Part of the beauty of Uber is that the payment process is all automated. Once your ride is complete, the firm bills the credit card they have on file, minimizing the time it takes to wrap up your trip; there is no fussing over payments and tips with the driver. But how should the driver be paying Uber? The driver after all is dependent on Uber to match them with riders. Currently, the drivers pay (effectively) by sharing their fares with the company. However, the Economist argues that such an arrangement is inefficient (Pricing the surge, Mar 29).
There is some evidence Uber’s surge pricing is improving taxi markets. The firm says drivers are sensitive to price, so that the temptation to earn more is getting more Uber drivers onto the roads at antisocial hours. In San Francisco the number of private cars for hire has shot up, Uber says. This suggests surge pricing has encouraged the number of taxis to vary with demand, with the market getting bigger during peak hours.
However, the inflexibility of Uber’s matchmaking fee, a fixed 20% of the fare, means that it may fail to optimise the matching of demand and supply. In quiet times, when fares are low, it may work well. Suppose it links lots of potential passengers willing to pay $20 for a journey with drivers happy to travel for $15. A 20% ($4) fee leaves both sides content. But now imagine a Friday night, with punters willing to pay $100 for a ride, and drivers happy to take $90: there should be scope for a deal, but Uber’s $20 fee means such journeys won’t happen.
Despite the revenues a matchmaking fee generates, it may not be Uber’s best strategy. A fixed membership charge is often firms’ best option in two-sided markets. By charging drivers a flat monthly fee Uber would generate revenue without creating a price wedge that gets in the way of matches. Since stumping up cash might put infrequent divers off, they could be offered a cheaper category of membership. Uber should keep its surge pricing in place. But to make the market as big as possible, and really revolutionise taxi travel, it might need to retune its fees.
Imagine that you are a service provider and you have two ways of reaching customers. One way has you selling directly to customer while the other goes through a middleman and requires paying a commission. If you have a limited capacity, how much should you allocate to one channel over the other? What if you have to sell though the channel requiring a commission first so you cannot easily reallocate capacity between the channels?
That is the challenge facing many restaurants who offer reservations through OpenTable. Many restauranteurs game the system and may be less than honest on OpenTable about available capacity. Here is how MainStreet explains the issue (How to Tell if the Restaurant Is Lying to You, Feb 10).
Longtime OpenTable user Marcy Schackne offers testimonial validation. She checked OpenTable to book at the Palm steakhouse in Bal Harbour, Fla; it showed up full, but when she called and asked for a table, she was promptly given a reservation.
Precisely the same happens at hundreds of restaurants every night.
What gives? Dennis Lombardi, executive vice president for food services strategies at retail consulting firm WD, said that for many restaurants, the $1 per diner they pay OpenTable for a booking – on top of a fixed monthly fee – “rankles.”
They think they can book diners more cheaply themselves,” he said.
Adi Bittan, CEO of feedback service OwnerListens, with many restaurant clients, added: “For times when they expect to be full based on past experience, they do not want or need to take the OpenTable reservation. They’re taking a gamble, because they could end up with empty tables — and then the diner will walk by and see it — but it’s a calculated gamble based on probability. Since most of us, restaurant managers included, are not economists or mathematicians, we understand this dynamic intuitively but will often get those exact probabilities wrong.”
Meaning the restaurant bets that it doesn’t need OpenTable, but the empty chairs it winds up with make a mockery of their inductive capabilities.
I’m not really an economist nor a mathematician, but I have thought about this problem. (more…)
One of the most basic tools in yield management is overbooking. For any service provider, capacity is perishable. Having an airline seat, restaurant table, or doctor sit idle is expensive so if you cannot be certain that every scheduled passenger, diner, or patient is going to show up, overbooking reduces the chance that capacity goes unused. Indeed, we have had a number of posts on overbooking over the years.
Because it doesn’t overbook, JetBlue enjoys the lowest rate of involuntary denied boardings in the industry: only 18 people out of 21.3 million passengers through the first three quarters of 2013, the latest period for which data are available. Virgin America, with a bump rating close to JetBlue’s, oversells only on certain flights and usually limits the number of seats directly to the number of no-shows it expects in coach, spokeswoman Jennifer Thomas said in an e-mail. On the other end of the spectrum, Southwest subsidiary AirTran Airways had the highest rate among U.S. non-regional airlines required to report oversales, with 1.28 passengers bumped for every 10,000 travelers (or 1,800 customers in total during the period).
Several analysts expressed puzzlement over why JetBlue has avoided a common industry practice that can tip a particular flight’s financial performance from loss to profit. The airline also doesn’t advertise its practice, so most people are unaware that it doesn’t overbook—including at least one Wall Street analyst who covers the company. “It’s a bit of a head-scratcher,” says Seth Kaplan, managing partner of Airline Weekly, an industry journal. “It’s all about the extra few hundred dollars that can turn a flight profitable, especially when it’s relatively free money.”
