1.
Surge pricing
The concept of dynamic pricing is simple – and easy for businesses to implement. Surge pricing is directly linked to increases in demand. In periods of high demand, the scarce goods are more valuable, and companies can increase their prices.
Perhaps the most well-known example of this is within ride-share companies like Uber, which have used surge pricing for years to charge riders when demand for cars spikes relative to the number of drivers available. Airlines have been implementing this business model since the 1980s.
Outside travel, online stores are increasingly using this dynamic pricing, too, says Vomberg. "On Amazon.com alone, millions of price changes occur within a day, corresponding to a price change of approximately every ten minutes for each product." He adds price changes not only occur frequently but can also be substantial. He cites a 2016 study, which showed the price of a Nikon camera on Amazon changed within hours from €700 ($743; £612) to €1,687 ($1,790; £14,74) – a difference of €987 ($1,048; £862), or 240%.
Now, surge pricing is happening withing brick-and-mortar establishments including bars and supermarkets as well. Physical businesses are adopting electronic shelf labels that enable real time price adjustments depending on the time of day, stock levels and whether items are approaching their sell-by date.
2.
Widening moat
Changes in a moat are hard to quantify in the short term because widening a moat can depress margins, earnings, and returns on equity.
When Nick Sleep was buying Costco, analysts were lamenting its structurally low margins. What Sleep understood to be a key feature of Costco’s moat looked like a bug to everyone else.
Costco widens its moat by foregoing higher margins in the short term to maximize profit dollars in the long term. It’s deferred gratification. A company neglecting its moat, like Kodak, can report higher earnings in the short term by scaling back advertising and cutting R&D. Instant gratification. In the long term, it will pay the price, as Kodak did.
Thought of the Week
“Look at those who fail and you will find that most people fail not because they make mistakes, but because they are not fully committed. The same goes for companies.”
- John D. Rockefeller
“The safest way to try to get what you want is to try to deserve what you want. It’s such a simple idea. It’s the golden rule. You want to deliver to the world what you would buy if you were on the other end.”
- Charlie Munger
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