Subscriptions Walked So Dynamic (Surge) Pricing Could Run. [Read It And Eat 16/07]

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Major Headlines:

• A Failed Presidential Assassination Attempt

• This past Sunday, there was an assassination attempt on the former president and current presidential candidate Donald J Trump at his political campaign rally in Pennsylvania by a Mr Thomas Crooks. It has been reported that there were 5 shots that rang out and that one of the 5 shots grazed Trump’s right ear. Trump beyond the injured ear is unharmed and is seen to be celebrating in his usual showmanship self in stark defiance of the attempt. It is also reported that this is an extreme failure of the secret service and there would be an overhaul of his security detail. If you are unaware, one of the perks of being a president is the fact that you would receive a state-sponsored secret service detail for life even after your tenure. There are many rumours and conspiracy theories as to the circumstances of the shooting but in our desire to be a reputable news platform, we would not be discussing any of those conspiracies it did bring about the sort of photograph that any political candiate would pay a good sum to have. [ABC News]

• Google About to Close a $26 Billion Acquisition, It’s Biggest Yet:

• Google’s parent company Alphabet is about to complete its biggest acquisition to date with the purchase of the cybersecurity startup Wiz for an eye-watering $26 billion. This would be twice the size of their previous largest acquisition which was of Motorola for $12.5 Billion. Wiz is a cybersecurity startup that was venture backed by heavy hitters of the Venture Capital space Andreessen Horowitz (A16z). Prior to the acquisition it was valued at around $13 billion, but now, not only would this be the largest exit for a tech startup since Rivian’s IPO, but it would also net the four founders ~$2 billion each. We speculate that the M&A advisors on this deal are either Qatalyst and/or Evercore on the sell-side and Morgan Stanley and Goldman Sachs on the buy-side. The deal is being described as a “smart piker move” as it ramps up efforts in order to compete with other cloud businesses like Amazon and Microsoft. With a deal this large there would be regulatory scrutiny, in terms of overwatch against antitrust practices, this administration has been heavy-handedly challenging colossal-sized acquisitions in BigTech and with this as a possibility, one can only wonder what the break fee for a deal is. [WSJ]

• Trump Announces Sen. J.D Vance as his Running Mate:

• Donald Trump chose Sen. JD Vance as his running mate, revealing the 39-year-old from Ohio as his VP pick as the Republican National Convention kicked off in Milwaukee yesterday. The announcement came two days after Trump survived an assassination attempt that drew condemnation from both sides of the political aisle and prompted President Biden to pause his reelection campaigning. In the aftermath, Vance blamed the Biden campaign for the incident, claiming its vilification of Trump was a direct cause. Biden repeatedly condemned the shooting and ordered an independent review of security measures at the rally where it took place. Vance gained a national profile by chronicling his troubled upbringing in a low-income Ohio family in his best-selling memoir, Hillbilly Elegy. The book claimed the socioeconomic struggles of the community he grew up in stemmed largely from Appalachian culture, which he said made people defeatist and over-reliant on welfare. Published in 2016, the book was widely viewed as a primer for outsiders on why Trump appealed to Rust Belt voters. At the time of publication, Vance wasn’t on the MAGA train; He publicly compared Trump to cultural heroin but Vance later embraced the former president, becoming one of his staunchest supporters and earning his endorsement when he successfully ran for Senate in 2022. The two have since been in sync on most issues, including promoting trade restrictions, allowing states to restrict abortion, and opposing the most recent Ukraine aid bill. In addition to his career as an author and politician, Vance founded the venture capital firm Narya Capital, which backed the farmland investment app Acretrader. While Vance touted the job creation fuelled by Narya’s investments, some of its portfolio companies have faced controversy. Indoor farm company AppHarvest recently agreed to settle for $4.85 million with investors who accused it of misleading them. Vance’s VC background could help the Trump ticket extend support among tech moguls. Last month, Vance helped organise a Silicon Valley fundraiser at the home of billionaire entrepreneur and MAGA supporter David Sacks, which raised $12 million for Trump’s campaign. [Financial Times]

• No Es Llegó A Casa [It Didn’t Come Home]:

• England failed to end '58 years of hurt' as their Euro 2024 final defeat by Spain in Berlin meant the 1966 World Cup remains their only men's trophy. For the fourth game in a row England came from behind, but this time they fell short with Mikel Oyarzabal scoring a late winner to snatch a 2-1 victory. Nico Williams' strike early in the second half put Spain ahead but Cole Palmer's brilliant leveller looked set to send the game into extra time before Oyarzabal pounced four minutes from time. This was the second European Championship final in a row that Gareth Southgate's side has lost, after falling to Italy on penalties in 2021, with 1966 being their only major tournament final before that. The country has yet to win a senior football tournament abroad, with the 1966 success and Women's Euro 2022 final - which England won - both at Wembley. This part of the article should be taken in totality as an unbiased reporting of the news and it does not reflect the view of the writer (UK Home Office if you are reading this I still very much want to be a citizen of the UK). [The Guardian]

