The Economics of Perception

Business problems rarely exist in isolation. A solution may be entirely effective in resolving the immediate difficulty and, nevertheless, create consequences elsewhere in the business. The strategic exercise is therefore not merely to ask whether a problem can be solved, but how it should be solved and how the consequences of that solution are likely to interact with the wider business.

Perception matters within that exercise because stakeholders respond not only to what an organisation does, but to what its decisions signal. Those signals influence perception; perception influences behaviour; and behaviour may ultimately carry an economic consequence.

FUBU: perception drove demand

The history of FUBU provides a useful illustration. The business began on a modest scale, with Daymond John and his partners producing clothing from his family home. Without the resources available to established fashion houses, FUBU pursued an unconventional approach: getting its clothing onto musicians and into music videos. The strategy proved remarkably effective. The brand acquired a visibility and cultural relevance substantially greater than its physical scale might otherwise have suggested. Perception drove demand.

Success, however, created its own problem. Demand began to exceed FUBU’s capacity to supply it. Samsung’s subsequent involvement provided the financial and distribution capability necessary to meet that demand, and FUBU expanded into major retailers.

On any ordinary analysis, the problem had been solved. FUBU needed capacity; it acquired capacity. It needed distribution; it secured distribution. The solution worked.

However, the strategic analysis cannot end there.

What the solution changed

As the product became increasingly available, the conditions surrounding the brand also changed. Greater distribution brought greater exposure, but it also brought ubiquity. Excess inventory eventually found its way into discounting and clearance channels. What had once derived part of its appeal from cultural relevance and relative scarcity became increasingly commonplace.

Accordingly, the difficulty was no longer one of supply. The solution to the supply problem had helped create an entirely different strategic problem: how to preserve desirability when the product was now everywhere.

This is where the Economics of Perception becomes relevant. FUBU’s original success had created what may be described as a Perception Premium. Consumers were not purchasing fabric alone; they were purchasing what the brand represented. Once availability, discounting and saturation began to alter that representation, the economics changed with it.

Burberry: the opposite direction

Burberry historically confronted a similar tension from the opposite direction. Unsold luxury merchandise retains an immediate economic value and, viewed in isolation, discounting it appears more rational than destroying it. However, repeated discounting may solve the inventory problem while weakening scarcity, exclusivity and the consumer’s willingness to continue paying a premium. Burberry’s controversial destruction of unsold stock therefore illustrates the competing consideration: sacrificing immediate value in an attempt to protect longer-term positioning.

That approach itself carried consequences. Once the practice became public, an act intended to protect exclusivity generated criticism concerning waste and sustainability. The solution to one perceived commercial risk thereby created another.

Neither example establishes that expansion is wrong, that scarcity should always be protected, or that excess inventory should be destroyed. The proposition is narrower.

A commercially effective solution is not necessarily a strategically complete solution.

Two questions

That question applies well beyond fashion.

• A business may resolve a dispute aggressively and damage an important commercial relationship.
• A company may respond to a cyber incident with an overly definitive statement which later becomes untenable as forensic evidence develops.
• Cost reductions may improve margins while signalling declining quality.

In each case, the immediate objective may have been achieved while the manner of achieving it creates consequences elsewhere.

Perception is part of the decision

Perception should therefore not be treated merely as a communications issue arising after the substantive business decision has been made. In circumstances where the decision changes how customers, employees, investors, regulators or other stakeholders behave, perception forms part of the commercial decision itself.

This becomes particularly acute in crisis because crisis compresses the economics of perception. Decisions become signals, signals become narratives and narratives can change stakeholder behaviour before an organisation has fully appreciated the consequences of its initial response.

The strategic task is therefore not to find a solution without consequences; such a solution may not exist. It is to identify the available solutions, appreciate their wider consequences and determine which course best resolves the immediate problem without unnecessarily compromising the wider business.

When the solution works

FUBU’s experience captures the point particularly well. The capacity problem was solved. The solution worked. The more difficult question was what the success of that solution would eventually change.

Rodney Jack BL

Founder, RJ Strategic Advisory

Rodney's background in law, business, cyber-risk and compliance informs RJSA's approach to governance, data risk, communications and crisis response. About the founder

Content published on RJSA Review is for general information and commentary only. It does not constitute legal, regulatory, financial, HR, cyber-security or other professional advice.