How marketers make you pay more: the art of pump and dump

Published: 2024-06-26
Author: Gerda Ponzel

In this problem, the life solution swapped places with the technical solution.

One day, students at Newcastle University, aspiring to learn about economics, gathered in a classroom. The professor was running late, and the future marketing geniuses entertained themselves in various ways: some scrolled through Facebook, others read Twitter, some chatted on social media while playing the initial level of GTA, and some simply tried to catch up on sleep. The minutes waiting for the professor flew by quickly, and he confidently walked to the board. The students barely had time to hide their gadgets when the professor, pulling out a hefty paperback book, presented them with a problem:

“A bottle of water, which almost each of you has in your backpack or bag right now, costs 50 cents. But the actual value of this water to you now is much less. You know very well that you can walk into any supermarket or go to the vending machine around the corner at the university and buy a new bottle of water. There is no difficulty in this.

Meanwhile, a bottle of water in the desert also costs 50 cents, but its value would be significantly higher.”

The students tensed up as the professor continued:

“Make it so that in normal conditions, in the familiar world where water represents minimal value, its price skyrockets by dozens of times! And make it so that people are willing to pay such a price for ordinary water.”

Whether this problem has a real connection to marketing and whether it can be solved by simple, life-based, and original technical methods, we will discuss below: in life-based and technical solutions.

This solution falls into the life-based category because, before implementing any strategy, marketers need to become consumers of their product: to study the habits and behaviors of their audience, the significance of the product, its irreplaceability in everyday life, its influence on people, and only then apply any solution based solely on human application.

Moreover, this solution is here because these marketing techniques are widely used in real life, and it is unlikely that anyone hasn’t heard of them at least once.

So, the first group of students immediately realized that the professor wanted to test their knowledge in manipulating value and price, so they decisively decided to use well-studied marketing techniques. After all, we are talking about artificially increasing the cost of a product, aren’t we?

Creating artificial demand is a common story if the product actually brings benefits and meets what the seller claims. You just need to use different tools to attract attention to a product that might have gone unnoticed.

The future marketers decided to act as follows:

Create an artificial shortage of water, which will naturally raise the product’s price. A far from new but always effective method of increasing demand.

Remember the story of Twinkies. Twinkies are those sponge cakes with creamy filling that you could find next to other similar cakes on grocery store shelves and major retail chains. But these particular cakes became famous because, at the end of 2012, shoppers started sweeping them off the shelves out of nowhere.

Twinkies didn’t become tastier, their packaging didn’t change, and their manufacturer didn’t launch a new advertising campaign, so why did they suddenly become so popular? The thing is, Hostess Brands, the owner of Twinkies, announced they were going out of business, and the cakes would disappear from sale. What did people do? They rushed to the stores and bought all the Twinkies, and pictures of empty shelves flooded the internet. The sudden end raised the value of the sweet cake, although nothing in the product changed except that it was about to disappear.

Creating an artificial buzz around water will definitely raise its price.

The enterprising students remembered that this is exactly what Ty Warner, the American businessman, founder of Ty Inc., and manufacturer of Beanie Babies did.

The entrepreneur used hard pellets in his toys instead of soft stuffing to make them more flexible and to stand out from competitors. Then Ty Warner lowered the price of all his toys to more than twice the cost of competitors’ toys (known as “dumping” in economic terms). After this, the entrepreneur pulled all toys from major retail chains and started selling them in small retail stores. Moreover, he delivered only one type of toy from the collection to different stores. It was impossible to buy the entire line of toys at once, and no one knew in which store the next toy from the collection would be. It even came to the point where parents sent their children to protest outside the Ty Inc. office, and in Chicago, a warehouse was robbed, with 1,200 soft toys stolen.

Then Ty Warner decided to turn even this to his advantage. In 1995, his company launched its website, which seemed like an unreasonable decision to Warner’s competitors, as only 1.4% of all Americans used the internet in 1995. But each sold Beanie Baby toy had a tag attached with a call to visit the website, where information about collection changes, which stores would sell certain toys, and the toys’ birthdays was available. Since the toys couldn’t be bought in supermarkets, the artificially created demand fueled supply, and the toys began selling in incredible quantities thanks to online commerce.

Give the consumer the feeling that with the help of ordinary water, they will stand out, be different from others, and even gain magical superpowers. This will immediately raise the value and price.

To understand how this works, one must remember that Red Bull gives you wings. Or the famous positioning of Timberland boots: “Quality beyond what you’ll ever need!” Or the timeless slogan of Diesel clothing manufacturers: “Only the brave.” And so, a customer, uplifted by the drink with the red bull logo, in the highest quality boots, confidently goes to buy $500 jeans, passing by rows of other manufacturers’ clothes because these jeans make them the bravest!

At such a moment, the customers are not buying the product itself; they are buying a certain image and lifestyle, where the price doesn’t matter.

The second group of students proceeded from the fact that buyers often don’t know what they really need, so you can artificially inflate the price of anything; the product and its useful properties don’t matter at all. The students reasoned: “If buyers don’t know what they need, why survey them, identify needs, and study their purchasing power? You can make a person pay any price with false, unfounded recommendations.” In marketing terms, this scheme is called Pump and Dump.

This strategy appeared in the American penny stock market and was successfully practiced in the early 2000s when fraudulent organizations, amid general interest in the stock market, “pumped” the shares of cheap companies, attracting the attention of gullible investors, and later, within a short time, dumped all the previously accumulated assets.

