Why Do We Pay Hundreds for Shades that Cost $3 to Make?
Monday, June 22, 2009
Would you pay $300 for a product that costs $3 to make? Chances are, you already have. It turns out that those stylish designer sunglasses you paid hundreds of dollars for are actually made in factories in China for a fraction of the cost. We speak to Marketing Professor Dr. Lois Bitner Olson about what makes sunglasses a unique product, and why we are willing to pay so much money for something that is so cheap to make.
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DOUG MYRLAND (Guest Host): Well, in these recessionary times, you may be thinking about spending less on fashionable items, but the allure of some of those items is still strong. Our next guest is Dr. Lois Olson, a marketing professor at San Diego State, and she knows a lot about designer sunglasses and why we want them. Dr. Olson, welcome.
DR. LOIS OLSON (Marketing Professor, San Diego State University): Thank you.
MYRLAND: Now you just came back from a trip to China with fourteen lucky students. And so you've been visiting places where items like these designer sunglasses are manufactured.
DR. OLSON: Yes.
MYRLAND: Can you tell us a little bit about the manufacturing versus the marketing?
DR. OLSON: Well, the manufacturing, the facilities are pretty primitive. Students were quite amazed to see exactly what goes on there and in many cases the factory workers actually just live in this really sort of ramshackle factory. But you'll see several production lines and running down them are sunglasses that are going to end up at Target for $6.99 and sunglasses that are going to end up at Nordstrom or Saks that are designer sunglasses for $250.00. And they cost pretty much the same amount to make.
MYRLAND: I understand that there is a little cost differential between polarized lenses and regular lenses, right?
DR. OLSON: Yes, but it's a very, very small differential. I've heard numbers as low as 17 cents for polarized. And when you kind of extrapolate that into what it shows up to be in the marketplace, it's quite a significant different. It's interesting though because people kind of rationalize buying sunglasses even when they're buying really designer, sexy sunglasses, they're kind of rationalizing, well, it's my eyes, I must take care of them. I have to spend the money, it's worth it. I'll pay for the polarization. If they knew how cheap it was to make the extra polarization, they might be a little surprised.
MYRLAND: Now we could be talking about almost any fashion item. There's a big markup on a lot of fashionable items. But other than the fact that there's a quasi-medical reason here because it's your eyes, is there something about the glasses being on your face that make them more important?
DR. OLSON: I think so. Certainly, sneakers have a lot of value, jeans have a lot of value, but if you think about when someone walks up to you, they've got their sunglasses on their nose, they've got their sunglasses on top of their head, it's almost like the very first thing that we meet. When you look at someone, you typically look straight at their eyes and so it really is kind of like a calling card, and here I am with my Chanels, here I am with my Ray-Bans or whatever particular brand it is and it's kind of putting us into a category: This is who I am.
MYRLAND: Now you work with a lot of college students who are very fashion conscious in their own way. Is this awareness of brand and image, is it unique to younger people? Or do people of all ages have this kind of connection to fashion items?
DR. OLSON: People of all ages do, especially among Americans, and in many other cultures as well. Actually, in some cultures, in Japan it's much more pronounced than it is here. But younger people tend to, to a lot larger degree, because they don't want to be a social outcast. Generally, people between the ages of 35 and 54 are a little bit less affected by it, maybe because they're too busy, maybe because they have confidence in what they've already bought. But the kids starting, I would say, probably – we used to say starting at 15, that's now sort of starting at 12, they're very much kind of encapsulated by what brand they're wearing and they don't want to be out of the group.
MYRLAND: Now as a marketing professor, you must know or be able to tell us how this information travels because it's not something that everybody is tuned into. I mean, I know I'm tone deaf when it comes to a brand of sunglasses. If I see someone wearing sunglasses, I couldn't tell you if they're $300.00 or $3.00. So what circles do I have to run in or what magazines do I have to read in order to be sensitized to the differences?
DR. OLSON: Well, it – a lot of those are also magazines and all kinds of media channels that are addressing younger people. Certainly a lot of online social networking has made some of the stuff even more popular. If you're not reading fashion magazines, if you're not reading entertainment magazines you probably won't be as aware of it. You're not going to find designer sunglasses in Popular Mechanics. But if you are in that social milieu believe me, you will know. I'm amazed sometimes at how 14 year olds will know that someone's wearing a $300.00 pair of sunglasses.
