The Risks of Surge Pricing
Would you spend $400 to take your five-year-old bowling?
Good Morning!
Here are today’s highlights:
Ami Kassar thinks Silicon Valley could learn something from Main Street.
Gene Marks warns of tax deductions that are ending while new regulations are arriving.
Carey Smith says it’s a mistake to cut back on customer service.
PRICING
Now everyone’s trying surge pricing, including restaurants, movies, gym classes, and even bowling alleys: “Alex Yenni recently endeavored to take his wife and 5-year-old son bowling with another family in Petaluma, Calif., close to their home. The plan quickly went into the gutter. Mr. Yenni, a 42-year-old advertising executive, tried to book online in advance at AMF Boulevard Lanes, where he wanted to reserve two lanes for two hours at 3 p.m. on the last Thursday of the year during winter break. The price quoted by the website, run by national operator Bowlero, knocked him over: $418.90. ‘This strikes me as outrageous for a pedestrian family activity,’ he said.”
“Debbie Roxarzade, founder and CEO of fast-casual restaurant chain Rachel’s Kitchen in Las Vegas, introduced dynamic pricing for takeout orders from three of its eight locations on third-party apps during the pandemic.”
“Prices swing by the hour by roughly 10 percent to 15 percent depending on the time of day and demand, she said. A few guests have commented on the higher online prices, though she said pushback has been minimal.”
“Rachel’s Kitchen will potentially use dynamic pricing for those dining in also, according to Ms. Roxarzade, although she acknowledged the practice could be a tough sell for regulars, and would require extra training for staff who ‘would have to explain to guests why they spent $15 yesterday and $16 today.’” READ MORE
FINANCE
Ami Kassar says Silicon Valley could learn a few things from Main Street: “Perhaps one domino of the SVB debacle that will fall is the divide between Silicon Valley and Main Street. If some of the tools that Silicon Valley companies had available to them will now go away, their entire ecosystem will have to adjust. In this process, Silicon Valley companies might need to start thinking and acting more like Main Street companies and playing by their rules.”
“I have watched Silicon Valley Bank over the years and was always curious about how they got away with their work as an FDIC bank. They were always making aggressive loans that most others would never touch – and playing in a different league.”
“So much of the story in the press is about all these ‘start-ups’ at risk. But let’s be clear: These aren’t companies in small garages just getting going. These are much bigger start-ups that have venture capital behind them.”
“Their VC funds might need to ante up and help their companies out of the crisis they helped create with their banking friends.” [Editor’s note: It was a nice thought while it lasted. The federal government has since stepped in to guarantee all deposits.] READ MORE
Here’s how Silicon Valley turned on its own bank: “Max Cho found himself in the middle of a bank run while sitting on a shuttle bus in Montana. The co-founder of insurance startup Coverage Cat, Mr. Cho had landed at the Bozeman airport Thursday and boarded the bus for the hour-long drive to a startup founders’ retreat in Big Sky. Mr. Cho took his seat and scanned the group. Fellow passengers were frantically tapping on their phones, rushing to move their money. ‘The bank run,’ he realized, ‘was actually happening.’”
“It took four decades to build Silicon Valley Bank and its parent company, SVB Financial Group, into the startup world’s pre-eminent financier. It took 36 hours to dismantle it.”
“Social media, which hadn’t been a factor during the last banking crisis, pinged both fact and fiction around the world at lightning speed. Spooked customers whipped out their phones and opened their banking apps. With a few taps and swipes, their money was on its way.”
“Startups that didn’t have business accounts at other banks sent their funds anywhere they could. ‘They were wiring to their law firms’ bank accounts and, get this, into the CEO’s bank account,’ said Kathleen Utecht, partner emeritus at venture firm Core Innovation Capital.” READ MORE
It turns out the libertarians of Silicon Valley aren’t completely opposed to big government: “For decades, the dominant mantra of Silicon Valley‘s powerful has been that government is just a drag on their innovative spirit. Get regulators off our backs, they’ve argued, and we’ll improve people’s lives to an indescribable degree. Not at the moment. The same investors and entrepreneurs who argued for less government and less regulation in the past successfully lobbied for a government bailout of Silicon Valley Bank, which failed Friday as a result of astoundingly imprudent business practices.”
“Let’s call the roll of small-government advocates who got their wish for a big-government bailout. Start with billionaire hedge-fund operator Bill Ackman, who has advocated for self-regulation by the cryptocurrency sector and has pushed back against efforts by the Securities and Exchange Commission to regulate one of his investment funds.”
“Then there’s David Sacks, an intimate of [Peter] Thiel and Elon Musk, who were his partners in establishing and growing PayPal. Sacks and his friends have promoted a worldview that opposes progressive laws and regulations, including those aimed at reining in economic inequality.”
“By this weekend, Sacks was squealing: ‘Where is Powell? Where is Yellen? Stop this crisis NOW. Announce that all depositors will be safe.’” READ MORE
THE 21 HATS PODCAST: DASHBOARD
Taxes, Regulation, and a Punch to the Face: This week, Gene Marks discusses what it means for small businesses that some tax deductions are going away, some new regulations are arriving, and Joe Biden has released a budget proposal. He also counters the Bare Minimum Monday meme with a suggestion for what practitioners of Bare Minimum Mondays can do on Tuesday.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
CUSTOMER SERVICE
Carey Smith suggests answering your phone (you might learn something): “Frontier Airlines recently made headlines for eliminating its telephone customer service, instead requiring customers to converse with boxes on a screen. In the airline's investor presentation, the justification was revealed: Actual human calls were characterized as ‘unscalable, inefficient, and expensive.’ Not only that, the presentation went on to say that those phone calls left open an ‘avenue for customer negotiation.’ Imagine that!”
