Five Lessons in Pricing
Between the pandemic and the uneven economy, this year has led to some unconventional pricing decisions.
Good morning. Today, we highlight the surprising economics of Christmas tree farming, the reasons to expect a boom in manufacturing, and a chance to ask questions about the looming PPP loan tax surprise.
Here’s an analysis of five Covid-influenced pricing decisions businesses made this year: “Free Zoom, $13 unlimited Walmart delivery, a $30 Disney movie, a $399 iPhone and a $2,495 Peloton bike: This year, companies in tech and other industries used the lever of pricing in ways that managed the pandemic’s obstacles or even capitalized on its opportunities. Ordinarily, an economic downturn causes a decrease in demand for many products and services. Yet the Covid-19 pandemic’s widely varying impact on different corners of the economy tested traditional pricing approaches. Companies played up conveniences, knocked down barriers and offered new services and new choices—with mixed results.”
“A seminal 1992 research paper looked at a $275 bread-baking appliance sold by Williams-Sonoma. When the retailer added a second model, similar to the first but larger and more expensive at $429, sales of the cheaper model doubled.” READ MORE
Americans have been starting a “staggering” number of businesses: “According to data from the Census Bureau, the number of new business applications filed in the United States surged during the third quarter of this year to nearly double the quarterly average of the past decade. The Census Bureau's data, which are aggregated from various mandatory filings that businesses must make with the IRS in order to obtain a tax identification number, show that more than 1,500,000 business applications were filed between July and September of this year. It's a dramatic spike in new business applications, which average about 800,000 per quarter and rarely deviate very far in either direction regardless of macroeconomic conditions.”
“Perhaps even more encouraging is the fact that the number of what the Census Bureau calls ‘high propensity applications’ has shot upward too. Those are businesses that have already surpassed several hurdles in the IRS application process and are deemed to have a ‘high propensity of turning into businesses with payroll.’”
“There's more good news: The growth in new business applications isn't concentrated in any particular part of the country. In fact, the Midwest led the way during the third quarter and every single state reported an increase, according to the data.” READ MORE
THE 21 HATS CONVERSATION
Is there a surprise PPP tax bill in your future? Here’s the gist: If you get your PPP loan forgiven, it essentially becomes taxable income. For many, that’s surprise No. 1. But it gets worse: You may not be able to deduct the expenses you paid with your loan. That’s surprise No. 2 -- and potentially a significant tax liability. Concerned? Join us Tuesday at 3 ET when we’ll try to sort out this and a few related issues with a couple of experts: Chris McKee, managing partner of accounting firm Venturity Financial Partners, and Lou Mosca, chief operating officer of management consulting firm American Management Services. Bring your own questions!
The surprising economics of Christmas tree farming: “Today, 98 percent of all real Christmas trees on the market come from tree farms. According to the USDA, there are 15,000 of these farms in the U.S., ranging in size from 2 acres to 9,000 acres. Though the market is largely stratified, the 434 largest farms control ~75 percent of the total supply. At any given time, there are 350 million Christmas trees growing on these farms in various stages of development — and in a typical year, ~25 million will be harvested for sale. Roughly 2 out of every 3 of them come from just 4 states: Oregon, North Carolina, Michigan, and Pennsylvania.”
“‘It takes so long to make a profit in this business and anything can happen in that time,’ [said Beth Ann Bossio of Quarter Pine Farm]. ‘This year, we had a late frost that damaged a good chunk of our Douglas firs; I know farms that had no rain and lost 100 percent of their trees.’”
“Today, 81 percent of the 96 million Christmas trees Americans display each year are artificial.”
“One of the industry’s biggest players, Balsam Hill — which sells high-end fake trees that run up to $3,000 — posted ~$150 million in revenue in 2018, far more than the largest Christmas tree farms.” READ MORE
Do the female founders of startups face unfair scrutiny? “To many in Silicon Valley, the toppling of so many of the industry’s most prominent female founders signals something much bigger and more disconcerting than the usual game of startup musical chairs. “There are very few women leaders who rise to the level where they get press and attention, and at some point, they’re all disappearing,” says Sara Mauskopf, the cofounder and CEO of Winnie, a San Francisco-based childcare platform that has raised $15.5 million. Throw in a slew of other female founders who remain atop their companies but who have faced pointed scrutiny of their management styles and cultures—including the CEOs of skin care startup Glossier, retailer Rent the Runway, dating app Bumble, and lingerie company ThirdLove—and it’s hard not to wonder, as Mauskopf does: ‘What the heck is going on? And why is this only happening to women?’” READ MORE
The soaring price of metals suggests investors see a manufacturing boom coming: “Prices for copper have risen to their highest level in almost eight years. Iron ore, the main ingredient of steel, is one of the best-performing assets in 2020. Other raw materials, such as aluminum and zinc, have added roughly 15 percent since the end of September and 40 percent or more since mid-May.”