A prominent influencer of such a manipulative scheme was the antivirus mogul, U.S. presidential candidate, and the most controversial figure in cybersecurity, who single-handedly influenced cryptocurrency prices during the surge in Bitcoin and other cryptocurrencies – John McAfee.

John McAfee was born in England, lived most of his life in the USA, and died in Spain in Barcelona.

The future founder of McAfee taught mathematics at Roanoke College, from where he was dismissed for an excessive interest in female students. Then, deciding to end his teaching career, McAfee became an employee at one of NASA’s laboratories – the Goddard Institute, then moved to UNIVAC as a software designer, then took a job at Xerox as an operating systems architect.

In 1978, McAfee became a consultant at Computer Sciences Corporation and later moved to Lockheed Corporation. At the latter company, McAfee obtained a copy of the Pakistani Brain computer virus and began developing antivirus software. Technically, the virus he got was not complex, but this didn’t prevent John McAfee from convincing people that the virus was highly destructive and starting to build his own antivirus company, which would be named after him.

After establishing his company, McAfee began executing the first step of the Pump and Dump scheme. He started traveling extensively around the country to give interviews and became a regular feature on various TV shows.

“Are you scared? Are you frightened?” McAfee would ask the audience from TV screens, “Global computer viruses eat you while you sleep, damage your computers while you ride the subway, destroy the whole planet! On the birthday of Italian artist Michelangelo, a new virus will be activated, rendering not only computers but all communication systems inoperable!”

It must be said that the Michelangelo virus, which McAfee spoke of so convincingly, did indeed exist and was indeed activated on the artist’s birthday. However, its destructive power only damaged 1,000 computers, which, compared to the total number of computers breaking down naturally, was laughable. However, the goal was achieved: McAfee antivirus software started selling in incredible quantities, capturing 60% of the entire software market, and McAfee himself became an antivirus magnate. The McAfee antivirus became so popular that Intel, dreaming of making the popular antivirus part of its products, bought it from McAfee for $100 million. Pump!

After successfully completing the first part of the Pump and Dump scheme regarding antivirus software, McAfee immediately moved on to the second part.
He appeared on TV screens again, but with entirely different statements:
“Are you scared? Are you frightened?” he asked the viewers the familiar question. “What are you scared of? A computer virus? And this is happening at a time when there is hunger and epidemics on Earth? As the founder of McAfee, I officially declare: the antivirus we released for you is the worst in the industry’s history. I myself have never used such crap.”

Time passed, and McAfee made similar statements about all his products: “I never used my products because they are complete garbage.” Needless to say, what happened to the stocks of all antivirus company monopolists at that moment? Dump.

Possessing $100 million, McAfee decided to create a yoga institute where anyone, for $200 an hour, could hope that during the classes, John McAfee, now a yoga guru, would join them just to look at them. During that period, McAfee wrote four books and created a hang-gliding club. Of the $100 million received from the deal with Intel, McAfee had $2 million left, which he decided to invest in antibiotic production. The production was a failure, and McAfee’s mansion was under 24-hour surveillance: McAfee’s neighbors were convinced that he was manufacturing drugs in his laboratories. John McAfee was forced to flee the country.

However, in 2015, McAfee reappeared on the scene, now in the political arena. McAfee ran for the U.S. presidency and actively participated in the political race. Although his candidacy did not gain sufficient support from voters, the guru of the Pump and Dump scheme regained audience loyalty and again became a sought-after personality on all TV shows.

McAfee resumed doing what he did best and started pumping cryptocurrencies:
“Are you scared? Are you frightened and therefore buying Bitcoin?” McAfee addressed the audience from his Twitter page. “Stop this immediately. You don’t need to be a mathematician to calculate the worthlessness of Bitcoin and the profitability of another coin – Verge…Pump!”

As soon as the price of the then-unknown coin Verge doubled in 30 minutes and then grew by another 2500%, McAfee went on air with a new statement.
“Friends, my Twitter account was hacked by intruders. Think about it, would a sane person talk about Bitcoin having no future in the cryptocurrency market?” the cybersecurity guru asked the audience angrily.

Needless to say, the price of Verge plummeted just as quickly as it had soared. Dump! McAfee did the same trick with DigiByte and ReddCoin.

By manipulating low-cap cryptocurrencies, McAfee and his team earned $23 million, after which they decided to raise the stakes even higher.

On national television, McAfee made a bold statement:
“I know you are scared, but I, being a brilliant mathematician, have calculated everything for you. Bitcoin will grow and be worth $500,000 by 2020. If I’m wrong and this doesn’t happen, I, John McAfee, will eat my own penis on national television.”
Pump! While people were buying Bitcoin regardless of the price, and the cryptocurrency market was trying to recover, McAfee made another statement, calling Bitcoin an outdated technology and everyone who believed his words fools. Naturally, he said this confidently and seriously, like a mathematician. Dump!

After this statement, McAfee faced a barrage of lawsuits and, in an attempt to justify himself, decided to create “the most invulnerable electronic wallet.” But the attempt was unsuccessful, and all cybersecurity experts recognized the Bitfi wallet as the worst product on the market after it was easily hacked by a regular 15-year-old teenager.

John McAfee showed the world how, in such emotionless fields as IT and finance, one could easily manipulate value and price without studying the product’s beneficial properties, using charisma, knowledge of mathematical formulas, and exceptional command of language. Just remember his phrase: “If you own the facts, you may distort them as you like.”

What the Newcastle students will show the economics professor and which phrases they will use to increase the product’s price remains a mystery. We’ll have to wait for the lecture to begin.

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