Category Archives: business modeling

Never Expires

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Given this raw material there is something to be said here.  But I can’t quite pull it together.

Something about how coupons are are a way to overcome the buyer’s impulse control?

Something about how no market is immune to discriminatory pricing?

This may well be the most evil thing I’ve yet encountered in my hobby around pricing games and shaping consumer behavior.

… Valeant’s business model.

They bought an out-of-patent drug (Sodium Seconal) which is used in physician assisted suicide – and after the California government passed laws to make the above legal they jacked the price up to $3000. … consistent with Valeant’s business model there is a copay coupon so that you, dear patient, are not out of pocket, whilst your insurance provider takes the hit.

via Bronte Capital.

Amazon Prime not a luxury good.

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One of my favorite insights about pricing came from thinking about why bespoke tailors never discount.    The fun bit was the realization that sales (discounting, coupons, etc. etc.) are about impulse control.   Both players, Betty the buyer and Sam the seller, are tempted by discounting.

Sam discounts because it helps to close the deal, since it helps Betty to overcome her impulse control.  So Sam is very tempted; and that temptation means he’s got an impulse control problem too.  At it’s core the discounting acts to expedite the sale, it’s an accelerant.

But yeah, if Betty knows that Sam is given to discounting that knowledge dampens sales!  For example there is a men’s clothing store near my office, but I know that everything in can be had for 40-60% less than the usual asking price.  But only if I play the pricing games this vendor uses.  I “just” need to puzzle out what those are and then: wait for the sale, get the coupon, and buy the gift card in the secondary market, order online with delivery to store, and finally exchange what I bought for the item I really wanted in the store.

When the bespoke tailor clarifies that he never discounts he’s signalling that his goods are a luxury item with a lot of bundled benefits.   Betty should not be making the purchase decision based on price!  Price should never be the deciding factor in the purchase of a luxury good.

Presumable Brilliant Bob can skillfully compute the cost of the dampening v.s. the benefit of the accelerant.  The drug store knows that a lot of their buyers need it now, and hence has less fear of the dampening.   The big department store knows that most of their Betty’s are skilled shoppers and enjoy the game.   The combinations are numerous.

But one place this leads is the realization one of the many inputs to price setting is the how much discounting head room the seller wants.  So when Amazon raises the price of Amazon Prime to $99 they may hope that Betty thinks this is because it’s become so much better.  More features, valuable, and expensive to deliver.  But I suspect it’s that they decided to play more pricing games with that offering.

So today you can buy Amazon Prime for $67 v.s. $99.  (You’ll need to go read some of the threads in the forums where pricing game player’s hang out to see various schemes for playing that deal well.)

Which means Amazon Prime is now another product about which Betty may mutter “I never pay retail.”

Is Bitcoin an Affinity Fraud?

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Somebody must have written something about the pedestrian idea that Bitcoin is entirely a case of affinity fraud targeted at Libertarians.

In fact I’d enjoy reading something about the data on affinity frauds.  For example what attributes of a group make it more or less likely to to attract these kinds of frauds.  Where wealthy Jewish people likely to attract Bernie Madoff?

I enjoy reading PonziTracker, and I don’t know that I can see any obvious patterns there.

The above was triggered by the comment overheard that the Republican party appears to be an affinity fraud targeted at it’s elderly white voters.

Demand Generation

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The standard model for economic recessions is that people become nervous and then proceed to hide under the mattress with their money.  That reduces economic demand, which in turn makes everybody more nervous.  What you need is to tempt them, and their money, out of hiding.

If you are a commercial enterprise and you want to tempt people to spend their money you labor to generate more demand for your product.  Demos, freebies, events to entice ’em into the store, advertising, coupons, etc. etc.

Recently I stumbled upon an interesting variation on this.  Like most vendor loyalty clubs, Sears/KMart has a loyalty club where you earn points.  I’m quite impressed by the range of tricks they play with this micro-currency.

For example they use classic intermittent conditioning to train customers to come into the store.  When you enter the store their app, on your smart phone, randomly rewards you with some points.  I got $10 the first time, presumably so I’d be sure to know that visiting the store might be valuable.

