BUBBLE ECONOMICS

Beverly Sibanda and Morgan Tsvangirai - Popular Brands Beverly Sibanda and Morgan Tsvangirai - Popular Brands

From Poles to Politics and Stock Markets; time to become Radically Mathematic about Brand Ideology!

Every brand loves to bubble in front of its consumers, doing the 630 or Zip it up dance on the stage of its market; until it bursts, losing its social equity and brand potency.

When the viability or the credibility of a brand is found wanting, we must assess BUBBLE ECONOMICS.

The application of financial and economic theories is as potently relevant in Brand Ideology as it is in brand development.

In stock markets, bubbles are periods investors enjoy as a counter experiences a dramatic increase in price from its perspective trading, though not necessarily actually operating trading.

Sometimes what a brand or leader could do yesterday bringing dramatic results, may not be possible today as the potency of the same has burst as a stock market share price.

Ability to make crowds stand in awe and consumptive following as a brand supplies the demand on its bubble, is no guarantee that choice will remain the same.

A brand crumbles or loses potency when its owners have, from conception, not studied the economics of Bubbles that incorporate the Basis of Bubbles, Greater Fool Theory, Herding Behaviour, and Moral Hazards.

The greatest remedy to avoid a terrible burst of the bubble is the development, at conception, a good Popularity Management and Penetration strategy.

Basics of Bubbles

Wikipedia.org says that an economic bubble (sometimes referred to as a speculative bubble, a market bubble, a price bubble, a financial bubble, a speculative mania or a balloon) is "trade in high volumes at prices that are considerably at variance with intrinsic values".

It could also be described as a situation in which asset prices appear to be based on implausible or inconsistent views about the future.

In finance, intrinsic value refers to the value of a company, stock, currency or product determined through fundamental analysis without reference to its market value.

It is also frequently called fundamental value. It is ordinarily calculated by summing the discounted future income generated by the asset to obtain the present value.

Greater Fool Theory

The fool will always follow what “seems” to be the right brand or leader, until the bubble bursts, and crises begin.

Popular among laymen but not fully confirmed by empirical research, greater fool theory portrays bubbles as driven by the behaviour of a perennially optimistic market participants (the fools) who buy overvalued assets in anticipation of selling it to other speculators (the greater fools) at a much higher price.

According to this unsupported explanation, the bubbles continue as long as the fools can find greater fools to pay up for the overvalued asset.

The bubbles will end only when the greater fool becomes the greatest fool who pays the top price for the overvalued asset and can no longer find another buyer to pay for it at a higher price.

Herding Behaviour

Just as the Serengeti Wildebeests jump into the crocodile infested rivers without thought, often many consumers consume brands just because others are consuming them, only to review their consumption after the crocodile has removed a limb or two.

Another related explanation used in behavioural finance lies in herd behaviour, the fact that investors tend to buy or sell in the direction of the market trend.

This is sometimes helped by technical analysis that tries precisely to detect those trends and follow them, which creates a self-fulfilling prophecy.

Taking a conservative or contrarian position as a bubble builds results in performance unfavourable to peers.

This may cause customers to go elsewhere and can affect the investment manager's own employment or compensation.

In attempting to maximize returns for clients and maintain their employment, they may rationally participate in a bubble they believe to be forming, as the risks of not doing so outweigh the benefits.

As the bubbling happens consumers of the brand, due to desperation or greed, have no choice but to go with the brand, until the burst.

After the burst, no matter how the shakeable the shakeables are, the profit margins or market share will still continue to dwindle.

Extrapolation of Brands

Extrapolation is projecting historical data into the future on the same basis; if prices have risen at a certain rate in the past, they will continue to rise at that rate forever.

The argument is that investors tend to extrapolate past extraordinary returns on investment of certain assets into the future, causing them to overbid those risky assets in order to attempt to continue to capture those same rates of return.

Overbidding on certain assets will at some point result in uneconomic rates of return for investors; only then the asset price deflation will begin.

When investors feel that they are no longer well compensated for holding those risky assets, they will start to demand higher rates of return on their investments.

Penetration and Popularity Management

Every bubble bursts, but it is up to the Penetration and Popularity Management strategies that will determine the brand’s going concern.

A brand must have a strategy that manages the life within the bubbling period and after a bubble has burst an insurance policy as it were.

As is in insurance, a Penetration and Popularity Management strategy safeguards from loss and restores the insured entity to reasonable operating levels in case of a burst of the bubble.

Managing bubbles begin right from the brand’s penetration; how the brand entered and exited in specific audiences as it traded.

A deliberated strategy ensures a victorious market journey for the brand, making sure that what must be considered is considered to avoid loss when the bubble burst.

Concluding Remarks

 

Thought must go into the development of an all-weather brand, able to maintain market leadership coupled with profitability; that coming from understanding Bubble Economics in order to have a solid Strategy.

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