Planet Money - Summer School 2: Competition and the cheaper sneaker

Episode Date: July 19, 2023

For episode 2 of Planet Money Summer School, we are talking strategy. You have your million dollar business idea, and maybe some money in your pocket to get it up and running. But now you enter into a crowded market. You have to deal with competition. So, what can you do to make sure your product is a success? That was the conundrum facing the Starbury. It was a basketball shoe with a celebrity endorsement, that had to go up against THE basketball shoe with THE celebrity endorsement: the Air Jordan. Our first story is about the ways in which the Starbury succeeded and failed in taking on a juggernaut.Then, we will hear a story about trying to avoid the dangers of "perfect" competition. Two companies making almost identical handbells learn that the key to their success lies in convincing customers how different they really are.Find all episodes of Planet Money Summer School here.The series is hosted by Robert Smith and produced by Max Freedman. Our project manager is Julia Carney. This episode was edited by Keith Romer and engineered by Robert Rodriguez. The show is fact-checked by Sierra Juarez. Planet Money's executive producer is Alex Goldmark.Help support Planet Money and get bonus episodes by subscribing to Planet Money+ in Apple Podcasts or at plus.npr.org/planetmoney.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

This is Planet Money, from NPR. Welcome back to Planet Money Summer School, MBA edition. No uncomfortable suits, no boring PowerPoints, just the secrets of business school delivered straight to your brain. I'm Robert Smith, and this is lesson number two, competition and the cheaper sneaker. Every Wednesday till Labor Day, we are meeting here in your ears to learn the way that business masterminds think, just in case you want to be one or outsmart one. Plus, in every episode, we play two great planet money stories and talk to a

brilliant professor. Last week, we walked you through how small ideas become successful businesses. But there's often one thing standing in the way of success, the competition. You are not the only one selling a better mousetrap. How do you navigate a world where everyone is trying to be smarter and faster than you? Look, I just teach journalism at Columbia, so I'm going to need someone with a little more of the competitive spirit to help us out with this question. And I found just the person.

Dan Wong from Columbia Business School. Hey, Dan. Hi. Great to be here. You are a professor of strategy. I love to say it that way, strategy. That's also how I say it, too. As a professional. Yes, absolutely. You have to be here. You are a professor of strategy. I love to say it that way, strategy. That's also how I say it, too. As a professional.

Yes, absolutely. You have to say it. It is in the code of conduct. So Dan, we're going to hear two case studies today, and they both deal with this really tough question. How do I compete in a crowded marketplace when I have a lot of competitors trying to do similar things? That's a great

question. And this is precisely the kind of question that strategy addresses. And I would say that the answer to that question comes down to one word, and that's differentiation. In a business context, what does that actually mean? How do you make yourself different than another company? Oh, there's so many ways to differentiate. The two primary ways are based on quality and cost. Quality differentiation refers to creating a product or service that has some unique feature that you can't get anywhere else. It might be because it's more reliable. It might be because it's more convenient. And on price, is that just, I'm the cheapest thing out there, so buy a lot of me? Yeah. The idea is that the creator of a good or service might be able to do so incredibly efficiently. And the result of that is that you can sell that product or service at a low price. All right. So let's keep in mind differentiation as we listen to our two case studies today,

stories of entrepreneurs desperately trying to seem different while facing fierce competition. First up, how do you dunk on Michael Jordan? At least in the shoe business. Another basketball star is lending his name to a new sneaker. Stefan Marbury unveils his line of high tops at a low cost. His Starbury one basketball shoe will cost $14.98. Making them affordable for low-income families and kids. Is it really possible to have high quality at a low cost? The answer after the break.

Welcome back to Planet Money Summer School. Our first case study aired on Planet Money back in 2017. Host Kenny Malone tells the story of a basketball player, Stefan Marbury, and his dream of a cheaper sneaker. Listen for how he differentiates his product. When Stefan was born in 1977, basketball shoes were essentially just a piece of sports equipment,

like knee pads for your feet. The most iconic brand for decades was a shoe called the Chuck Taylor All-Star. They were basic, affordable shoes, canvas, rubber, nothing fancy. But when Stefan was eight years old, the sneaker game changed. In 1985, Nike released this commercial. There's Michael Jordan. He's soaring in slow motion through the air. Who says man was not meant to fly?

