Biggas Savings

A funny commercial from a while back uses puns aimed at my adolescent sense of humor. Kmart wants to entice potential customers into its store, so it discounts the complementary product. I always enjoyed playing this video to classes.

How Vail changed the economics of skiing

WSJ:

Ski resorts used to be weather-dependent businesses — essentially farmers who grew snow. Bad snow year, bad revenue. In 2008, Vail CEO Rob Katz asked a different question: what if we could sell skiing in advance, before anyone knew how good the conditions would be? The Epic Pass was the answer.

The business model is textbook: bundle access to dozens of resorts onto a single pass, price it attractively, sell it in the offseason, and collect nearly $1 billion in revenue before a single lift spins. Weather risk transfers from the firm to the customer. Cash flow becomes predictable. Vail can now plan capital investments, acquire more resorts, and grow — all without watching the sky.

The tradeoff is equally textbook. To make the pass look cheap, you make day tickets look expensive — some now top $300. That's not accidental; it's price discrimination by design, nudging committed skiers toward the bundle. The side effect is crowded slopes and squeezed independent resorts that can't compete with a bundle their customers already bought.

Economies of scope between SpaceX and xAI

Link:

The merging of what is arguably Musk’s most successful company, SpaceX, with the more speculative xAI venture is a risk. Founded in 2023, xAI’s main products are the generative AI chatbot Grok and the social media site X, formerly known as Twitter. The company aims to compete with OpenAI and other artificial intelligence firms.

...

With this merger, he plans to use SpaceX’s deep expertise in rapid launch and satellite manufacturing and management to deploy a constellation of up to 1 million orbital data centers. This will provide the backbone of computing power needed to support xAI’s operations.

HT: MarginalRevolution

Anchor Shock Pricing: How Vail makes most of its money

In 2008, 65% of skiers at Vail Resorts bought single-day lift tickets. Today, 75% of their customers purchase season passes, committing thousands of dollars months before the first snowfall.

People are shocked by the $329 daily ticket price and then realize that “If I ski just 3-4 days this season, the annual pass pays for itself!” 

In other words, Vail "anchors" price expectations at $329, and then offers consumers dramatically lower average daily prices with the annual pass, and they switch. This is akin to bundling as a form of indirect price discrimination but includes a bit of psychology. 

CITE:  DemandCurve.com 

HT: Justin

Airline Yield Management

 It had been hard to manage an airline in the Covid-19 and early post-Covid-19 era. As Alison Sider
 at the WSJ reports:

Airfares plunged in the early months of the Covid-19 pandemic, only to soar in 2022, when airlines couldn’t add flights quickly enough to keep up with the frenzied urge to travel. Then prices tumbled when airlines expanded service and flooded into popular routes. Now airlines are constraining supply and lifting prices. 

Now it looks like things have settled back into a yield management problem. The quantity demanded has been  rising for the past three years, but the seems to have plateaued.

Airline price increases have begun to outpace inflation.

This suggests that demand has shifted out enough that it is constrained by airline capacity. Airline load factors have rebounded to pre-Covid-19 levels. At these higher prices, Airlines would like to sell more seats, but there are no more seats, at least in the short-run.

Acquired Podcast: Costco

Listening to the Aquired podcast about Costco.  Lots of interesting history and economics in it.  

• The start of discount retailing by figuring out how to skirt manufacturer RPM's (resale price minimums) with the "club format," Fed-co (nonprofit) to Fed-mart (
• The first US Hypermarket, idea imported from France
• How Costco evolved from retail to wholesale warehousing, where manufacturers take care of all the logistics: once a pallet is dropped off, it is immediately available for sale.  
• To Price club, which opened up to credit union members as a benefit, which had a huge word-of-mouth advertising.  
• Limiting # SKU's (#products=3800) to increase volume and get lower prices from manufacturers.
• To adding hot dogs from Hebrew National, $1.50 for hotdog and a drink, Costco's only loss leader
• Costco turns inventory 12x/year, where vendors finance Costo's inventory because it sells faster than the payment terms (pay manufacturers within 30 days).
• To two-part pricing (selling at MC and making money on the membership fees).  
• Costco clones:  Wal-mart, Home Depot, Starbucks

HT:  Charles

The NFL sends Mediocre Teams to Play in Europe

The NFL schedules a handful of games each season to be played in Europe, London and Munich this year. With plans to expand the program to Africa, Asia, and Australia, The Times of India asks why they disappoint their European fans by not sending "contender teams."