Restaurant reservations remain an endless source of fascination for me so I was struck by a recent article on Slate suggesting that restaurants sell reservations (Restaurants Should Sell Reservations, Dec 28). Here’s the pitch:
Walking past a bunch of people standing in line to wait for brunch tables just now, I’m reminded that there seems to be a compelling logic behind the idea that restaurants ought to sell reservations separately from food or drink. The price of a steak is determined by the food cost and the food cost ratio that a restaurant needs to make its economics work. But as there’s clearly higher demand for a table Saturday at 7 p.m. than Tuesday at 5 p.m., making the Saturday reservation should cost you extra.
The author notes that Alinea here in Chicago sells reservations (which we have covered before with its sister restaurant Next) and argues that while Alinea is very high-end that a similar logic should hold at less lofty places.
But for a more ordinary restaurant—good food, good service, good decor, but nothing to make a huge fuss over—timing is really important. A table outside on a nice day at the prime brunch hour is a delight, over and above the value proposition of the food. Putting the table and the time itself up for sale over and above the price of the food would be a smart move.
I am not much of a soccer fan. Hence, I don’t really care that tickets for next year’s World Cup tournament go on sale today — except, as MarketPlace reports, the sales process is crazy complicated and kinda interesting (A confusing path to get World Cup tickets, Aug 20).
This figure gives an overview of the phases of the sale.
At a high level, the processes is broken into phases that reflect when the schedule is known. If you buy now, you don’t know where or when your preferred team is playing. If you wait until Phase 2, you will know just when and where your team is playing. By the third phase, the tournament is starting. For more, you can peruse the official FIFA brochure on how the process works.
What’s really interesting here is that both Phase 1 and Phase 2 include lotteries. So it’s not completely accurate to say that tickets go on sale today. Rather you can enter the lottery today but you will have the same chance of winning if you enter in early October. Why go through so much trouble?
Congestion is a common problem in services. A large number of customers put demands on the system all at the same time and delays ensue. A few weeks ago we posted about GymFlow, an app that tries to address congestion at health clubs by providing better information. GymFlow doesn’t tell you can’t go to the gym at 5:30. It just points out that the gym is going to be a whole lot less crowded if you got 3:30.
Now the Wall Street Journal has an article on a different way to ease congestion by relying on games and lotteries (Gaming the System to Beat Rush-Hour Traffic, Aug 1). It reports on the work of Balaji Prabhakar, a Stanford Computer Science professor, who has tested out various systems to get commuters to tweak their travel habits. The article’s author discusses his approach here:
Here is a summary of one of Prabhakar’s at his place of employ.
His team recently brought the technique home with a federally funded experiment to help Stanford keep its promise to Santa Clara County to alleviate rush-hour traffic. The 3,900 participants—a significant share of the relevant pool of 8,000 parking-permit holders—installed devices on their cars (soon to be replaced with a smartphone app) and got points for arriving and leaving an hour before or after the rush hour.
The popularity of the Chutes & Ladders-like game stunned Stanford’s director of parking and transportation, Brodie Hamilton. He doubted people would take the time to spin the electronic dice to play it, and insisted that Mr. Prabhakar include an auto-play feature. But, Mr. Hamilton says, “I have people on my staff who play it regularly. People are really into it. Balaji was right!”
About 15% of the trips taken by participants have shifted away from rush hour. Students tend to come and leave later; staff tend to come and leave earlier. Smartphones make all this easier to implement: A new mobile app tracks bikers and walkers and gives them points, too.
Those who commuted off-peak got points to play in the on-line game with a chance to win cash. We are not exactly talking a year’s tuition here. The program’s website touts “random cash rewards from $2 to $50.”
Check out these two images from the Wall Street Journal (Airline Seats Available for Elite Fliers Only, July 12). Both show available seats on an American Airline flight from LA to New York. The first shows what’s available if you lack any status in American’s frequent flyer program. The second shows what seats are offered to a flyer with sufficient status in the frequent flyer program.
To be clear, these seating charts are for the same flight at the same time — all that differs in one’s frequent flyer status. Further, while this example comes from American, other airlines play similar games.
Unlike American, Delta Air Lines shows the Preferred seats it has held back for elite customers, but doesn’t allow regular customers to book them until 24 hours before departure. At that time, Preferred seats are offered for a fee to nonelite-level customers.
US Airways also blocks seats for elite-level customers and labels them Preferred. The airline sells what it calls Choice seats in rows near the front of the cabin for $5 to $99 one-way that don’t have extra legroom but do have early boarding privileges. On the whole, US Airways says 9.5% of its coach seats are labeled Choice. Preferred, Choice and exit-row seating, which is sometimes sold for a fee, account for an average of 30% of coach seats on the airline’s planes.
Those seats open up to customers without seat assignments who don’t want to pay starting 24 hours before departure, US Airways said.