For example they used the class trick learned during the great depression that if your want your micro currency to work well you should design it so it loses value if you horde it.  So many of the points you get have a limited lifetime.

One trick they use that I find particularly thought provoking how they pay you to shop.  They have dozens of “contests” where you answer a few questions (“How old is your Vacuum Cleaner?”  “How often do you use your Vacuum Cleaner?” …) and then you must “like” a few items in the Vacuum cleaner section of the catalog.  Having done this you are then entered into a drawing for – oh – a 100$ worth of points.   They actually tell you how many people have entered, so I can see that for a very low cost they got a thousand people to think about their Vacuum Cleaner and browse the catalog for a new one.

It’s a glimpse of the future.  For example the micro currency lets them make micro payments for all kinds of activities that aid their business.  For example 50 points (5 cents) for reporting your weight to their little fitness club.  They also let you register your fitness device or app and get micro-payments for exercise, which only raises the question why it is taking so long for the fitness device makers to sell that service to health insurance companies?

Why don’t airlines or the grocery stores play these games?  Why doesn’t Amazon?  I think mostly because they haven’t realized the potential in their loyalty card/points programs to engage in behavioral gimmicks to train customers and draw customers into the shopping.  But of course to a limited extent they do play these games.

I find the idea that the Government could use techniques along these lines to generate address a recession extremely provocative.   Hire 5% more workers and it enters your firm into a sweepstake for $250 thousand dollars, etc. etc.

 

Precarious: freedom’s just another word for nothing left to lose

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I am watching with great interest the emerging backlash to open systems and sharing economies and I support it.  It’s going to be subtle to assemble a workable framework for this backlash.  Like fire or light or honesty the open/sharing movement has so much good to say for it.  A potent populist appeal is always nice, and it has that too.  But this is not working out well.

… the ‘sharing economy’ has shown itself to be overwhelmingly an anti-regulatory, precariat-creating way of monetizing social interactions. The term has been so exploited by some of the most vile, greedy technolibertarians around that it is time for me to write off more than a decade’s work. …

Amen brother.

1-900-COM-PLAIN

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For at least a decade, maybe longer, I have entertained myself at parties and other gatherings by pitching this idea for a start-up: 1-900-COM-PLAIN.  This service would help you complain about  – ah – whatever.

Part of my pitch is that you would have lots of up-selling opportunities.  For example for 5$ extra you get extra letters sent to regulators, the owners mother, etc.  For 3$ we would write the letter in a folksy style suggesting you are a good egg.

There is part of the plan that involves acquiring certain firms that have gone bankrupt just to get our hands on their files of complaint letters.

A key risk in this business – obviously – is that you’d be training your employees to become expert complainers.  I’ve yet to figure out a good, and ethical, way to temper that risk.

So.

Today I’m delighted to find this web site: Planet Feedback, which provides an analogous.  For example here is the page where they show the last few dozen letters.

Welfare Economics

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MBA types like to talk about “your business model,” and less so they like to talk about “their business model.”   I like to ask about the model’s effect on the wealth distribution.   It’s a hard question, but generally few businesses actually shift wealth and income in what I’d see as the desirable directions.

With that said here’s a cute B-School chart:

For my purposes think of these two technologies as two business models; i.e. ways of organising the world to create goods for sale to the public.  And for my purposes we can think of the two axis as being rich and poor.   It helps illustrate how the technology has consequences.

That drawing is taken from an interesting post by Steve Randy Waldman, who’s coming at the question I’m interested in from what might be a quite productive angle.  But one way or another this kind of modeling helps to illuminate what I mean when I try to highlight how your business model, standard, technology, ontology, etc. shape in interesting and oft powerful ways the resulting distribution.

Flash Boys

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I just finished reading Flash Boys and I highly recommend it.  Well, assuming your interested in WTF is going on in the financial markets.  Phrases like Liquidity, HTF, Dark Pools function have a high thought stopping power and it’s nice to read a book that helps temper that.  The book has a nice narrative arc.  It’s got a nice hero, who struggles with a problem, had a band of magical helpers, he even goes to visit the king(s) and vies for the hand of their – ah – portfolios.   The book is short, and it’s even shorter if you already read his older magazine piece about the horrible injustice done to the Russian programmer by Goldman Sacks and/or the excerpt that appeared recently in the Times.