Since the league’s initial foray into Europe in 2007, 42 games have been held on the continent. Yet, only two of these contests featured both teams with winning records - the New York Giants and Green Bay Packers in 2022 and the Kansas City Chiefs and the Miami Dolphins in the 2023 season.

One possibility is that they don't need to - the stadiums sell out anyways. I am reminded of when I lamented to a friend that I have a fondness for the Chicago Cubs but they, at that time, had not won a World Series since before the Depression. His reply was that the fans are so loyal that they do not have to. Why pay for a better team roster when you already sellout the stadium? If you cannot adjust capacity to meet greater demand, adjust demand to meet capacity.

Echo versus Kindle

 

Amazon's strategy for devices is to generate "Downstream Impact"or DSI. That is, if you buy a Kindle Ebook reader, you are probably going to buy high margin Ebooks from Amazon. The hope was that if you had an Echo in your home, you would impulsively order products from the Amazon store. Subsidize the device in order to generate profit from high margin complementary DSI purchases. Turns out, not so much for the Echo.

Echo and other devices are generally sold at or below the cost to make them. The devices team, in internal pitch meetings to senior management, would claim the top end of a range of estimated revenue from downstream impact, some of the people said. The team relied heavily on the metric to justify costs related to Echo and other devices and the growing size of staff devoted to the business, which at one point swelled to more than 15,000 employees across all its products.

Sufficient DSI has not materialized for other Amazon devices such as game streaming on Luna, an in-home robot Astro, a video-calling gadget Glow and the Halo fitness tracker. The last three are discontinued or will soon be. With 500 million Echos in use, it might be hard to discontinue.

All my rich friends sold too early...

Bubble-ologist Robert Schiller developed the CAPE [Cyclically Adjusted PE Ratio] as a measure of the long-term value of a stock:. The idea is that a stock's price will eventually return to its CAPE average.

Financial Times on the usefulness of the CAPE:

Cape ticks many boxes you’d want from a rule-of-thumb: simplicity, comprehensibility, and clarity. Its relationship to long-term returns is statistically significant but for short-term forecasting it is next to useless. And even longer-term forecasting accuracy depends on the future looking like the past. We should celebrate it as a superb starting point for market analysis — one that furnishes market outsiders with probing questions to put to their fund managers. But let’s not overburden it with unrealistic expectations of precision.

Spotify's Complements?

 

Anne Steele at the WSJ reports that Spotify is the leading audio-streaming platform with 600 million users and a 30% market share. Even so, it seems to be struggling. After a couple of rounds of layoffs, some false starts from expansion into podcasting, concert promotion, and audio books, it earned its first quarterly profits since 2022 in the last quarter of 2023. Competition with tech giants Apple, Amazon, and Google have kept margins low - for every dollar it earns on music streaming, it pays $0.70 in royalties.

But its tech giant competitors do not have to earn profits on streaming music. Their other services can be complementary to audio-streaming. For example, Apple would be happy if Apple Music operated at a loss so long as it helped to sell more high-margin iPhones. This is exactly what Netscape complained about in the late 1990s when Microsoft gave the Internet Explorer away for free. Netscape's revenue model was based on the sales of the browser. Microsoft's was based on sales of operating systems. So long as a free browser sold more computers with Windows already preinstalled, Microsoft was happy. How could Netscape compete with free? How can Spotify compete with subsidized competitors?

Steele hints at this problem by suggesting that Spotify could be a takeover target for companies like Microsoft, Netflix, or Tencent. These companies all have services that could be complements for music streaming. They might be willing to subsidize Spotify if doing so sells more operating systems, movies, or video games.

