Brand Equity vs. Economics 101
The law of supply and demand: the only thing many people remember from Economics 101.
When demand goes up, prices increase. When demand goes down, prices decrease.
But according to the recent New York Times article, "Why Surge Prices Make Us So Mad: What Springsteen, Home Depot and a Nobel Winner Know," strict adherence to this economic principle can be detrimental to a brand. Playing the long-game of building and maintaining brand equity is often more important than maximizing short-term gain.
Bruce Springsteen priced tickets for his one-man show on Broadway at $75 to $850 and implemented a system to thwart scalpers from buying up and reselling tickets at a profit. Lottery-winning ticket buyers-turned-opportunists priced their show tickets at $1,200 to $9,999 on StubHub. So Bruce could have made a lot more money by following the simple law of supply and demand, selling tickets at the price the market would bear, and filling the theater with his wealthiest fans. But at what cost to his brand?
One of my colleagues used to say, “You can always get tickets. It just depends on how much you’re willing to pay.” The aftermarket for sold-out concert tickets and sporting events can exceed 10 times the face value of the tickets, especially for premium seats. Yet hot acts and championship teams are reluctant to be viewed as price gougers in order to maintain the goodwill of their fan base.
“A good rule of thumb is we shouldn’t impose a set of rules that will create moral outrage, even if that moral outrage seems stupid to economists,” says Richard Thaler, a recent Nobel Laureate in Economics, as quoted in the Times on Oct. 15. Stories of bottled water selling for $24 in Puerto Rico after Hurricane Irma certainly produced universal moral outrage.
Contrast that with how mega-brand Home Depot responds to hurricanes. The chain has a corporate policy against price-gouging following a disaster, and it deploys emergency logistics to meet the demand of its customers in a disaster area with additional supplies of plywood, tape, etc. This approach meets demand by increasing supply, maintains stable pricing and boosts revenue. More importantly, it creates goodwill and trust in the brand.
So the economic law of supply and demand is not universal when it comes to brand equity.
“If you treat people in a way they think is unfair, then it will come back and bite you,” Mr. Thaler said.
Score one for the Brand.