System of commissions
and its consequences
Have you thought about the difference between fixed price and commission?
Let's consider the system implications
According to the textbook
A fixed price is an amount paid in exchange for a product or service. It is generally described in terms of time and it's determined by the market’s demand and offer. On the other side, the commission is remuneration for securing the sale of a product or service and it’s usually determined by a percentage of the sale
Now let's consider their incentive
A consultant charging by the hour will be rewarded by working more hours
A consultant charging a commission will be rewarded by focusing on top deals
Do you notice one difference?
One focuses on quantity and the other on quality
Use cases in the wild
Now let's study some pricing models
Microsoft Excel: yearly subscription is $70 a year or the perpetual license is $160
Pricing model: Fixed Price
I wouldn’t pay $160 dollars for Excel 2010, we can say that software apps keep the demand by releasing new versions
Realtors: A friend paid 5% in realtor’s commission when she sold her place
Pricing model: Commission
This means that a realtor selling a house in BC would earn double that of a realtor selling a house in Ottawa
Credit Cards: I pay $70 a year for my credit card, according to our definitions this is a fixed price model, however, credit cards are a marketplace, which means, it is a double-sided market, on one side they charge customers to be members and on the other side they charge merchants 4% commission of the transaction
Pricing model: Customers is fixed price and for merchants is commission
Now let's take a turn into the effects of picking high-quality deals
When transactions are costly, small merchants don't have the volume to make it worthwhile
When the offer is limited, demand will drive prices up
Going back to the credit card pricing model, at the end of the day, customers are paying the whole bill, merchants would just reflect the transaction fees on the product price, wouldn't they?
So the reality is, I pay 70$ a year + 4% of each transaction to the credit card company
The Age of Empires
Look at one industry that conquested the market:
Where premium calculations are not public knowledge
Where claims are not guaranteed
Where policies expire every year whether you use them or not
Where law enforces you to buy it
Yes, the car insurance industry, according to the Insurance Bureau of Canada (1)
57% of net written premiums are paid back in claims
60% of the market is served by 8
empirescompanies30% is operating expense and profits
Employee compensation is the largest operating expense. Compensation levels in the industry are relatively high compared with most other sectors in the economy. The average weekly salary in 2018 was $1,293. This reflects the advanced skill mix that employees in the P&C insurance industry possess.
I compare insurance with having a piggy bank for a rainy day, one difference is that one only refunds only half of what you put in
Why does saving ought to be so complicated?
A New Hope
Another aspect that I didn't mention before,
What is the effect of machines if the equation?
We don't pay in gold and don't need to move tangible assets around
Why would you want to focus on quality deals when you can automate the work?
Technology produces an unlimited amount of service/hours and social media unlocks the ability to reach millions
References
http://assets.ibc.ca/Documents/Facts%20Book/Facts_Book/2018/IBC-Fact-Book-2018.pdf