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Thou Shalt Not… Misprice Thy Wares
A Drive Around the Predatory Pricing Block
We set the price and the market decides. I bet you’ve heard that idea. And if we place our trust in the market’s invisible hand, then morality takes a backseat to ‘whatever the market can bear.’ If we overshoot, the customer refuses to buy. And if we aim too low, we bleed cash. From that perspective, morality plays no role, right?
I contend that the market can, and will refuse a fair price. And conversely, an amoral price can have the markets grasping for the product like a child for candy. The morality of a price is therefore knowable well before a customer lays eyes on it. Which is why all the error in price-setting occurs before your customer sees the price tag.
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And there’s no better place to begin discussing the ethical context of price than with predatory pricing.
We find a great example of a service priced unethically in Uber.
By now it’s common knowledge that capital and deficits funded Uber’s rapid expansion. And to achieve their market penetration, Uber undercut the taxi industry on price. At the onset of UberX (Uber’s low-budget rideshare option), the service undercut comparable taxi rates by up to 75%. And to attract new drivers to provide rides in exchange for these hostile commissions, Uber offered generous sign-on bonuses. To keep the driver’s content, Uber took a meager compensation for itself, sometimes as little as 2%.
For-profit organizations thrive on one thing, can you guess what that is? If a business fails to turn a profit it isn’t a business, it’s a hobby. As Uber consumed market-share and kicked off an industry, it disrupted the transportation hierarchy.
Now, I’m going to withhold a glowing 5-star ethical review for the taxi cab industry. But I will assign some respect to the long-standing practice of taxi driver certification, municipal oversight, and the tradition of marking taxi vehicles; markings which imparted authority and trust in their operators.
Rather than revolutionize a functional and well-integrated taxi system, Uber deployed commonplace technologies (SMS, GPS, and digital maps) with uncurbed financing to carpet bomb the taxi industry.
My Father Drove a Cab
Driving a cab was a hard job. He worked long hours and had a deep commitment to the medallion (an expensive license required of cab drivers). And despite its many difficulties, taxi driving carries a great legacy in the United States; a legacy which established countless immigrants in this country, among which I find my father and myself.
A rider-pairing platform with fixed rates could have revolutionized a great system in desperate need of a 21st century facelift. Instead, Uber chose the nuclear option.
Uber Killed The Taxi For Sport
The case for Uber’s unethical pricing is this: if Uber had charged prices which afforded them a sustainable commission and their drivers a proper wage, today we might instead ask, “what’s Uber?”
In fact, the taxi industry may have responded to Uber’s innovations with their own. They may even have partnered with Uber to maintain the taxi’s viability among modern consumers. Instead, Uber made disruption its mission.
In short order, Uber wantonly evaporated the wealth of hundreds of thousands of immigrant families across America; and Uber achieved this by engaging in predatory pricing and foregoing their profit mandate.
Organizations that fail to profit are doomed, and those that fail to seek a profit are damned.1
I fully appreciate that in today’s popular thinking, profits are thought to be evil; yet few ideas are as misguided as this one rooted in Marxist ideology.
You may be familiar with the phrase, the whole is greater than the sum of its parts – the purpose of any human organization is to fulfill this pledge. And profit is the primary measure by which we judge an organization’s ability to achieve this aim; a terminal lack of profit suggests an organization should cease to exist. Here’s why.
If an organization fails to profit, it prevents its members from participating in an activity where their efforts may be applied profitably. Therefore, any organization that fails to be greater than the sum of its parts steals valuable creativity, effort, and strength from the community at large.
Ipso facto, anti-profit is theft.
Profit Is Everywhere
I implore you to see profit as more than cash on a balance sheet; profit takes many shapes. Take habits for example. We don’t smoke, eat ice-cream, or play golf without a profit-like incentive. The cigarette feels good, ice-cream satiates our sweet tooth, and golf satisfies our burning desire to hit balls with sticks. And each activity incurs an operational cost.
A cigarette costs money, requires us to step outside (at least in the United States), creates a chemical dependence, and slowly poisons us to death – can you say quadruple win? By the books, smoking is a net-negative activity, this habit costs more than it produces and ultimately claims the livelihood of people who participate.
Whereas golf, which has some initial and long-term costs, keeps bodies moving, minds focused, brings joy, and encourages adults to hit things really hard in a way society deems acceptable.
