9.6.2019 Weekly Blog: Our Cursed, Vital Love Affair with New

Our Cursed, Vital Love Affair With New

In the TV show MadMen, Don Draper said, “The most important idea in advertising is new…(it) creates an itch.  You simply put your product in there as a kind of calamine lotion.”  And he was right.  We are obsessed with all things new.  As human beings, particularly of the American persuasion, we are in constant search for the next, great new thing to fix or improve what we are certain needs fixing or improving.  Advertisers know this.  What Don didn’t elaborate on was the knack for advertisers to actually create the “itch.” 

You see, long ago we created solutions which addressed all of our vital needs, save a few medical cures.  In fact, we even created solutions to address all of our low to mid-level wants.  For the great majority of us in this country, the struggle to provide for our basic wants and needs is a distant memory.  Yet, our search continues to find the next calamine lotion to soothe that persistent itch.  We can thank advertisement for that—it actually creates the itch. 

An Itch for Better or Worse

The “itch” is vital to the consumer based economy—without a “need” there is no demand.  So, advertising plays a vital and necessary role in the economic growth of our economy.  Yet, sometimes it is hard to accept the degree or manner in which we are being subtly persuaded; or the collateral damage caused by the bombardment of messages telling us that we are missing out, or lacking altogether, the items that can make us happier or more fulfilled.  Our tolerance and collision with these issues is illustrated by news of Google and Facebook collecting our search data and using that information to better understand our pressure points and susceptibility to various forms of “itch” creation.  I also cannot help but wonder to what degree our drug addiction epidemic in this nation is a by product of our consumer culture. 

Love it or hate it, the impact of behavioral influence is here to stay—it’s a part of our DNA.  But that doesn’t mean we have to be a slave to it.  In his book “Influence,” author Robert Cialdini lays out many of the methods influence practitioners use to push us into action.  He refers to it as the “click, whirr” behavior.  The click is his word for the “itch creation” and the whirr is our natural response to the click.  In keeping with the subject of “new” one tangential influence tactic is the notion of scarcity.  If you can create the feeling that an item is in low supply, or soon will be, then you can elevate the demand for that product.  You think Apple doesn’t know that when they withhold the number of new iPhones available with each new release? 

Itch in the Investment World

The investment world knows how to work these influence methods as well, and the private equity market is the perfect example.  The private equity market offers investors the opportunity to invest in companies that are not traded on the stock market.  The allure of private equity has grown substantially over the last 10 years, and the market capitalization of the private market has exploded as a result.  Some of the most notable companies to recently IPO have been darlings of the private equity market for years:  Uber, LYFT, and Pinterest to name a few.  Many of these new tech companies have taken an old product, say taxi service, and repackaged it under a new image.  The valuations of these “new” services have exploded in the private market in large part because investors have bought into the scarcity influence.  “You’ll want to get a piece of this amazing growth story before everyone else (read pre-stock market listing) gets a chance to buy it.”  Exclusivity is scarcity re-phrased.  Investment banks have sold investments in these companies by “promising” dramatic returns once the companies IPO. 

However, recently these promises have not lived up to expectations, and much of this may be due to the fact that the exclusivity factor is more fairytale than reality.  Given the billions of dollars raised by some of these companies it is clear, if you are investing in them now, you probably aren’t the only one being given the opportunity to invest. 

Sometimes an Itch is an Allergy

One of the largest current offerings in the private equity market is WeWork, a commercial real estate company which offers collaborative working spaces for small companies, self-employed workers, or employees of larger companies who don’t live near larger corporate offices.  WeWork, like Uber, has taken an old concept and gussied it up to make it look new and exciting.  Valuations for this company, during its last capital raise, reached upwards of $47 billion.  Now, as it is exploring an IPO, and its finances and business practices have become more transparent, skepticism is forcing the valuations much lower.  Currently, according to the Wall Street Journal, the company is exploring an initial public offering valuation of “only” $20 billion, less than half its valuation a year ago. 

In case, my mentioning that the price has “come down” has created a “click, whirr” response in you to buy the stock when it goes public, I’ll caution you that even at that price tag it may be anything but a bargain.  You see, WeWork is not really new—commercial real estate has been around for years.  Even small, independent office space has been around for years.  In today’s Wall Street Journal commentary in the “Heard on the Street” section, at $20 billion, WeWork’s valuation is still $8 billion higher than its competitor, Regus.  This despite the fact that WeWork’s revenue is nearly 50% less than Regus.  So, maybe that’ll temper your “click, whirr” response. 

Newness and scarcity definitely create an itch, but in the case of the private equity market it’s possible it’s creating overvaluation as well.  In sales there is an expression, “People don’t buy the steak, they buy the sizzle.”  Private equity markets definitely produce some sizzle, but beware, the meat may be rancid. 

Thanks for reading,

Zach and Dave

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