As Internet companies reach more deeply into the economy and our lives, they’re encountering a problem that has long afflicted other industries. When a person doesn’t understand how a service makes money, he tends to believe the worst. And it matters.
In Silicon Valley, the issue of consumer trust is becoming more acute, and companies are deploying two clear tactics in response.
One is to give users a fixed price or subscription to anchor on as the “price,” even though the majority of the actual business revenue is driven in more complicated and opaque ways.
Take, for instance Instacart, a service which I use weekly, and sometimes daily. If you asked the average Instacart user how the service makes money, they will likely point you to the small delivery fee that it charges, and perhaps tell you about the subscription service it offers that reduces the delivery price. Having a clearly understandable and defined fee makes the service approachable by consumers.
Anchor Price
The reality, of course, is that if Instacart is successful, it will make far more money through its ability to control and change the prices of individual items and through merchandizing than by their small delivery fees. A few bucks per delivery just won’t cut it to pay for the time and gas of someone to do your shopping for you. The math might suggest just cutting the fee entirely; however, my strong suspicion is that keeping the fee is more about giving consumers a “price” to anchor on and understand more than it is about actually driving the majority of the business.
Another service I use and love, Shyp, employs a similar tactic. The cost of having them send a package for you is the cost of shipping + a $5 pickup fee. My strong suspicion is that the $5 is more about giving consumers an understandable, trustable, fixed price than it is about being the economic engine of the business. The service they perform for me, even if you believe that over time they can get great logistical advantages, probably costs more than $5 to deliver. The $5 fixed fee is about marketing to consumers a price to understand, and trusting Shyp. The real money will come when the company gets to scale and negotiates on terms with logistics providers & commerce companies.
In its own way, WhatsApp—while a very different type of company—deployed a not dissimilar tactic when it was independent. The WhatsApp team espoused extremely high ideals about their mission and privacy. They also designed a service that was fundamentally simpatico with their view of the world, both in terms of how they stored data and how they cleverly set up their cost structure as a result. When it came to their business model they suggested that the idea was to charge a small annual fee to every user. The interesting part, however, is that very few people actually ever paid that fee. I personally believe that their stated approach to monetization in the short to mid-term was genuine and in line with their views; but it also happened to be extremely clever marketing. Even though not many people actually paid for the service, people were able to understand in concept its business model—a subscription—and therefore trusted the company more than they might otherwise.
The other approach that technology companies seem to be following is the Wal-Mart pioneered strategy of marketing EDLP (everyday low prices). In this approach, rather than anchoring users on a fixed price, you anchor users on the fact that you will always race the hardest with the best technology and the most scale to offer the best prices.
The obvious online example in this realm is Amazon. It has been so stunningly effective at this that the company has not only convinced consumers that its mission is to have the best pricing, but Amazon has convinced Wall Street that this is such a fundamentally good idea that it doesn’t have to really even price in profits for itself anytime soon. Sometimes I wonder if what Amazon is really doing by operating effectively at zero profit for as long as they have is running an amazing consumer marketing campaign by way of Wall Street. Wouldn’t you trust it a little bit less and perhaps look for other options if you saw it was making fat profits?
I believe that Uber is trying to follow this strategy with consumers as well. I have no real idea what an UberX ride should cost. But as a consumer I am confident that Uber is dropping prices as low as it can, because the company has successfully portrayed itself as in a vicious war for growth at all costs, at least for now—which necessitates lowest-possible pricing. It has convinced me that it is following the EDLP strategy of price marketing.
This second approach is very powerful because it pushes price to the back of the story and builds trust at the brand level. It basically convinces people to trust a company on the price they will pay. It also is a massively powerful macroeconomic stance. Wal-Mart is often directly credited with keeping inflation in check in the U.S. I have to imagine that Amazon and upstarts like Uber are also playing their part.
Squeezing Suppliers
There are, however, two obvious costs to this strategy. First, the way you guarantee this strategy is by squeezing your suppliers and by putting your competitors out of business. Wal-Mart and Amazon have dealt with the brand implications of this; Uber is feeling this strongly now as well. Second, it is a very fragile message to maintain because it requires consumers to trust that the company has their best interests at heart in terms of pricing.
That, I believe, is part of the outrage at the recent comments attributed to Uber about its ability to up its take per ride. As much as the outrage was about the company’s apparent lack of concern for its drivers, it was also about the idea that Uber would take consumer profits.
Many people are currently sounding the alarm about startups funneling cheap capital into highly subsidized consumer services that cannot last. While this is a concern, especially for earlier-stage companies, I generally believe that most of the marquee private companies actually have reasonable businesses that work. Most aren’t shoveling VC into artificially low or free services. However, I do think that technology companies are getting more and more sophisticated about how they talk about pricing with consumers and realizing that “free” actually has taken on a huge psychic trust cost for users.