MYRLAND: How long does this cachet last? If I buy a pair of $300.00 sunglasses and impress all my friends today, how much time is going to have to go by before they're no longer impressed and they expect me to buy a different pair?
DR. OLSON: Sometimes people will buy another pair. An interesting thing that we've discovered is that the people will – they know they're going to lose them or they're going to break them, sit on them or something, and so if they see another pair that they kind of like and they can afford it, they'll sometimes have a pair waiting in the wings in the event that they lose one. But the pair that you've got will last for awhile. Again, it's kind of like your business card or your calling card. They know that someone has got a really cool pair of, you know, a really cool pair of Chanels or a really cool pair of Dolce & Gabbana, and so that's – that's very nice.
MYRLAND: Now you've been focusing on sunglasses but you've also studied other products that are…
DR. OLSON: Right.
MYRLAND: …manufactured in China. Are there some other ones that are similar to the sunglasses that are actually being distributed to different outlets at wildly different prices but coming off the same line?
DR. OLSON: There are some. I think sunglasses are probably the most definitive in terms of really, really low manufacturing cost and extremely varied. Again, all the way from something like seven dollars to $250.00. Certainly, you can look at shoes, you can look at a lot of just designer clothes and tee shirts. There, there can be a fairly large range. But few of them have quite as much of a spread in terms of what the price is as sunglasses do.
MYRLAND: Now you've been thinking about this for awhile and you're actually working on a book about manufacturing in China. Do you think that this is strictly a late 20th century phenomenon, this desire to own this fashionable item no matter what the markup? Or does the market eventually have some logic to it and there become more price competition and does this shake out in a different way?
DR. OLSON: Well, it'd be interesting to see what sort of the transparency of the internet, what affect that has on, you know, the cost of things because, increasingly, we can kind of go online and find out what things are worth, how much people will pay, how much it costs to manufacture. But, overall, it is something that especially younger people and Californians, to a large extent, are very aware of what brands are and what you're wearing and I don't think it's going to go away completely. It may shift categories from time to time but probably for the last 200 years, there's always been some product category that people are very interested in what the particular brand is.
MYRLAND: And is it fair to say that they don't even care that there's a huge markup? That they're paying an extraordinary profit to somebody that – that it's really more important to own that brand than it is to be economically wise?
DR. OLSON: I think so. I think there – It's kind of interesting because there's some product categories where people are very price competitive.
MYRLAND: Is there any logic to it?
DR. OLSON: No, there's no logic to it, and that's marketing. That's essentially what we teach. Sometimes I'm kind of embarrassed by the fact that this is actually really good marketing if they can produce a product for that low of a price and people are willing to pay it. In certain product categories, they simply will pay it. It's always interesting when I'm teaching pricing theory in class and we go through the whole pricing mechanism and then I reveal to them this is the price for sunglasses, and you can sort of see people's – students' faces. They're just kind of shocked. Like, oh, my gosh, I just paid $250.00, I just paid $200.00 for these sunglasses. And then there's almost a sort of denial. They kind of wipe it out of their mind like, but I really like my sunglasses, I don't – I don't want to know this. I really don't care. And to a large degree, that's good marketing.
MYRLAND: Now there is a quality difference among sunglasses.
DR. OLSON: Right.
MYRLAND: You can go to the discount store and you can take them off the rack and you can feel that they're…
DR. OLSON: Right.
MYRLAND: …lightweight and they're flimsy. Or you can go to an optician and you can buy a pair that clearly have more heft to them.
DR. OLSON: Right.
MYRLAND: Is part of that built into the price? Or are you saying that despite the quality differences, the price is still outrageously different than the manufacturing cost?
DR. OLSON: It's – The price is still outrageously different. There is some difference and when we say that, short of basically—and this is one of the people who owned a factory, a sunglass factory in China, said to me, unless there's gold, silver or they're made out of real tortoiseshell, basically none of them cost more than three dollars to make. That means that some of the ones you're buying for $6.99 or a pair that you might be buying for your child for, you know, $2.99, those might be costing twenty-five cents to make, They are really, really inexpensive. Total markup, you know, on those versus the ones that are $3.00 being extrapolated to $150.00. Those have a higher margin but most of them are still really inexpensive.
