We talk about a lot of different types of goods in economics- normal goods, inferior goods, Giffen goods, Veblen goods, etc. So what is a positional good? I will let Sheldon from the Big Bang Theory explain:
Raj: Dude, I’m glad you finally got a girlfriend, but do you have to do all that lovey-dovey stuff in front of those of us who don’t?
Sheldon: Actually, he might have to. There’s an economic concept known as a positional good in which an object is only valued by the possessor because it’s not possessed by others. The term was coined in 1976 by economist Fred Hirsch to replace the more colloquial, but less precise neener-neener.
(That works totally better with the video, but the one that I’ve referenced before has been made private, probably because CBS is ridiculous.)
Update: Reader Russ is awesome:
I guess you can think of the value to be had in positional goods to be a variant on conspicuous consumption, though conspicuous consumption is based a bit more on the signalling of wealth and/or status in and of itself rather than taking an “I have this and you don’t” approach.
From a business standpoint, positional goods can be a bit complicated to manage, since there is a tension between price and sales volume that works differently then with regular run-of-the-mill products. With regular stuff, lowering the price leads to more units sold, so the company just has to think about the balance between this price/quantity tradeoff and the costs of production. With positional goods, however, there is another level of analysis, since a lower price makes more people able to purchase, but then more people purchasing makes the goods less attractive, which makes fewer people want to purchase. Therefore, a true equilibrium for positional goods will not only balance supply and demand but will also require a steady state within the demand itself. This feature, if you’re doing your analysis right, clearly makes a high-volume strategy much less feasible for positional goods than for other goods. (I sometimes find the concept of trying to market music to hipsters to be a useful analogy here.)
Another major difficulty with positional goods is that it’s not always clear whether the good you are selling has the properties of a positional good. As a result, it’s hard to tell whether companies adopt misguided volume strategies because they don’t understand the market implications of positional goods or because they don’t realize that they have a positional good on their hands. Take Coach, for example:
Coach, under pressure from investors to boost revenue, added line after line of merchandise and dozens of factory outlet stores over the past few years, fueling a dramatic run-up in earnings — to the point where Coach isn’t really Coach anymore.
“If you’re a luxury brand with outlet stores, maybe you’re not a luxury brand,” mused Tim Hanson of Motley Fool Funds on a podcast Tuesday. “They took a growth-at-any-costs attitude that has done brand damage that they are paying for, but at the time that they were doing [it], it fielded stock price gains because it allowed them to put up very heady revenue numbers.”
It’s a problem all luxury brands face, especially public ones: How can you both sell enough on a quarterly basis to make Wall Street happy while at the same time maintaining the aura of exclusivity that got you where you were in the first place?
Supply and demand- sometimes it’s a lot harder than it looks sometimes. At the very least, this makes me feel like I’m not crazy for thinking that Coach used to be “nicer” than it is now, since for a while I couldn’t tell whether anything had objectively changed or whether I’ve just gotten more finicky over time. (I am willing to admit that it’s probably a little from column A and a little from column B.) It’s not just me, however, since I distinctly remember walking through the mall with my friend Kim and pausing in front of the Coach window for a second and having her grab my arm and give me a stern “no…just, no.” In any case, it appears that Coach, at least initially, had a bunch of positional goods on its hands and either didn’t know it or didn’t know how to manage the supply and demand balance properly.
Or, in Sheldon terms…
The whole linked article above is pretty interesting, since it talks about how other companies have faced similar problems but become aware of the nature of their products more quickly and were able to manage their way back to success by scaling back before too much irreversible brand damage was done. It’s also a good reminder of the degree to which value is driven by scarcity, both on a practical level and a psychological one.