The value of 'free'

A recent promotion by the Denny's restaurant chain - the giving away of breakfast for free, raises some interesting valuation questions: what is the expected future value of a promotions that involve free 'gifts' and how do firms successfully sustain repeat business? Read the article here.

Now obviously the two questions are related. The immediate costs of the free breakfasts are associated with an intangible asset that we can call "customer loyalty". Now we know as accountants that this asset is not capitalized and we would question any attempt to measure this asset due to uncertainty. Clearly it would appear that a gimmick like this could be easily replicated by other restaurant chains, so it is less likely to give rise to any sustainable competitive advantage. Would you return to a restaurant that (willingly) gave you a free meal? does getting something 'free' give you some kind of irrationally happy feeling that makes you want to return to where you got something free? Even though you know that you won't get something free there again?

Another approach may be to look at their ROE generating ability in terms of the DuPont decomposition. In general, I'd imagine most of us would agree that Denny's is going to be profitable as a low margin high turnover company, and based on the google finance numbers for profit margin, this certainly appears to be the case.

Is this promotion consistent with their strategy? How does this strategy have to affect their turnover and/or margins in order to be effective? what do you think the overall affect on value is likely to be?

Rock on...

So here's an interesting question posited by David Edery in Steven Dubner's Freakonomics blog: Can guitar hero help save the music industry?

Some interesting 'statistics' from the article:

Weezer’s “My Name is Jonas,” a song originally released in 1994, saw a tenfold increase in sales when included in Guitar Hero 3.
Songs from The Who’s greatest hits released for Rock Band, experienced a 159 percent increase in SoundScan sales.
A special guitar hero featuring Aerosmith’s music resulted in more revenue for the band than any individual Aerosmith album.

So if this is valuable 'free advertising' for the record industry, why would they still charge the software companies money to include their licensed songs?

Are glitzy motor shows a thing of the past?

Many companies in the automobile industry announced heavy cutbacks to spending on motor shows. Traditionally these motor shows have been an (expensive) customer courtship activity, but with significant drops in the car market, possibly due to tougher loan criteria, many companies are not going to be engaging in this form of advertising this year. Further details can be found here.

At this time, Congress is currently debating the merits of bailing out the automobile industry, as summary of recent segments of the debate can be found here.