This weekend I’ll be getting married to my best friend and fiancee, the Boss. I couldn’t be more excited to embark on this journey for the rest of our lives (and to take a much needed honeymoon). I am without a doubt in my mind the luckiest guy in the world to be able to marry the love of my life, as well as to have the world’s best job and an unreal team alongside me.
So now that all of that’s out of the way, let’s get to it: the process of getting married is an expensive and exhausting process. (NB – yes, it’s possible to get married without the hullabaloo, but I’m from a huge Italian immigrant family and she from an Irish one, so that’s not an option in the world I live in). Now, Kathleen has done close to 100% of the hard work here so I shouldn’t complain, but given my background as a consumer analyst and where I currently sit , the whole process struck a few notes to me that I think are pretty instructive on the dynamics of any B2C sales cycle.
I like to think that I’m a pretty good negotiator but even I’m pretty susceptible to the overtures of these vendors. And I think what I’ve narrowed down on is three or four key elements that necessarily influence the pricing power (and margins) for any given service or product:
Stakes, Frequency and Transparency. And along the x axis let’s say “emotion” or longevity acts as a multiplier on this effect.
The lever for nearly all consumer businesses is the delta between customer acquisition cost and lifetime value of a customer. Often times, that second part is exacerbated, or most often generated by repeat customers. When a customer acquisition event is extremely infrequent, the vendor has little to no economic incentive to take a loss in order to encourage future visits or purchases. In fact, it’s quite the opposite — a lifetime of a customer experience needs to be squeezed into a single transaction, so the “upsells” and “add ons” that you might get over the life of a subscription business or in app game purchase manifests itself into a 9th piece in the band, chrome handles on a casket, a clear undercoat on a car or (still pulling for this one) a buffalo sauce fountain at the cocktail hour. It’s why you can get a free training session or a week trial at almost any gym: the conversion rate to paid and average customer lifetime way way way outweighs whatever costs are in the upfront. It’s also probably why spending on every child after one’s first drops so precipitously.
The stakes of the customer event likewise adds to the potential for absurd margin capture. My own personal sleuthing suggests that the all things being equal, calling something a wedding instead of a summer party tacks on an automatic 30% extra. That’s precisely because a captive audience is one with little leverage in his or her favor. This is probably one of the biggest reasons that healthcare costs are so high. Facebook spent $2.7 Billion in R&D last year alone. That’s more than what it costs to develop and bring to market a new drug. The difference is that if you don’t take facebook you won’t die or get very sick, and there’s no built in payer to leverage for payment.
Any kind of efficient marketplace has some balanced knowledge set for both sides of that market about relative pricing and costs. That’s why when you go to buy something at a store, on eBay or Amazon the prices will usually be pretty close together. That kind of widespread and readily accessible market information translates to some degree of demand elasticity for customers — and a baseline for retailers. Karmax is a great example of a company that sets the market in this way.
Throw that out the window when it comes to areas with some degree of specialization required. When a supposed “expert” is selling to an “amateur”, the opportunity for misaligned incentives is too high. Kayak eliminated that imbalance in travel. But try to find wedding costs somewhere. You can’t. It’s not online, you can’t just call and ask, and emails will come pretty close to demanding an in person meeting. Without some baseline of knowledge, the “experts” are incentivized to be opaque and to keep prices relatively high together.
Combine this with a fragmented, highly local market, and it starts to make more sense.
The final part of this equation as I see it is emotion or longevity. When something is emotionally charged, or expected to last…forever, the extent of that emotional pull (either extremely happy or extremely sad) dictates the opportunity for a premium. You buy organic, handmade diapers for your first kid because you are terrified of making a mistake. You buy whatever’s on sale for your second kid because you realize you are literally flushing your money down the toilet.
The best upstart businesses aim at eliminating at least one of these elements. At the heart of it, that translates to saying “opening a reasonably priced wedding hall” has a limited ceiling while creatin the kayak for wedding venues is likely a tremendous platform with a lot of scale. And that’s the fundamental difference between a service and a platform.
In the end, the stakes couldn’t be higher, the frequency lower, the transparency more confusing and the range of emotions more volatile…but I couldn’t be happier to be getting married in a few days. And I couldn’t be more grateful for all of the help, love, and support we’ve received from our families and friends.
I’m off for my honeymoon, and when I get back we’ll be announcing our next class of GCT. It’s going to be awesome. Talk about being a lucky guy.