Groupon and Dynamically Priced Restaurant Meals: DOA?

Adam Lashinsky, of Fortune magazine, has an interesting piece on Groupon that is wrapped around his interview with Eric Levkofsky, one of Groupon’s founders and one of its two co-CEOs today. 

It makes for an interesting read. But what jumped out of it for me was this: 

What’s more, Groupon thinks it has a whole new approach to retail pricing. Jeff Holden, an Amazon veteran who heads product development for Groupon, suggests that Groupon can use its giant merchant and customer rolls to introduce dynamic pricing that mimics the success of airlines. It’s “completely ridiculous,” says Holden, that a restaurant would charge the same for a meal on an evening when the joint is empty than when it is jammed. Airlines figured this out a long time ago, and restaurants, using Groupon’s ability to target local customers, adjust their pricing opportunistically. “There’ll be a street price and a Groupon price,” says Holden.

Now, dynamic or “demand-based” pricing is one of those things that makes great sense on paper and some sense in practice.

Airlines use this of course, as the excerpt says. And scalping, for movie tickets and sporting events, is the market’s response to the lack of dynamic price setting on the part of authorized ticket sellers. In fact, in markets where electricity is dynamically priced, there is even some evidence that consumers respond in intended ways. So far, so good. 

But restaurants selling a steak for $64 on a Friday evening but dropping it to $32 on Mondays and Tuesdays?

In theory, based on basic laws of supply and demand, such a scheme should smooth out demand over the week and everyone comes out ahead. But in practice, I highly doubt if that’ll work because it collides with consumer behavior. 

We go to restaurants not because of the “utility value” of ready-to-eat fresh food (alone). Instead we go because we value the whole restaurant “experience”. We go because a crowded, hard to get into place signals quality and scarcity in our primal brains. And so many of us go towards the end of the week and over the weekends because we have the luxury (or the illusion, depends on how you see it) of time. 

What this means is that while many of us are OK with flying (for leisure) on off-peak days between inconvenient airports to save money, not many of us (a few might) are going to visit restaurants on off-peak days, at inconvenient times, just because the food is marked down by 50%. And that is even if the restaurants were to rashly sign up to gain a predictable discounter’s reputation.  

So how exactly does Groupon plan to change consumer behavior on such a massive scale?

Purchasing “Intent” and Behavior = Higher Prices?

Sometimes ideas that come out of research offer plenty of food for thought – both the good kind and the not so good kind. 

Consider an excerpt from a piece by Tom Ryan on RetailWire:

Technology is increasingly available that enables retailers to alter prices on certain products based on customers’ intentions to purchase or not purchase other products. Researchers at the University of Arkansas label the practice “sequential pricing” and claim it can be highly profitable.

According to a new study from the university, sequential pricing occurs when a seller, aided by technology, is able to set the price for a subsequent product based on a customer’s interest in or preference for an initial product. 

They are not talking about reducing the price on something based on what the shopper just bought, or even added, to his or her shopping cart. Au contraire, they are positing that “sequential pricing” can be used to increase prices, resulting in higher profits. 

That’s great in theory – but can you imagine the consumer firestorm that will be set off when, say, Amazon (who I don’t think will do this, just to be clear), raises the price on a pair of jeans because you added a matching pair of shoes or a shirt to your shopping cart?

Textbooks, The Supreme Court and The Grey Market

Before they come to the US to start grad school, many in India are (or they were, a few years ago) advised by the wise to buy their text books for the 1st semester in India. Doing so, it is said, can save them a couple of hundred dollars because the exact same textbooks cost four or five times more in the US. 

The reason is that while $120 for a textbook in the US is not exactly chump change, it’s not a deal-breaker either. However, Rs 7000 is still an enormous amount of money in India. So Wiley, McGraw Hill and others make low-cost versions of American textbooks (other books too, actually) for sale in the 3rd world – as a form of price discrimination. The quality of the paper used and possibly the cover, are the only two things that can be used to differentiate between the two versions.

As anyone with common sense and/or a background in business knows, such pricing differences give rise to arbitrage opportunities – as long the cost to “move” the goods between the two markets is less than the price difference. And it looks like someone was quite successful in doing exactly that – at volumes high enough to attract a lot of attention and a lawsuit.

And when the lawsuit made it all the way to the Supreme Court, the pricing strategy was dealt a potential death blow yesterday.

So we have this, by way of the SCOTUS blog:

A Thai national (Kirtsaeng) came to this country to study at Cornell and U.S.C.  To subsidize his educational expenses, he resold textbooks purchased by his family at bookstores in Thailand.  All in all, he sold several hundred thousand dollars’ worth of textbooks imported in this way, reaping a net profit in the range of $100,000. 

When his activities came to the attention of Wiley (a major American textbook publisher), a suit for copyright infringement predictably ensued. The district court found for Wiley and imposed statutory damages of $600,000.The Second Circuit affirmed.

The Supreme Court disagreed. The Justices said that the first-sale doctrine applies to all books, wherever made.  So even if you buy a book made in England, you can resell it without permission from the publisher.

The pharmaceutical industry, in theory, should of course be affected more than anyone else – but FDA rules and various other “safety” laws are probably going to help it. 

But what about others? For example,  Costco. It lost a similar case a couple of years ago, against Omega watches (it had wanted to reimport Omega watches from foreign markets where it could legally buy them more cheaply than in the US and resell them to US customers in its US stores). 

