people still park on the street.”
“That is because Americans also store unused products in their garage.”
Some American homes had three or more rooms designated as depositories for products that they had purchased but didn’t use.
Step 4: If low profit margins and low cost weren’t enough to move products off of the shelves, sellers could use sales and coupons to entice buyers. In some cases, products were sold at a loss. These products were called “lost leaders.” The thinking is, you come in the shop to buy a lost leaser and hopefully make ten other compulsion purchases while you are there.
When I was a student in Germany, I discovered that Germany had very strict rules against sales. And lost leaders were actually illegal. You couldn’t sell a product below cost. The German rational was that by selling low cost products, large stores had an advantage over small stores and this was detrimental to a free market.
My American classmate, John-the-Republican would get angry. “Having the government tell you what price to charge for your products is detrimental to a free market,” He would complain. One day, he came back from a shopping excursion to Stuttgart, where he had just bought a new album. “Do you know why this CD was $30? Because I am paying for some old guy’s retirement.”
At that time, Germans were taking early retirement in their mid fifties. The unions were pushing for a four day work week. Women (or men) could collect three years of maternity leave benefits from the government. An advocacy group in support of unemployed people was complaining that with recent government benefit cuts, “many unemployed people earn less than those who are working.”
Germany had one of the lowest unemployment rates in western Europe and yet it was more than double US unemployment.
In the face of so much money going out and so little coming in, the government still put money and resources into campaigns, telling people not to consume.
We American students all said that selling more products was better for the economy. It created jobs and created financial movement. We suggested lifting bans on sales and lost leaders.
The German’s rebuttal was telling of the differences between the two countries/cultures. My Germans classmate said, “Each week, people will buy the products they need. If you decrease the price, people will still buy the same number of products, because they don’t need more products. And you will earn less money.”
“But when they are in the store, won’t they suddenly see other products that they needed or wanted?” we asked. “For example, in America we have end displays at the ends of the aisles, which feature a different product each week. Or we have compulsion purchase products near the registers.”
“That should be illegal,” retorted our colleague. “You are making people buy things they don’t need.”
Then I pointed out that making people buy things they don’t need isn’t as bad as packing them in trains and shipping them off to concentration camps. And the conversation pretty much deteriorated from there.
One interesting point that the Germans made was that, if you decreased the price of product, lets say cans of tuna, German consumers would still buy exactly the same amount. If they normally bought two cans a week, and you decreased the price, they might buy eight cans. But they wouldn’t consume eight cans. They would just be buying a month’s supply in one day. So, while your sales would spike during the week of the sale, they would slump, and average back out for the rest of the month. But your profits would be lower.
In sales, we call this shifting tomorrow’s spending to today. In America too, sales we walk a thin line in developing sales strategies. The question comes up, “how can I get people to buy more today, but still buy again next week?”
This is why American producers keep developing new types and brands of products. In the former East Germany, if you were lucky, and if you had connections, and if you had foreign exchange coupons, you could go into a shop and purchase a brown box, marked with a black stamp, which read, “COOKIES.”
In the new Germany, you go in the supermarket and there is about half an aisle dedicated to cookies, candies, chocolates, breakfast cereal and a number of other products. Most grocery stores in Germany only carry about six or eight flavors of breakfast cereal and they are all the same size.
There are also very strict rules in Germany about how these products are marketed. In general, advertising which targets children is discouraged, if not illegal.
Big grocery stores in the US have an entire aisle dedicated to breakfast cereal. There are thousands of brands, most of which are tied to cartoon commercials and memorable characters or movies. Tony the Tiger, Dig’em the frog, the Rice Crispy Guys, Count Chocula, Boo Berry, Frankenberry, Fruit brute, Lucky the Leprechaun, and my all time favorite, Captain Crunch.
Inside of each brand are numerous varieties. Captain Crunch comes in regular (which cuts the inside of your mouth), peanut butter, Captain Crunch with Crunch Berries, and new, Choco Donut Captain Crunch. And each flavor comes in a variety of sizes.
If one brand, flavor, or size is on sale today, you buy more. But next week, you also buy, because you want another flavor or brand. The same is true for consumer goods, such as TVs, DVD machines, computers, clothing, cars, and even houses… By creating so many new choices and types, the manufacturers guarantee that a decrease in prices this week causes a spike in sales this week, but by releasing a new product next week, they can also expect a spike in sales next week.
The spike became the norm.
This strategy has gone on and on for years. At some point, even the US consumer ran out of money. You can only take advantage of sales if you have cash.
Step 5: Extend liberal lines of credit to your customers.
From the 1950s to the 1970s you to had show income, savings, and credit history to obtain credit cards. By the 1980s college students and unemployed people could obtain cards simply by filling out the application form. By the 1990s, unwanted credit cards actually arrived in the mail. You had to simply call to activate them.
Now, you had spikes in sales, driven by the invention of new models and brands. You kept your profit margin low, so your end product was low, but your overall product was high because your sales were high.
The US had the lowest inflation, lowest unemployment, and one of the highest qualities of life of developed countries. This last claim is more of an opinion, but we definitely owned more stuff than anyone else.
The Germans argued that our low unemployment rate was artificial because it included low paid workers who were below the poverty line. In Germany, less people had jobs, but everyone who had a job could afford to eat and live. They also argued that our sales figures were artificial because they were built on an ever growing consumer debt, which would eventually have to be repaid.
I personally know a couple whose credit card debt had reached one year’s salary. That will never be paid off.
Companies who cut their profit margins to almost nothing also used debt to expand and sell more products. They were functioning on such a narrow shoestring, that as soon as the hint of this financial tsunami hit and consumer spending dropped by a small percentage, the shops collapsed into bankruptcy.
Many economists predicted that the system couldn’t go on forever, and that the whole economy would eventually blow up.
I guess they got it right. And now, we will be paying for yesterday’s spending tomorrow.