Playing To Win
Positional Goods & Strategy
A Different Take on Customer Value
Occasionally, I come across an entirely new concept to me that has a profound impact on how I think about business and strategy. Sometimes it comes from the business domain, other times it comes from elsewhere. The latter — connecting concepts from other disciplines to business — is always a rewarding exercise for me. In that latter vein, in this Playing to Win/Practitioner Insights piece, I tackle Positional Goods & Strategy: A Different Take on Customer Value. All previous PTW/PI can be found here.
Ideas that Fascinate Me
I am fascinated and thrilled when I come across a new concept that changes the way I think about business. For example, Aristotle on the fundamental limitations of science (thanks, Tony Golsby-Smith) changed the way I think about proof. Jim March on exploitation versus exploration (thanks, Hilary Austen) changed the way I think about producing change. Niccolò Machiavelli got me thinking differently about the nature of competition. Hernando de Soto helped me understand the importance of real estate in economic development. Chris Argyris caused me to see patterns in the way humans interact with one another that were previously entirely hidden to me.
Eight years ago, I came across a book by Fred Hirsch that changed my way of thinking about the nature of demand, especially for high-end goods and services. I came across it in a very Malcolm Gladwellian way. I saw it mentioned in a footnote and pulled that thread until it impacted my work.
Who was Fred Hirsch?
Fred Hirsch was a British welfare economist, far from the world of business. Tragically, he died at the age of 46 in 1978, only two years after publishing what is seen to be his most important work, a book titled The Social Limits to Growth. However, it is super-obscure. I bet it has sold less than ten thousand copies in its history. Its current Amazon rank is #5,413,073 — which means it sells a couple of copies per year these days. But I loved it!
The book explores why even though average income and wealth in advanced western economies increased enormously during the first three quarters of 20th century, their citizens were much less happy and satisfied with the impressive level of mass affluence than economists would have predicted. Bottom quartile families were ahead of where median families were two generations earlier. But that didn’t bring nearly the expected level of joy or satisfaction.
Positional Goods
His exploration of the mystery led Hirsch to the development of the concept of the positional good. Economists have always known that goods with limited supply tend to have higher value than those with unlimited supply, other things being equal. But Hirsch identified that there is a class of goods for which if I have the good, you can’t have it. Thus, there is a social positioning impact of me having it and you not having it. For example, if I buy the last available beachfront lot on Nantucket, you can’t have it. And I will be in the limited social cadre of people with a beachfront summer home on Nantucket (or Southampton or Carmel) and you won’t be.
The same holds for a position in the entering freshman class at Harvard College, or a table at the Presidential Inauguration Ball(s), or a Picasso, or a major league sports franchise, or a backstage pass to a Taylor Swift concert.
Hirsch observed in 1976 that there was already an arms race in these good whereby the value of a good (product or service) is an inverse function of how many other people are able to acquire it. If lots do, it is of lower value to the individual than if few have it — in which case, it is valued greatly. Even if the intrinsic utility doesn’t seem so high, only the wealthy and/or connected can and do bid for and acquire those positional goods. Since 1978, the arms race has done nothing but intensify as prices in all of these classes of positional goods have skyrocketed with no end in sight — literally no end.
This means that those with no access to positional goods feel more left out and left behind by the economy, even though their ability to afford non-positional goods has increased dramatically. It is what makes income inequality in America feel much worse than the actual numbers would suggest. You are completely shut out of positional goods if you can’t compete in the arms race.
It Explains a Lot of Things
The concept of positional goods explains why Dan Snyder fought so long and so hard to keep ownership of the National Football League’s (NFL) Washington Redskins (now Commanders). He bought the team for $800 million in 1999 and agreed to sell it in 2023 for $6.05 billion — the most ever for a sports franchise, with a gigantic profit for Snyder. But he fought it till the end and, I bet, took no joy in making a $5 billion profit. It is because a top-tier NFL franchise is one of the most coveted positional goods in all of America — and Snyder will never get one back. He got $5 billion in profits but lost his position in one of America’s most exclusive clubs.
It explains why Mexican multibillionaire Carlos Slim bought the largest stake in the New York Times, Amazon founder Jeff Bezos bought the Washington Post, and Steve Jobs’ widow Laurene Powell Jobs bought The Atlantic magazine — each a top tier American intellectual positional good.
And it explains some dark things in the modern economy. Some positional goods aren’t supposed to have a market price with an arms race associated with them — like a spot in the entering Yale or USC freshman class. But as the ‘Varsity Blues’ admissions scandal demonstrated, rich parents were willing to pay huge sums to a ‘fixer,’ Rick Singer, to bribe college sports coaches to get this precious positional good for their darling children. Some parents, like former PIMCO CEO Douglas Hodges, end up in jail.