Minor Headlines

• Amazon’s Prime Day is here, July 16th and 17th. [Daily Mail]

• Jerome Powell said the Fed wouldn't sit for a 2% inflation rate to cut interest rates. [CNBC]

• AT&T hack affects all 110 million customers. [Reuters]

• Robert F. Kennedy Jnr., an independent presidential candidate is to be assigned Secret Service Protection after the failed assassination attempt on Trump.[The Independent]

• Apple releases a public beta of their newest software for iPhone Mac, iPad and Apple Watch. [CNBC]

• Elon Musk to donate $45 million monthly to a Trump Super Pac. [WSJ]

• Goldman Sachs beat Q2 analyst estimates on a 150% YoY jump in profit thanks to strength in fixed-income trading and a rebound in investment banking. [Financial Times]

• BlackRock AUM hit a record $10.65T in Q2 thanks to rising asset values and ETF inflows, while total revenue rose 8% YoY. [Barrons]

NEWS OF THE DAY:

Subscriptions Walked So That Dynamic [Surge] Pricing Could Run

Subscriptions are nothing new. In 2024 almost everything is or could be called a subscription, even things you do not realized, it is that normalized. According to Wikipedia, a subscription business model is one where a person pays a recurring price at regular intervals for access to a product or service. In that line of logic, subscriptions go beyond Netflix, Spotify and HelloFresh and apply to things like Rent, Bills, Insurance and most controversially, taxes.

Capitalism would have you believe that BigTech pioneered subscription pricing, and even though there is an extent of truth to this, the full truth is that it repackaged an old concept and repackaged it with a cute bow on top via apps and brilliant marketing. However, subscriptions date back to 1860 UK with a subscription milkman delivery service.

In the world of Finance and business, because there is an inflow of extremely driven people, who innovate and develop new financial vehicles to deliver more value to investors and shareholders and one of those things that seem to be repackaged and marketed is Dynamic pricing. Just like subscriptions it is not a necessarily new concept, the intended applications are what is new. Dynamic pricing, also known as surge pricing or demand-based pricing is a pricing strategy in which businesses set flexible prices for products or services based on current market demand. In essence, the charging of a higher price at a time of greater demand. A clear example of this is the fact that a hotel room in Greece costs more in July than it would in October, or the fact that a taxi costs more on a Friday night than it would on a Tuesday at noon.

In this article I will explore the subscription economy, how it has been modernized, its proliferation into everything from wants, nice-to-haves and to needs and then to the most useless subscriptions that are attempting to be normalized. I will also analyse it from a business standpoint to have you try and understand if it is profitable or even a beneficial business premise. I will then discuss how subscriptions have primed the business landscape via predictable revenue and customer retention for the entrance of dynamic pricing into other aspects of the market such as hospital bills, fast food and groceries all for the maximization of profit.

The Rise of Subscription Pricing

As discussed, Subscription pricing allows a business to set up a structure where customers pay at regular intervals – often monthly or annually – for the right to use a product or service. This method is favourable for businesses as it sets up a reliable source of income. It can lead to more stable financial planning and forecasting because the business can anticipate a certain amount of income at regular intervals. It also tends to build a loyal customer base that uses the product or service consistently. A subscription is not defined by recurring revenue alone. Rentals, leases, and memberships generate recurring revenue, but none are subscription business models. So, what’s the difference? A subscription is when the customer pays for the future delivery of a good or service involving a degree of variability. Fundamentally, a successful subscription business’s economic value is a function of the strength of the habits they create

The modern subscription service was popularised by Netflix. This was revolutionary at the time although there was substantial pushback due to the fact that it had the uphill battle of changing the behaviour of the market at the time which was used to owning what it paid for. However, there seemed to be a growing space within the market as there was a high demand for movie and TV show rentals and within that, the pinpoint was the fact that there were arbitrary fees that just seemed to rise consistently, as such, Netflix marketing campaign was a monthly subscription price with no fees and no ads ever. This was in all honesty revolutionary for its time and did provide positive proportions that at the time were extremely beneficial to its subscribers.

