I came across this hilarious explanation of economics today and thought I’d share it with you today.

A professor once explained marketing to me as having 2 parents — economics and psychology. Much of what I focus on in Hausman Marketing Letter is the psychology side of marketing. In fact, much of what you hear from marketers and social media types focus on only the psychology side.

The Economics of Marketing

If economics is the harsh father of marketing — containing all the sternness, rationality, and sobriety — it’s not an easy relationship, which probably explains why marketers tend to focus on the psychology-side of marketing. And, marketers don’t believe everything economists say. In fact, only the first 6 principles in the video (micro economics) apply to marketing. But, let’s focus on areas of agreement first.

Points of Agreement between marketing and economics

1. People face trade-offs – despite the humorous approach to economics, choice is an important element of consumer behavior. No matter how much money you have, you can’t possible buy everything you want. That means you need to make trade-offs. So, maybe you forgo the Mercedes you want for a Chevy so you can afford to pay your rent.

So, how does this relate to marketing? It means that brands don’t just compete with each other, they compete with other choices a consumer might make. So, choice is not just between the Snickers and M&M’s illustrated in the video, we make choices between Snickers and a hamburger. But, we also make choices between a Snickers and shoes.

Practical implications – the practical implication is that you need to convince consumers not only that your brand is the best candy bar for the money, but that a candy bar fills some innate need worth spending their money on. Just using a catchy slogan and celebrity to convince consumers they should buy a Snickers isn’t enough.

2. The cost of something is what you’re willing to give up to get it – true. And, not everyone is willing to give up the same amount to get something. This supports price skimming – where you charge consumers willing to pay more a lot for something and consumers willing to pay less for something less.

Practical implications – if you have something not easily copied, you can sell it for a lot initially and slowly lower the price over time. Sales start to people willing to pay more and, once they’ve all bought, your lower prices convince other folks to buy your product. You can also use this in international trade — by selling at a higher price to affluent countries and lower prices to less affluent countries.

3. People respond to incentives – if you give coupons, for instance, consumers are more likely to buy. But, all incentives don’t have to be financial. You can offer any incentive.

Practical Implications – this explains why coupons and rebates work or why consumers will wait in long lines for discounts.

4. Trade can may everybody better off – in early civilizations, consumers created what they consume. In modern society, we’re specialized. We create things we’re good at and buy other things we need from people who are good at making those things. This is efficient. If you’re good at something, you do it better than someone else and often do it faster and cheaper.

Practical Implications – people make trade-offs with labor, too. So, rather than creating your own advertising, you might hire an advertising agency. The same is true for doing your social media marketing. Companies also may need help creating their long-term strategy from a company experienced with strategy.

Points of disagreement between economics and marketing.

Maybe more important than the points of agreement are the points of disagreement. And, there are some serious areas of disagreement between economics and marketing.

1. People are rational – there’s lots of evidence that people aren’t rational. Look at people who spend their rent money going on vacation or people who buy a luxury car then live in a dangerous part of town. People are emotional and often buy based on how they feel.

Practical implications – emotional appeals work better than rational appeals. Look at the success of the e-Trade baby — a totally emotional appeal for even a major financial commitment. Don’t forget emotions in retail settings — people will buy more if they’re happy. So, creating a setting that makes people happy will result in more sales.

2. Markets are efficient – this assumes people have “perfect knowledge” which almost never exists. It’s also a long-term focus. In the long run, maybe bad products fail to sell and their firms go out of business. But, in the short run, lots of bad products exist and consumers lose money buying them. Social networks help create better information so bad products are driven out of the market sooner, but inefficiencies still exist.

Read More:

Economics and Marketing: What it Means for Business

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