“It never ceases to amaze me how the same companies that gladly fork over vast sums of money to marketing agencies to ‘build their brands’ then go to such extraordinary lengths to undermine them. How difficult is it to part with a few more pennies and actually do the right thing, when it pays off in spades?”
“If you want to keep your good name, and keep those five-star recommendations coming (and why wouldn't you?), then it's vital to keep your customers happy when they ask for help. And that includes some good old-fashioned conversation between one human and another.”
“At the company I founded, Big Ass Fans, we … didn't view the customer as someone out to make trouble; for us, the customer really was always right, especially when they told us what we were doing wrong.” READ MORE
GOVERNMENT CONTRACTING
Small businesses are finding it harder to win government contracts: “Earl Stafford Jr. has been trying mightily to make a climactic switch for his government IT services company, from subcontractor to prime contractor status, in some ways an equivalent of a veteran teaching assistant to tenured professor. His Aperio Global has so far consumed subcontracting slivers from other companies that work directly with the Department of Defense, putting the roughly 30-person Reston [Va.] company more at the mercy of those prospective partners. To wit, Aperio Global is listed as a subcontractor on a government award that’s been protested — twice. ‘One that we have been waiting for, which would double the size of our company,’ said Stafford, Aperio’s chief executive.”
“Aperio is now spending thousands of dollars on consultants to help it get certified in the U.S. Small Business Administration 8(a) business development program for firms owned and controlled by socially and economically disadvantaged individuals.”
“But to break in as a prime contractor, it’s not just a matter of money, it takes time to dot i’s and cross t’s — time small businesses don’t always have. ‘A small company doesn’t have the talent that it can just sit on the bench,’ Stafford said.”
“A recent study by D.C. market intelligence firm HigherGov shows the number of small businesses nationwide that received government contracts hit 121,270 in 2010. However, by 2022, that plummeted by more than half to just 58,681.”
“‘I think that part of it is that the government is measuring and benchmarking the wrong thing,’ said Justin Siken, HigherGov founder.” READ MORE
ECOMMERCE
Leaked documents show that Shopify’s customer support for its merchants has deteriorated: “Shopify's Support organization includes thousands of employees who troubleshoot problems of the company's more than 1 million merchants over the phone or via live chats. Support staff tackles problems like technical issues with things like payments or checkout. These employees are also expected to educate merchants about Shopify's products and encourage them to explore new ways of growing their businesses. Cuqui's post goes on to say that Shopify's number of active merchants has ‘dramatically accelerated’ over the last six months, driven in part by a current promotion that reduces Shopify's subscription costs to $1 a month for three months on select plans.”
“‘This has stress-tested both our support efficiency and our merchant experience. Wait times are increasing. Our merchants aren't as satisfied as they used to be,’ [Clovis Cuqui, vice president for merchant acceleration] wrote.”
“Shopify executives have declared a ‘Code Yellow’ for its support organization, saying it needs to improve customer service levels ‘that have deteriorated beyond acceptable ranges.’”
“Shopify's support teams have long been a source of pride for the Canadian e-commerce company. But it was also one of the divisions that was most impacted by Shopify's layoffs of about 10 percent of its workforce last July.” READ MORE
ACCOUNTING
Do you know what your EBITDA-per-employee ratio is?
OFFICE SPACE
In Chicago, office buildings are spending tens of millions of dollars to try to stay competitive: “As downtown Chicago office buildings continue to struggle to recruit and retain tenants, some building owners have looked to reinvest in their properties, spending millions in order to make them more competitive. Recent rehabilitative plans at office buildings across the Loop show that there continues to be a ‘flight to quality’ when it comes to leasing activity. ‘In one of the recent deals that we've seen at 500 West Madison, KBS spent between $20 and $40 million to renovate that building and has since shored up the occupancy in that building,’ David Hoebbel, who leads Cushman & Wakefield's research team in Chicago, told the Chicago Business Journal.”
“He said the building is responsible for ‘one of the latest suburban-to-CBD migrations’ with Zoro.com signing a 42,000-square-foot deal there. E-commerce company Zoro.com consolidated its headquarters to floors 39 and 40 in the Accenture Tower after closing the other offices on the building’s 16th floor and in Buffalo Grove.”
“Another building that followed a similar path is 303 E. Wacker, which was traditionally more of a B to B+, but now has moved into more of an A-, according to Hoebbel. The 30-story building recently completed a $35 million renovation that included a full lobby renovation, a full service cafe and bar in the lobby, and a new penthouse-level tenant lounge.”
“‘Without the renovations in the last few years we’re talking about a building that would likely have some trouble leasing, but since those renovations, they have signed some major deals,’ Hoebbel said.” READ MORE
Thanks for reading, everyone. — Loren
Surge pricing is one of the absurdities of algorithm-driven customer service. As for Silicon Valley Bank, I love the irony of the libertarians of Silicon Valley -- those anti-government, anti-regulation folks -- clamoring for a government bailout. Ha!