At the organizational level, profit proves the value provided by an organization exceeds the costs required to sustain it. Companies that always breakeven or fail to turn a profit are the cigarettes of commerce: we should put a warning label on them. Yes, some companies spend excessive capital to develop their technologies, but how many organizations have wiped out their competition during the research and development stage?
Undercutting Is Not Amoral (By Itself)
Great leaps in innovation have undercut existing product hierarchies by providing the same value with a fraction of the effort. A multi-day train ride across the United States is priced higher than a five-hour flight: the airlines ravaged passenger trains… with innovation.
And there exists conditions when pricing below an adequate compensation for ourselves proves moral, too. I count among them, upfront getting started costs which ease customers into your ecosystem. These prices come at your temporary expense with the expectation that customers stay around to indulge in additional services.
For example, video game consoles such as the PlayStation release at price-points tolerated by the console gaming market (300-500 USD). However, initial hardware releases rarely achieve economies of scale. The manufacturers of these consoles pay more in parts and labor than the consumer pays for the final product.
The manufacturers do so as part of a long-term strategy that provides a reasonable return on games, services, and accessories purchased by console owners; the console itself is merely a getting started point. But that’s not what we’re talking about when we consider Uber.
Uber’s investors believed in a future where Uber at last turned a profit by first ridding itself of rivals, then by hitting the gas on price. That dream became harder to realize as more money sank into the Uber hobby.
As Uber attempted to become the world’s premiere mode of public transportation, their road grew bumpier. As Uber grew, the demands placed on their staff compelled an increase in headcount and resources, funded by the same short-sighted investors. These resources taxed Uber’s cashflows further, forcing them to raise additional capital and seek revenue in trial projects such as Uber Eats.
Cities naturally pushed back at the venture-capital-funded trampling of public transportation by placing hurdles ahead of Uber’s expansion. And more recently, legal challenges to the gig-economy are becoming lasting migraines for Uber’s legal team; regulations may even force Uber to shut-down local business outright.
The public loves a cheap price, but they loathe a monopoly.
The Hail Mary
The situation leaves me wondering, what did we get for all of this? An immorally priced service destroyed a public tradition and congested the wealth-engine for thousands of families, and what did society gain? So far, nothing new.
The saving grace of Uber’s investor-funded hegemony is the self-driving car, but at the time of this writing it doesn’t exist in any meaningful capacity. Lyft, Uber, Waymo, and other ride-sharing services race to develop a fleet of self-driving vehicles. These four-wheeling automatons would need neither food nor money to transport people swiftly and safely in all the markets in which ride-sharing services presently thrive.
This potential great leap in innovation is the one shot Uber has to build something that operates at a net-profit gain while offering low-cost rates to commuters. The question is, will Uber live long enough to realize its dream? And will it be the first to do so? And if it does, will the benefits of self-driving public transport outweigh the destruction of the taxi industry and the creation and subsequent elimination of the gig-driving economy?
Could we have gotten to the same place without the intermediate steps? These are difficult questions to answer, but Uber’s choice to pursue predatory pricing tactics can be judged with what we know today.
What we wish to avoid, especially in a question of right and wrong, is to judge actions based on their outcomes. That behavior is what Annie Duke calls resulting, and we should never apply it when judging the quality of our decisions.
In Uber’s case, the willfully inadequate price of their services helped achieve their mission, which was to dismantle taxi’s place in the economy. To achieve this, they chose an immoral pricing scheme which had no rational basis in the marketplace.
Predatory pricing necessarily disrupts industries without guaranteeing profit to the entity which participates in it.
Predatory Pricing: The Bottom Line
When we undercut our competitors with a predatory price, we deal three blows.
First, we hurt incumbents. We hurt them not by the merit of our skill or cleverness of our invention, but by the vastness of our dollars.
Second, we make an unwitting accomplice of the customer who ‘buys in’ both mentally and monetarily to a false reality. A customer who will soon realize their moral culpability as they survey the results.
And thirdly, we hurt ourselves by making a really poor bet. By failing to compensate ourselves for the value provided we place at risk the entire organization and people who contribute to it; employees who believe their organization delivers a value greater than the sum of its parts.
The likelihood that we turn a profit at some later date is low, and if achieved, does not begin to excuse our prior behavior.
A subsidized price in tandem with a profitless strategy is an amoral pursuit. Shut. that. shit. down.
Non-profits are profit-seeking entities, but do not measure their profits in dollars