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Why companies make their products worse

Why companies make their products worse

And why that’s a good thing for their customers. Richard Davies explains

And why that’s a good thing for their customers. Richard Davies explains

Richard Davies | September 15th 2016

There is much about computing to make the blood boil – the badly timed crashes and the endless software updates are frustrating. Yet most annoying of all is the fact that some products seem needlessly bad. Anyone setting up a home office, for example, will find that Microsoft has made the cheap version of its software worse by stripping away its email tool, Outlook. New versions of free-to-download apps can be slower and clunkier as they bombard the user with ever more adverts. These frustrations are all by design: microeconomics explains why, in the digital economy, firms work hard to make their products worse.

For many companies price and quality move in sync. Take guitars. A top of the range Martin or Gibson starts at around $3,000 and will be made from solid wood, in America. Cut the cost of the inputs (use plywood instead of spruce) or the labour (make it in Mexico) and you lower quality but can sell at a lower price (from $500). This natural relationship means there are a range of qualities and prices and allows the firm to serve various different customer types. 

In the world of tech, budget options arise from a more disturbing process – product sabotage, otherwise known as “crimping”. Take printers. In the late 1980s IBM’s LaserPrinter, retailing at $2,395, printed ten pages per minute. In 1990 it launched the LaserPrinter E. At $1,495 the economy model offered a big discount and printed at half the speed of its pricier sibling. But the new printer was not made using cheaper parts, or assembled by workers on lower wages. In fact it was just the original printer with extra inputs: microchips has been added to slow it down. IBM had not designed a low-cost printer, they had spent time and money making their original product worse. 

The roots of this bizarre behaviour lie in a headache all firms face: how to set prices. If a firm knew its customers’ income and willingness to pay it could tailor prices carefully to extract the maximum profit from each punter. Sometimes obvious signals help tailor prices. Since full-time study is likely to be correlated with low incomes, newspapers and magazines offer a student discount. And since flying between London and New York and back midweek suggests a business trip, carriers charge more for this than for a trip including a weekend. But often there is no easy way to distinguish between your customers, so the bargain hunter and the high roller (who could afford much more) get charged the same price.

This is where product sabotage helps. The reason was first spotted by Jules Dupuit, a French engineer, in 1849. French railways offered three classes of travel with the lowest tier pretty rough: the carriages had no roofs, and the seats were wooden benches with no covers. Surely, people complained, the discomfort was unnecessary. Dupuit pointed out the value in the inconvenience: by making third class really bad, only the truly threadbare would use it. Those with a little more cash would reveal their preference for comfort and stump up for a second-class ticket. 

Today Eurostar offers a ticket that uses Dupuit’s logic. It offers ultra-cheap tickets that do not specify the time of travel (this is revealed two days before the trip takes place). Adding uncertainty to a traveller’s itinerary is a reduction in quality. But it is useful because it forces business travellers – who must be in London or Paris at a specific time – away from this bargain option.

It might seem like product sabotage should be banned. But as research by Preston McAfee – now chief economist at Microsoft – has shown, it can make customers better off. The key test is whether the practice means more goods are sold. Suppose the French had regulated trains so that all carriages had roofs. All those in second class might have switched to third class, potentially rendering both uneconomical to provide. Altering quality, even if that means damaging goods, can make total supply rise. So the fact that apps are rammed with annoying adverts is actually a sign of good economics. If that is little comfort, perhaps it is time for an upgrade.

7 Readers' comments

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j238 - April 4th 2017

The conclusion is that this is "good economics." Actually, it all seems like an awful market distortion allowed by a lack of competition.

JSeely - September 26th 2016

There's even more nuance here in the world of chips. One of the major components of a chip's cost is testing. One of the criteria for different chips is speed. But the standard method is to test a chip at the top speed first, then if it fails, drop the speed and test again, if it fails, drop the speed again and test. So by this logic the *slower* chips should be more expensive because they spent more time on the expensive test equipment. But obviously no one is going to pay $100 to get a 1GHz chip if they can get a 2GHz chip for $50. The problem, however, is the speed-yield is an unknown quantity. So in some cases, based on customer demand, you'll package a "fast chip" as a "slow chip" just because there is more demand for these lower-cost devices.

srlevine1 - September 16th 2016

This is nothing new with IBM. I remember the first line printer (IBM 5211) we ordered with the IBM System/34. You had your choice of 150 LPM (Lines Per Minute) or 300 LPM for an additional cost (and increased maintenance cost). When we ordered the upgrade from 150 LPM to 300 LPM, all the customer engineer did was change the position of a belt on a spindle and we were upgraded.

dadpolice - September 16th 2016

cweiriit, you're almost right, but not quite. The examples you give are accurate, but these aren't relics of the past. They are incredibly common strategies that chip makers still use today. However, it's not really a relevant example to the article. They are not making their products worse. They are finding ways to turn defective products, products that would otherwise go to waste, into usable products. Instead of throwing away a defective dual-core chip, they just disable the defective core and sell it as a cheaper, slower, single-core chip. In fact, virtually any processor you buy today with an uneven number of cores is likely a cut down version of a better chip. And as you say, they do the same thing with clock speed. But again, this isn't something cynical these companies do, it is just a basic part of the process. Manufacturing processors is not like manufacturing most products. They are not all identical, and they all can be stably clocked to different frequencies. Manufacturers test chips as they come off the line and sort them by how high of a clock speed they can handle. This is called "binning;" higher binned chips can run faster, thus are sold as high-end chips, and vice versa. Your last sentence is particularly wide of the mark. There was a time when chip makers actively fought against overclocking, believing it undermined sales of their high-end chips. But then they realized that most end users were not overclocking to save money, they were doing it as a hobby. Now manufacturers sell chips specifically marketed towards overclockers.

cweiriit - September 15th 2016

There was a time when Intel sold defective CPUs. It was, as I recall, in the time when dual-core CPUs were just entering the consumer market. If a processor had a defective core, Intel would disable that core and sell the CPU as a single-core CPU. That is a pretty brilliant strategy for offering a low-cost alternative to a high-quality product. Another strategy CPU manufacturers used at various times is underclocking. They'd manufacture a large number of high-end CPUs, then set some of them at a lower clock speed (slowing down the computational performance of the chip) and sell them as a cheaper model. That's more in-line with what you are describing. I believe they have mostly stopped this practice because it was fairly easy for a sophisticated end user to "overclock" these CPUs.

chunter - September 15th 2016

Its not good to waste resources making a product worse. If they were able to take an old printer and make it worse and it sold well, it was only because there wasn't alot of competition in that market. Competition takes capital and the freedom to create.

Randolf Fadul - September 15th 2016

Never thought formally about this, but pretty interesting indeed. Here (in Latin America), this is a pretty common way to operate a business, problem is that very few can pay for the premium option and so services improvements rarely get incorporated.