For me the books answered some questions I’d puzzled over.  For example a huge question for me has been why are there so many stock exchanges.  Starting in the late 19th century you would rarely go wrong predicting that an industry would consolidate into a few huge players.   That pattern has drivers on all three sides: supply, demand, technology, and to a lesser degree regulation.

Electricity has played a huge role.  It allowed industries to move way from the power source, first moving away from the falling water sites, and then away from the harbors where coal might be delivered.  It allowed management to function at a greater distance from operations.  Walmart’s managers don’t need to be in the stores.   It is less and less necessary for buyers and sellers to rendezvous in a place.   And so we end up with only a few players in many industries; one auction house – eBay, one retailer – amazon, one search tool – google, one operating system – windows, three broadcast networks, one phone company,  two and half credit card networks, .  Any yes these dominate players have competition, and yes they can stumble etc. etc.  Winner take all is both an exaggeration and a real possibility.

So why hasn’t this happened in the domain of stock markets.  In fact, the opposite has happened – more stock markets.  It’s bizarre.

Industry consolidation is rarely pretty because lots of people are displaced as it unfolds.  Watching Sears (the Amazon of a earlier generation) die is a painful example of that.  The firm(s) that drive the displacement can take many approaches to the problem.  Silicon valley firms typically try to route around the existing players, creating a new industry from scratch while leaving the old one to wither and die.

There are books that talk about what makes an industry resistant to consolidation.  Advertising is said to be hard to roll up into a single huge firm because the artistic talent is hard to roll up.  Garden centers are said to hard to roll up because they demand a lot of managerial talent mostly around agile hiring  (as usual that’s a euphemism).

In some examples consolidation happens in spite of deeply entrenched players by negotiating a deal with them.  The consolidator captures some part of the existing players but leaves the existing player in place.  Banking if full of examples of that kind.  Few banks run their own back office anymore; the website, the books, the bill pay, etc. etc. are outsourced.  Almost no banks actually sell credit cards or merchant services anymore.

At this point most banks, and there are thousands of banks in this country, look more like instances of a franchise.  I’ve no doubt that there are vendors out there who will happily sell you a package to setup a bank just as there are vendors who will sell you a package for a hamburg stand.  And, as an aside I assume there are also vendors who will sell you kit to start your own microbrewery.

 

What has happened with the proliferation of stock markets is as if in the book industry the arrival of the Internet had triggered, instead of Amazon, a huge increase in the number of book stores.

It looks to me as if what happened here is that the electronic trading industry dealt with the entrenched players by offering them a deal.  The book suggests that a key part of that deal was for those players to sell early access to their customer’s order flow.  I suspect, and the book hints, that there are numerous other elements to these deals.

I guess it’s possible that originally the proliferation of markets was driven by a Silicon Valley like attempt to route around the existing players.   BATS, a market, might have been that originally, but like Paypal they no doubt quickly discovered how entrenched the existing players are.  And so the plan changed into one where they made messier deals.

All the above is terribly rough, but yeah … you get what you pay for.

 

 

Complements

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Long time ago I drew this little picture to illustrate the difference between complementary products v.s. competing products.

You can’t complete the phone call without both the phone and the phone network.   They complement each other. You can’t pay the bill without both the check and the check clearing network, so they complement each other.    There competing means that of paying or communication.

The customer pays the cost to cross the entire cascade of complements. So, a trick of the capitalist’s trade is to strive to have the cost for any of the complementary products minimized. That leaves more money on the table for him.  The Telco tries to reduce the cost (or at least the apparent cost) of the phone. The Biller’s advocate for low postal rates and state subsidies for the check clearing network.  It looks to me like Google and Amazon work very hard to cut the cost of Internet access.

Since learning about all this I have joked that the grapefruit growers should give away the grapefruit spoons. And, I am delighted to report they do.

Well sort of.  Like the phone company you need to subscribe – in this case to a bag of fruit.

Complements, like suppliers and customers, are another member of the “can’t live with ’em, can’t live without ’em” relations.   Personally I suspect that competitive relationships account for a tiny percentage of what the firm’s managers need to manage.