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Economics and PR of surge pricing

Sharing economy taxi services like Uber and Lyft sell themselves on increased efficiency. Any car can become a taxi, thus decreasing the cost for such a service, while increasing the number of people able to make an income from driving others around. Surge pricing is a key part of this strategy, by increasing the revenue drivers can make in high use times, while increasing the cost for riders, the goal is to optimize the supply/demand curve for taxis to where there a more drivers and less riders, but everyone remains happy (drivers make more, riders can get home).

Surge pricing has been extremely controversial, with users surprised by $400 rides home. To Uber and Lyft’s credit, they have improved their notification system warning of surge pricing, and while the final price can’t be certain (traffic conditions, etc.), ignorant consumers cannot replace good economics. And surge pricing is good economics. On rainy nights or Saturday evenings, finding a taxi has been a notorious impossibility. The reason for this may be counter to our economic assumptions. Cab drivers (non-uber drivers) as studied in New York City, operate with a goal in mind. In general, when they meet that goal, they stop driving for the day. On busy days, they meet the goal faster, so fewer cabs stay on the road. Surge pricing encourages these drivers to stay on the road longer because the improved windfall is greater than driving the same amount of time during non-peak periods.

However, this brings us to the PR challenges of surge pricing. In Australia, when a hostage situation in Sydney terrified the downtown area, Uber instituted a A$100 minimum price on rides. Uber’s claim here was they were encouraging drivers to enter the market and help people get home. This would be the same approach for New Year’s night, using high prices to get more drivers on the road. But unlike New Year’s, no one chooses to be out and stranded during a hostage crisis. Uber’s surge pricing preyed on people stuck because of terrifying and unpredictable events – events that stalled alternative transportation plans and increased the need to be a home and safe.

Uber particularly has received negative press even prior to this regarding surging pricing. As such, someone should have pointed out that unanticipated events should treat surge pricing in a different way, not because of economics, but because of the PR. For Uber, the cost of surge pricing during the hostage tragedy was arguably higher than the profit made. Instead, Uber could have found other ways to increase driver revenue – even going so far as to forgo their cut of each ride, increasing driver profits without increasing prices. Since Uber’s matchmaking technology is automated, the marginal price for each rider should be almost nothing. Thus, Uber could show how important and valuable its service is through smarter occasion pricing rather than blind economics.

Uber bringing gender diversity to taxi drivers through safety

When I described Uber to my mother, she immediately ruled it out, saying she didn’t trust the background checks of the drivers. Both Uber and Lyft do full background checks on their drivers, at least as much as traditional taxi companies, while only Uber and Lyft give you the driver’s name, phone number, picture, and GPS tracking. This can make using an Uber arguably safer than a regular taxi.

Uber’s policies also appear to significantly improve the lifestyle for the drivers, making the profession safer and thus opening it up to more women.  The Occupational Safety and Health Administration reported that cabbies were 60 times more likely to be killed on the job than other workers. Drivers often work alone, carry cash, and and travel through high-crime areas. Only about 2 percent of all U.S. taxi drivers are female.

Driving an UberX car, which is open to anyone who signs up and passed the background check, has turned out to be a much safer operation. Just like riders, drivers can see the name and rating of a potential pick-up. The rider already has a credit card on file, meaning the driver never needs to carry or handle cash. And the car is tracked completely through GPS. While this doesn’t make crime again driver or rider impossible, it significantly lowers the risk. Though Uber won’t release gender breakdowns for its drivers, casual estimates place the number around 15%.

What stands out about this discussion is how Uber has been incentive to create a superior product to traditional taxi cabs without the strong regulatory regime. The initial taxi monopoly regimes were created to encourage safety, reliability, and maintain certain standards. However, this has led to a large undeserved market, mostly from a lack of available drivers or rigid pricing regardless of demand.  Uber, incentivized to create a superior product to taxis, has put technology to innovative use, making taxi transportation far more efficient for the drivers and riders. This is why bans on Uber, as Berlin recently did, have more to do with protecting entrenched businesses or simply ignorance of how the service works.  Uber is likely also the reason demand for taxi medallions, once one of the best investments available, is now dropping.

For regulations, it’s important to recognize what the business already incentivizes. Companies can only cut costs to the point employees and customers are willing to partake in the transaction. If driving or riding an Uber became unsafe, both drivers and riders would exit to competitors. And since there is no longer an artificial limit on supply, competitors like Lyft can more easier enter the market, forcing all entrants to engage in higher levels of service. Legislation should look at what the base line of service their car sharing services offer and determine that to be what is needed for consumers to use the product and for the businesses to be able to make a profit.



Competing with piracy: Streaming services can be even better

Slowly media companies are migrating to more digital savvy strategies, however much kicking and screaming may be occurring. Most movies and tv shows are available for download and music streaming is becoming the new standard for music consumption. Models are moving to subscription from a la carte, and this is better for consumers.

