GroupOn – Pricing Games

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I don’t find anything surprising in this report out of Rice University about the experience of businesses that tried GroupOn.

If you are unfamiliar with GroupOn, they are a hugely successful internet business.  A two sided network bridging between small local businesses and local consumers.  They have an opt-in email list, sorted by city, of consumers.  Once a day they mail out an offer to buy a coupon for a local businesses; typically 30$ worth of goods for $15.  They often sell a few hundred of these each day, and GroupON keeps, I’ve been told, 30%.  The business gets the money right away.  A large percentage of the coupons are never redeemed.  So it is a gamble for the business and the consumer.

The buisness may or may not get a long term customer out of this transaction.  The business may achieve higher utilization using this to reach cheap-skate customers.  Given that most businesses have very low marginal costs those customers can be quite profitable.  The deal might damage the reputation of the business.

Pretty far down the hearsay chain here, but the article says of the report says:

  • 66% of the deals reported to be profitable
  • 42% would do it again
  • 20% of those who were profitable would not repeat the deal
  • restaurant deals are less profitable than spa deals
  • customers using the deal are: poor tippers, “entitled”, not likely to repeat
  • employee satisfaction is a good predictor of profitability on these deals
  • other predictors of profit include:  overage on the bill and repeat customers.

This quote by the study’s author “… there is disillusionment with the extreme price sensitive nature and transactional orientation of these consumers among many study respondents.”  irritates but doesn’t surprise me.  Small businesses tend to be naive about how to play pricing games effectively.  So they don’t comprehend what is necessary to tap into the higher utilization rates these games enable.  If you are going to play those games then yes you are going to make contact with more one time customers who are cheap skates.  For many small businesses a good customer relationship is a part of how they are compensated.  Maintaining that when playing pricing games is exceptionally difficult.

Over time large firms have learned how to vacuum up a larger and larger share of the business that was once done locally.  They have been quite calculating about that.  One reason I enjoy being subscribed to GroupOn is that it provides me with a stream of examples of businesses that remain small and local.  I guess I hope that these businesses can learn how to play pricing games effectively.

First Time Right

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I had not heard this term before: “First Time Right”

It describes that situation where switching costs are so extremely high you had better get it right the first time you choose.

I saw the term used in a deck describing a problem faced by modern device makers.  More and more devices are being made that absolutely must have connectivity to the cloud.  Examples of these devices include: power meters, security systems, eBook readers, navigation systems.  Quickly this is becoming everything.  Typically do this using the cellular networks.  The problem for the device maker is that once they pick the cellular vendor to use they can not switch.  Even if they pick a GSM vendor they can’t switch to another vendor unless they swap the SIM cards in all the devices, devices they probably do not have access to.

I like this term and it’s fun to enumerate things that feature a strong element of “first time right.”  Your native language, marriage, where you settle after college, where you site your factory, the programming language you become fluent in.  More often than not these are things with strong network effects.

keeping my confirmation bias happy

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I must thank Andrew Gelman for drawing my attention to this flawed but yet interesting article about a “recent breakthru.”  No doubt my regular readers will appreciate that I have hinted that this is clearly the case a few times already.  But is is always nice to have one’s intuitions validated.  No doubt anyone familiar with power-law distributions will find the results unsurprising.

Silly Surveys and Death

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If it wasn’t so bleak I’d find this chart amusing.  I love the idea that we can reduce the worries of business owners to just four things; for sake it doesn’t even call out the five things that your freshman business major is is taught to worry about.  It is obvious this data series was intended to server a anti-government anti-tax PR agenda.

The second thing I notice is that two of the curves (taxes and finance) are sufficiently constant as to be uninteresting.  The only signal in this data series is just  the business cycle – when things are hot the problem is finding good people; when they are lousy the problem is sales.

Sadly this is a horribly bleak chart.  It shows that the recession is just awful.  It’s the worse in 25 years, at least.  It also shows who tightly coupled demand for goods is to demand for labor.  Of course it’s not surprising that if you can’t sell your don’t worry much about finding good labor.  One way to look at that red line is that it hints at what percentage of firms are hiring.

If we don’t find a way to crank up demand, e.g. sales, we are in for a long a miserable decade.

The short term pleasures of metrics management

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Criminal behavior is a natural result of metrics management.  Yesterday’s episode of This American Life is a horrific example of that.  It tells the story of how the much lauded introduction of metrics management into the police department in NYC lead ultimately to horrific criminal behavior by the police.

But that’s not exceptional.    Why this happens is full of  fascination.  Metrics management encourages unethical behavior.  In some cases this is intentional but I think that’s rare.

What happens is easy to explain if we set aside the question of ethical behavior.