Air Jordan. It was the first Air Jordan sneaker, and it was beautiful. It looked like a sports car, white and black leather with streaks of red. Stores couldn't keep these things in stock. People were wearing them as shoes, not just as basketball shoes, and they cost a lot. The Air Jordan 1 retailed for $65. People were wearing them as shoes, not just as basketball shoes, and they cost a lot. The Air Jordan 1 retailed for $65. And then the next year, 1986, the Jordan 2 came out. It's all in the imagination.

Those cost even more, $100. The Jordan 4s cost $110. The Jordan 5s cost $125. Stefan was 13 years old when those Jordan 5s came out. He was living in Coney Island, Brooklyn, one of seven kids. His family didn't have a lot. And so when Stefan asked his mom for those shoes, she was not having it. I mean, my mother, if I asked my mother for a pair of shoes at that price,

the reply was, boy, those are groceries for the month. Why am I going to go spend that type of money for a pair of shoes? And you would say what? Because everybody else got them. Oh, yeah. You're not going to be the one that's going to have a pair. But it wasn't because she didn't want to buy them. It was because she couldn't buy them. Stefan says this planted a seed for him. He always wondered, couldn't there be another option here? Does a famous player's basketball shoe always have to be so expensive? Now, a lot of kids might think this, but Stephon got to do something about it because he grew up, he got very

good at basketball. And in 1996, he was drafted into the NBA. With the fourth pick, the Milwaukee Bucks select Stephon Marbury. The camera cuts to the whole Marbury family. They are freaking out. And pandemonium reigns backstage. Stephon Marbury is standing by now. Stephon joined the NBA. He became an NBA All-Star twice. And year after year, famous player after famous player

signed endorsement deals to sell shoes at ridiculously high prices. And Stefan doesn't remember the exact moment, but an idea started to form. And you can think of it this way. A sneaker is made up of foam and rubber and leather. And by attaching a famous basketball player's name, you get to charge more and kids go crazy for them. But could you use an endorsement to do the exact opposite? To take the same shoe of foam and rubber and leather and attach a famous basketball player's name but charge less and still have it be cool, still get the kind of buzz the Air Jordan got? In 2005, after he'd been in the NBA for almost a decade, Stefan finally met someone who could help him make this happen. A guy named Howard Schachter.

He's always talked about there has to be a different way. Well, we were the different way. Howard worked for a clothing company called Steve and Barry's, founded by a pair of Long Islanders named Steve and Barry. It was a relatively unknown chain that sold clothes at ridiculously low prices. And they said they were able to do this a couple of ways. For one, they cut out the middleman. They manufactured their own line of clothes in China. They took the smallest markup that they could possibly afford. They basically had no advertising budget. And then

they opened stores in struggling malls where they would ask for discounts or free space. This was the business model. But now Steve and Barry's wanted to get in to the athletic sneaker market. So word gets to Stefan that Steve and Barry's would like to meet with him. And his first thought, uh, who and who? I didn't know. I mean, I learned of them before the meeting and I was like, this is, you know, I got to see this for myself. So Stefan took this meeting and he remembers Stephen Berry's laying out their vision for the sneaker. They're going to call it the Starberry. That's been Stefan's nickname since high school. And they had brought some prototypes, plus some clothes that would be part of the Starberry line.

They start showing me and, you know, this is the stuff that we're making. The quality is really good. Da-da-da-da-da-da. And I'm saying, okay, cool. I was like, how much is all of that? How much? It was like $15. I was like, oh, you're going to make all of that stuff for $15?

Damn. And then it was like, no, we're going to sell all of this stuff. All this stuff you see is going to be $15 or less. I said, yeah, okay. Like, all you see is going to be $15 or less. I said, yeah, okay. He was like, all right. And they was like, no, serious, for real. On August 17th, 2006, the shoe dropped.

