The Free Market Realities of AirBnB

AirBnB has received much attention, granting any individual with a room the chance to be a landlord.  It’s a classic rags to riches story to be expected in a free market.   Characteristic of a free market, it not only has its winners, but also its scofflaws, exploiters, unintended consequences, and unpaid taxes.

Many have been able to earn enough via AirBnB to pay their rent with a few nights rental. One sharing entrepreneur in San Francisco leases three apartments in the same San Francisco building, and at 90% occupancy, makes $2,000 per month after expenses, or $72,000 per year.  He’s planning on leasing three more in this building, and could net $144,000 a year.  The apartments are furnished with IKEA furniture.  This is a dream scenario for any big city dweller, being a landlord without having to buy buildings at big city prices.

But its not always legal to rent out one of your rooms when you’re renting the apartment. In fact, up to two-thirds of New York AirBnB renters may be renting illegally according to state law.  The state has shut down 200 short term rental apartments.

Landlords have recognized the potential bonanza of daily rentals and have participated in the sharing economy as well.  NY state attorney general concludes about 30% of the state’s AirBnB listings are from multiple listers, suggesting landlords are sharing rather than renting.

It was probably not AirBnB founders’ original intent, but AirBnB is causing high RENTAL prices of apartments while simultaneously pushing down HOTEL prices.   Traditional landlords looking for a reason to free up an apartment could evict tenants for illegally renting out their rooms.  Simultaneously, landlords raise rent since AirBnBers can afford to pay more if they re-rent rooms or the whole apartment. Hotels find consumers prefer to pay less for a private apartment at a lower rate than the hotel and have to respond by lowering their rates.

The popularity of this housing sharing economy has reduced rental vacancy, making the rental market more efficient.  The decline of rental housing units puts disproportional pressure on low income families.  Estimates are 20,000 apartments may have been taken out of the traditional rental market due to the sharing economy.  Lower supply leads to higher prices for remaining units, causing a disproportional impact on low income families.  The number of available lower cost rental units declines in the market.   Further, while rent control laws were instituted to support low income families, the sharing economy created an alternate revenue-generating opportunity as some landlords subvert rent control by “sharing” their apartments.

Similarly, lower priced, non-business traveler hotels that serve lower income visitors are deleteriously affected as better accommodations are found for the same or lower prices.   While better for less seems appropriate in a free market, the market is not as efficient as might be expected. Adding to the woes of hotels, academic research suggests a competitive advantage is held by AirBnB against any hotel, even if the hotel is renting out the same AirBnB room.  AirBnB renters provide a more generous evaluation of a hotel than do consumers who rent directly from that same hotel.  There seems to be some kind of evaluative generosity granted to a residence from a personal connection over a traditional business.

These entrepreneurial efforts have not gone unnoticed by the IRS.  Ignorant renters in the AirBnB network frequently are unaware that rental income is income that must be reported to the IRS.  The company reports user income to the IRS and this income is easily traceable. Those who fail to report their income can expect the IRS to reach out.

There is no doubt AirBnB has created opportunistic economic order out of chaos, the chaos being the millions of inefficiently used housing resource with no governing body to exact profit.  But it has it has also created the ripe potential for scofflaws, exploiters, unintended consequences and tax evaders.

Will the Sharing Economy Cause the Creative Disruption of Hotels and Taxis?

How have hotels changed in the last 100 years? How about taxis? Not much. But people have changed. I have an MBA student who rents out his couch in the living room of his one bedroom student apartment to visitors and makes $500 a month. Pays for books and groceries! I know one couple who just rented out their entire apartment for a week in NYC and then went on a week-long trip in San Francisco with their entire hotel bill paid for by the renters in NYC. In both cases, Airbnb, was the broker that brought landlord and renters together. Uber brings car and driver together with passengers. What enabled these and similar sharing opportunities?

Complacency and loss of flexibility. The dynamics of the free market incentivizes entrepreneurs to enter the market when an unfulfilled need is perceived and if the entrepreneurs can create a solution to satisfy that need. If they guess right, they become profitable, grow, and become the kingly standards of their industry. As oligopolistic giants of their industry, there are few challengers to force substantive innovation and little incentive to obsolete the platform (brick and mortar, fixed buildings) or lower price (margins are needed to support the platform).