The manager’s problem is always how to coordinate behavior toward his goals.  If the existing behaviors are fine, and often they are, he want’s to add additional behaviors.  Metrics management is tool for doing just that.  He creates metrics that highlight the desired behaviors and then works to bend the curve.  Just making the metrics visible is usually  sufficient; but people tend to escalate so it’s common to pile on some carrots and sticks.

Lots of us who have used these methods have found them to be  marvelously  effective.  Early in my work life, for example, I put a chart on my door showing the number of open bugs in the large software system we were building.  The line wobbled along, moving up and down, over a period of maybe a year.  That was, pretty much all I had to do.  In the following six months the curve steady declined until it finally crossed zero.  Managers, engineers, customers suddenly became focused on that line.  They starting asking about stupid little meaningly wiggles in the trend.  It was magical.  When we finally crossed zero parties and tee shirts emerged.

Other things suffered.  And that’s the thing.

Or no, it’s not.  Presumably as things suffer the natural response would be to adjust.  And yet people don’t.

There is a weird pattern here.  Any organization is skilled at some things, call those A.  If we had metrics for those it’s scores would be pretty good.  But we typically do not have metrics for these.  Not because we are incompetent managers, but because the behaviors that achieve A are so deeply embedded into the organization that they do not require close supervision.  These behaviors are sustained as norms, manners, etc.  These behaviors are so  fundamental  that they are part of the organizations social fabric.  The social contract it has made with it’s self.  This fabric is slow to change.

So when the metrics management card is played into the game, in service of adding or improving a set of behaviors, cal them B, a very odd thing happens.  Of course on thing that happens is that B behaviors increase.  If they didn’t managers wouldn’t use this trick.  For a period of time the overall score A+B rises.  The A behavior score does not decline (at least not much) and the B behavior score rises.

But in time the A behaviors start to decline.  This alone is an interesting pattern and I don’t think I can recall any instance of metric management that didn’t manifest this pattern.  At first, and surprisingly rapidly, everything gets better.  This a quite delightful  experience.  It’s positively addictive.  Later A scores decline, but since your not measuring them this tends to go unnoticed.

Except it doesn’t go unnoticed.  Individuals in a social fabric are extremely aware of the social contract.  If only because it’s enforcing feedback look is implemented thru millions of tiny social cues.

What appears to happen as metric management moves into a organization is that it displaces the existing social contract.  This triggers a lot of cynicism.  Which in turn undermines ethical behavior.

License Please

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Here’s an amusing backfire.

Exchange standards serve two audiences: buyers and sellers.  Well, maybe they serve three audiences; the buyers, sellers, and the middlemen.  Oh wait, maybe they serve four audiences; the buyers, the sellers, the middlemen, and the tool/technology vendors.  No wait, what about the agents?  I could go on, but the point is that as we negotiate and evolve the standards each group advocates.  Successful advocacy for a given class requires solving a coordination problem.

The smaller classes can coordinate more easily.  The middlemen, the agents, the tool vendors are well positioned in this game.  Real estate agents, or condo management companies, or manufactures of tools that conform to the metric system have an inherent advantage when it comes time to set the rules for their respective industries.  It’s not just he middlemen of course, any industry were either the buyers or the sellers are concentrated will end up with standards that benefit who ever is more concentrated.  But I have a particular interest in the folks that gather around the actual point of exchange; i.e. the middlemen and the agents.

Ok, so there’s that.

As market scale up private ordering is reified into commercial and civil law.  This is entirely natural, any large scale market will require regulatory devices at the scale of the law and government.

So unsurprisingly the agents, middlemen, etc. work to assure that the regulatory frameworks are aligned with their preferences.  And this is one reason why their professional societies often transition.  This is one of the drivers of professional licensing.

None of the above requires any appeal to ethics and while it might be standardized fun to we need not say anything snarky about the player’s motivations.  I don’t want to deny people their fun.  There are lots of other fun to be had.

Licensing systems breakdown in pretty regular ways.  There are always some percentage of practitioners who’s licenses have lapsed.  There are always some, and often a lot, of failure of discipline; e.g. practitioners who should have lost their licenses.  There are always tenure issues, that give rise to license holders who’s skills are woefully out of date.

This morning’s news includes the discover that a vast percentage of the real estate agents in Massachusetts are practicing without a license.  Often their licenses lapsed years and year ago.  The commissioned paid to such agents were illegal and so sellers, who generally paid those fees, should be able to get their money back.

What fascinates me about these stories is how the scale of the varies groups plays out.  The individual sellers will have trouble coordinating their response; but on the other had the amounts are sufficient to motivate them to act, even if they have to act individually.  Individual brokers are small entities as well, which makes them hard to track down and means they lack deep pockets.  But, then most of the brokers worked for larger brokerages; some are very large.  One the one hand these provide a deep pocket to go after, but on the other hand these guys have the ability to mount a coordinated response to the threat.