However, media and technology companies still forget who their top competitor is: piracy. Online piracy remains cheaper and more flexible than any official option. Technology companies eager to convert pirates to paying customers need to recognize the features pirates value and find ways to offer alternatives.

For streaming services, they should want to remove any reason to leave their system. Netflix encourages keeping track of videos to watch and remembers where you left off, even if you stop mid-show. In music streaming, Spotify and Rdio have excellent selection, fair prices, and flexible options for mobile and off-line usage.  They solve many of the issues a streaming service may present. But for some power music users, features available in iTunes and other music management software are not replicated within streaming services.  Personally, I still prefer MP3s so I can track my play counts and ratings for songs I like. This way, I can always find or re-find music I like, which can be challenging in a large collection. Additionally, I’m picky with how my music gets tagged, again to help with my discovery of old music in my collection. Music streaming, while excellent for discovering new music, fails to make it easy to keep track and rediscover that same music.

Research shows pirates spend more on media content, like music, and may already subscribe to streaming services to help with discovery. But to fully capture these users and deter them from pirating content, ensuring streaming services replicate the non-streaming experience can be vital to making streaming as ubiquitous as phone service.

No limit to what customers can tell you: Ask them and respond

Some consumer insights might seem obvious in hindsight, but it’s nevertheless very easy to get caught in the way we do business. This is why surveying customers to glean insights is so valuable, either to confirm you’re on the right track or to discover new business opportunities you’re customers are craving for.

Bonobos, a menswear website, sought to make a better dress shirt.  Using a Qualtrics survey, the company found exactly what customers wanted: slimmer-fitting shirts for work.

Bonobos responded by making a $98 slim button-down shirt and sold almost half the stock in the first week.

They are now using survey’s to make better sweaters and jeans.

Having purchased a great many ill-fitted dress shirts, this observation seems apparent to me. Yet without a company asking for my feedback, and including a mechanism to respond to it, my concerns go unheard.  Having a company willing to hear customer feedback and be willing to act on that feedback can lead to valuable business opportunities and competitive advantages, simply by asking basic and obvious questions to truly understand what your customers want.  Relying on intuition and assumptions alone is not enough.

So speak to your customers. Ask for their insights. And don’t just listen. Respond. Don’t give customer’s an excuse not to give you their money.

Netflix’s Innovation: Giving Viewers Control Over Content

netflix-logoNetflix’s stock has soared this week on news of excellent earnings and growing subscribers.  More significant is the release of Netflix’s new original series “House of Cards.” The $100 million prestige soaked series, from Academy Award winners David Fincher and Kevin Spacey, launches its full 12 episode season in all markets on February 12th. Also important, “House of Cards” will be available on every platform Netflix supports.  Any Netflix subscriber can watch every episode of the season by Saturday morning.

Compared to legacy media models, this is revolutionary, while at the same time, so simple and obvious about how consumers want to consume media.

Between time-shifting DVRs and online piracy, viewers already have pretty significant control over their viewing experience. International viewers still have to choose between piracy or waiting months to watch foreign shows. American “Downton Abbey” fans waited for almost six months for season 3, even needing to avoid major plot spoilers because of the long delay. Legacy television continues relying on windows and restrictions, something consumers are less willing to accept.

Netflix’s model has long been about enablement.  “House of Cards” screenwriter Beau Willimon explained Netflix considered several ways to release the episodes:

Should we do a traditional [one episode per week]? Should we do it in chunks, like four episodes, then five episodes, then four episodes? And we eventually arrived at [offering] 13 all at once because that speaks to what Netflix has to offer that really no other network does. Its subscribers watch content when they want to watch it, how they want to watch it, in what chunks they want to watch it. And so it puts the decision in their hands.

Let consumers choose how they watch their shows. It’s a revolutionary idea. Remove restrictions and enable users.  It’s empowering and value-enhancing.  These sound like great ways to build a business.

Instant gratification determines decisions, even against our best interests

Harvard researchers found that wellness programs at organizations resulted in gains of $3.27 for each dollar invested. Yet programs like these are few and far between. Even asking CEOs, like CEO of the Energy Project Tony Schwartz did at Davos, whether wellness programs are beneficial for business, and all CEOs said yes. Yet again, few implement wellness programs at their companies.

From pollution to eating habits to drug use, there is a recognizable pattern of humans making decisions based on the short term gains (laziness, enjoyment, small rewards), even when the long term costs are well known. 

Our incentive systems have gravitated toward rewarding these short-term gains. Stock price now determines a CEO’s worth, rather than building a sustainable business. Daily poll tracking in politics makes politicians legislate for the immediate campaign rather than invest in long-term gains.

This makes companies more reliant on their current profits. And because politicians are always campaigning, they will pass laws to protect those profits in order to raise money for the endless election cycle.