Another basketball star is lending his name to a new sneaker. Stefan Marbury unveils his line of high tops at a low cost. His Starbury won... The story was everywhere, and so was Stefan showing off this new sneaker. People seemed excited to see it, but over and over, the same question kept coming up. One question I might ask is, are you cutting corners at the production end? Because that's a sensitive issue. Not at all. Everybody thought, if this costs $15, it cannot possibly be a good basketball sneaker. On Good Morning America, Diane Sawyer was

worried about the bottom of the shoe. I was asking you, is this enough traction to play basketball in here? What the Starberry had was a price signaling problem. In the marketing and retail world, prices communicate so much information, especially in an aspirational market like athletics. So when you go out and you buy a new golf club for a little bit more money, you're hoping that that is going to buy you performance. Like maybe your drive will be 10 yards longer or something. And so pricing the Starberry at $14.98 had unintentionally signaled that this sneaker is crap. The fancy shoes are 10 times more money. Does that mean that they are 10 times better? Does that mean that the Starberry is 10 times worse? And what Stefan kept saying was if people would just try these things

out, they would see that these are not 10 times worse. Before we talked, I went on eBay. So these shoes are 10 years old. They're my size. I'm gonna put these through the ringer, man. I'm gonna play games on it. I might try to run a half marathon even though I haven't trained. My prediction is that they're gonna hold up.

You're gonna run a half marathon? I'm gonna try. You're good. Okay. You're good, baby. Go for it. Go for it. One mile. Two miles, three miles. Shoes good, baby. Go for it. Go for it. One mile.

Two miles. Three miles. Shoes kind of heavy. Don't breathe well. But not the problem. I am the problem. Okay, six miles. 6.55.

Oh, God. All right, fine, whatever. I did a half of a half marathon. Terrible idea. Shoes held up fine. But Howard Schachter from Stephen Berries says that both he and Stefan knew there was really only one test that ultimately mattered. Can an NBA player wear these $15 shoes in a real NBA game? It's very easy to rip a $15 anything.

Yeah. But if an NBA player can entrust their body to these, it's got to be good enough. It's got to be good enough. And then on November 1st, 2006, the day arrived. The first game of the season, New York Knicks versus the Memphis Grizzlies. There's Stephon wearing the black version of the Starberry, the version he wore for away games. Howard Schachter remembers watching this. Enormous pride.

Every time they showed him and you saw that logo, say, wow, we actually, this little company nobody ever heard of, we made it. We got this NBA star is wearing the sneaker we thought about on court. The game was going great. It was the third quarter. Stefan and the Knicks were leading by nine points. And then all of a sudden, I think Steph tripped or something. Oh, Stephon has turned his ankle.

He's asking to come out of the game. I'm thinking it better not been the shoe. Remember, he's playing in those reduced priced shoes. The wind is knocked out of me like, God forbid, the shoe ripped on court or it didn't hold the traction and he slipped and tore his knee or something. You know, it's done. Stefan goes over to the bench. The game goes on without him and somebody rushes over to look at his foot. And everyone is like, oh, my God, let's hope it wasn't the shoe's fault.

Like, do you know what I'm talking about? Probably. Stephon was totally fine. He'd gotten kicked in the shin or something. Came back into the game, and honestly, he doesn't even remember it. You know, it's part of basketball. For the entire season, Stephon Marbury wore a $15 sneaker. Sales of the Starberry took off. Stephen Burry's expanded the line beyond just the basketball sneaker. And in total, over the next

year and a half, they sold around 4 million pairs of Starberry sneakers. And Stefan, for his part, he earned around $8 million in royalties off of clothes and shoes. The experiment was a success. It had worked. That dream, it did not last forever. Because in 2008, the financial crisis hit. Howard Schachter says it hit Stephen Berries particularly hard. Retailers that work on thin margin rely heavily on the credit markets to give them a line of

credit in which to go out and buy inventory. But credit lines froze up and Stephen Berries filed for bankruptcy. Without the store, the $15 sneaker experiment was done. Without the store, the $15 sneaker experiment was done. Other things were also going badly for Stefan at this moment. His father had died tragically. His basketball team was struggling, and he was getting blamed for it. Plus, he wasn't young anymore. And so in 2009, he decided it was time to move on. Stefan left the NBA, and he left the Starbury sneaker experiment behind.

