Prices, Zombies and the Advertising-Consumption Cycle

Welcome to another installment of my Understanding the Consumer Products Industry series, where I'm leveling the informational playing field between consumers and the companies that sell us stuff. Today we return to the subject of price drivers.
Recall the three key drivers of prices in the world of retail:

1) Barriers to competition
2) Input costs
3) Current inventory levels

We've already talked about barriers to competition. Today we'll cover input costs, and we'll draw a few compelling conclusions about the modern consumer products industry that, with any luck, will help you get far more value for your money.

Input Costs
If you think about it, there's an entire stack of costs involved in getting a basic item like a box of Oreos into the hands of a consumer. There are ingredient costs, processing costs, packaging and transport costs, marketing and advertising costs, and so on. All else equal, if a company wants to make money on the goods it sells, then the retail cost of Oreos must be the sum of all the various costs in that cost stack, plus a profit margin.

Therefore, the more you can tilt your purchases away from products with large cost stacks, the more value you'll get for your consumer spending dollars.

Of course, long-time CK readers (especially those who have read my essay Stacked Costs and Second-Order Foods) will consider this a borderline obvious conclusion. In today's post, however, I'm going to use that conclusion as a starting point, because it helps us arrive at an important insight.

But before I can get to that insight, let me ask a question: What is, by far, the single biggest cost in the cost stack of most consumer products?

It's advertising and marketing.

In fact, almost all major consumer products companies use a laughably simple, three-step business model centered around advertising:

1) Spend lots of money blasting consumers with repeated advertising and branding messages,
2) When those consumers shuffle mindlessly and zombie-like to the store to buy those products, charge them a premium price.
3) Then, take those premium-price proceeds straight to the bank.

Some of the most successful and long-lived companies in modern economic history (Proctor & Gamble, Colgate-Palmolive, Clorox, General Mills, Kellogg, Pepsi, Coca-Cola, Unilever Corp., etc.) use this business model.

The bottom line? This business model works--and it works extremely well.

Here's another example of how well it works: During my career on Wall Street, I watched the profitability metrics of the world's best technology companies fluctuate massively (and sometimes horrifically) with business and technology cycles. But companies like Pepsi and Proctor? They earn operating profits in the 18-22% range consistently, regardless. Recession, depression, boom, bust--it didn't matter. They earn these profits like clockwork.

(Two quick tangential comments here: 1) for those readers who tuned out at the words "operating margins," please just take my word for it, 18-22% margins are really juicy, especially if they're recession-resistant; and 2) for those readers with a predilection for the stock market, understand that this also explains why consumer products stocks are awesome to own during an economic slowdown).

Handwringing Is Not Permitted
Now, I refuse to let this discussion devolve into a "companies are evil" handwringathon. Companies aren't evil. They merely sell us what we consent to buy, and this advertising-based business model works for one reason and one reason only: because we as consumers make it work.

If you think this unattractive market arrangement is purely the fault of greedy fat-cat companies, then you must also assume humans have no alternatives for the expensive, branded products they buy (which in almost all cases they clearly do), and that they also have little free will to seek out and seize those alternatives. Despite the semi-facetious title of this post, most human beings are not zombies.

(That being said, if you happen to be in line at your local grocery store, and you hear someone behind you moan "braaaiiinnnns!" you should probably run. That could be a real zombie.)

Okay. Here's my point. Now that we're totally familiar with this simplistic business model, we know everything. We know that consumer products companies are going to play a predictable role in the marketplace--they are going to run lots of ads and spend lots of money on branding, and they're going to sell us products at prices high enough to earn them generous profits, even after taking into account all the money spent on advertising and branding.

We also know that we as consumers are the most important piece of this puzzle. Why? Because we can respond by doing one of two things:

1) We can complete the cycle by responding passively to advertising and then paying extra for products offering dubious value,


2) We can break the cycle.

And that's why in this post I'm advocating an entirely new philosophy of consumption: When you see products advertised, don't act out in standard zombie behavior and passively ingest the message of the ad. Instead, develop the instinctive reaction to avoid those products. In short, make it so those ads make you not want to buy.

