Tag: economics

Price-driven costing and Demand.com

I was captivated by an article in this month’s Wired: The Answer Factory: Fast, Disposable, and Profitable as Hell. It’s a good example of straightforward proposition that makes you wonder why it hadn’t occurred to you before. The big idea is that search engines, effective as they are, only address the desire side of the equation. What if people start asking for content that doesn’t exist? No search engine in the world can find it. But that doesn’t have to be the end of the story, because the hard part is now done. If you know what people are unsuccessfully searching for, you not only know what the market wants, but also that no one else is providing it. That’s lovely.

Demand Media feeds the hunger exposed by Big Search.

The article is about Demand Media, a company that uses algorithmic search analysis to research the niche market needs of the day. It then immediately underwrites the rapid (and cheap) production of text or video content so that it can be used for its own ad placement. If you want to make money efficiently, don’t scratch where it doesn’t itch. But when it itches, scratch fast!

I immediately thought of Peter Drucker’s Five Deadly Business Sins, one of which is cost-driven pricing. As Drucker puts it: “The only thing that works is price-driven costing. The only sound way to price is to start out with what the market is willing to pay and design to that price specification.”

The media business these days is full of hand-wringers fretting about the collapse of journalism and the Decline of Western Civilization (by which they mean they aren’t getting paid). The bonfire in the newsroom is genuinely disturbing, but hand-wringing won’t make it stop. There’s something refreshing about how Demand Media smashed right through the problem and onto the next promontory. How much are people willing to pay for their media diet these days? Not much! But that doesn’t mean you can’t make a successful business. Now shut your piehole and get to work.

The healing power of Slack

Today I happened to watch Randy Pausch’s lecture on time management. It’s in the same breathless spirit as David Allen’s Getting Things Done work. And both of these, after all, are just the newest forms of time management techniques that have been around since Frederick Taylor’s time and motion studies. At their heart, these techniques boil down to something like this: always have a goal, always be doing, always measure your progress against your goal. Waste not.

Inefficiency, or slack, is the sworn enemy of Taylorism and modern scientific management. And we have banished slack so completely that unexpected new problems arise. One example of this is traffic. If you look at the space between cars on a typical highway, you might conclude that it is inefficient. May we not, in the name of maximizing throughput, squeeze out that space? But even if you discount the safety issues associated with tailgating, researchers have discovered that crowding between cars contributes to flow-choking traffic jams. At a critical car density and speed, a simple tap on the brakes can initiate a backward traveling wave that ultimately locks up traffic somewhere upstream.

Here’s a video showing what these waves look like in practice.

How do you calm a traffic jam? Feed it space. Add more slack in the form of restrained acceleration, lower speed limits, and more space between cars.

That’s old news. Here’s something more relevant to our Recent (and Ongoing) Financial Unpleasantness.

Paul Kedrosky writes about where false efficiencies get in the way of market stability. Automatic rebalancing is a financial tool that guarantees a certain balance to a financial portfolio. When it gets out of balance by, say, 3%, automatic buy and sell orders are placed to rebalance things. This works fine when the weather is calm, but when the markets are in turmoil, and when everybody is using the same automatic rebalancing robots, destructive waves can result. What to do? Feed those robots a dose of slack. Turn down the rebalance margins to 6%.

Slack doesn’t get the respect it deserves. “Nothing” isn’t nothing. Emptiness is solid and alive.

And when times get lean, don’t fret. Help yourself to fat slice of empty pie. It helps. Just ask Bob.

Gas prices here and there

Gas prices are tough all over. For years, Europeans have lectured us about our profligate ways with petroleum. We deserved the lecture, no doubt about it, but even so I’ve always felt that judgmental Europeans have portrayed themselves as virtuous and far-sighted when in fact they were simply responding as anyone would when faced with a much higher price. It was economics and not virtue that pushed them onto the moral high ground. Or rather, high enough prices make virtuous environmentalists of us all.

Here’s an LA Times article on the price of gas everywhere else in the world: Gasoline prices hit harder outside the US. As you might expect, the places that have significantly cheaper gasoline tend to be petroleum exporters. In Venezuela, Iran, and Saudi Arabia, gas still costs less than a dollar a gallon. But for the most part, we still have it pretty easy compared to everybody else.

The moral of the story is: don’t whine, it’s much worse elsewhere. That’s fair enough, but there’s an interesting fact hidden in the list of prices: the most expensive place to buy gas in the entire world (according to their list) is Norway. But Norway is an oil exporter. Russia, Norway, Mexico, and Kazakhstan are the world’s largest non-OPEC net oil exporters (data from 2004). This tidbit forced me to update my thinking regarding smug Europeans. I might still begrudge a lecturing Frenchman, but the Norwegians have earned the right to take us to school. They have the oil, and they still tax themselves into the stratosphere.

Well done Oslo! By the way, would you be interested in a slightly used Humvee?

Irrational gas-buying behavior?

Books on the imperfect psychology of financial decision-making are popular these days. In works like Predictably Irrational, we hear story after story about how people make bad decisions, generally along the lines of being penny wise and pound foolish.

What do you think about the following situation? With gas prices heading ever upward, web sites like GasBuddy.com have become popular. Drawing on the contributions of readers, GasBuddy will show you a nifty map of where the cheapest gas is near you. Assuming you don’t take big detours to do so, you can save money by consistently patronizing the cheapest stations. But here’s the thing: the money you save is only the difference between the best and worst price. So while your change in behavior, a change triggered by high prices, may genuinely save you money, it can’t save you any more money than it would have when the prices were low.

In other words, you could have saved that same money last year, but (relatively speaking) you weren’t pissed off about it then.

Is that irrational behavior or not?