Part 2: Entrepreneurs, Macroeconomics, Transaction Costs, and eBay

The last post ended with the teaser: “It turns out that transaction costs are one of the factors that can have a huge impact on entrepreneurial projects, marketing, sales channels, and major strategic decisions.” One of the reasons eBay has become so successful is because it is one of the biggest and most effective environments for reducing something called “transaction costs.” In macroeconomics, these are the financial and emotional costs associated with the time and work needed to find, negotiate, and close a sale on both sides of the transaction. The person who bought my microphone out of the hundreds who looked at it associated the most value with my offering and had the most desire to take a little risk to save a few dollars. He saw my great feedback rating, the clear photos of a pristine used microphone, the complete set of accessories, and a fair shipping price so he kept bidding to $81 to win it. On the other side of the transaction, I found the eBay bidding audience the largest, the selling prices reasonable, the effort to create the microphone auction low, and the payment logistics fast and secure.

Many entrepreneurial startups have created thriving businesses based on even slightly reducing transaction costs. For example, Square (http://squareup.com) created a way for anybody with a smartphone and a bank account to accept credit / debit cards for a minimal fee and no monthly recurring costs. They even provide a free credit card reader. The transaction cost for a “merchant account” (as it is official called) was reduced dramatically for both the sellers and the buyers who could now use their cards at tiny merchants such as street vendors, farmers’ markets, etc.

For the rest of us, transaction costs are a way of thinking that can lead to better sales and marketing techniques. How hard is it for a customer to find you (online or otherwise), ask a question, buy an item, process a return, or get service? There are some companies that have such “annoying” salespeople that I never want to call them, the transaction cost of interacting with these people is too high. Car dealerships are a perfect example of this. There are other companies that I rarely call, like Southwest Airlines. I book, change, cancel reservations online, manage my mileage plan, check-in for flights, get flight status, but once in a while I call and amazingly, I look forward to it. They have great running jokes as their “music on hold” and every person that I talk to can solve my problem immediately. Remember, I only call them for the really messy problems, so this is a great compliment.

Take a moment and think about your entire customer relationship in terms of transactions costs. Next post will discuss more specific techniques to improve and provide a better experience based on this framework, both externally and internally.

Part 1: Entrepreneurs, Macroeconomics, Transaction Costs, and eBay

A couple years ago, I finally made the switch and moved from a big desktop computer to a shiny new MacBook Pro. Apple sold a powerful model with a 17″ screen so I thought “Great, almost the size of my old screen, fast, great battery life, what’s not to love?” After a couple dozen trips taken over the next year, love faded: 6.6 pounds felt like 36.6 pounds. So I decided to sell it on eBay and boom, it sold for more than 80% of the purchase price. Other pieces of electronics have sold for similar prices. Most electronics, even if returned within 30 days, have a 15% restocking fee, so how can eBay perform so well?

Since I am very familiar with microphones, here’s an example of a “commodity” microphone, the Shure SM57. Rockers for the past few decades have relied on this model consistently and Shure, true to their name, has made sure that it always sells for $99 new so it is a good example. So what are people willing to buy this for on eBay? One lucky seller (me) got $81.

This made me think about macroeconomics. I had a wonderful economics professor while doing my MBA who is an entrepreneur at heart, but was slumming it for awhile between startups as a professor. We definitely lucked out with her. During one session, she gave a great lecture on transaction costs using eBay as an example. It turns out that transaction costs are one of the factors that can have a huge impact on entrepreneurial projects, marketing, sales channels, and major strategic decisions. More to come in the next post.

Public Wifi – The Good, the Bad, and the Ugly

I took a trip to the San Francisco Bay Area last week for a project. As with any travel, there are blocks of free time. Also as usual, there were many things to do online and almost everywhere had free WiFi available including airports, coffee shops, and the hotel. Since I have so many points on Southwest, they even provided free WiFi on the flights. All the free WiFi hotspots were “open networks.” Those are the networks that don’t have a little lock symbol by their names and you log in using a separate webpage. The airport hotspots had ads, “watch this short video and get 30 minutes of free WiFi.” This was great, it all worked well, but what about security? How public is public Wifi? The lack of security on free public WiFi has been in the news regularly in the past year.

  • Fox News – http://www.foxnews.com/tech/2012/12/08/5-tips-to-stay-safe-on-public-wi-fi/
  • eWeek – http://www.eweek.com/security/slideshows/public-wifi-security-10-things-to-remember-before-signing-on/
  • InformationWeek – http://www.informationweek.com/byte/personal-tech/wireless/open-public-wi-fi-how-to-stay-safe/240149727

These articles are basically correct. Personally, I use a Virtual Private Network (VPN) on any Public WiFi while traveling. There are several good companies, some are free, but I prefer to pay for Witopia because they seem to be the most reliable. But Southwest airlines WiFi didn’t work while connected to the VPN. Was it worth the risk to get some work done? Could somebody on my Southwest flight see my email password on this “public” WiFi? This required some complicated research to determine what was really going on technically. Once I returned, I installed a WiFi data capture program on my laptop and  looked directly at the data my iPhone was sending and receiving.

The results were fascinating. The common iPhone apps I use while traveling did actually encrypt the data. Even if somebody captured the WiFi data on the flight, they would not be able to see my passwords. These apps included Mail, Flipboard, Google+, LinkedIn, Twitter, Facebook, and Tumblr. Logging into certain websites with Safari was a serious problem through since passwords were sent over the public WiFi for anybody to see. The only exceptions were websites where the HTTP part of the address was replaced by HTTPS which stands for “HTTP Secure” connection. If I logged into my email through webmail and the address was HTTP and not HTTPS, anybody could capture my password. This was obviously not good.

To summarize, public WiFi is a great convenience, but be careful. It is best to use a VPN connection. Do this by connecting first to the public WiFi hotspot, logging into the hotel or airport website, then once the connection is established, start your VPN software. To find a good, free VPN provider, just do a Google search for “free VPN” before you next trip. You can then enjoy that free public WiFi in comfort and safety.