MYRLAND: So what's the lesson here for your college students in your marketing class? How do they apply this inelastic price theory to the rest of their career, to selling automobiles or houses or some other consumer good?
DR. OLSON: Hey, that's very good. You understood there was pricing elasticity. Actually, one of the things that we try to teach them is what is price sensitivity? And I always say to them, for instance, how price sensitive are you to a textbook? They complain like crazy if a textbook costs a hundred dollars. But they don't complain when a pair of sunglasses costs $250.00. And that's sort of the starting point of, okay, what is it that it takes to build the brand? What is it that it takes to make an identity? What is the difference when you're buying, you know, writable CDs that are almost a commodity, a textbook, which is a required product, or those sunglasses that you just have to have? That's really the cachet of marketing, to be able to get people to want those sunglasses so badly they don't care that they're $250.00.
MYRLAND: Now the conventional wisdom is that the older we get, the less susceptible we are to change our minds. So your college students are open to new ideas, open to marketing, whereas people my age, even if I know that there's a certain brand that I used to like 20 years ago, I'm more likely to buy that brand even despite lots of marketing by somebody else. Is that true anymore or has the internet and the new ways we communicate with each other changed some of those ideas and those – that conventional wisdom about people in different age groups?
DR. OLSON: It is still true to a very large extent that as you get a little bit older, you kind of buy through habit, and I don't mean habit in a negative way. It's just – it's easier. You don't have to go through the whole process of making a decision, so you buy what's comfortable, you buy what you know, you buy what you can count on. However, again, with the internet and people being able to figure out what prices are – The other two things that are – or other two institutions that make a difference in this actually are Costco and Walmart. Costco and Walmart have taught us how cheap things are and we go in and we buy 54 rolls of toilet paper for some ridiculously low price and we come to realize, wow, why does it cost so much more someplace else? So all of these things together have begun to sort of tackle people thinking about what price is. Again, there are still some product categories where they just don't care. That's their special – They need sunglasses, or I know one of my own children, when he was a young teenager, it was sneakers. He didn't care what the price was, he had to have the right pair of sneakers. He's kind of outgrown that at this point in time. Shoes are still important but not to the same degree. So we're getting a little bit more knowledge about it, and I think some of it may go away but there will always be a few product categories where people just want the brand they want and they don't care what the price is.
MYRLAND: In the couple of minutes we have left, tell me, other than this almost peer-to-peer kind of thing going on where it's reinforced, how do new brands reinforce their image against brands that in some cases have been established for a hundred years in this culture?
DR. OLSON: It's not easy because we have so many brands that have locked in on certain things. I mean, imagine if you were a brand new cola trying to penetrate the market up against Coke and Pepsi. That's a pretty tough thing to do. But in some markets where there are multiple brands, some that have larger market shares, some that have slightly smaller market shares, there are some pretty creative ways to do it. In fact, if many people knew exactly how some companies are using the internet and they're doing some really pretty creative viral marketing. We even have, for instance, students on campus, certain students get paid by a company to be a spokesperson. And no one really knows that they're doing that and they just talk about a product. Then you also do things like you include products, you know, product placement has become a very big issue. You get someone in a television show, you get someone in a movie to use the product. That has gotten to be a lot more expensive than it used to be. It used to be pretty inexpensive to do that but because they know that's a very powerful tool, if they see a television star or a movie star using a product just as if that's part of their normal way of living, that's a very – a very strong motivation to get people to pay attention to something new.
MYRLAND: And even though most of us know that it's product placement and…
DR. OLSON: Umm-hmm.
MYRLAND: …I went to see the Star Trek movie a while ago and there was some product, I forget what it was, in the movie and I heard two or three people yell out, product placement. And it still has an effect even though they know it's…
DR. OLSON: It does, it really does. It's very interesting. Starbucks is a company that has really not advertised very much at all. They have, early on, realized the power of product placement and they've – in some cases, they've just been incorporated into movies because Starbucks is such a part of life in America. Some places they've actually paid a lot of money and it has tremendous ability. Even when they enter a new foreign market, people know about Starbucks before it's even gotten there because it's been in the movie.
MYRLAND: Well, Dr. Lois Olson, thanks for joining us and, you know, I'll never look at a pair of sunglasses quite the same again. Dr. Lois Olson is a marketing professor at San Diego State. You're listening to These Days on KPBS.
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