That was Planet Money's Kenny Malone in 2017. There is a coda to this story. Stefan Marbury had a second career playing in China, where he became a huge star again, and he even brought back the shoe for a while. But the idea of a brand-name sneaker at a generic price did not catch on. These days, if you want a Starbury, you'll need to buy them used. After the break, we will bring back our professor and talk about what we MBA students can learn from a $15 shoe. can learn from a $15 shoe. All right. All right, everybody, settle down. Take your seats. Class is back in session. And Professor Dan Wong has been taking notes. Dan, Stefan,

he took your advice. He tried to create something different, and he sold a decent amount of sneakers, but it never became an Air Jordan. It never really took off, and no one else has tried to do the same thing since. So what is the challenge here? You know, when it comes to differentiation, a lot of it has to do with making sure that all of your choices that you're making are aligned to the essential feature that's going to make you distinct. And what I would say happened with the Starberries was really a problem that I like to think of as being stuck in the middle. Stuck in the middle. Okay, so what does the middle space mean in business? Well, simply put, that means that a product or service is trying to be everything to everybody. And that's really hard to pull off. I don't know, Dan, it seems like maybe that would be great to have a product that is everything to everyone, that is both the most awesome thing in the world and also

the cheapest. Like that's a good product, it seems, but maybe a bad strategy. I think it's a bad strategy because you're not optimizing for any one distinct thing. And there are going to be competitors out there that do optimize for that one thing. And so Starburies are trying to have great brand power, and at the same time, they're trying to be incredibly affordable. But they're not going to be as affordable as the most affordable sneaker on the market, and they're not going to have the same level of brand power as, let's say, Jordans, which are obviously at the top of that status hierarchy.

The people who buy Jordans really care that they're incredibly highly priced. And the reason why is because that price contains information. People want others to know that they have spent their earnings on these Jordans. And because they have these Jordans, they occupy high status. on these Jordans. And because they have these Jordans, they occupy high status. That's a really important way in which Jordans differentiate themselves from other competitors on the market. So if you're stuck in the middle lane, you basically open up all these other lanes for your competitors to be like, hey, you know, we can do a shoe for $8. Absolutely. If I'm a generic sneaker maker looking at this situation,

I'm probably not as threatened by Starbreeze as you might think. And the reason why is because I know that the people who buy my shoe are those who are looking for affordability. And although Starbreeze are more affordable than, let's say, Jordans or other brand name shoes on the market, they're not going to be affordable as my generic sneaker, which I'm producing with the lowest cost possible so that I can sell them for the lowest price possible. Okay, so that is differentiation on quality and price. But what if two products are almost identical? Think Coke and Pepsi or Uber and Lyft, or as you'll hear in our next case study, handbells. You know, the kind you hear in Christmas pageants. This is one of our favorite episodes about how a seemingly peaceful product

can spark a brutal competitive war. It was hosted by David Kestenbaum in 2013. When you've got two companies down the road from each other making the same thing, you can almost guess the history. Originally, there was just one company. Something happened. Maybe someone got angry, somebody left, and they started a second business, a competitor. In this case, that someone was a man named Jake Malta. In the 1960s, he worked at what was the only bell shop in town, a place called Schulmerich. And Jake was Schulmerich's chief engineer. This is Jake's daughter, Joanne Malta. His library was full of books on music and nothing was not read.

He designed Schulmerich's first hand bells. But then there was a change in management. Jake Malta didn't get along with the new bosses, so he left. And he could not stop thinking about bells. He thought he had a way to make an even better hand bell, a bell of supreme perfection that he hadn't quite achieved at Shulmrick. I gotta explain a little bit about bells here. A bell, when you ring it, it vibrates and produces this one central note. But you also get these other notes in there, overtones they're called.

And Jake Malta wanted to try to get rid of as many overtones as he could. He wanted to make a bell with a very pure sound. Because he knew that he could make it better. And, you know, we still believe that he achieved that. Jake Malta's new bell had a slightly different shape, and this part is key, so remember it. He removed the little brass nub at the top of the bell where it attaches to the handle, something called the tang. The result, he felt, was a bell that produced an uncommonly pure, clean sound. Malta took his design and he started a new handbell company, not far from his former employer, and he gave it a name like his own.

Not Malta, but Mallmark. So now you had two bail companies, the old one, Shulmurik, selling bells with tangs, and Mallmark, Jake's upstart, selling bells with the tang cut off. And before we get to the decades-long war, I'm just going to play you what they were fighting over. This is a Shulmurk bell, the one with the tang. And this is a maulmark bell, Jake's new bell, with the tang cut off. I have driven myself crazy trying to compare these two bells. Sometimes I hear a difference, but frankly, I think it might just be that I was holding the microphone in a different spot. Here, I'll play them again. Schoenberg bell with tang. Tang.

