Benefits Need to be Credible

“IPOs have fallen out of favour because investment banks have broken the implicit deal with the purchaser.”

Post Purchase Cognitive Dissonance (PPCD) is the phrase given to the state of unease which exists in the customer’s mind after buying a product or service. If you want repeat business you need to ensure your customers are happy before, during and after the sale. If they are they will come back and buy more, if not, then they won’t. If you don’t keep your promises they will feel tricked by you and while you might get away with it once it will damage your later sales, at least to them, and the wider market too if you get a reputation for not delivering.

Marketing promises need to be credible if you want to keep people buying what you have to sell. Fundamentally, if I buy something I want to feel that it is still worth the amount of money I paid for it after I own it or, hopefully, even more. Successful initial public offerings (IPOs) give people the opportunity to buy stock in a company on the public exchanges for the first time and the value of that stock goes up after the IPO, or at least it doesn’t go down.

Although paid ridiculously large fees the guys and girls who do this sort of thing are just rather grand sales people and the same marketing rules apply to them as they do to McDonalds. At the moment though while many people are still pretty satisfied with their burger buy they are not at all happy with the IPO market.

The recent Facebook IPO saw a lot of wealth changing hands.  It was a massive and arguably one-off deal where a big speculative bubble of popular enthusiasm encouraged everyone involved to over promise.  This was good for advisers, Mark Zuckerberg and the “early money” in the company, as something like a third of the cash raised went to them, but not at all good for the more naive investor, most of us, who have now seen a significant fall in the value of their shares. Of course, we don’t know what the future holds, but it is not a great start for these new owners of Facebook stock who are all now suffering from severe PPCD.

Graff Diamonds has just pulled its Hong Kong IPO as sentiment is pretty low at the moment for this sort of thing. To some extent this also reflects the relatively poor performance, over the short term, of owning stock in companies although everyone will still tell you that equities are proven, over the longer term, to be a superior class of investment.  Well, that rather depends on the price you paid for the stock in the first place. In these financially difficult times many portfolios are much higher weighted in bonds than equities even though they are considered by some to be “cheap” historically.

Folk are so worried at the moment about the end game financial risk of the imploding Eurozone and the general poor economic climate, that they are all running scared. People are even buying German bonds with a 0% coupon, taking advantage of Germany’s fabled “safe haven” status. However, money isn’t the only issue here, just like the psychological contract all employers have with their staff, or you have with your family and friends, if you break it, like the banks have broken the implicit IPO sales contract of late, we all feel let down and want to withdraw from the game.

The sad thing is that whilst you may leave your job if you employer lets you down with something it has promised, or fall out with a friend if they do, we human beings have a tendency to too easily forget when investment banks, in particular, let us down. This is for one simple reason, we are all greedy and want to believe the hype that these sales people build around future cash flows and time and time again we end up exposing ourselves to much more downside risk than we realise, at first at least. This human frailty is one of the principle reasons that investment bankers are so rich; we just can’t help ourselves.

Whether it’s Facebook stock, or your products and services, you better deliver on your promises if you want to sell more in the future. But while the stock market punters have ridiculously short memories it is unlikely that your clients will have, as you are more likely to be selling something reasonably mundane, not dreams, like our investment banking friends.


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