It will be interesting to see how companies respond to this. In the short term, consumers will benefit, but in the long term, prices may rise for everyone since companies will want to compensate for any lost profits. 

The Tyranny of Channel Bundling: Who Captures More Value?

A while ago, I compared the plight of someone interested in just one channel on Cable TV to that of a Hershey Special Dark Chocolate Bar fan that has to buy an assorted basket with 99 other types of chocolate, just so he can get what he wants.

Well, bundling is back in the news, thanks to an NYT article that talks about how all Cable TV subscribers in certain markets have to pay more every month, because a sports team (the Dodgers, in this case) is going to charge more to carry its games. So it doesn’t matter whether you are a Dodgers fan or not. In fact, it doesn’t matter if you strongly prefer reality shows to sports.

As long as you live in a market with some people that like Dodgers games and Time Warner Cable carries their games in your market, you get to pay more. Naturally, that offends notions of fairness.

But Matt Yglesias at Slate thinks that this reasoning is naive and instead argues that:

Say your monthly cable bill is $60 –> You only watch 5 channels 99.99% of the time –> Your per channel cost is $60/5 = $12.

He concludes, implicitly, that

a) You value each channel at $12 or more, and are therefore happy to pay $12*5 = $60 for the bundle, regardless of what else is in the bundle that you don’t watch.

b) Even if your bill goes up to $70 or $80 because of other non-watched channels becoming more expensive, you shouldn’t complain.

[He further asserts that unbundling here won't help because cable companies will find a way to charge you $12/channel if they eventually go the a-la-carte route and that the only good solution is to have more competition.]

I get the competition part, sure, but what about the rest of it?

There are two ways to look at it. 

a) Each time the price of your cable bundle rises because of the Dodgers or someone else raising their prices, even if you don’t “consume” their channels, you are giving up some of the value that you previously captured for the channels that you watch (so the gap between “B” and “C” in “B minus C” keeps getting smaller).

If this keeps continuing, eventually, what you pay for each channel is going to be more than the value you assign to it. Naturally, your Cable TV company will likely get you to just under that point so they don’t lose you. That’s the point in having a near monopoly, no? [This is where the competition part comes in.]

b) From an economics’ perspective, with channel bundling, more consumer surplus (the area under those demand-supply graphs, for the more academically minded) is being captured by the companies (Slide 5) and not consumers. Since content creators and distributors “collaborate” to maintain status quo, I doubt if this is likely to change in the near or distant future.

In both situations, since one could argue that consumers are being harmed, should regulators take a close look?

Renting Space And WiFi To Customers…The Coffee Is Free

Just the other day I wrote about how you are not buying coffee or frozen yogurt at Starbucks or Zinga, respectively. What you are instead buying is the ambience and the buzz…(full article here).

An enterprising entrepreneur in Russia has taken this model to its logical conclusion by “renting” space in cafes to customers and plying them with free coffee (here’s the NPR article that reported it).

As noted by by Professor Marty Lariviere at Kellogg who discusses this on his blog, 

In many service settings, the cost of providing a service depends on choices customers make after they have contract with the firm. You and I can have the same Internet service provider and pay the same monthly fees. However, if one of us is a serious movie junkie and is streaming videos every night, then the costs we impose on the system differ. A Starbucks is no different. If you get your coffee to go while I camp out to write a blog post, I am using more resources and may, in fact, have paid less than you if I bought a smaller drink.

The point in bold is key…that’s because, in the services business, while each customer pays the same amount for the same item, the cost to you can vary wildly, ultimately impacting profitability. This, in turn, makes pricing extremely important…and the right pricing model needs to take into account the behavior and usage patterns for different customer segments, the associated variation in costs, the right way to spread fixed and variable costs, etc.

Coming back to Russia though, one would imagine that this innovative model works best when the target consumer segment is made up of lingerers, students and others that place a premium on access to the coffee house and the amenities it provides, rather than just the coffee.

Clearly, those that come in for the coffee and are likely to drink it on their way to work or back from work will probably gravitate to other coffee houses. But, as the NPR article says, Clockface Cafe (or Tsiferblat, in Russian) already have 9 outposts and the founder is thinking of setting up shop in London next. So there is certainly an unmet need here. 

Will Clockface eventually bring this model to the US? Will American entrepreneurs beat them to the punch and get started sooner? I don’t see why this wouldn’t work here, do you (have you ever counted the number of half-day or all-day lingerers at your local Starbucks)? 

PS: This whole thing also reminds me of Airline Clubs in airports…where frequent flyers with annual memberships and others that splurge on “day passes” pay for access to the space, an hour or two of calm before a flight, coffee, free snacks, WiFi, newspapers and magazines, etc. Don’t they represent a manifestation of this model also – with a customer loyalty element thrown in?

Scalpers: Batman’s Real Bane?

A bunch of Batman fans were not able to see the movie on its opening night because scalpers were selling tickets for 500% or even 800% more. 

As a consumer, naturally, I don’t like it. 

I don’t like this “secondary market” because I am forced to pay significantly more for something that I think I should be able to buy at face value. And this practice of course, is not limited to the US by any means. When you want to see a (over?)hyped movie in some countries, you go to the venue knowing that “scalpers” might be selling them for 2x or 3x their face value at the gate. Or here in the US, for sold-out concerts and such (add movies to this category now), you might check out StubHub or Craigslist to see if scalpers are selling them there. Or, if you live in certain states where ticket-scalping is illegal then you check out scalpers’ legal offices in neighboring states. 

But from an economics perspective,

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