This is the condition that begs for entrepreneurs to enter the market, offer lower priced rooms or entire apartments, more convenient locations, and/or a non-institutional feel. As broker of housing, Airbnb, has no owned inventory of rooms or buildings. As a broker of transportation, Uber has no owned fleet of vehicles. Competing with such entrepreneurs is like competing with a ghost army. Why didn’t members of the hotel industry or taxi industry initiate such innovative business models? Schumpeter used the term “creative destruction,” in his 1942 book, Capitalism, Socialism and Democracy, to describe how successful firms grow large, bureaucratic, and less flexible in the process of innovation. The result is that alert entrepreneurs can create a business that can live in the shadow of the giants and feel relatively safe from competitive retaliation. Will hotels and taxi firms competitively respond to provide the market with what it wants, or will they seek government regulatory competitive protection?

Uber Will Help Build Market Network Effects, But Not a Brand Network Effect

A recent NY Times article argued that if Uber can find a way to lever its own network effects, it too can be a Microsoft or Google.[1] Due to its initial success, Uber is now the protest target of the incumbent regulated taxi companies wherever it begins service, around the world. While Uber will contribute to creating a market network effect, it will not likely create its own brand network effect.

First, we need to differentiate between market versus brand network effects. Networks effects refer to the increasing benefit consumers receive as more consumers buy a product or service. One example is how the early adopters of the Internet received increasing benefits as increasing numbers of users adopted the Internet and participated in creating and posting increasingly useful information, businesses, and news. This example describes market network effects derived the collective adopting the Internet, and not necessarily of a brand.

Apple is an example of brand network effects. By choosing a proprietary approach to many key business decisions, like operating systems, product, software, and accessories compatibility. Its commitment to a proprietary approach create a brand network effect; e.g., increasing numbers of iPhone adopters led to increasing benefit for any one consumer having Facetime. The strategic risk of the proprietary approach is a topic for another essay.

Can Uber become the dominant brand in its sharing economy space? Quite possibly. Can Uber gain brand network effects? Unlikely.

Uber is an entrepreneurial taxi startup service with a $250 million investment from Google. The implied valuation and the absolute size of Google’s financial commitment suggest there will be considerable momentum for brand success. The company is receiving attention now from the incumbent, regulated taxi services that are claiming Uber is threatening the viability of the traditional taxi operators. Other viable competitors exist, like Hailo and Lyft. Halo is partnering with traditional taxi operators so it may be able to survive the inevitable regulations that are sure to come. Lyft has received a $250 million investment so it can meet Uber price cut for price cut and build the industry. There may only be an oligopoly at the end, there may be market network effects, and Uber may have economies of scale, but not brand network effects.

 

[1] Irwin, Neil (2014), “Uber’s Real Challenge: Leveraging the Network Effect,” The New York Times, June 13, 2014, http://www.nytimes.com/2014/06/14/upshot/ubers-real-challenge-leveraging-the-network-effect.html

 

Can the Buggy Whips Metaphor Withstand the Disruption of Technology?

A popular story providing some solace to victims of disruptive innovations is the buggy whip metaphor. The argument is that although the horse-drawn carriage industry was diminished by the innovative internal combustion engine, a niche market for buggy whips could profitably survive because there will always be a need for them. In fact, the Westfield Whip Manufacturing Company in Massachusetts, founded in 1884, is still making whips, albeit for equestrian dressage and jumping.[1] Is this buggy whip example a useful metaphor for other disrupted industries?

My friend, Roger Christian, President of University Camera, operates an independent camera store in Iowa City, Iowa. He is one of the analog survivors of disruptive digital imaging technology. The independent operators find it difficult to compete at the scale of a Snapfish, the internet purveyor of printed images. Roger just wrote me about how the store his family shops at, part of a regional chain of supermarkets, is replacing its photo lab with a store-within-a store national chain of coffee shops. Coffee consumption is more valuable to the supermarket than the declining consumer interest in printing photos. The denouement of photo processing labs in stand-alone locations as well as in local drug stores, supermarkets, and discount store is part of a national trend. It is a challenge for even the big brick and mortar retail chains to compete successfully with the internet photo processors, particularly in the face of a declining consumer market.

Can high transaction cost brick and mortar retailers compete with the low transaction cost competitors on the internet? One alternative to competing on costs is to break down the value chain into its parts and specialize in one or only a few parts where the low cost disadvantage is not present. For example, the Timken Company, manufacturer of roller bearings and other moveable machine parts in the 1890s went from providing bearings to carriages, to automobiles[2] and today is a $6 billion market cap company with a 20+ PE ratio. These roller bearings are metaphoric buggy whips. Another alternative is to compete in product-market segments where internet companies cannot tread. E.g., in the photo industry, niche portrait services, wedding, sports photography and other special events photography are relatively secure. Providing retro cameras (called “Holga”) or offering slide processing (called Ektachrome) to small niche markets are survival techniques. These examples are “buggy whips.” The buggy whip metaphor is alive and but only surviving. A successful solution like Westfield Whip Manufacturing or Timken may not be obvious in the photo industry. I don’t think a Starbucks in Roger’s camera store is the answer either.