The Economics of Skiing

Vail's two-part pricing (Fixed Fee + Low Daily Price) from The Economist:  

With the Epic Pass, Vail has changed the offer. Skiers can now get unlimited skiing at a whole pack of resorts cheaply, but only by committing before the season starts. The result, says Stuart Winchester, who runs the Storm Skiing Journal, an industry blog and podcast, is that for the first time in decades skiing in America is reliably profitable. But it has come at a cost to competition. “Everyone else is swimming around. Vail is buying everything,” he says.

Vail now owns 41 resorts, including more than two dozen tiny hills on the East Coast and in the Midwest, which they consider “feeder” resorts that nurture new skiers who eventually may come west. In 2018 a competing pass, the Ikon, was launched by the Alterra Mountain Company, owned by the billionaire Crown family of Chicago, which shares revenue with independent resorts. Nowadays, most of America’s biggest ski areas are on one or the other pass.

Gas Stations -> Convenience Stores -> Restaurants?

Gas stations have always offered complementary services. In the 40s and 50s it was mechanic services, in the 60s, and 70s, it was wiper and oil changes, and in the 80s and 90s it was convenience store items. Pay-at-the-pump may have given drivers less of a reason make in-store purchases. Ease of substitution across gas stations makes the search for higher margin complements a profitable strategy.

However, the current trend is for more gars stations/convenience stores to offer fresh food. This may be the result of declining demand in convenience store mainstays - cigarette smoking is steadily declining and more fuel efficient cars go longer between fill ups.Perhaps the transition from selling packaged Slim Jims and Corn Nuts to preparing fresher foods is to get a leg up on the transition to EVs.

But a shift to electric vehicles should go well with the food business if it means consumers spend longer stretches of time charging their vehicles. 

Car Wash Industry Dynamics

"The Economics of Everyday Things" a recent episode on Car Washes. Lots has happened to transform this industry.

•  Growth - The industry is growing fast thanks, in part, to less "home production."

  When we started in— back in 1996, more than half of people with cars in the U.S. reported that they most frequently wash their car themselves in the driveway. Our most recent survey, we’re approaching 80 percent now use a professional car wash.

• Bundling - New technology has allowed new pricing schemes more like subscription services or gym memberships that are likely to increase consumer surplus capture.

We fix a little RFID sticker in the bottom corner of your window. And it knows exactly what wash to get, how often you’ve washed and what vehicle you’re in, any contact information. It’s kind of like a barcode, if you will, for your vehicle. And when you pull up to the pay station the gate goes up immediately.

• Input Substitution - Increasing use of technology has reduced labor costs.

A modern car wash today can be run with three or fewer employees versus having, you know, 12 to 25 at some stores back in the day. In those days, car wash owners were almost like farmers. I mean, you’re always watching the weather. You’re always trying to anticipate what demand is going to be so you can manage that labor expense.

All these changes have manager implications. Growth often allows firms to exploit sale economies. Bundling is easier with multiple establishments run under the same brand. Fewer workers could mean more decision rights to each one suggesting more incentive compensation.

Amazon Ads

From Podean

Early on [2012], Amazon executives realized that they were sitting on incredibly valuable online real estate (in the form of data collection and customer accessibility) that they knew they could monetize, but they had to be careful not to negatively impact the customer experience in the process.

We can think of this ads as a complementary product to Amazon's electronic marketplace or a demand-side economy of scope: once Amazon had the online marketplace, targeted ads were a logical add-on.

[REPOST from 2017]: Reduce Prices When you Acquire a Complementary Good: Amazon/Whole Foods

The WSJ is reporting that Amazon will begin steep price cuts at its newly acquired Whole Foods affiliate. One way to think of the merger is that it couples Whole Foods's retailing niche with Amazon's logistics expertise. These are complementary assets. Lowering the margin on one increases the demand for the other. This is likely to be profitable for Amazon. Some evidence that this will benefit consumers can be gleaned from the effect of the announcement on traditional retailers.

The announcement Thursday, which sent stocks of traditional grocers into a fresh tailspin, said price changes for both staples and more high-end foods would go into effect as soon as Amazon closes the Whole Foods deal on Monday. 