On an individual level, neuroscientists have theories for how to retrain people to mentally account for the long-term costs and benefits in decision making, the type of thinking people more often rationalize away. 

From a business and legislative level, we need to create incentives that encourage long-term planning because that, in the end, generates more revenue and profits even if there are initial losses. Reducing stock price as the main barometer of CEO performance would be the most obvious change (or adjust the time table to judging the stock price over a two year period rather than quarter to quarter).

The Innovator’s Dilemma further explains how companies ignore the long-term. Often, companies under-estimate the speed of changes to the market, preferring to hold onto their current profits rather than invest in a long-term risk. Newspapers, for example, have continued instituting paywalls online in order to stave the loss of readers from their more profitable print publications. The long-term plan would involve investing in the online market, recognizing that that is the growing market, possibly at the print publication’s expense. Because the longer newspapers wait, the more competitors step forward to dominate the new space. Kodak, who invented digital cameras more than a decade before everyone else, focused on its profitable photo printing business. By the time that business collapse, almost every other consumer electronic company had digital cameras on the market and Kodak is facing bankruptcy.

Price regulations should fix inefficiencies, not cause them

France is push forward a law to place price regulations eBooks.  This expands current price regulations on paper books that requires all books sold in France to be sold for the same price – no discounts. The law aimed to protect small book stores, but it now going to cover eBooks regardless of who is selling them.

Our love for the corner book store is wonderfully nostalgic, but economically inefficient.  While we in the United States lament Walmart and Amazon pushing out mom and pop bookstores, the reality is authors are publishing more books than before, and people are reading more books than ever before.  And because eBooks reduce upfront and marginal costs for book publishing, authors are more able to read audiences. Amanda Hocking, for example, has been selling her own, cheap eBooks without a publisher and is making millions of dollars.  Even publishers are starting to see the success of eBook revenue – Hachette claims more than 20 percent of its U.S. revenue is from eBooks.

Let’s ignore the impossible regulatory nightmare France opens up by trying to regulate online businesses like Amazon and Apple.  Rather price regulation is a mistake France and even digital media companies are making.  Apple and Amazon set very specific prices on songs, movies, and TV shows. Almost every new video game is sold for $60.  These are price regulations even without government interface, and they only lead to economic inefficiency.  It means more popular/valuable products can’t sell for higher prices and less popular ones can’t sell for cheaper.

Like Amanda Hocking, other digital products not subject to price regulations are seeing great success with lower prices leading to great profits in greater volume.  Game publisher Valve discounted Left4Dead significantly and found sales jumped 3,000 percent – leading to more sales than its opening weekend.

Remember, price and value are not the same thing. We all value air immensely, but the price is free. When something many people value is made cheaper, then the market for that product increases.  With smart pricing and other business models, businesses can make more money with lower prices – computers are more valuable today, but are far cheaper than 10 years ago.

Price regulations can be used to fix inefficient markets, most specifically for products where the overall cost is not built into the price.  For example, oil is running out and damages the environment, but these costs are not felt by the purchaser because the costs will come years later.  Smoking also will lead to greater health costs in the future, but that is not built into the price of the initial purchase.  This is why taxes can help limit these markets for the better.

It’s a very fine line to find an inefficient market.  Price uniformity is in the form of price regulation is inefficient.  Maybe that’s why so many economists oppose it. Or tax a working market just because. Utah seems to like that idea.

Harvard Business Reviews sees Big Content is threatening innovation

It’s always exciting to see a new, mainstream publication see what I and other haves been so concerned about.  James Allworth writes a short piece for the Harvard Business Review about how Big content is strangling innovation with its misunderstanding and animosity against technology. Allworth writes:

Many in the high technology industry have known this for a long time. Despite making their living relying on it, the Big Content players do not understand technology, and never have. Rather than see it as an opportunity to reach new audiences, technology has always been a threat to them. Example after example abounds of this attitude; whether it was the VCR which was “to the American film producer and the American public as the Boston strangler is to the woman home alone” as famed movie industry lobbyist Jack Valenti put it at a congressional hearing, or MP3 technology, which they tried to sue out of existence. In fact, it’s possible to go back as far as the gramophone and see the content industries rail against new technology. The reason why? Every shift in technology is difficult for them. Just as they work out how to make money using one technology, it changes.

This is nothing new and shouldn’t be a surprise to anyone who follows Big Content’s approach to technological innovation.   Allworth didn’t even include the TV industry fighting cable television, movie industries fighting TV, and the music industry fearing the player piano (leading to their own congressional hearings in the turn of the 20th century).