When you see an ad on national TV or hear a product jingle played on the radio, think of the enormous cost of that ad. Think of yourself paying for that ad (which, if you think about it, is exactly what you do if you buy that product).

When you see a product or company sponsoring a major sporting event, or buying naming rights for a stadium, think how much that sponsorship deal costs. Then, imagine that money coming directly out of your wallet when you buy that company's products.

Before long, you'll start to see heavily advertised products as destroyers of consumer value. You'll have no problem instinctively avoiding them, and instead you'll instinctively seek out lower-priced and equally useful substitutes. Further, you can apply this thinking to all the products you buy, including clothes, entertainment, and even big-ticket items like vacations, cars, furniture and appliances. You don't have to limit these ideas to your grocery or drug store.

How many consumer items do you buy that are heavily advertised? Are you receiving appropriate value in return? Ask yourself these questions and you will extract far more value for every dollar you spend.

Help support Casual Kitchen by buying Jules Clancy's exceptional new e-cookbook 5 Ingredients, 10 Minutes (see my rabidly positive review here). Or, support CK by buying Everett Bogue's revolutionary book The Art of Being Minimalist. (These are both affiliate links, so if you decide to make a purchase, you'll help fund all of the free content here at CK!

Related Posts:
How to Give Away Your Power By Being a Biased Consumer
If It's So Cheap to Cook at Home, Then Why is My Grocery Bill So Huge?
Does Healthy Eating Really Cost Too Much? A Blogger Roundtable
Survivor Bias: Why "Big Food" Isn't Quite As Evil As You Think It Is

How can I support Casual Kitchen?
If you enjoy reading Casual Kitchen, tell a friend and spread the word! You can also support me by purchasing items from via links on this site, or by linking to me or subscribing to my RSS feed. Finally, you can consider submitting this article, or any other article you particularly enjoyed here, to bookmarking sites like, digg or stumbleupon. Thank you for your support!


Jonathan said...

Great post! I first understood this principle when I worked as a temp for a luxury goods retailer. They spent lots of time (and therefore staff costs) planning parties for their public relations, parties to which I would not be invited. So why should I buy their watches, when the cost stack for watches includes hundreds of parties I wouldn't attend?

Stuart Carter said...

I am heading towards being a much more deliberate consumer. I want to know what I am eating, what I am buying, and can I source it better and more locally. I would rather put the money into the hands of the farmer than into the hands of "food engineers", marketers, and grocery stores.
That's why I find myself actively resenting the cost of 2nd and 3rd order foods - I know how little it costs to make a batch of cookies, why does a pack cost $4?!!?

chacha1 said...

I'm trying to think if I do regularly buy anything that is heavily advertised. The problem is I may just not KNOW if something is - because I subscribe to few magazines and watch little-to-no daytime television. Primetime ads tend not to be for products available in grocery stores.

I do agree with you, Dan (as I often do) that heavy advertising generally makes me NOT want to buy something. Especially if the ads are overtly stupid, condescending, or misleading. Which, unfortunately, many of them are.

Barbara @ VinoLuciStyle said...

Nice post and some great information. I've been advocating 'non' brand names for a long time; chalk it up to necessity from years of single parenting and having to really stretch every dollar. I had never read an informative article like yours but I knew that buying a non name brand equated to spending less; and in my case, purchasing local and making my own helped even more.

I know people that spend an inordinate amount of time 'couponing' when I don't bother; they think me nuts but I ALWAYS get a can of green beans at a reduced price!

I'm certain that one main reason I'm not often swayed by advertising campaigns can be summed up in one word. TIVO. Saves me time and money it seems!

Daniel said...

Happy to see such a positive reaction from readers so far. No offended zombies either.

By the way, this anti-advertising philosophy all started during the early years of my career as a stock analyst. I remember seeing for the first time the stable, consistent and substantial profitability of almost all major consumer products companies, and it became painfully clear to me that this business model works well--perhaps too well.

I'm working on a post in that will run in the next month (I hope) that talks more deeply about how thinking about these companies from an investor's standpoint can really lay bare a lot of the ways consumers get separated from their money.

Finally, I'm curious if any readers want to step up and tell me where there might be holes or gaps in my thinking here. Who wants to volunteer? :)