Can Good Looks Really Guarantee a Product's Success?

The New York Times, "Economic Scene" , July 12, 2001

Last week brought bad news for people who like their products with at least as much style as substance. Apple Computer said it was canceling its beautiful Power Mac G4 Cube, barely a year after it introduced the machine it called "the coolest computer ever."

The cancellation was not a big surprise. Despite minor price cuts, the tiny, elegant computer had not been selling well. In February, Apple acknowledged that demand for the Cube had only been a third of projections.

People who could pay Cube-level prices, which easily topped $3,000 with a matching flat-screen display, memory upgrades and a warranty, tended to go for Apple's G4 towers, which are less glamorous but more powerful and easier to customize.

When Apple introduced the Cube, one observer called the machine "a test of the aesthetic revolution in computing" ignited by the success of the iMac.

What does its demise teach us about the economic value of good looks? Not much, actually. A single product from a single company, with particular management strengths and weaknesses, can't prove anything definite about the value of any given characteristic, including aesthetics.

But the Cube's story does raise interesting questions. Lately, everybody from industrial designers to city planners claims to be looking after our aesthetic interests, and there is ample anecdotal evidence that, on the margin, people do put a higher premium on the look and feel of things than they once did. That is to be expected as society grows richer. But aesthetics is not the only value -- trade-offs must be made -- and aesthetic value is hard to measure. What is "it," after all? Aesthetics doesn't come in neat units like microprocessor speed, calories, or tons of steel. Style is qualitative.

The value of qualitative improvements poses tricky problems for economists. It is a major challenge to tease out how much consumers value each individual attribute that comes bundled in a given good or service. If you pay $2.99 for a toothbrush, how much of that is for the cleaning ability? How much for the feel of the handle? How much for the durability? How much for the packaging? How much for the convenient distribution to your corner drugstore? How much for the color?

Economists use statistical techniques called "hedonic pricing" to try to separate the implicit prices of various characteristics. Essentially, they look at how prices go up or down as features are added or subtracted and try to figure out how consumers value the individual features. How much will consumers pay for an extra megahertz of computing speed, for instance?

Hedonic pricing calculations are extremely difficult because a lot of feature combinations are never tried, feature prices do not necessarily go up in a simple formula, and not every company uses the same pricing strategies.

Even more important, not every characteristic is as easily measured as megahertz. The trickier the measurement, the more difficult the problem. For aesthetics, economists generally don't even try. It's just too hard. How do you account for the restaurant decor or subtle enhancements in the taste of the food? How do you measure the increased value of a typeset resume, memo or client newsletter -- the result of ubiquitous word processors -- over an old-fashioned typed document?

That sort of detail is simply lost in crude economic statistics.

Many product characteristics -- from convenience to snob appeal to aesthetics -- are hard to quantify and so tend to be undercounted. The result is that the standard of living can change for the better without much notice.

That is especially likely if products improve without becoming more expensive. Consumers are happier, but if they aren't spending more money, no revenue increase shows up in the productivity statistics. This isn't unusual in competitive markets. Shopping malls redecorate, and newspapers adopt color printing just to keep up with the competition. They aren't able to charge more. They are just able to stay in business.

When thinking about new products, producers face two challenges. First, they need to offer something whose value to the consumer is greater than its cost to produce and distribute. Increasing the surplus of value minus cost is where both higher living standards and higher profits come from. It is the measure of real economic improvement. The second challenge is, of course, to price the offering to maximize profit.

This brings us back to the Cube and the "aesthetic revolution in computing." Managers observed that computer buyers now value style: Look at the iMac. Look at the Sony Vaio. As a general matter, aesthetics sells, not just in computers but in other goods and services. But "as a general matter" obscures all the specifics that make or break a product: What exact design will you use? How will you manufacture it? What will you charge? And, given those decisions, how will customers respond?

The answers can't be found through a blackboard exercise. Price theory is a useful tool, but we can't know in advance how much people will value the characteristics of a product they haven't yet seen or compared with real alternatives. Even market research, while helpful, cannot duplicate real-life choices. Although we all have fun predicting and second-guessing business ideas, the only way to find out is through trial and error. Market competition is a discovery process that subjects business hypotheses to unsentimental testing.

Some managers are better than others at identifying promising new sources of value, and some companies are better than others at operations and pricing -- the skills that determine whether a product that consumers do value will in fact be profitable. Market competition tests these theories and skills. And, like all competitions, this one has its failures, some of them beautiful.

Not every attempt at improvement works out. Sometimes value does not exceed cost. Sometimes it does, but managers fall in love with their product, price it too high and drive away potential customers. Sometimes the coolest of the cool just can't survive the heat. With 20/20 hindsight, it is easy to see that the pricey Cube was doomed. But nobody knew that a year ago.