Pricing to stay in business

How much does a single donut at Dunkin Donuts cost?  Calling around to a few stores I received the following 4 answers: $0.50, $0.69, $0.99, or $1.29? Are the stores charging $1.29 overpriced? Are the stores offering it at $0.50 discounting too much? The answer is “yes, it depends”. This same question applies across the QSR spectrum.

A thorough analysis of all transactions and an understanding of the locations is required to best answer the question. Using economic principles with the results displaying graphically, a business owner can make a more informed decision.  By understanding the local demand through the use of data insights techniques, he can work to maximize marginal profits. Typically this improves bottom line profits by several percent.  In a world of compressing margins, knowing where you can and can’t pass higher commodity costs to the consumer could mean the difference between staying in and going out of business.

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Pricing to stay in business

Flash Crash Aftermath

It’s been months since the flash crash that caused several major stocks to trade at values close to zero for a few minutes before returning to a more reasonable level. Since that time several mini flashes have occurred. And yet, no irrefutable proof exists to blame any one type of trader. Most importantly virtually no policy changes been enacted to prevent a repeat occurrence.

I contend no one type of trader is to blame, but rather all traders are to blame. When a $40+ stock is suddenly trading for less than a dollar, how does no one step up and offer 35? It’s equivalent to a company that sells 1 IPOD online every min to the highest bidder. If suddenly they started selling for $1, someone would step in and offer a “reasonable” price.

So the question is; why doesn’t this happen.

1) Black box trading programs which typically help make the market are deigned to shut down when massive swings occur to give a human the chance to override the program. Trading itself shuts down when this takes place, except that there are now secondary markets that don’t abide by these same rules.

2) Typical investors have stop losses in place. If they stock drops below a certain level they give the order to sell at any price. Usually this is the price they set but if there are no buyers in the market then they could sell for far less than intended.

3) The traditional market makers have vacated their usual roles. Black box programs have replaced them and reduced the overall cost of trading. The bid/ask spread is far smaller today than it was 10 years ago. They’ve left because they can’t make money.

Stopping these crashes from taking place doesn’t require placing blame on one of the 3 groups above. They are all to blame but each is doing what make rationale sense to them. What needs to take place is that when a listing exchange flips the breakers and halts trading all the secondary exchanges need to halt trading for at least the same amount of time, if not longer. What is needed is a chance for cooler, more logical heads to prevail.

Flash Crash Aftermath

What is the Value of Online Privacy?

Many people worry about what companies will do with all the data they are collecting on web behavior. Virtually every major website is keeping tabs your behavior through a variety of tags and various web analytics and tracking technology. Most are just tracking your actions on their site, but more and more companies are coming up with new innovative ways to track your behavior as you cross web domains, principally through the use of tracking cookies.

A recent Wall Street Journal article examining the 50 most popular US websites comments on the fact that many top internet firms aren’t even aware that 3rd party vendors are using their site to place such code on your computer. These 50 sites collectively placed over 3000 tracking files on a test computer with over 2/3rd of those files installed by 131 other companies “many of which are in the business of tracking Web users to create rich databases of consumer profiles that can be sold”.

Companies will claim that this monitoring is the price we pay for free services on the internet. Basic economics state this is not the case.

Companies have the ability to make a buck based on your work and are seizing it without even a thought towards compensating you for you data. Many don’t even ask for you permission and some have developed new flash-based cookies that redeploy themselves even after you have deleted them. At least supermarket, department and other big box stores have to ask, if you want to sign up for their “preferred customer tracking cards” and then use incentives to use them each time.

Since the data carries no value to a consumer, tremendous value to marketers and there is little harm in sharing, I say compensate consumers for their data. This practice is common place in surveys and study groups. All I’m saying is you should get your 1/10th of a penny.

What is the Value of Online Privacy?

$200 to Fly, $400 More to Bring Your Bag

Airline after airline is approaching bankruptcy only to be rescued by another airline. At the announcement of most of these mergers the airline proudly proclaims that they will be taking the best of both airlines and making one new better airline. In reality most of these mergers were done for two reasons. The airline wanted to buy more gates and reduce competition in its more profitable markets.

The major airlines do everything they can to manipulate the supply of seats from one city to another. Another way they accomplish this is by treating a seat on a flight differently for those flying direct than for those flying a connection. Same plane, same seat different cost. In many cases it’s pay more get less.

An example: To fly direct from LGA (New York) to DTW (Detroit) on a flight tomorrow the lowest fare on a major airline is $585. However, for flights on the same day you can fly to MCO (Orlando) for $215. What is incredibly interesting is that the $215 to MCO is a connecting flight which stops in DTW. By spending an extra $370 you get a seat on the same plane from LGA to DTW but you give up the seat from DTW to MCO and gain the right to check bags. You thought $30 to check a bag was a steep price. Keep in mind you could already be paying over $300 for that ability.

I’m a huge proponent of analytic based pricing; it’s what I do for a living. But, somewhere along the way airlines allowed computer pricing to take over and common sense went out the window. Then again if consumers want to complain they need to use the power of the purse. Next time you fly see if you can’t get less for more.

$200 to Fly, $400 More to Bring Your Bag