Benefits and Limitations of Subscription Pricing

For a business, the shift from one-time payments to subscription pricing was a literal godsend, this is because they could more accurately predict and forecast their future earnings and more importantly, they could extract continuous revenue from previously one-time clients and customers. Subscription pricing has become so successful, that it has moved from an insignificant share of a company’s revenue to the majority of the revenue of the company. For example, services accounted for 8% of Apple’s total revenue in Q3 of 2016, as of Q1 of 2024 the revenue from services has more than tripled to 26% which is a higher share compared to the revenue from iPads and wearables like the Apple Watch according to Statista

The biggest benefit of subscription businesses is the fact that businesses that used to sell one-time or one-off purchases can now have the benefits of recurring payments. This change was first adopted within BigTech and the “Subscripfication” of their software. For example, in the good old days (I was born in the late 90s), you could buy the latest software version of Adobe and the specific product you wanted to use from Photoshop to After Effects and you owned that version and could use it as much as you wanted sometimes without an Adobe account. Now you have to pay up to $60 every month for the full suite of apps if you are an individual or $20 if you are a student. Apple had the same thing too, as late as January of 2023 you could purchase the video editing software Final Cut Pro for the one-time price of $200 and you are eligible for a lifetime of app updates, this changed in May of 2023 to a monthly subscription of $4.99 per month or $49 per year. This predictable recurring revenue is not only beneficial to the business's ability to manage cashflows and adjust operating expenses in order to maximise the amount of revenue it generates, but it also gives them more data points to consider and input in their forecasting financial models. This is important to determine the total customer retention, churn and overall, the amount of growth of the company and the number of subscribers.

Another benefit of the subscription pricing model is the fact that there is a surgical-like precision on what offered products and services the majority of customers use, how they use it, how much they would be willing to pay for it and how best to retain them. Using the real-time data they have and collect these businesses can do the math to figure out which aspects of their product they can make changes and improvements upon to ensure that when they do make an update or overhaul their apps the customer feedback can support or disprove of the changes in the business direction. An example of this is Spotify. They pioneered Spotify Wrapped in 2016 which allows Spotify users to view a compilation of data about their activity on the platform over the past year and invites them to share it on social media, it includes the five musicians a user has listened to most often, the songs which they have listened to most, and their favourite music genres. Other companies have begun to integrate their own version of this from Apple Music to Monzo. Spotify has also included other services and products in their app such as Podcasts, Audiobooks, DJ X (an AI-powered personalised DJ), and most recently Courses. All of this is to set the music streaming platform apart from the others on the market and encourage its customers to return to the platform and not switch to another. The thing about customer retention and such surgical precision and understanding of the customer base is that it creates a moat in the business. The term "economic moat," popularized by Warren Buffett, refers to a business's ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share. Just like a medieval castle, the moat serves to protect those inside the fortress and their riches from outsiders. As great as this is for businesses, this may encourage the businesses to begin slowly price gauging their customers. Take the Spotify example, even though they have added all these services and products to their platform, they have also subsequently increased the price of their subscriptions twice in the past two years which, to me considering the macroeconomic market whereby there are price increases occur without any tangible positive increase in services offered or quality of the products and services provided. In essence, most corporations have increased the prices of goods and services for the mere fact that they can without offering any increased value for those prices, some even giving worse quality products and services while increasing the price [see  Shrinkflation for further context] while Spotify has delivered more value for the money. (You may disagree but this is my blog as such my opinion stands, I would like to hear your opinions within the comments section)

The most ironic thing about subscriptions is the fact that the users are both the cornerstone and the Achilles heel of the entire business. This is because as soon as customers begin to perceive a decrease in the value of the subscribed service or product, they would switch immediately. The reason for this switch might be in the direct actions or omission to act of the business itself. A few paragraphs ago I mentioned the word ‘Churn.’ Also known as Churn rate or as the rate of attrition or customer churn, it is the rate at which customers stop doing business with an entity. It is most commonly expressed as the percentage of service subscribers who discontinue their subscriptions within a given time period. This rate and calculation are important to determine whether or not a business is actually growing or is failing slowly, and also determine the total value of each customer called LTV (Lifetime value). For example, a company may advertise that it has over 300,000 subscribers sign up per quarter, which on the surface is a net positive. However, if the same company is losing 400,000 subscribers every quarter and each subscriber only pays and uses their services for a period of 2 months on average then it could be reasonably calculated that that company isn’t growing and has a high churn rate.

