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Archive for the ‘Incentives’ Category

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.

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Uber is an interesting company. While you might argue that their business model is based solely on ignoring the existing regulatory structure of the taxi industry, they certainly have brought innovation to a staid market. They have gotten a lot of attention for the surge pricing program but it is also worth noting that they are doing something novel on the capacity management side of things. Uber does not employ it drivers. Instead, it deals with drivers as independent contractors. In particular, it does not schedule drivers the way, say, a city bus service would. The bus service can tell drivers when and where they are working. Uber can’t do that. It has to offer an incentive for drivers to be available when demand will be high. At the same time, it basically promises its customers that they won’t have to wait long for a ride. Obviously, surge pricing is part of this. Uber takes a fixed percentage of the fare. So if the fare is consistently 50% higher at rush hour, there is a clear reason to be willing to drive at rush hour.

But more generally there is a question of what is it like to drive for Uber. That gets to an interview with John Pepper (What happened when Boloco founder John Pepper became an Uber driver, boston.com, Feb 7 — with a hat tip to my sister for sending this to me). Pepper was the CEO of Boloco, a regional burrito chain, until he had falling out with his board. He then starting driving for UberX. UberX is the Uber service more or less anyone can get into. It competes with Lyft and Sidecar and is premised on people driving their own, standard vehicles. (In contrast, other Uber offerings are for black car service and require a sufficiently lux vehicle and a commercial driver’s license.) Pepper may have quit his job but he doesn’t mean he has to be doing this to put food on the table. He talks about dropping his kids off at a private school and then picking an Uber customer in his Tesla. What makes this interesting is that he brings the perspective of a person who for many years ran a business that hired lots of lower wage workers. Here are some of his interesting observations.

Q. Did you sign up because you wanted to learn about Uber?

A. Whatever business I do next, there’s a lot to learn from their model. Wherever possible, they leverage skills we already have– people already know how to drive. They set very, very clear expectations as to what constitutes success, and then they follow through with the metrics. There are no stories [from drivers] — they don’t want to hear why this customer was wrong, or that customer was crazy. There are these things that are rigid and effective, but I think they could really effect the world of restaurants and retail. …

Q. You write a lot about the ratings that customers give drivers, and how they made you pretty anxious.

A. Right now, the review process of employees is pretty broken in corporate America. Most of us have read Jack Welch’s book about how GE was so diligent about ranking people. But it’s hard to give fair and just performance appraisal. At Uber, they’re not evaluating drivers in that way. The drivers are being evaluated by someone who sees the full experience from start to finish. There’s no conversation to have, no discussion. It’s very compelling. People know moment to moment that they’re being evaluated. It becomes a norm, not a stress point. The good people surface to the top, and the people who can’t deliver consistently good service don’t make it. But they definitely expect the customers to weed out the bad drivers. …

Q. Does it feel like it would be a good job?

A. It’s very free. You can do nine hours, and stop on your own time, and not work the next day. There’s value to that flexibility. They’re guaranteeing $20 an hour at times, and I happened to make about that even when there wasn’t a guaranteed rate. I worked when I wanted to, and didn’t work when I didn’t want to. That sounds pretty good compared to working at a fast food restaurant, making $10, and not being very in control of your life.

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In the basement of the Kellogg School, there is a cafe. It’s a busy cafe, which says more about the available alternatives than about its absolute quality. Because it gets busy and because a good number of its customers are polite enough to walk out of class five minutes early to beat the crowd, I and my colleagues have learned that it is a much better to plan to go down for a sandwich a little before noon than a little after noon. According to CNBC, Goldman Sachs faces similar issues with queuing in its cafeteria and it actively tries to manage the system (The creepy capital efficiency of Goldman’s cafeteria, Oct 17).

The most crowded time of the day to eat lunch is, naturally, during lunch time. For most people, this falls around noon. This creates the phenomenon of the lunchtime rush hour. You know this all too well if you’ve ever tried to stop in your local chopped salad place at, say, 12:30 in the afternoon.

