My econ professor has another video out!  Great stuff.

“The Tea Party: People who believe in Social Darwinism, but don’t believe in Darwin.”

-Nick

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If you’ve driven along 580 lately, perhaps you’ve seen this sign, protesting the construction of a giant new premium outlet mall.  The sign claims the planned Paragon Outlets hurts the local community.  How so? I wondered.

Image courtesy of http://www.arounddublinblog.com

The mall, which is scheduled to open in November 2012, is being built on a huge empty lot, not some protected national forest or even active farmland.  Construction costs will pump $162 million into the local economy, and the outlets are expected to generate over 2000 jobs when they open.  Sales tax receipts will bring in valuable revenue for the city for decades to come.

Looking over the list of stores (Barney’s, Sak’s, Michael Kors, etc), it’s pretty clear I won’t be shopping there, but I’m not sure exactly how a non-competitive retail construction project of this magnitude could hurt the community.

After some digging, I found out the group behind is the protest is a local carpenter’s union.  Their concern is that Paragon Outlets “fails to require their general contractor to use subcontractors that pay area standard wages and benefits.”

Substitute “market” for “area standard” and you have yourself a pleasant oxymoron.  By definition, subcontractors (or any employer) MUST pay market wages and benefits or else they wouldn’t have any employees!

The union’s literature also accuses the project of “KILLING OUR ECONOMIC RECOVERY” and includes an image of Death with a scythe.  A little dramatic.

-Nick

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WhatsYourPrice.com is an online dating website where “generous” suitors pay for dates with “attractive” singles.  It’s a business model that really stands out in a crowded space, and is the perfect example of the free market at work.

Customers browse the profile of prospective dates and bid cash for the privilege of taking them out on a first date.  I think once you get over the inherent awkwardness, it makes a lot of sense.

Both men and women can sign up in the “generous” category (but not surprisingly, it’s mostly guys):

What’s Your Price has been the target of criticism, with people calling it borderline prostitution and saying the women are basically hookers.  These people are wrong.

If there’s someone you really want to meet, based on their profile and picture, what’s $50 or $100 in the long run?  If that’s what it takes to stand out from the crowd and get noticed, what’s wrong with that?  It’s pretty much exactly Coca Cola does when it spends the big bucks to buy advertising time.  They can buy the airtime, but if the message doesn’t connect, they won’t sell any soda.  Your WhatsYourPrice bid only buys you a first impression; it’s a foot in the door, and nothing more.  And just like the ad that doesn’t connect, if your winning personality doens’t impress enough for a second date, you lose.

Now if it really works out, you’ll probably want to leave out the WhatsYourPrice details when you tell your grandkids how you met.  But a lasting relationship really is priceless, so I don’t see the problem in spending (or accepting) a few bucks initially to see if it’s worth pursuing.

WhatsYourPrice.com is social economics at its best.

Did You Know?

Their unique dating system is “patent pending” with the US Patent Office: Application No. 61407831.

If necessity is the mother of invention, I would guess the creator of WhatsYourPrice.com was a busy (read: un-attractive) but “generous” (read: rich) individual.  Indeed — enter former Fortune 500 executive and serial entrepreneur founder Brandon Wade:

-Nick

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Prefer nonstop?

Who doesn’t?  When booking flights, no one ever thinks to themselves, “man I could really go for a layover or two.”  Everyone “prefers” non-stops, which is why it’s silly to put the checkbox that many flight search services do:

I never checked that box before today.  I was afraid that doing so would hide some amazing deal on a connecting flight.  If you’re curious, it doesn’t; it just makes the non-stops show up first in the results list.

So I guess it’s really about value.  Sure, I prefer a non-stop flight, but if I can save serious money by arriving an hour and half later, I’ll be taking the connecting flight.  Some customers will value that hour and half more than others.  Is it worth an $20 to fly direct?  An extra $100? $500?

What else do you “prefer” when flying, that there aren’t checkboxes for?

• Prefer no red-eye flights.
• Prefer no really early morning departures.
• Prefer no middle seats.
• Prefer to fly only the airline where I earn loyalty miles.
• Prefer no checked-bag fees.
• Prefer no TSA groping.
• Prefer to fly first class.
• Prefer only flights with movies.
• Prefer no crying babies.

Except for the TSA groping, (paying extra won’t exempt you from that experience) nearly every preference has a price.

-Nick

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If you want to fly with your dog, it’s not cheap.  On Southwest, it costs $75 each way.  On Alaska Airlines, it costs $100 each way.  This is another example of airline silliness.

Consider:

• When ticket prices for people occupying a real seat are cheaper than the dog fare, you must still pay the full dog fare.  I asked if I could just buy another ticket instead, and completely oblivious to the silliness, the airline rep said, “yes of course, but you’d still have to pay the dog fee, and they would still have to stay under the seat in front of you.”
• Babies under 2 fly free, as long as they don’t occupy another seat.
• Other carry-ons that fit under your seat fly free.
• A pet carrier essentially takes the place of another carry-on, meaning increased revenue opportunity for the airline in checked bag fees.