“Metal prices will likely receive an additional boost from a shift toward renewable energy, traders and large producers like Freeport and Glencore PLC say.”
“Green energy projects from electric-car charging stations to wind turbines use large amounts of copper and other metals, contributing to the excitement in the sector.” READ MORE
These are good times for cannabis companies: “After years of sluggish official sales, buying soared in early March and April when lockdowns began and consumers, fearing supply disruptions, stockpiled the drug. Though many expected the initial surge to fade, monthly sales have kept hitting records. One of the top cannabis data aggregator and research companies Akerna said sales on Green Wednesday, as the eve of Thanksgiving is known, climbed by 80 percent above the daily average this year, hitting an all-time one-day record. The company’s calculations, based on data collected from its partner dispensaries in 19 U.S. states and adjusted to project the full market, show total cannabis sales of around $238 million during the Thanksgiving weekend, nearly 14 percent above last year.”
“By keeping people at home, limiting their entertainment options and adding to stress, the pandemic has helped to drive demand for cannabis for much of the year.” READ MORE
Two British gas station entrepreneurs, former attendants, are bringing their business model to the U.S.: “Two brothers who became billionaires in Britain by focusing on food over fuel at gas stations are looking to roll out that model globally in the hope of finding broader success. As teenagers, Mohsin and Zuber Issa worked at a filling station in northern England owned by their parents, who emigrated from India in the 1960s. They used that experience to expand from the purchase of a single derelict site nearby into one of the world’s largest independent gas-station operators, with over 6,000 sites across Europe, and more recently in Australia and the U.S.”
“They took advantage as big oil companies sold off underperforming gas stations, snapping up sites in the U.K. and then in Europe.”
“Their playbook: doubling down on higher-margin food, selling fresh and packaged groceries and franchising some of the world’s most recognizable fast-food brands.”
“David Marcotte, a retail analyst at research firm Kantar, said the brothers have raised standards at the U.S. stores they have bought but questions whether Americans can be persuaded to shop for groceries at gas stations.” READ MORE
Workplace break rooms are proving to be Covid hotspots: “They’re often small, indoor spaces where people let their guard down to socialize. Even those most careful about masks must remove them to scarf down lunch. That leaves workers vulnerable to a disease that’s primarily spread through close, person-to-person contact. At the Mayo Clinic in Rochester, Minn., over 900 staff members were infected with the coronavirus in November, says Laura Breeher, an occupational medicine specialist there who helps track the spread of the coronavirus among its staff and patients. Once Mayo’s contact tracers started looking into the high number of infections, they found work-related exposures mostly happening in break rooms and lunchrooms.” READ MORE
The U.S. has passed the hospital breaking point: “A month ago, in early November, hospitalizations passed 60,000—and kept climbing, quickly. On Wednesday, the country tore past a nauseating virus record. For the first time since the pandemic began, more than 100,000 people were hospitalized with COVID-19 in the United States, nearly double the record highs seen during the spring and summer surges. The pandemic nightmare scenario—the buckling of hospital and health-care systems nationwide—has arrived. Several lines of evidence are now sending us the same message: Hospitals are becoming overwhelmed, causing them to restrict whom they admit and leading more Americans to die needlessly.” READ MORE
IN CASE YOU MISSED IT
On Saturday, we asked Morning Report readers to tell us about their businesses: We’re always looking for people to highlight in articles, podcasts, and interviews. And we’re always looking to learn more about the needs of our subscribers. If you haven’t seen it, it’s an interesting read. And it’s not too late if you’d like to tell us about your business.
Tony Hsieh had been spiraling downward for some time before his tragic death: “By August, it was announced that he had ‘retired’ from the company he built, and which Amazon had let him run largely autonomously since paying $1.2 billion for Zappos in 2009. Friends and family members, understanding the emerging crisis, attempted interventions over the past few months to try to get him sober. Instead, these old friends say, Hsieh retreated to Park City, where he surrounded himself with yes-men, paying dearly for the privilege. With a net worth that Forbes recently estimated, conservatively, at $700 million, Hsieh’s offer was simple: He would double the amount of their highest-ever salary. All they had to do was move to Park City with him and ‘be happy,’ according to two sources with personal knowledge of Hsieh’s months in Utah.”
“In the end, the king had no clothes, and the sycophants wouldn’t say a f------ word,’ said a close friend who tried to stage one of the interventions, with the help of Hsieh’s family.”
“‘People took that deal from somebody who was obviously sick,’ encouraging his drug use, either tacitly or actively.” READ MORE