 

[1]Stross, Randall (2010), “Failing Like a Buggy Whip Maker? Better Check Your Simile,” NY Times, January 9, http://www.nytimes.com/2010/01/10/business/10digi.html?_r=0

[2] Ibid.

 

2012 in review

The WordPress.com stats helper monkeys prepared a 2012 annual report for this blog.

Here’s an excerpt:

600 people reached the top of Mt. Everest in 2012. This blog got about 4,200 views in 2012. If every person who reached the top of Mt. Everest viewed this blog, it would have taken 7 years to get that many views.

Click here to see the complete report.

Validation of the Values Concept of a Brand

CHALLENGE:
How valid is the emphasis on human values for building brand equity? There is no debate that Coke has effective marketing, being ranked number one by Interbrand and having the number one and two share positions in soft drinks. Coke positions itself on peace, love and family because it is marketing to a global market and uses a broadly acceptable values-based appeal to do so. Other brands emphasize features or benefits. Recently published global research concludes that values create brand resonance.

HOW THEY RESEARCHED IT:
A team of researchers, including Aysegul Ozsomer, a Ph.D. graduate from Michigan State’s marketing department, studied the relevance of 11 cultural values with respect to 41 brands in 12 product categories. In the pretest, they asked nearly 2,000 consumers across 8 countries to rate brands “as if it were a person” who embodies certain values. Then, using different samples, the team asked consumers to rank a variety of ad slogans with respect to how well the slogans fit brands’ images, to rate their liking of brands based on the 11 values, and evaluate fictitious brands whose images were experimentally changed.

WHAT HAPPENED?
The pretest resulted in a global values structure that looks like the figure below. Brand icons are inserted by this column’s author to give a more substantive meaning to the abstract values’ structure.

Representing brands as human values uncovers meaning that can be added to an established brand concept. Layers of meaning can be added to a brand provided the additional values are very different and unrelated rather than opposite in the brand’s established meaning. For example, BMW can add security/safety and stimulation/excitement to its brand meaning, but environmental concern and benevolence are not as likely to be successful. (NOTE: Interestingly, BMW is ranked 10th in Interbrand’s Best Global Green Brands 2012, behind Toyota, Honda, and VW).

WHY MANAGERS SHOULD CARE:
Human values are integrated to the values ladder and brand pyramid frameworks for building brand equity. This research validates the use of human values to build the brand persona and helps to validate the values component in the brand equity frameworks. In practice, this research suggests that if brand managers want to broaden a brand’s meaning, unrelated, different human values CAN work. The researchers offer up the example of Apple using self-enhancement of power (“The Power to be Your Best”) and the unrelated openness value of self-direction (“Think Different”) as affirmation of their idea. In contrast, they suggest using a directly opposing value, such as countering tradition with stimulation/excitement is not likely to work (e.g., the failed “This is Not Your Father’s Oldsmobile” campaign. This is consistent with positioning research that posits inventing a new positioning is likely to be more successful in the market than arguing against an established positioning.

CAN YOU HELP:
Tell us about how you’ve been successful or unsuccessful in using human values in building brand equity.

SOURCE: Carlos J. Torelli, Aysegul Ozsomer, Sergio W. Carvalho, Hean Tat Key, and Natalia Maehle (2012), “Brand Concepts as Representations of Human Values: Do Cultrual Congruity and Compatibility Between Values Matter?” Journal of Marketing, Vol 76, July, 92-108

Can a Brand Community Deliver Positive Financial Returns?

CHALLENGE:
Companies spend millions on the internet building brand communities. Is it worth it? If so, how much? The answer is a 19% lift compared to spending prior to becoming community members.

HOW THEY RESEARCHED IT:
The largest North American retailer of entertainment and information-related media was researched. It has both brick and mortar and online presence, with 10% of sales coming from the latter. It launched its online community in 2007, using a Facebook-like framework to allow profile pages and note-posting. Data were collected from 26,624 community members (from about 260,000), including specific purchase data in 2009. Hence, purchase data were compared from BEFORE the online community was formed in 2007, and after that date.

