The Bad Good Idea
What happens when corporate innovation goes wrong
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The last time I saw Marc Roberts, Professor of Political Economy at The Harvard School of Public Health, we went for a long and typically chatty lunch at a very bad pub across the road from the Longwood Medical Center. Marc walked with a limp, a legacy of the polio he caught at age six, and it would have made no sense to make him walk any further away from campus.
But no matter, we were there to see each other and catch up, not for the quality of the burgers we were eating. I thought the world of Marc. He was a quirky and characterful Professor who arrived at Harvard in 1960 and almost never left. He was himself an institution, in a way. That he was the twin brother of Steven Roberts, and brother-in-law of Cokie Roberts, only added to the sense that somehow, Marc Roberts knew everyone. As well as, in a good way, everything.
When I worked briefly as a Teaching Assistant for Marc, he loved to tell stories about his previous TA, Michael Spence (a Nobel laureate in economics) and his own experience working as a TA with Tom Lehrer (yes, he of the Elements song, and of Poisoning Pigeons in the Park, whose songs spread like herpes, but who also taught maths at MIT). And it strikes me now that Marc’s genius was indeed just about half way between the two friends he liked so much to talk about: 50% Spence, and 50% Lehrer. That really captures it for me. His lectures, as you can imagine, were legendary.
So what did we talk about over that last lunch? Well, I had recently graduated and taken a job in business, and so Marc said: let’s talk about business. “What you have to understand about the company”, he went on, “is that it is just an organisational structure – but one which is uniquely designed to achieve two goals: to innovate, and to cut costs. Those two things. Nothing more, and nothing less.”
As was typical of Marc, it was a simple statement but with a brilliantly simplifying insight baked in. And over the years, as I mulled over his comments, I have realised that they do indeed capture the best, and the worst, of what the private sector has to offer.
Let’s start with the best part. Companies are an amazing mechanism for advancing new ideas, particularly new ways of getting useful things done. The classic example is the mousetrap: build a better mousetrap, Emerson said, and the world will beat a path to your door. That sounds pretty good for the top line, doesn’t it? If you’re a mousetrap guy, you’d be mad to propagate your invention in any other way. 1
King Camp Gillette invented the disposable razor blade, and still, over a century later, the Gillette Company had over $10 billion in sales when it merged with P&G. László Bíró invented the ball-point pen in the 1930s, after watching children rolling marbles through a puddle, and sold the patent to the Société BIC, which has now sold over 100 billion BIC Biro pens. (If that sounds impressive, bear in mind that the 3M company has sold, by some accounts, a trillion Post-It Notes.) More recently, James Dyson built a better vacuum cleaner, but also created Dyson Limited, a company with a constant pipeline of new ways to move hot and cold air around, and now also has around $10 billion in annual sales.
These are what I would call good good ideas, and Marc was exactly right that a private company turns out to be an excellent vehicle for those kind of ideas. But the truth is that companies sometimes also come up with much more dubious ideas. The pressure to innovate and cut costs can push companies down a much less honourable road. Here are some examples which stand out to me as meriting entry to some kind of corporate Hall of Shame:
The 99p price point. Who really thinks that a product sold for £9.99 costs anything other than a tenner? Well, the practice persists, despite the annoyance of all those pennies in change, so it must be that many of us do still fall for this trick.
The mail-in rebate. Why would a company offer a mail-in rebate, if they didn’t know that the consumer would forget to mail it in? Or that if the customer does remember to mail it in, that you can still send them the rebate as a cheque, and some customers will do you the favour of forgetting to cash that in as well.
Vouchers with expiry dates. When I was a child, kind relatives would sometimes send a book token for a birthday present, and the tokens would last as long as it took you to go and spend them. But these days such tokens have an expiry date: use within 12 months, or something like that. But who would sell a disappearing birthday present for a child? You have taken the money already; inflation erodes your liability over time anyway; and it would cost you nothing to leave the voucher open-ended. The only reason to add an expiry date is that, apparently, you can. (But it is still a mean thing to do.)