And it explains why disgraced hedge fund manager Steven A. Cohen paid $2.4 billion to buy the New York Mets Major League Baseball (MLB) team. Cohen is a truly heinous businessman — and if you think that is an excessive criticism, just read the SEC settlement to which agreed, including the payment of a $1.8 billion fine, to circumvent criminal prosecution of what certainly appear to be criminal activities.
But thanks to making a fortune of nearly of $20 billion, including who knows how much stock manipulation and insider trading, he could bring himself the joy of buying a premier American positional good: one of New York City’s six professional football, baseball or basketball franchises. Fortunately for him, MLB (like his hedge fund investors) has low enough standards to accept him into its folds as one of its 30 principal owners — I still can’t believe how low the other owners stooped.
The only thing that makes it less maddening for me is that since he took over and started spending like a drunken pirate (not sailor), the Mets have been considered by observers to be an embarrassing failure, reinforcing that Cohen likely may have only one distinctive competence — stock manipulation/insider trading — at which he was demonstrably brilliant!
Implications for Strategy
I have always understood the careful management of supply-demand balance to make sure the curves cross at an attractive price — especially in luxury goods. High end wineries are expert at releasing just enough but not too much wine each year. Luxury condo builders release new units carefully to not flood the market.
But that is just the economically rational side of the issue — where the proverbial curves cross. I guess I once naïvely thought that the price was set by how much purchasers wanted and valued the good for themselves. But the accelerator on that is the purchasers’ recognition that to a segment of society important to them, it is meaningful that the good in question is ownable by them and not by somebody else. That is, ownership of the good positions the purchaser favorably with a segment of society that matters to the purchaser.
That is why the prestige co-ops in New York City make such a big fuss about their process of interviewing prospective buyers for approval. Not only do buyers have to pay insane prices per square foot, but they also must go through extreme vetting. But that makes for a much better positional good: I got a condo that the co-op board would have never allowed you to buy!
Also, it is the only explanation for the sky-high valuation of Hermès. Its market capitalization is currently 42nd in the world, which itself is pretty amazing. It is only one spot behind PetroChina, a company with $430 billion in revenues versus Hermès $15 billion. Hermès’ market cap/revenue ratio is a sky high 17X, double tech giants Apple (9X), Google (7X) and Meta (9X). (Only Nvidia trumps it with a 40X ratio — which tells you something about the sanity of that valuation.)
Hermès, as with high-end competitors like Chanel and Dior, is known for constraining supply to protect high prices. But it is interesting to see the way in which Hermès makes its products positional goods. To get a Birkin or Kelly bag, you need to score an appointment at the atelier at the flagship 24 Rue du Faubourg Saint-Honoré store in Paris — or buy a bag on the used market at far above purchase price. Anybody with fashion chops will notice that you have a Birkin or Kelly bag on your arm and will know how resourceful you must have been to get it, and much you paid for it (a lot).
The idea of a positional good is, of course, a tricky concept. It can be exploited for and by evil, as demonstrated by Steven Cohen and Rick Springer, or in a way that exacerbates the effects of income inequality. But it can be a force for good too. Arguably being a signatory to the Giving Pledge, created by Bill Gates and Warren Buffett in 2010 for billionaires to pledge giving the vast majority of their wealth to charity, is a positional good. You can only be part of that club by being a generous billionaire — not just a run-of-the-mill billionaire (though over time it appears that sub-billionaires can sign the pledge as well).
The important implication for strategy is to recognize that value is socially constructed. I always understood there was a social component of value. People consider what others will think of their choice of car. If it previously was a Prius or now is a Tesla, it connotes that you are environmentally responsible. People consider what others think about their choice of clothes. I remember when I first became Dean, a friendly senior faculty member advised me to stop wearing ‘bankers’ suits’ because that sent an un-academic message. But this is a more extreme form — your possession of a good as exclusionary of others’ possession thereof.
It is, by the way, behind my interest in my collaboration with ReD Associates to think through the dynamics of socially constructed value — to use it for good.
Practitioner Insights
Understanding customer value has always been and will always be tricky. We used to be told it was all rational and functional. Then behavioral economics came along and demonstrated that there are many emotional elements involved that go well beyond the traditional functional definitions. And now it is clear that value is clearly socially constructed.
So, when you think about your customers, make sure to consider all the elements of value not just functional value and not just emotional value within the customers themselves. Over and above that, ask to what segment of society does possession of your good helps them to be a member. That final piece may be much more important than you may think at first blush.