Stripe Press

Stripe is a tech firm that allows just about anyone to collect payments digitally. It has been very successful, valued at $50 billion and on track to process $1 trillion in payments. It has also launched a book publishing arm, Stripe Press, in a space where the big five publishing houses collectively have 80% market share and independent publishers have regularly entered and regularly folded. Tyler Lasicki has asked, and answered, why an online payments company would think it could do better than real book nerds?

Stripe Press isn't publishing just any books.

Publishing content about technological and economic advancement is one way, albeit probably not the most capital efficient way, of helping entrepreneurs build and start businesses (which eventually may help grow the GDP of the internet).

They also publish physical rather than digital books aimed at potential entrepreneurs who may be eCommerce shy. Many of these new small scale internet entrepreneurs will end up using Stripe's payment services. Stripe Press in the publishing business with razor-thin margins is a complement to Stripe services in the hugely profitable online payments business. So Stripe Press doesn't have to do better than real book nerds. Heck, it can even sustain losses, so long as the books create enough Stripe using entrepreneurs. 

Stripe Press is not much different than the bar offering free peanuts to sell more beer.

HT: Marginal Revolution

Marketing to influencers

Is EU headed for recession because of US?

When the Pope called on the US to stop raising interest rates because it would force the rest of the world into recession, he must have been reading my previous post, What happens when US Interest Rates Rise?  

Now the The FT reports that the EU is saying the same thing, that US efforts to fight inflation by raising rates will lead to recessions in other countries:

The Federal Reserve is leading a worldwide rush of central bank rate rises that risks tipping the world into a recession, the EU’s top diplomat said, as he warned the union is not fighting its corner in the world. 

Josep Borrell, the high representative of the 27-member bloc, said central banks were being forced to follow the Fed’s multiple rate rises to prevent their currencies from slumping against the dollar...

Are algorithms that give us what we want discriminatory?

Ad algorithms "learn" what we want by our behavior, e.g., by maximizing click-through-rates (CTR's).  For example, women are more likely to be shown ads for shampoo and conditioner, while men see ads for products that combine the two :

...Irish Spring offers men one green bottle with the instructions: “Pour it on your head and let gravity do the work.”

Which brings us to the US Justice Department, which charged Meta with "discriminating against Facebook users based on their race, gender, religion and other characteristics." 

To settle the charge, Facebook said it "would work with HUD" to alter its algorithms to achieve less discriminatory outcomes, i.e., to show us ads that we don't want to see, e.g., for example in areas where we may not want to live. 

 We have met the enemy and it is we.

How to raise prices without raising prices

 From WSJ:

1. Unbundling services, lowering product quality and devaluing reward programs

... airlines have unbundled services so that fliers pay extra for checking luggage, boarding early, selecting a seat, having a meal and so on. The charges for these services don’t show up on the ticket price, but they are substantial. Second, the airplane seat’s quality, as measured by its pitch, width, seat material and heft, has declined considerably, meaning customers are getting far less value for the ticket price. And third, many airlines have steadily eroded the value of frequent-flier miles, increasing costs for today’s heavy fliers relative to those in 1996.

These practices are also common in other industries, whether it’s resort fees in hotels, cheaper raw materials in garments and appliances, or more-stringent restaurant and credit-card rewards programs.

2. Shrinkflation and the quantity surcharge

To raise prices covertly, the brand or the grocery store sells more of the higher-margin items by increasing their availability and visibility in the store, or withdrawing popular lower-margin items from circulation for a period. The prices don’t change, but customers pay more.

3. Disappearing deals and coupons

...Even increasing the threshold for free shipping, from $49 to $99, is tantamount to a price increase. 

4. The sunk costs of memberships

...f you consider that the warehouse club requires a separate mandatory membership fee, the customer is actually paying more per ounce at the warehouse club.

5. From good to better and from better to best

Another way to raise prices covertly is to introduce new, higher-quality versions at higher prices. 

BOTTOM LINE:  The smartest companies don’t raise their prices with great fanfare, because direct price increases are often met with customer resistance.

HT:  Quinn C.