Maumark bell, no tang. Some experts say they can tell the difference, though they're divided over which one sounds better. The Bell Wars arguably began in 1976. Here is one of the first shots fired in the war. It's an ad by Shulmarik, trying to make the case that their original bells with the tang were better. Here, I'll read.

All Schulmerich bells have a tang. This is the raised crown at the top of the bell that gives the tonal brilliance. The Mallmark bell, hereafter referred to as Brand M, touts the tangless bell, saying it is a new concept in handbell design, tuning, and performance. In reality, they are weakening the tonal quality and doing it even more when drilling a hole for the handle placement. This ad infuriated Mr. No Tang Is Better, Jake Malta, at Mallmark. In fact, the reason the text of this ad still exists is because it was recorded in legal documents. Jake sued his former employer over it. Now, court cases are a chance for both

sides to have their say and to have someone impartial weigh the evidence so you can just move on. And in this case, the two bell makers did settle. And they came up with a solution that seems like it would put all this behind them. Both sides agreed not to compare their bells to the others' bells, which seems like a fine idea. Unless, of course, you are in the sales department. Which seems like a fine idea, unless, of course, you are in the sales department. It's your job, after all, to go out and talk up your bell. Kermit Junkert was in Schulmerk's sales department. He says these were kind of terrifying times because, remember, neither side was supposed to compare its bell to the others,

which means he couldn't say, for instance, our handle is solid, theirs is hollow. So the lawyers came up with a workaround, special kind of awkward phrases the salespeople were cleared to use. For example, our handle is not hollow. Well, by saying it's not something, you would refer or infer that someone else's handle is hollow. It's like you were indirectly trash-talking the other one. Indirectly, of course. I mean, literally, there were legal teams that would write, here's what you can say, here's what you can't say. And that would come about from

whoever won the latest lawsuit. How long did that go on? Forever. And the salespeople weren't trying to just sell single bells. They were trying to convince an entire choir to exclusively ring their bells only. Go all tang. No, go no tang. And when Malmark or Shulmarik succeeded in selling a whole set to a big-name bell choir, they'd brag about it. The music you're hearing right now, this is the Arsis Handbell Ensemble. All Malmark bells, not a single Schoenberg.

I'd kind of imagine that the bell ringers, all those choir directors and teachers, would be kind of laughing at all this, or even be oblivious to it. But it was the opposite. Some of them got totally swept up. They took sides. People at both Mallmark and Schulmerk remember various incidents. Here's one story from the Mallmark side, told by Tim Schubach, who had gone to an industry meeting. I had, unbeknownst to me, mistakenly, said hello to a Schulmerk customer from our booth. The customer continued to walk by and over their shoulder, not even stopping to acknowledge me, said, we're Schulmerich ringers in a very kind of condescending way. In the end, after many, many years of the courts throwing up their hands,

Malmark had a kind of victory. Jake Malta was awarded $2 million, though that was a lot less after the legal fees. His daughter says he put a lot of the money into a handbell education fund. There are wars that end because one side surrenders, and then there are wars where no one gives in. There isn't even a truce. Two sides just stop fighting. A day passes, then a year, then another year. Jake Malta, the proud perfectionist engineer head of Malmark, eventually passed away. And so did the people calling the shots at Shulmrick. A younger generation took over.

Tim, who you just heard, came to run Mallmark. Shulmrick had been bought by Jonathan Goldstein, a former lawyer who knew nothing about handbells. I knew less than nothing. I can't even read music. Shortly after Jonathan bought the company, he and Tim, the new heads of both companies, found themselves at the same meeting in Cincinnati. He came up in his very Jonathan way and, hey, I'm Jonathan Goldstein. I just bought Schulmerk. So I said, you know, my understanding is that these two companies went out at hammer and tongs for a lot of years, and I'm just not ready to do that.

