Bait & Switch (#406)
Too many of the hottest companies of the 2010s set prices that were unsustainable. Today, we're seeing the results of that trend.
Recently, I took what felt like a fairly expensive Uber ride from the San Francisco airport. Ridesharing used to be far less expensive than taking a taxi, but that is not the case anymore; in many places, it’s equally expensive, if not more.
However, despite the price hikes, the driver shared that he was struggling to make a profit lately. He said Uber is now taking more than 50% of the fee for many of his rides in an effort to cover their costs.
This shift in ridesharing mirrors a dynamic visible in industries as varied as grocery delivery, cloud services and video streaming. Customers who were initially hooked by bargain rates now find their bills ballooning as all these services raise prices.
The streaming example is particularly striking. Though streaming was positioned as a disruptor to the cable bundle, I know many people today are longing to return to those bundle days, rather than paying for 10 different streaming services that now cumulatively cost more than cable ever did.
This trend is not a coincidence. The attractively low prices that many of these businesses debuted with were never sustainable, as they didn’t even cover the cost of running those companies. Now that we have seemingly left the age of abundant, cheap capital, investors aren’t willing to let companies operate in the red in perpetuity. Hence, rampant price increases.
These services aren’t valueless, but it’s hard to deny that many of these companies would never have attracted as many customers had they entered the market with the higher prices we see today. Customers were drawn to those services for the low price offered, not for the price needed to keep the company going. This reality calls into question the fundamental viability of these business models.
The businesses that endure in the long run are ones that can attract customers with sustainable pricing that ensures healthy margins for the company. Many of the hottest companies of the 2010s didn’t meet that standard.
Sustainable pricing impacts both product/service providers and customers. Let’s examine each.
Impact For Product/Service Providers
Price is a neutral indicator of value. You need to charge a sustainable price to discover if customers value your product enough for your business to be viable in the long run.
For example, let’s say you run a delivery business that charges a 10% service fee. Customers love your pricing and sign up in droves; unfortunately, your company requires a 30% fee to generate a sustainable profit. Wouldn’t you want to know sooner rather than later whether customers are willing to pay the 30% you need? If they aren’t, you don’t have a business—you essentially have a Ponzi scheme that may collapse as capital runs low and growth slows.
Similarly, if you have a competitor that sets unsustainably low prices to win market share, don’t race them to the bottom by slashing prices, as that’s a no-win game. Stand your ground and work on demonstrating superior value.
Impact For Customers
As a customer, it always feels good to get a deal even if you know the price isn’t sustainable. It’s fine to accept that bargain, as long as you understand you’ll either get less than you expected, or you’ll eventually see a price hike.
We have seen this at Acceleration Partners time and again. Every so often, a competitor swoops in offering a prospect six months of work for free. We often attempt to dissuade the client from going this route for all the reasons above. Typically, the competitor that offers free work overloads their staff with more accounts than they can handle—often up to 30 per person—and the results are so poor that the prospective client doesn’t want to even try again with another agency at all.
I am always surprised when clients are surprised by this outcome. Offering services for free does not indicate a position of quality or strength—often, it hints at desperation.
Customers should be wary of demanding unsustainable prices that leave their vendors stretched perilously thin. However, I have seen far too many procurement departments who do exactly that, heavily prioritizing price over value. Getting a low price is great in the short-term, but the customer will inevitably suffer in the long run when the vendor’s business erodes because they can’t deliver a quality product or service at that price.
We all want a good deal, but sometimes we find ourselves being penny wise and pound foolish, resulting in poor outcomes for everyone involved.
Quote of The Week
"If a deal sounds like it’s too good to be true, it probably is." - Author Unknown
Have a great weekend!
Another example of what I like to call ‘happy now, sad later’, which I think is an unfortunate byproduct of how our brains work. Makes us way too subject to focusing on the short term and neglecting the bigger picture (see smoking and credit cards for two more examples). This isn’t the first time tech-oriented companies have taken unsustainable paths, and sadly, it probably won’t be the last.
I’ve set into practice that when I procure things, after getting the offer from the supplier, ask them to slightly raise their prices (5-10%). If it’s a small supplier, I usually say it’s because I know running small businesses are hard. If it’s a slightly bigger one I justify it by saying “I already know I might ask for re-dos, or additional help - consider it a buffer”.
The ROI on those 10% are usually very high. You show that you value the partnership and that you will ask for the best of them - and you willing to pay for it.
Also, it tends to shock the supplier and create great word of mouth.