The biggest reason why a higher churn rate is problematic is the fact that the company may not be able to just raise prices in order to make up the difference as they risk causing a larger spiral of attrition of customers especially if their economic moat is not as strong as they believe it is and/or the alternative products that they compete with on the market tremendously improves in their own product offering. It is a delicate situation. Especially because in a market where the average person experiences an astronomical rise in the cost of real-world necessities such as rent, groceries and bills, they would choose to cut back on the non-necessities such as streaming, personal shopping and other niceties. It makes sense why streaming services and other subscriptions are the first to be cut back on, the average American spends $924 every year on subscriptions and the average Brit spends £500 per year.

Finally, the biggest downside of the subscription economy is what is regarded as the “end of ownership.” This came out of the essay from the Danish politician Ida Auken which in essence stated “You will own nothing and you’ll be happy.” This is used as a criticism of the subscription economy. “People aren't as interested in filling their homes with physical goods anymore. They don't want to deal with upfront costs, the hassles of maintenance, and the frustration of obsolescence. Why buy and own something if there is an easier way to get the same or even better outcome?” This changing viewpoint has come about in part thanks to what is termed the “subscription economy.” This term refers to the new economic reality that things once obtainable only by ownership can now be rented. Furthermore, whenever an inch is given, a lightyear is taken within late-stage capitalism as such subscriptions have proliferated into products and services that are nice-to-haves such as Netflix, Amazon Prime and Spotify, to unreasonable products and services such as Adobe Office Suite, to downright ludicrous such as BMW offering a subscription price if you want heated steering wheel and heated seats. At this point, there is a subscription for almost everything, from underwear (ONTHATASS a socks and underwear subscription company), to Board Games.

The Emergence of Dynamic Pricing

As a Nigerian, the concept of dynamic pricing isn’t new to me. Anecdotally, whenever I choose to go shopping in a marketplace such as a farmers market or on Instagram/Facebook I am very much used to negotiating [haggling] prices, mainly because in these places I, and many others are sized up by the sellers taking into account a variety of arbitrary data points such as height, weight, how good your skincare is, how nice your clothes are, what car do you drive, your accent etc. These sellers then use these data points to give you a price that is between 50-250% above their cost, and it is then up to me the buyer to knock down the price to something more affordable to me, I usually slash these prices given by 50% as a starting point. The modern world so far uses more sophistication in order to do the same thing the sellers at the farmers’ market do but more on a macro scale. They use a few more data points such as previous search history, previous purchase history, age, interests, conversations, season of the year, time of day etc, they feed it into proprietary algorithms that then determine the best possible price to set on the item.

How Are They Applied?

In the digital marketplace, prices don’t just stay fixed. They dance to the tune of supply, demand, competition, and even your behaviour as a shopper. Whether you’re booking a flight, ordering a ride, or shopping online, dynamic pricing silently works behind the scenes, adjusting prices in real-time to match what you’re willing to pay and what the seller wants to earn. Uber uses surge pricing, to balance supply and demand for rides. When demand is high, such as during rush hour or bad weather, prices increase to encourage more drivers to get on the road and meet the demand. Amazon is one of the pioneers of dynamic pricing. It adjusts prices based on factors such as demand, competitor pricing, and customer browsing history. For instance, it might raise prices on popular items during peak shopping times and lower them when demand slows down. Zara a fashion company, employs AI to establish its initial prices and allows prices to dynamically respond to trends. This approach has led Zara to only need to discount 15 to 20% of its products, in contrast to the 30 to 40% typically seen at other European retailers.

Benefits of Dynamic Pricing

Dynamic pricing seems to be overtly beneficial to the businesses that do it as it permits them to engage in price maxing, which is the practice of discontinuing the known established practice of price elasticity where the price is reflective of the demand of the product, and the price becomes deliberately inelastic. This is reflected in the fact that CEOs have become increasingly tone-deaf in the things stated in interviews and earnings calls which include them saying that since consumers cannot afford other necessities like housing and cars they would be willing to pay more for groceries even though the price completely covers their cost and the inflationary price. Kellogg's CEO has also said that struggling Americans should “eat cereal for dinner” and finally the Pepsico CEO reportedly stated that the company has earned the right to raise its prices.

However, I always look for a way to game the system best understand the system in way I can use it to benefit me. As such I have noticed that those companies that use dynamic pricing, tend to significantly lower prices when you do not place an immediate order. If you go all the way by putting the item(s) into a cart, providing delivery details and an email address and then stop right before you pay. The company either, offers you a percentage off the price through a coupon code or they inform you that the price has been lowered by a specific amount to encourage you to complete the transaction.