All in all it looks like if you sold a house in the last decade you might want to investigate if the agents involved in the transaction had their paperwork in order.

Change in your pocket

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One of my esoteric interests is currency systems.  For example I wish the feds would stop handing the currency system over to Visa and MasterCard.  This posting by Stan Collender provides a treasure trove of insight into how hard it is to understand the forces at work when you try to shift how a currency system works.  And, it finally answers the question: “why do the dollar coins keep failing?”

  • Retailers decline to pay the extra cost to shipping costs (i.e. they are heavier).
  • The paper manufacture lobbies heavily and generates the usual fog of PR disinformation to undermine their adoption.
  • The vending machine industry demanded to be paid to convert their machines.
  • etc…  it’s a fun read, if your into this kind of thing.

Insurance Deductables

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My father was wrong.  I learned at my father’s knee that it is wise to self insure for the little things and buy insurance for the big things.  Thus it is clever and thrifty to buy insurance policies with large  deductibles.    It is a little odd to notice that poor people should buy more comprehensive, and hence expensive insurance.  Large economic actors can afford to self insure more than smaller ones; so for example a Billionaire may minimal car insurance – since if he can casually afford to replace the car – but he will carry a substantial personal liability policy since replace his wealth would be harder.  Firms often self insure and some even gin up their own employee health insurance systems.

This advice turns out to be wrong, for most of us.  There are three reasons.  The simple reason: people buy high  deductible  policies not because they can afford to cover the cost of small loses, but because they don’t have a clue what they are buying.  Secondly the marketing of these things is entirely a pure confusopoly; buyers haven’t got a chance.  But the third reasons is interesting.

Insurance has plenty of adverse selection and agency problems.  Nominally a benefit of self insuring is that your less like to engage in some risky behaviors since you will personally bear the cost.  On the other had you remove any incentive for the insurance company to bring it’s scale advantages to into the equation; e.g. the insurance company is likely to work for systemic improvements that reduce risk.

So there is an  argument  to be made that my father’s advice might be wrong.  I noticed this because I have a few medical bills on next to me.  My health insurance includes a  deductible.  What I notice about these bills is that I am not getting the prices the insurance company negotiated with the providers.  I am paying full price!  Note that agency is not all bad; since agency creates a locus for skill.  In this case I have lost access to both of these.  Having taken the choice to self insure for the amount of the  deductible  I now have the option to simulate the skills of the insurance company – i.e. I can call these providers and attempt to  negotiate  a discount … or not.

So this is another interesting story about middlemen.  There are three actors in this story; the service providers, the insurance company, and the service consumers.  I’m am  fascinated  to notice a new move in the game that can takes place during the negotiation between the insurance company and the providers.  In exchange for a reduction in prices the insurance company assures the providers that it will sell more high  deductible  policies.  That’s great for the providers since they can then charge those consumers the list price.  To  fulfill  the promises made during this negotiation the middleman may have to set goals to assure he sells enough of the high  deductible  policies.

That shapes the market in very perverse ways.  The small jobs become the high profit work.  My father’s advise become obsolete.  How weird is it that purchasing high  deductible  policies is a form of free riding – since as long as the insurance company price control feedback is working effectively you get the prices and quality provided by that loop without paying for it.

This is all  marvelously and distressingly perverse.  Since poor and innocent people tend to mistakenly purchase high  deductible  policies (do to regulatory failure enabling market failure) this process shifts costs onto poor people.  I also think this explains why the last car I bought had a bumper design that was prone to failure who’s repair was just bellow the typical  deductible.  The dealers presumably like that.  The usual feedback loop thru the insurance company that would fix it wasn’t just broken – somebody removed it.

ssh secret server

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I wanted to set up a n2n vpn and the way n2n works at this point participation in any given requires that you configure the three things, one of which is a password.  Which means that if you want to ostracize a participant to whom you have previously given these facts you need to change one or more them.  That is inconvenient since it effects everybody in current installed base.

This is a tractable problem if you set up the installed base correctly from the start.  If each participant fetches the n2n configuration using ssh and his identity you your all set.  Just set up an ssh persona (<mr_config_provider@myvpn.example.org>) that provides the configuration when asked and add all participant identities to Mr. Config’s authorized_keys.  Then when it comes time to remove a participant you change the configuration and remove that participant’s ssh key from the set of authorized keys.  Presumably you’d also use the “command=…” feature of ssh’s authorized keys.

Of course in the case of n2n using rotating key files and a cron job to fetch and trigger their reload into the edge is probably a better approach.  But this problem, how to get adhoc secrets distributed to community members, comes up a lot.