‘Drip pricing’ (or hiding unreasonable charges until late in the checkout process). A few years ago, a friend with a successful online business told me proudly that he’d found a million pounds under the rug. How so? His online checkout page was adding a payment processing fee which was reflective of the actual payment cost. I think it was about £0.50 at the time. But he noticed that he could increase the fee to £1.50, for no reason, and customers would not abandon the basket. Since he was clocking a million transactions a year, he had found a ‘free’ million pounds! 2
Value engineering. The practice of making your product more cheaply every year while maintaining or increasing the price. A good example is the board game Monopoly. During World War II, Monopoly sets were such good quality they could be used to smuggle real money into POW camps, or other useful items (compasses, etc) which might help the prisoners escape. These days, you wouldn’t stand a chance: the quality has tanked, but not the price. The money in particular is printed on cheap paper, in a smaller size, and only on one side. There would be no chance any more of hiding real bank notes in a modern Monopoly set.
I call these bad good ideas because, sure, at some level they do seem to work. They are of course not illegal, and they may help the company in question to make its return. But at another level, these practices are not improving innovations of the type Marc Roberts was talking about, and I would bet that they don’t help to grow the economy, because there is no real world improvement which lies behind them. To fall back on a standard economic image: I would bet that these cheap tricks don’t increase the size of the pie, they just increase the slice of it which any particular company can take for itself. And if I’m right about that (these hacks are largely zero-sum) they are no good for productivity either.
So the question I am left with is: what can we do about this? How can we encourage companies to focus on innovations which create real value, and steer them away from those zero-sum, behavioural hacks - which seem to do little more than exploit the flaws in the customer’s reasoning process?
You might hope we could regulate against the worst examples, but regulators move slowly and business moves fast. And anyway, I am not sure we would want a regulator to be ruling on whether prices should be round numbers, or how the money in a Monopoly set should be printed.
Alternatively, you might hope that consumers would vote with their feet. Perhaps they just won’t buy a Monopoly game that isn’t nicely made, and they’ll spend their money on something else. Perhaps after a while they will stop shopping at a site that over-charges for payment processing? Well, maybe that does happen a little over time - but I am not optimistic. The cleverness of the companies is to deploy these hacks in exactly those areas which don’t negatively affect sales.3
A final, and slightly dispiriting thought, is that some companies may even consider that they are obliged by their fiduciary duty to shareholders to do this kind of thing. If the hacks are legal, and the customer isn’t reacting negatively, then I suppose a shareholder could in theory bring a legal action against management for not deploying these tricks.
So what on Earth can we do? How can we get companies to focus on real innovations which make the world better, instead of hacking the well known decision-making flaws of a distracted customer? I really don’t know. My best guess is that the bad good ideas are just an unavoidable cost of a system (capitalism) which allows the good good ideas to flourish and prosper. It may be a price worth paying, because the good good ideas are so enormously, incalculably valuable. But in that case, there may be no way to root out the bad good ideas, and we may be stuck with them forever.
All I really do know is that I would love to have had a chat with Marc about this problem. And I bet he would have had a very good idea about how to solve it.
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Actually the Emerson mousetrap quote seems to be apocryphal. What he actually said was: “If a man has good corn or wood, or boards, or pigs, to sell, or can make better chairs or knives, crucibles or church organs, than anybody else, you will find a broad hard-beaten road to his house, though it be in the woods.”
This is an interesting example. You might be tempted to say, so much the better because the company is doing well. It is making a greater profit and can employ more people. But for the full picture, you need to consider where the new million pounds has come from, and the answer is: the customer’s pocket. There is no suggestion that the cost of items sold on the website was been reduced by a similar amount (if it were, there would be no gain for the company) and there is no improvement in product quality or customer benefit. It is just a zero sum transaction: a million pounds taken from customer’s pockets which might have gone to other companies with better innovations or more real world value to add. Note: I’m being careful not to name the company in question! This kind of practice is fairly common.
For example, I would bet that most Monopoly sets these days are bought as gifts - for birthday parties, or Christmas perhaps? The problem the customer needs to solve is ‘I need a present for person X’, and in that moment, the quality of the money inside the box is entirely irrelevant. But on the other hand, you might guess that as the quality of the game deteriorates, the child will spend less time playing it, which means that the long term value created by the boardgame company has gone down.
Pity you couldn’t take him to the poacher for lunch!