Bad (price) signaling

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There’s business, and there are noble pursuits, and sometimes they overlap.

In the case of Stephon Marbury, the overlap was about sneakers.

More specifically, basketball shoes.

You see, Stephon Marbury was an all-star NBA player. Long before he made millions in the NBA, he grew up with very humble means. He grew up idolizing Michael Jordan, but his mom couldn’t afford to buy him Jordan’s sneakers.

Steph wanted to give kids like him, and moms like his, the opportunity to have great basketball gear.

There was a simple answer: charge less.

Steph had the concept in mind for a while, and eventually met like-minded retailers who wanted to sell shoes and clothing for less than $15 apiece.

When they announced the “Starbury” line – which was Steph’s nickname – they were met with skepticism.

Can a $15 pair of sneakers be any good? Can they compete with Jordan’s line of shoes that retailed for nearly $200 at the time?

From the beginning, the Starbury sneaker had a price signaling problem.

Steph invited his critics to cut into and dissect the shoes, and challenged them to find the shoes inferior. Eventually people did, and they found that, surprisingly, the shoes were well-manufactured.

In fact, a Nike designer named Dewayne Edwards commented:

“It was better than I expected a $15 shoe to be.”

The Starbury line was obviously not competitive with Brand Jordan, just as Stephon Marbury was no Michael Jordan on the court.

The fate of the shoe was ultimately doomed by the price, but not for price signaling reasons. Instead, the razor-thin margin built into the model of selling a $15 sneaker meant no room for error in the business model.

As credit markets tightened in 2008, credit dried up and became more expensive, breaking the manufacturer of Starbury shoes and clothing.

The line was doomed, and eventually died a quiet death.

Here’s what I take away from the story:

  1. Price is a powerful signal, even though inexpensive items can be perfectly competitive with much more expensive ones
  2. You can’t create a premium product or brand with a budget price; premium requires people to pay for it, there’s no way around that
  3. Your price is an important branding mechanisms, and choosing budget means you’ll always be seen as a budget brand
  4. Competing on price makes you vulnerable to changing market conditions, and other macro factors outside of your control, which feels like a substantial, unnecessary, and self-inflicted risk

This story comes from the wonderful and highly recommended Planet Money podcast. You can listen to the episode here: https://www.npr.org/sections/money/2017/07/21/538621509/episode-785-the-starbury

-Liston

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