Goldman didn’t like the idea of its people waiting on long lines to get their lunch. People are capital to Goldman. It wants to use its capital efficiently. Standing on line waiting for dumplings or salad or a burger is not an efficient use of Goldman’s capital. …

The cafeteria has a set of timed discounts. If you show up in the cafeteria before 11:30 or after 1:30, you get a 25 percent discount on your food. Goldman incentivizes employees to avoid the rush hour.

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Getting people on and off planes is a fascinating topic. Most people have a very visceral response to it if only because it is a business process that we are routinely exposed that often does not run well. Why it doesn’t run well can be blamed on the airline (since there is not the same degree of process standardization in boarding that one sees at, say, a supermarket checkout) or our fellow travelers (since those idiots so often don’t follow instructions). There have been some recent innovations such as boarding passengers in a random fashion or allowing those who do not need an overhead bin to board first. Now Wired reports that other process changes are coming (Airlines Still Trying to Make Passenger Boarding Less Annoying, Aug 28).

The most unusual — and deceptively simple — idea is simply opening the door at the rear of the plane in addition to the door at the front. Alaska Airlines is trying this at a few airports, including its home base in Seattle and Mineta San Jose International Airport in San Jose, California. The idea isn’t entirely new — many airlines, including Alaska, open the front and rear doors at those airports where there is no jetway, only a staircase leading to the tarmac.

“We’ve been doing the dual-door boarding at some of our Mexico destinations for a while,” says Alaska Airlines spokeswoman Bobbie Egan. But now the airline has a new tool to help facilitate using both doors at other airports. “Because of the solar-powered ramp, we’re testing the idea of dual-door boarding at airports where we didn’t have it before.”

Yes, a solar-powered ramp. Mounted on wheels, the ramp can be driven to the backdoor of the airplane, and passengers make two switch-back turns down the ramp to the ground, providing an alternative to stairs for easy suitcase rolling and wheelchair access.

Using the aft door to unload passengers can reduce the turnaround time by up to 10 minutes, according to Alaska. Egan says the airline will continue to evaluate the data and feedback collected, but for now it’s a pilot project there’s no word yet on whether the process will be expanded to other airports.

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How do you feel about tipping? Are you happy to reward a well-done job or do you have more of a Mr. Pink attitude toward gratuities?

A pair of recent Slate articles got me thinking about tipping. The first is pretty straightforward and makes the case that tipping at restaurants should just be banned (Tipping Is an Abomination, Jul 9).  The argument is that the practice is bad for customers since it leads to uneven treatment and bad for workers since it allows employers to pay absurdly low wages. But what happens when a restaurant simply eliminates tipping? That is the topic of the second article written by a former restauranteur who did just that (What Happens When You Abolish Tipping, Aug 14). In lieu of tipping, the restaurant added an 18% service charge to the check. Thus it pricing was more like an auto service station that breaks out its labor charges from the cost of parts.

The primary reason for the switch was to have greater equity between the front and the back of the house.

We made this change because we wanted to distribute the “tip” revenue to our cooks as well as our servers, making our pay more equitable. Servers and cooks typically made similar base wages—and minimum wage was the same for both jobs—but servers kept all the tips, which could often mean they were taking home three times what the cooks made, or more. In California at that time, it was illegal to distribute any tip money to cooks. (Recent court rulings in the Western U.S. have loosened that restriction somewhat). By replacing tipping with a service charge, we were legally able to redirect about a quarter of that revenue to the kitchen, which reduced the income disparity and helped foster unity on our team.

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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.”

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How do you learn how crowded a service provider such as a gym (or a bar in Santa Fe) is without going? There is clearly some value in getting information on how congested the service provider is. At least some customers would come in to the gym if they knew it was very likely they would be able to get on their preferred piece of equipment while others would stay away if they knew the place was busy. The service provider arguably has an interest in providing some information. In a one-off setting in which the customer doesn’t deal with the service provider repeatedly, the customer may be dubious of a claim that the wait is short (for more on that, see here). For something like a gym, however, in which customers subscribe and have the option of switch providers, the service provider should have an incentive to provide information over time if congestion information allows customers to get more value from using the service and thus increases their chance of sticking with the service provider.

