free_LUNCH

Was wondering if these book stores can start a Netflix like scheme ala. Book rentals. The consumers need to sign up for a plan, pay a monthly fee and rent a certain number of books in a month. Sounds like a simple and effective plan. The only draw side could be that the books may not be maintained properly by the members thereby the retailers not recouping the whole cost. But I am sure that some scheme to offset the loss can be put in place.

I recently came across Campusfood.com and found it quite convenient to order food from. It has a list of all major restaurants that deliver near the place you stay and helps to coordinate order processing for delivery. From most restaurants that I ordered from, they also had a $1.00 off coupon for next order (can be used within 7 days of prior order). For a student, a penny saved is a penny earned. Moreover the convenience was good enough. That was until I saw that they charged me a 75 cent service fee on my order. C’mon! Shouldn’t businesses such as these charge restaurant owners for a placed order. Maybe they do, but it is not transparent to me. Well, doesn’t the $1.00 coupon offset the 75 cent payment. No. Because the next time I order, I pay 75 cents again. Thus I am essentially 50 cents out of pocket. You may say the sum is small and the convenience makes up for it. No. I just picked up the phone, called the restaurant, ordered my food without the unnecessary service charge. Convenient enough!

The bigger picture here is this. Restaurants are getting visibility on the site, they are gaining business and thus they should the only ones who are charged. The consumers on the other hand, have another option of get the same food at the same price without a fee. So there is no reason why they should be charged. Yes, there may be some benefits to the consumer, but the business model can be better than charging the consumer.

Note that there are a few promotions for the restaurants mentioned on the site. One argument could be that you will not get the savings if you called the restaurants directly. My question to you is – have you tried?

And BTW, have you ever come across a promotion which says free laptop/iPod/etc. and then they make you sign up and pay for services from other companies. Yes, Campusfood.com wants you to do that if you want free cash. Free?

Number of articles have been written on Amazon and Wal-Mart’s war on book prices this holiday season. Let’s take a different look at the same story and how it can possibly help the economy and the consumers by – increasing the pie.

First, the story. Wal-Mart recently decided to start its own price war, taking on Amazon in the online book market. Wal-Mart began by marking down the prices of ten best-sellers—including the new Stephen King and the upcoming Sarah Palin—to ten bucks. When Amazon, predictably, matched that price, Wal-Mart went to nine dollars, and, when Amazon matched again, Wal-Mart went to $8.99, at which point Amazon rested…From a game-theory perspective, price wars are usually negative-sum games: everyone loses. A recent study found that, if competitors do match price cuts, industry profits can get cut almost in half. (Read more: here)

So the final prices were $9.00 (Amazon) and $8.99 (Wal-Mart). Where is the pie here?

I did some research to find out what exactly is the price elasticity of demand for books. Its a difficult number to calculate and I wasn’t very hopeful until I found this research article. This research intended to determine demand for books and was conducted in Norway. The research took into account number of demographic parameters into consideration. One of the numerous conclusion of the article was:

For our calculations, lets assume that demand is fairly elastic and it is –1.5.

So if the prices fell from $10.00 to $9.00 (say) then prices fell by 10%. Which means the books expected to be sold will increase by 15%. Which in turn means that the revenues will grow from 10X to 10.35X (9 x 1.15X). A value creation of 0.35X or 3.5%. While this number may look small in percentage terms, it is substantially big when we can find the real value of X (in 2006 3.13B books were sold) and substitute.

What Amazon and Wal-Mart have unintentionally done is to increase the total pie (the total revenues that can be earned by them). Yes, the margins may have taken a hit, but don’t we know that NPV is a better measure than IRR.

Do you think this research if conducted and analyzed in the US can change prices in the longer run? Thoughts?

A good analysis on this price war has also been done here.