Not to surprisingly, a lot of customers find these games rather annoying. In the American example, there is one seat to be had for free for a non-elite flyer in what can only be described as a crappy location. The article has this wonderful quote “American says it doesn’t think blocking open seats from view pressures customers into paying for extra-legroom or Preferred seats.” which makes you wonder whether the folks at American are naive or dishonest.
TKTS has long been a Time Square fixture. For those unfamiliar with it, TKTS is a non-profit that sells discounted tickets to Broadway and off-Broadway shows. It recently celebrated its fortieth anniversary and Marketplace had a story summarizing its business (Broadway discount booth TKTS turns 40, Jun 26).
“Shows look at their inventory the day before and they say: I’ve got tickets to sell, I don’t have tickets to sell,” says Victoria Bailey, executive director of the Theatre Development Fund, a non-profit that owns TKTS.
Bailey says TKTS sells nearly 2 million tickets a year. Theaters get the ticket money, and TKTS takes a $4 service charge. Bailey says a good year on Broadway isn’t necessarily a good year for TKTS.
“A good year for TKTS: You need a lot of shows running, doing well enough that they keep running, but not so well that they don’t have empty seats and need us to sell seats for them,” she explains.
That’s all good. The quote in the story that got me thinking, however, was the following.
Larson notes critics have said TKTS pushes ticket prices up because theaters know that they can get rid of seats if they overcharge. TKTS’ Victoria Bailey says Broadway ticket prices have risen sharply over the years. Tickets now generally run $100-150, but can easily be more than twice that. Still, she says, you don’t have to shell out that kind of money to see a show. You just have to wait.
It’s an absolutely gorgeous in Chicago today. It’s so nice that when our son said he wished he had a Little League game today, my wife and I said that we would see about getting Cubs tickets for tonight’s game against the Rockies. So where should I go look for tickets? Should I buy them from the Cubs themselves or look on the secondary market? The secondary market, of course, means StubHub, the partner for most Major League Baseball teams for reselling tickets. Here’s how the Chicago Tribune puts it (Baseball teams get dynamic with ticket pricing, May 12).
Teams deal with StubHub because the online reseller provides a trusted outlet for season ticket holders to dispose of tickets to games they don’t attend. Buyers also have confidence that tickets on StubHub are not counterfeit.
But the first signs of backlash against StubHub appeared in the past offseason, when MLB renewed its five-year agreement with the website.
Two teams, the New York Yankees and the Los Angeles Angels, opted out of the partnership to form their own ticket exchanges with Ticketmaster because they wanted more control over pricing on the secondary market, said Bob Bowman, CEO of MLB Advanced Media.
StubHub spokesman Glenn Lehrman was more blunt: “There’s one clear reason why those teams are not using StubHub. They did not like to see tickets resold below face value. We let the market dictate prices.”
The Cubs also considered opting out. Team officials were unhappy after some of their tickets were listed on StubHub for less than a $1, not including fees, for the team’s final three home games last season. In 2012, the Cubs lost more than 100 games for the first time since 1966.
To address some of the league’s concerns, StubHub now includes fees in ticket listings. The cheapest baseball ticket on StubHub is $6, which includes commissions and a delivery fee.
The Cubs also are one of two teams that cut off StubHub sales six hours before game time, up from two hours in 2012. By ending sales on StubHub earlier, the Cubs presumably hope to sell more last-minute tickets.
Getting moved from coach to the front of the plane is one of the nicer things that can happen on a long flight. If you fly a lot (especially on full fare tickets), getting upgraded can be a routine occurrence. Of course, that raises the question of why airlines pretty much give upgrades away. Yes, it makes sense to take care of really good customers particularly when moving someone up to business class costs the airline very little. But there is no guarantee that high status frequent flyers necessarily want the upgrade more than some more lowly coach passengers. That is, Mr Executive Platinum may not be willing to pay more than Ms. No Status for the privilege of escaping the cattle car.
Airlines overseas have started auctioning off upgrades, with travelers in economy or premium-economy cabins bidding against each other for seats that offer better space, food, service and sleep. Bids for premium seats that otherwise might fly empty begin online weeks in advance and typically close 48 hours before takeoff. The company behind the auction technology says it may come to the U.S. soon.
So far, airlines say travelers end up spending more for upgrades in online auctions than they would spend at check-in. Unlike a casual offer at an airport kiosk, the auction system can generate excitement as fliers strategize about how to win.
“You can buy the cheapest ticket and still have a chance of sitting in business class,” said Danny Saadon, North America vice president for El Al Airlines, where the average winning bid for a business-class upgrade is $800. That’s a deal when the airline’s business-class tickets cost anywhere from $3,000 to $10,000 more than coach.
Different airlines run the auction in different ways since the system from Plusgrade, a New York City company, allows flexibility. An airline can choose who can participate in the auction so it may choose to offer the opportunity to bid to all customers or only those that bought in a particular fare class or to those that meet a certain profile. Besides access to business class, El Al also auctions off empty middle seats to those in couch want some extra elbow room. (more…)