Friday, 26 June 2009

Selling in a recession - the idea trap

There's lots of Bryan Caplan I don't agree with, but I can't deny he has some interesting ideas and a good way of thinking about them.
The connection between growth and ideas is not so much logical as psychological. It is not logical for people to embrace counter-productive ideas just because conditions are getting worse, but they seem to do it anyway.
This is from a paper on idea traps which is the concept that a society can get stuck in a sub-optimal equilibrium where the economic ideas that it runs on are flawed, but do not self-correct.

My own experience of this is a paradox based in the economic situation in the UK right now.

Logically, when there is low demand in an economy companies with a fixed cost base should spend more on sales and marketing.

(This might not apply to firms which can easily scale down their costs - you can argue that the marginal return on sales spending is lower and therefore the optimal spend is less. But most companies are retaining most of their staff in the hope of riding out the recession. In this case, to maintain profits, or at least to reduce your losses, you should increase your spending on sales and marketing tools or activities.)

However that's not what we see. Most companies use the recession as an excuse not to invest in sales. Why would this be?

I think there are two combined reasons:
  1. Recessions increase fear. When fearful, people put a greater weight on uncertainty and their loss aversion increases. Spending on new sales and marketing activities feels risky (indeed, it really is risky) and so there's a psychological reluctance to do it.
  2. Most small to medium business owners do not see sales and marketing expenditure as an investment. They regard it as an obligation, something they know they are meant to do (all the business books say so), but they only do it when they can afford to. This is counterproductive - like the taxi drivers who go home each day as soon as they make £200 - but it feels like a natural way to manage your resources.
Because my company's CVM software is a sales and marketing tool, we suffer from this psychology. Our solution? To turn the lion's share of our price into a success fee. Clients only pay a small amount for Inon CVM software itself but if it successfully generates sales, they pay a commission.

In this way we not only reduce the risk for the client, but signal our confidence in the effectiveness of the software. Both of these effects increase our customers' willingness to buy from us, and in this way we overcome the paradox. The phenomenon certainly doesn't disappear altogether - architects in particular are very reluctant to spend anything at the moment - but it helps a lot.

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