And now there is an app for that (Now There’s An App For Beating The Crowds At The Gym, Business Insider, Jul 11).

Enter GymFlow, a new startup created by four current and former students from the University of Southern California.

GymFlow launched at USC’s Lyon Recreation Center earlier this year in February. Within a month of launching, peak hour traffic decreased by about 20%, but the same number of people were still going to the gym, GymFlow’s business development manager Nhi Duong tells Business Insider.

GymFlow works by tapping into the gym’s IT center to provide real-time traffic data, since a lot of them require you to swipe a card at the turnstyle. GymFlow also uses that data to predict how crowded the gym will be in the future.

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It is the holiday shopping season so it will soon be the post-holiday returning season. Dealing with returns imposes serious costs on retailers. What are steps firms can take to control how customer return products? Is a Big Brother approach reasonable?

While the Children’s Place only requires an ID for a return without a receipt, a growing number of stores, including Victoria’s Secret, require that you let them scan your ID to return an item with or without a receipt.

According to the National Retail Federation, 62 percent of retailers have ID requirements. Among those who have similar policies for returns are The Finish Line, Home Depot, Target and more.

So where does your information go? Likely it’s being stored on The Retail Equation, a service which tracks how often you bring stuff back and identifies habitual returners. …

Return items too frequently, and you may lose your right to bring back your purchases anywhere.

This is from ConsumerWatch: Stores Requiring ID, Tracking To Prevent Repeated Returns (KCBS, Nov 20). Here is the full video so you can get your outrage and paranoia really racing.

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It’s a big week for on-line shopping so I thought I would discuss an Amazon program I stumbled across this weekend. My goal was to order a simple kitchen brush. A quick search showed that Amazon carried the product and that it was in stock. But there was a catch. Check out that little tag in the picture below stating that this is an “Add-on Item.”

So just what does that mean? Here is how Amazon explains it:

The new Add-on program allows Amazon to offer thousands of items at a low price point that would be cost-prohibitive to ship on their own. We’ve kicked off the Add-on program with thousands of new Add-on Items, and we’re adding more each day. Add-on Items ship with orders that include $25 or more of items shipped by Amazon, and you can get them delivered to your doorstep with free shipping. …

If you have an Add-on Item in your cart but less than $25 of items shipped by Amazon you can still check out with the rest of your items. When you proceed to checkout we’ll give you the choice either to keep shopping or to check out with the rest of your items and save your Add-on Items for later. We’ll keep your Add-on Items in the “Saved for Later” section of your cart so that you can easily add them to a future order.

Or to put it in a straightforward fashion: Amazon won’t sell me a kitchen brush unless I buy something else. (more…)

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Here at the Operations Room, we love queues and few queues have gotten as much attention lately as the lines of drivers waiting to buy gasoline in New Jersey and New York following the hurricane. Stories abounded about wasted time and why allowing price gouging would actually be good. Of course, neither states cleared station owners to jack prices up. Instead, they implemented Nixonian rationing based on license plate numbers. Those with plated ending in even numbers got to buy on even days and those with odd numbers got to buy on odd days.

Now, the Numbers Guy column and blog at the Wall Street Journal is asking whether it worked (Fuel Rationing Is Hard to Gauge, Nov 16, and Does Odd-Even Rationing Work?, Nov 17). Turns out there is no clean answer on this. On the one hand, studies of when similar schemes were used in the early 70s claim to show they were ineffective but even those studies authors think this time may have been different.

“I’m not sure our analysis transfers directly to the Sandy shortage situation,” said Robert Goldfarb, an economist at George Washington University in Washington, D.C. In a 1983 paper, Prof. Goldfarb and co-authors found the odd-even rationing system could lengthen waits, because people who normally spaced out refills by an odd number of days—say, five days—might move up their regular refills to every four days to avoid running out.

William Huss, co-author of a 1981 paper with a similar conclusion, added that while his model “has a solid mathematical foundation, its assumptions regarding driver behavior are hypothetical and logical but not necessarily based on psychological research.”

I have to admit that I love that last quote since it could equally apply to every paper I have written.  (more…)

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