I’m not suggesting the airline shouldn’t charge anything to let dogs on board, because in doing so they are accepting a certain level of liability, whether it be passenger allergies, annoying barking, or even a vicious shih-tzu attack.  And to a certain extent, customers are willing to pay something for the privilege of transporting their pooch.  But I’m suggesting the airline could actually make more money (if that’s their goal) by reducing their pet fee to, say $25.

Currently the airlines are pricing themselves out of the business.  By agreeing to lower price, they’ll attract more dog customers.  And when you’re selling something that costs you nothing, it’s always best to sell as much of it as you can.  The margins on under-seat storage are incredible!  The pricing should focus on achieving maximum volume, not gouging the few flyers who have no alternative.  Plus you get to make more on checked bag fees as the dog replaces another carry-on.

-Nick

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Airfare pricing is a silly dance. It’s possible to fly across the country and every passenger will have paid a different fare. I know they’ve got the actuaries and statistical models to maximize profitability, but I’m curious how a different pricing structure would work. I propose a different kind of transparency. Instead of customers and airlines playing chicken with each other, what if they offered a predictable, fair price well in advance, and increased in a predictable way as the departure date got closer?

It wouldn’t have to be a screaming deal, but it would give incentive for customers to buy early knowing prices will only go up if they wait. And the airline will sell more tickets earlier on, so they could fill up the plane without a profit-killing fire-sale. Then, if there are still empty seats at truly the last-minute, the company can offer a super-cheap fare to real impulse flyers.

This way, customers can feel confident they’re making a smart decision to hand over the money now, knowing prices will only go up — and not wanting to gamble on true last-minute availability.  With their constant price changes, airlines seem to go out of their way to make customers feel unconfident, and that’s not a great way to do business.  Beyond the assurance they’ll reach their destination safely, people want to feel the got the best deal available to them with the least amount of headache.

Say it goes something like this:

• 4+ months out: $200 – 1/3 of tickets
• 2+ months out: $250 – 1/3 of tickets
• 1+ month out: $300 – 1/3 of tickets
• 2 days out: $100  (Unfortunately for the airline they can’t distinguish between the true last-minute impulse flyer who will buy only if the price is low enough, and the last-minute “emergency” flyer who will buy regardless of price)

The airlines think they can manipulate demand more than they really can. Most people I know have a destination, and then seek out the lowest fare using the online tools available. Nobody is going to wait until the last second to book a ticket in the hopes of an amazing deal if they have somewhere they really need to be. Under my pricing model, these are profitable customers that are willing to pay a good fare in advance. But when the plane is empty and the price is still artificially high, they know they’re getting taken.

It will certainly be a tough model to stick to, like the car dealer who says no-haggle pricing and means it.  But consider other industries using a similar model. Hotels, another business with a limited inventory that goes 100% to waste when unused, often offer discounts for customers who pre-pay in advance. Registration fees for conferences start cheap well in advance, but go up as you get closer to the event. Customers who can plan ahead are better off, and they’re happier. And in general, aren’t companies better off when their customers are happy? Maybe some brave airline will try my experiment.

-Nick

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Seat Maps

Should Airlines show their seat map to customers shopping for tickets?  I’m going to argue they should not.  Not all do (kudos to them), but many have started to show the seat to customers before they buy their tickets.  And what do you think when you see a seat map like this?

When I see this, I reason that the price of the flight is likely to fall.  If 84 out of 116 coach class seats (72%) seats are empty, it seems silly to pay whatever they’re currently asking (unless it’s a limited time screaming deal).  They need to fill the seats, and the current price isn’t getting the job done.

My Suggestion

Of course, the opposite is true if you look at the seat map and the plane is nearly full, but I have a solution that fits for both scenarios.  Instead of showing customers the actual map, airlines could just have a little red note that says, “Only 3 seats remain at this price.“

Could they be lying?  Absolutely, customers would have no way of knowing.  But in either case, it builds a sense of urgency that they should buy now.  I think Zappos does a great job of this, and I doubt they are lying in the way I could totally see an airline.  When you select a color and size combination of a shoe that is running low on inventory, they let you know.

If the plane is still empty, all the airline has to do to stay “honest” is change the price after those “final” seats are sold.  Even a few pennies or a dollar would technically maintain the truth behind “only a few more left at this price.”  Plus, customers understand that airfares can change on a daily or even hourly basis.

When they show the seat map, they’re essentially eating into their own profitability, encouraging customers to wait for the inevitable sale.  It’s a case where too much transparency can be a bad thing.  Well, good for the customer but bad for the airline.  But then the customer isn’t too happy either because they have something they’d like to take care of right away but feel like they risk being punished financially for doing so.  Tomorrow I’ll discuss my pricing proposal for airlines to improve the ticket-buying experience.

-Nick

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Yes.

There has been a lot of discussion lately on the rising cost of tuition and the piles of student debt that is crushing recent graduates, but the fact remains higher education is an excellent investment.