WHAT HAPPENED?
The key finding was that members of the brand community spent 19% more, post their joining the community. This is the incremental revenue from consumers who joined the online community, over and above their pre-existing purchase behavior with the firm (and relative to a control group). The authors estimate that the 19% incremental sales lift is more than sufficient to cover the fixed cost of setting up the community as well as the variable cost of maintaining it. In fact, breakeven for this company occurred after 33,000 existing consumers joined the community. This means there is a positive ROI for successful brand communities on the social net. The driver to the 19% lift appears to be order frequency as nearly 3 additional purchase occasions occurred over the 15 month observation period, representing an 18.4% increase in order frequency.

WHY MANAGERS SHOULD CARE:
The power of brand communities is accepted, but the cost of building one is a major stumbling block. This study provides some assurance that we might well get positive financial returns from these communities. In addition, we might expect that community members are likely members of off-line networks for which members may serve as opinion influencers.

CAN YOU HELP?
What is your experience in the cost and effectiveness of building brand communities?

Source: Manchanda, Puneet, Packard, Grant M. and Pattabhiramaiah, Adithya, Social Dollars: The Economic Impact of Customer Participation in a Firm-Sponsored Online Community (January 12, 2012). Available at SSRN: http://ssrn.com/abstract=1984350 or http://dx.doi.org/10.2139/ssrn.1984350

“Sweethearting” Deals Cost Retailers Billions Per Year

CHALLENGE:
What is the cost of employees who slip their friends an extra appetizer or comp a drink at a restaurant? It may cost the service industry as much as $80 billion a year. But does this help the business? The answer is a disappointing, “NO.”

HOW THEY RESEARCHED IT:
Professors Clay Voorhees from Michigan State University, Michael Brady and Michael Brusco from Florida State University surveyed 171 service employees. These employees were instructed to request survey completions from two of their customers involved in a sweethearting incident and two of their customers who were not involved, resulting in 610 customer-completed surveys. The researchers hypothesized that sweetheart customers would develop close personal relationships with frontline staff and thereby lead to customer satisfaction with the business, and subsequently, loyalty to the business. Sweethearting with heavy usage regular customers was excluded from the study.

WHAT HAPPENED?
Any positive effect from sweethearting is tied to the collusive employee; the gain any business might receive is filtered out by the employee. Further, customers who were sweethearted provided inflated satisfaction, loyalty and positive word of mouth measures on the surveys. The threat of punishment has little deterrence because staff and customers are collaborating, unlike when staff is pitted against customer-shoplifters.

WHY MANAGERS SHOULD CARE:
Shrinkage and other retail losses are increasing globally. Sweethearting is one form of shrinkage. Further, businesses that reward staff on the basis of customer satisfaction are misapplying rewards when sweethearting is common. The researchers argue that a broad range of traits should be measured prior to hiring, including ethics and need for social approval. They suggest that such measures could circumvent the need to implement oppressive and alienating security measures.

CAN YOU HELP?
Have you found techniques that can inhibit sweethearting? Have you found when sweethearting is valid?

Source: Michael K. Brady, Clay M. Voorhees, & Michael J. Brusco (2011), “Service Sweethearting: Its Antecedents and Customer Consequences,” Journal of Marketing.

News pickups:
‘Sweethearting’ deals cost retailers billions, MSNBC, February 17, 2012 http://bottomline.msnbc.msn.com/_news/2012/02/17/10418928-sweethearting-deals-cost-retailers-billions

‘Sweetheart Deals’ Could Cost U.S. Companies $80 Billion a Year, U.S. News & World Report, February 14, 2012
http://www.usnews.com/news/articles/2012/02/14/sweetheart-deals-could-cost-us-companies-80-billion-a-year

Another Zappos Happy Story

I teach MBA Marketing Management.  Naturally, I have my students reading/viewing the Zappos story.  Today, one of my students, an MBA-JD double major emailed me this wonderful story to add to the Zappos legend….

A few weeks ago, I was up late reading an article for class about Zappos Customer Service excellence. I remembered earlier in the semester watching a YouTube clip for Dr. O’s class in which Tony Hsieh told the story of how a Zappos Customer Service Rep helped him and his friends find a pizza joint that was still open after a long night out at the bar. I’m sure you remember the story. And, as I was remembering this, I was feeling skeptical. I’ve ordered plenty of shoes from Zappos and couldn’t recall anything remarkable about it except that shipping was free, but it was offset by paying MSRP on the shoes. Thus, I called Zappos Customer Service. For no reason in particular.

 A gentleman named John answered. I said, “Hi, John. My name is Katherine. I have no intention of placing an order. I just called because I am reading an article about Zappos Customer Service, and having had plenty of customer service experience myself, I wouldn’t say I believe that it’s all just wine and roses when people call complaining all the time.” John responded, “You know, I’ll tell you, I’ve worked here for about 8 months, and I have had hardly any customer complaints. They’re pretty rare around here, and when we have them. It’s a pretty easy fix.”