It seems to me that, you know, you're not my enemy and I'm not your enemy. The enemy is the 300 million people out there who don't ring handbells. Let's go get those people and show them what a great instrument this is and get them ringing. That story from host David Kestenbaum in 2013. What tricks can businesses use to keep their customers loyal? Our professor Dan Wong has some ideas after the break. We're back with Professor Dan Wong of Columbia University. Hey, Dan. Hi. So I listened to this story about the bells, and I don't hear a product that is differentiated. This sounds exactly the same to me. Wait, I don't hear a product that is differentiated. This

sounds exactly the same to me. Wait, you can't hear that? I definitely hear the difference. No, you do not. Oh, yes. So how do you create loyalty to your product that isn't that much different? This is actually something that companies do all the time. I think the term for this, when you hear about it, is called locking in customers. And the way that the bell companies are doing it is really similar to the way that, let's say, Pepsi or Coke do it with their customers, in that they create these emotional associations between their customers and users of certain bells. They create kind of a group mentality to say that you're either a Shulmerick person or you're a Mallmark person.

And you can go on the street of New York today and ask people, Coke or Pepsi, and their loyalties will be fierce. Well, what are the ways that businesses can encourage this lock-in? Because it sounds like a great thing that someone's going to buy my product no matter what. Sure. So when it comes to locking users in, what companies first start with is typically through branding. You know, they create a persona that's associated with, let's say, a certain brand of soft drink or a certain bell. But there are other mechanisms for creating lock

in as well. And what some companies do is that they might create a whole ecosystem of products, gadgets and other accessories that might be associated with the core product that they might create a whole ecosystem of products, gadgets, and other accessories that might be associated with the core product that they're selling, such that if you're buying that product and you want to enhance your experience, you buy this other widget. Maybe Shulmaric could start selling gloves, let's say, that are only specialized towards Shulmaric bells. Yes, ringing gloves. And another approach is to offer a subscription plan. the Shulmerick subscription, let's say. You get repair, you get maintenance, you get yearly bell replacement.

I mean, the possibilities are endless. What happens, Dan, if you cannot differentiate? If you just have a competitor that is identical in all ways? Well, this is a situation that most competitors in the market fear, and it's a situation called perfect competition. Perfect competition sounds good. Sounds great, except that the only way to survive as a company at that point is by lowering your prices.

And so if you lower prices, then what your competitor will say is, oh, well, all I have to do is whenever those same consumers is to lower my prices. And by that point, you're each lowering your prices to the point where you have effectively destroyed all of the value in the industry. So you work for a business school that's supposed to be the sort of temple to capitalism. And what you're telling me here is you should do anything possible not to compete. It's not so much about asking rivals not to compete,

but it's really about asking them to avoid direct competition. It's actually about making choices that are really different that your competitor wouldn't even think to make those same choices as well. Thank you so much for joining us, Dan. It's been such a pleasure to be here.

Oh, I didn't get to say the thing that I wanted to say about the Bell Wars. This episode really resonated with me. You know, because of bells. No. That was pretty good. Dan Wong is a professor of strategy at Columbia Business School, and he left us with a list of vocabulary words.

The main concept, differentiation. Offer your customers something of value that your competitors don't have. Maybe you can be the cheapest or the luxury brand, but just don't get caught in the middle space. That's vocabulary word number two. You cannot be everything to every customer. And what if you can't differentiate? Well, that is called perfect competition. The only thing everyone could do then is lower their prices, and that can bankrupt companies. Here at Planet Money Summer School, we differentiate by offering the most efficient business school education in the entire world at the price of free. Huh. Think I made a strategic mistake there.

We'll revisit that profit math in next week's show when we take on accounting. Meanwhile, I hope you've been thinking of your own business idea. Big or small, we'd love to hear how Planet Money Summer School has influenced your ideas. Send us your pitch to planetmoneyatnpr.org. Just put summer school pitch in the subject line. If we think you've got something interesting, we'll have you on our final graduation episode at the end of August, and we'll run your idea by our professors.

That's planetmoneyatnpr.org. And remember, Planet Money Plus members get to enjoy sponsor-free listening for both summer school and every episode. This series is produced by Max Friedman. Our project manager is Julia Carney. This episode was edited by Keith Romer and engineered by Robert Rodriguez. The show is fact-checked by Sierra Wires. Planet Money's executive producer is Alex Goldmark.

I'm Robert Smith. This is NPR. Thanks for listening. Thanks for listening.