It will remain so until employers stop valuing college degrees.  And I don’t see that happening anytime soon.  You can watch as many Khan Academy videos as you like, but no employer will treat that education — however excellent it may be — as the equivalent of a 4-year degree (at least yet).

Some facts:

• The average student debt is $24,000.
• Over a lifetime, the average college graduate with a bachelor’s degree will earn nearly $1 million more than their counterparts with only a high school education.
• The unemployment rate among college graduates is 4.5%, which compares very favorably to high school graduates (9.7%) and those with no high school diploma (14.6%).

I guarantee you Bill Gates and Mark Zuckerberg are the exceptions to the rule.  If you want to work for a living, college is clearly the way to go.

Now is your high-priced liberal arts education worth it?  Probably not.  You can hang out in the Quad discussing gender roles in the 12th century French feudal system until the cows come home, but unless your dream job involves working at Medieval Times, it may not be the best use of your time or tuition dollars.

In the marketplace for workers, employers value education.  But more than that, they value skills.  They’re asking, “How will this candidate help my company?”  For many positions, a college degree is simply part of the screening process.  But it’s only the price of entry; it may get you in the door but after that you’re on your own.

Every now and then you hear stories about people suing their schools because they couldn’t find a job.  Take a little personal responsibility.  It’s not the school’s fault employers don’t see you as a valuable worker.  Imagine how much less valuable you’d be without your education (see numbers above).  And now you’ll forever be known as the person who sued their school, and who’s going to want to hire that baggage?

To be sure, the education system is broken.  The idea of an ivy-walled university as a repository for knowledge is 1000 years old.  The world is a very different place but education is making changes as the market forces it to. (A little too slowly for some.)

Tuition hikes are here to stay, as long as people keep paying.  It’s supply and demand.  Instead of saying education is overpriced today, maybe it was just under-priced before, relative to it’s value in society.  As the price of school draws closer to it’s value and perhaps beyond, that’s when you’ll see sweeping changes in both education and company’s hiring preferences.

-Nick

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I’m about a third of the way through Priceless: The Myth of Fair Value (and How to Take Advantage of It), and I think I’m going to call it quits.  I was expecting something more like Freakonomics or something more Gladwell-esque, but definitely didn’t find it here.  Author William Poundstone is a serious academic and writes like one too.  There are some interesting real-life examples, but they are too few and far between.

I got lost in the economic theories and academic studies.  Priceless is not a book for the armchair economist, and I didn’t really get any valuable takeaways for the biz either.

-Nick

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It took a while, but I finally finished Michael Pollan’s In Defense of Food: An Eater’s Manifesto.  You may recognize the cover with its lettuce and the book’s key advice: “Eat food.  Not too much.  Mostly plants.”  It was a very interesting read, thanks Chris for the recommendation.

Pollan believes our “Western Diet” is the root cause of our obesity epidemic and the ills that go with it: heart disease, cancers, and diabetes.  For centuries, humans around the world lived perfectly healthy lives on an incredible variety of local diets.  Then, food became a business, and the business became an industry, and the industry became a powerful government lobby, and everything changed.

The Western Diet is characterized by lots of processed foods, refined grains, dairy products, high fructose corn syrup and soybean oils, and cheap red meat.  As food became more industrialized, quality took a backseat to quantity, and we’ve paid for it with our health.  One interesting statistic Pollan cites is that in 1960 we spent 17.5% of our income on food and 5.2% on health care.  Now we spend just 9.9% on food but 16% on health care.  What kind of implications does this have for a government that heavily subsidizes industrial farming and now has to pass health care legislation partially to deal with the monster it helped create?

The above graphic is from TheSocietyPages.org.

The food industry has done an amazing job of producing cheap calories; Americans consume 300 more calories a day than we did 30 years ago.  The problem is these calories don’t supply much nutritional value beyond simple energy.  We are bombarded with 17,000 new food product launches each year and are no match for the industry’s $32 billion annual marketing budget.  Other cultures spend more on their food, feel less guilty about what they eat, and live longer healthier lives.

One thing I would have liked Pollan to address is how much the increased food production was out of necessity to feed a rapidly growing global population.  Not everyone can grow their own organic food, shop at farmer’s markets, and join local CSAs, as he recommends.  Some degree of mass production is required to feed 7 billion mouths.  Only eating food your great grandmother would recognize as food is another difficult recommendation to follow in today’s world; it’s a very different place than it was 100+ years ago.

The more health-conscious we become, the fatter we get.  Pollan calls this the American Paradox, and warns against what he calls the growing cult of nutritionism.  Any food manufacturer can spin their product to make it sound like it’s good for you, so maybe it’s best to avoid packaged foods that make health claims.  When Lucky Charms can claim to be “heart-healthy” because of their whole grains, these claims have lost all meaning.

So all in all, very interesting read.  I found it a little academic in parts, but it touches on history, evolutionary biology (and suggests our bodies may eventually adapt to our new diet), business, economics, and politics, and covers a topic, food, that’s near and dear to my heart.

-Nick

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