Dynamic Pricing in Late-Stage Capitalism

Karl Marx first analysed the last-stage of capitalism in his three-volume magnum opus Capital: A Critique of Political Economy. For Marx, an acceleration in the turnover of capital, concentrating wealth in the hands of the few, would result in a continuous tendency to crises. This, he believed, would ultimately make the system collapse. However, Marx did not use the term “late capitalism”. It was coined by Werner Sombart, a controversial German historical economist, almost a century ago in his three-volume magnum opus Der Moderne Kapitalismus (published from 1902 through 1927). Sombart’s main contribution was to define three periods of the capitalist economic system: early or proto capitalism, advanced capitalism and late capitalism. In Sombart’s analysis, late-stage capitalism referred specifically to economic, political and social deprivations associated with the aftermath of the First World War. 

Late-stage capitalism is a popular phrase that targets the inequities of modern-day capitalism. For example, it spotlights the immorality of corporations using social issues to advance their brands. It also criticises the growing wealth gap and the concentration of power in the hands of a few. The term "late-stage capitalism" got its name from the idea that the current phase of capitalism is the final, often most exploitative and unsustainable, stage before a significant change or collapse. It's the sense that monopolies, and the oligarchs that run them, have rigged the system in their favour. They hire well-paid lobbyists to influence politicians. They win Supreme Court cases, such as Citizens United v. FEC (2010), which gives corporations the same rights as people. This allows them to spend untold millions on political ads that benefit them. Many feel that capitalism's winners may even favour inequality or "rig the system" by creating barriers to entry. Many who use the term "late-stage capitalism" believe the next phase is socialism. Some agree the new system could include universal basic income. It would subsidise those who have lost their jobs to technology. At the very least, the new system should include universal healthcare.

Subscriptions in late-stage capitalism have caused everything, even the most mundane things to become a subscription. Even to the point where services and products are being paid for without even being used and/or offered. Tesla charges a flat fee for its Full Self Driving at the time of purchase of $9,000 (down from $12,000) and the drivers are still required to pay an additional monthly subscription of $99 (down from $199), which wouldn’t be problematic if not Full Self Driving is still not available and some customers have been paying the monthly cost for about 10 years with the promise of a continually-delayed release date. That is a total of $35,880 spent over the 10 years, that money put in the S&P 500 with an average annual return of 7% with further assumptions that you put the initial deposit of $12,000 as the reduction to $9,000 only occurred mid-last year and you contribute a monthly amount of $199 per month, you would have a principle of $35,880 with an interest of $22,679 bringing your total to $58,559.81. This epitomises the absurdity of subscriptions especially when mixed with late-stage capitalism.

When you set the scene with subscriptions coupled with tone-deaf CEOs and an insatiable desire to extract just that little more from the average consumer, what you tend to get is a CEO (Kirk Tanner of Wendy’s) who says, when talking about dynamic pricing, about increasing the price when their customers visit them the most. Walmart is reportedly beta-testing electronic shelf labels which could pave the way for dynamic pricing with groceries. I may be naive to believe this but I am of the opinion that some items should be placed beyond the reach of commodification such as groceries, housing, water and electricity. These, I believe should be part of the inalienable part of human rights. I think the next form of pricing modelling would be a hybrid between subscriptions and hybrid pricing, whereby the companies use your credit score to determine how much to reasonable charge you per month and peg those changes to a calculation that takes in changes in your credit score with the current demand of the product and or service, to determine a price.

Conclusion

In conclusion, the landscape of modern commerce has been significantly reshaped by the proliferation of subscription-based and dynamic pricing models. These models, while beneficial in providing predictable revenue streams for businesses and ostensibly tailored services for consumers, also reveal the intricate dynamics of late-stage capitalism. Subscriptions have evolved from simple recurring charges to complex systems embedded in nearly every aspect of life, from entertainment to basic utilities. This shift, spearheaded by BigTech and other industries, has highlighted both the conveniences and potential exploitations inherent in a system that prioritises continuous revenue generation over traditional ownership.

As we move forward, the fusion of subscription and dynamic pricing models will likely become even more prevalent, pushing the boundaries of what consumers are willing to accept and adapt to. The examples of companies like Spotify, Uber, and Amazon illustrate the potential for both innovation and consumer manipulation. This raises critical questions about the ethical implications of such business practices, especially in essential sectors like healthcare, housing, and food. While these models offer undeniable advantages for businesses, it is imperative to consider their long-term impact on consumer autonomy and economic inequality. As these pricing strategies continue to evolve, striking a balance between corporate profitability and consumer rights will be crucial in shaping a fair and sustainable economic future.

GEN-Z WORD OF THE DAY

Rinse

This could either mean to make a complete fool of someone. It could also mean to play a song/film so many times you get bored of it.