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Using Industry Statistics To Sell Business Opportunities

Lance Winslow, a colourful character who has battled the FTC a number of times, writes on his blog about the use of Industry Statistics and the new FTC Biz Op Rule

"In the past many business opportunity sellers would use industry specific statistics on their Web sites, brochures and even in videos, which they would mail to potential buyers.

The Federal Trade Commission looked into this and found that many business opportunity sellers overused these figures to sell their wares.

In the future this tactic of using industry statistics may become illegal and considered fraudulent due to a proposed rule that the Federal Trade Commission is considering which would govern business opportunities.

In the rule business opportunity sellers would have to prove and have records to prove that the statistics they use are actual statistics of people who bought their particular business opportunity."

What the FTC is trying to prevent is the anchoring, the well known psychological disposition to give too much significance to industry numbers.

For example, suppose that you were told that the payphone business is a $12 billion business, and that "on average" each payphone is used for a 50 cent call once every 2 hours. Is .1% of this $12 billion market worth $3,000 per payphone, if on average the payphone will earn $12 per day?

The mathematical answer is that 12 * 365 is greater than 3,000 and so the payphone will pay for itself within a year.

Even if you believe that the payphone is only used every 4 hours or every 8 hours, then the pay back period is 2 or 4 years. Not bad and certainly reasonable.

Unfortunately, this reasoning is an example of anchoring on the first number: the payphone is used every 2 hours. The real number might be, for a certain location, once a week - dramatically altering the real value of the deal.

Good for the FTC for paying attention to some of the new behavioral economics.

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Full post as published by Misleading Advertising Law on June 30, 2008 (boomark / email).