Today, Big Content is trying to stifle everything from Netflix to BitTorrent.  Viacom is continuing its billion dollar lawsuit against YouTube.  Media companies prevent web browsers on your TV or phone from viewing Hulu because they want you to pay for the privilege, limiting its usefulness.  Movie companies have announced they want to cut off Netflix’s supply of good movies. Cloud music services and news aggregators both offer products customers want, but the established content providers only see this technology as threats to their current, obsolete business models.

Let’s not forget how that VCR thing worked out. Home video eventually grew to be a larger part of the movie business than the box office.

With the DMCA already oppressively one-sided, Big Content is trying to get the COICA passed which would make legal the domain seizures the government is already engaging it (and finding it to be a complete failure).  Censorship and stifling new, innovative businesses.  Sounds like the perfect way to win the future in America.

Apple’s subscriptions: The price of not controlling your business’ fate

Apple announced its subscription feature to iPhones and iPads last week. The fallout has ranged from excitement to launching antitrust lawsuits.

The controversy is over Apple’s requirement that any subscription service must use Apple’s subscription feature in addition to their own web alternatives.  Any in-app purchases would earn Apple 30 percent.  So while Amazon and Pandora Radio can still sell products and subscriptions on their website, where they keep 100 percent, they must offer iOS users the same options in the app.  Because of the convenience of the in-app purchase, it is likely many users will use Apple’s offerings.  There is significant ambiguity in the rules: Netflix, for example, has already received a special exception, likely because it adds so much value to Apple products.

Music subscriptions are rightfully angry about this.  The iPhone and other portable devices have made music subscription services useful.  Record labels squeeze any business built on their music for every possible penny.  Pandora Radio reports 45 percent of its revenue went to SoundExchange in 9 months of 2010, and that doesn’t count the licensing dispute its still having with the ASCAP. Take 30 percent off the top for Apple and music subscription doesn’t look very viable.

But this is part of the problem with relying on others for your business.  Apple loves to control its business, and it’s within its rights to (Claims of antitrust on Apple are completely unfounded. Apple does not have a monopoly. It has significant competition in all areas of its business.). But newspaper, magazine, and music publishers have all been looking to iTunes or the iPad to save them or fix their problems (such as people paying for content). This is a poor way to grow a business. If Apple decides to alter course or Google changes its search algorithm, it could hurt or destroy your business.

Newspapers and magazines eager to charge users for content have linked their fates to the iPad.  The Daily, while impressive solely for its exclusivity to the iPad, does nothing that couldn’t have been done in a web browser.   As a web app, the Daily would have sacrificed some hype and sleekness compared to an iPad app. But it also could have had full control over its fate.

This is not to say building iOS apps are bad for business. Just like you never want only one revenue stream, you never want your business beholden to just one company, whether it be Google, Apple, Microsoft, or another.  The web opens up these options and the more inventive and innovates your business is, the more control and freedom you will have.

Changing our cultural mindset to understand abundance

Clay Shirky gave a fascinating speech at the NFAIS Annual Conference where he showed how society has difficulty understanding abundance. Our entire economic theory is based around allotting scarce resources – money, natural resources, tangible property.  Shirky says: “Abundance breaks more things than scarcity does. Society knows how to react to scarcity.” As a society, we are used to only having a few books, CDs, and DVDs, but now it is possible and even feasible to have tens of thousands of each.

As Michael Masnick adds, abundances has not been an issue for most of history. Now technology is introducing abundance and infinite goods into society and we’re struggling to make sense of it. As Masnick says, “It’s a ‘divide by zero’ sort of problem.”

This is why we’re seeing so many companies trying to force scarcity in order to hide abundance. DRM serves that exact function – to make an infinitely reproducible digital file scarce. mp3 and eBook retailers are simply taking brick-and-mortar mentalities of selling single items into a digital space.  Shirky explains how this radical change requires completely new ways of thinking, not just the old system on a new platform.

It’s easy to say “preserve the best of the old and combine it with the best of the new,” but in revolution, the best of the new is incompatible with the best of the old. It’s about doing things a whole new way.

Business models disrupted by abundance (recording industry, newspapers, software and game developers, etc.) need to scrape their old way of thinking. Paywalls for newspapers and more release windows for movies are examples of old businesses trying to force scarcity onto abundance.  These systems do not make sense when anyone can easily copy, share, and view every newspaper article or movie with the few clicks of a mouse.

Of course, when more abundance (well, less scarcity) is introduced, businesses eventually find they can make more money because they have more stuff to sell and more people willing pay for it. Shirky had a great example last year showing how the printing press, and small innovations on printing methods, led to more books which, in turn, made literacy more valuable and thus created more readers. Books were then cheaper to make, but with more readers, publishers could make even more money.  VHS and home video, a great example of the movie industry trying to stop abundance, rather helped to expand the movie market and make it billions more dollars.

Shirky ably frames one of the major problems facing the next generation – changing our understanding of abundance. What once was scarce is now infinite and that requires a whole new approach to business.