 Anyway, John and I talked for close to two hours! Not once was he interrupted by someone telling him to get back to work, nor did he put me on hold to take another call. He didn’t try to sell me anything and didn’t even stop at all to check if a boss was around. Turns out, he’s from Pennsylvania, graduated from law school there, and moved to Las Vegas because it’s where he wants to practice law. He got the job at Zappos for something fun to do while he studying for the Bar Exam, and he hopes to work in the legal department for Tony’s nonprofit organization, Delivering Happiness, once he passes. 

 Another thing he told me, which I thought was cool, was that everyone who works at Zappos has met Tony, and John regularly runs into him whenever Zappos is offering up free food. John said that Zappos often supplies free food for everyone, for no reason, just because they figure people get hungry. In fact, John said that from his desk, he can see Tony’s office and Tony never closes the door and pretty much always wears jeans. John described him as “completely down to Earth. If you met him on the street you would have no idea how successful he is.” And so, as our conversation came to an end, I thanked John for his time. Before I could say goodbye, John asked for my shipping address. “I didn’t order anything,” I said. “No, no. I know. I’m going to send you a great book. It’s a really easy read. You’ll love it.”

 And he did. A few days later, I received a copy of Delivering Happiness: A Path to Profits, Passion, and Purpose signed by Tony Hsieh – one of Dr. O’s “Important Books” from the syllabus. No charge. No delivery fee. Just because.

 In the end, John made me a believer. Zappos really did live up to their reputation. So, I wanted to let you both know that you can both borrow the book whenever you would like. I’ve heard it’s great. J  

 Sincerely, 

KATHERINE E. LIPPMAN

 J.D./M.B.A. Candidate, 2014 | Marketing

Eli Broad Graduate School of Management

Michigan State University College of Law

lippmank@msu.edu| LinkedIn Profile

Innovate, Add Value; Don’t Just Raise Price

Consumer ARE angry over revamped Netflix pricing.

I wrote this a week ago in the Brand Consortium Forum:
What is more important: Investor satisfaction or customer satisfaction? Netflix announced a price increase and share price jumped 2% the next day as customers howled. Is this a trade of short term gain for long term loss? Certainly, Netflix needs the cash and it needs to appropriately charge customers who are high volume streamers. According to Brand Keys, Netflix met 99% of consumer expectations earlier this year, but that score is now 93%. This is brand equity erosion. As every marketer knows, its not easy to build brand equity. How much will Netflix invest in brand equity-building? How much will it cost to bring the brand back to where it was earlier this year? Given its competitive situation, Netflix can’t afford to invest in brand equity. Careful Netflix, this could be the beginning of a downward spiral. It needs to preserve what it has.

Today, the NY Times reports that Netflix lost 600,000 subscribers, making it only the second quarterly customer loss in its history. This does not include the customers who opted for DVDs rather than get their movies streamed. But what of its stock price? Does the investment market believe that 600,000 subscribers were not worth keeping anyway? Share price was down almost 19 percent to $169.25 on heavy trading yesterday.

This cost-driven price increase is not an uncommon situation for many companies. Additionally, the economy is making customers think twice about monthly subscription services. These services are commodities despite the providers’ use of technology to deliver the service rather than brick and mortar. Customers will trade off price for convenience and/or time shifting. Netflix is not the only source for movies.

Is there a way out for Netflix? Maybe there are some lessons from the CPG industry. CPGs are in the same situation: increasing costs, price-sensitive customers, commodity-like products. SymphonyIRI recently reported that product categories with the highest brand loyalty demonstrate less sensitivity to price increases. For example, 67 percent of coffee buyers are loyal to their coffee brand, and that is a decline of only 1.5 points from 2008, despite a 21 percent rise in prices in the same period. In contrast, 33 percent of sugar buyers are loyal to their sugar brand, and that is a loyalty loss of 6.5 points since 2008 as prices went up about the same amount. Some brands and collectively, some product categories, successfully invest on building brand loyalty. Brand loyalty mitigates the effect of price increases on sales.

How can you build loyalty? One way is through innovation. Since 2008, SymphonyIRI reports loyalty to brands in the beer category is generally down by 0.4 points. But within that category, craft beer sales are up as smaller firms produce new blends. The national brands then buy or partner with the craft brews to provide broader distribution. Without meaningful innovation, the category would have suffered a steeper decline in loyalty. Meanwhile, wine has seen a 0.8 point gain in loyalty as it new labels have rushed to market. New offerings build connections to the offerer.