Episode #77 - Free-Rider Friday - January 2016

Ron’s Topics

Value Pricing in Tanzania

From Kenneth Morrison, CPA, CA, at Provision Accounting Group in Richmond, British Columbia, an excellent example of culturally-adjusted Value Pricing from Tanzania.

Here’s some excerpts from his letter to us:

Value pricing lessons from Africa

Nancy and I just returned from a three-week trip to Tanzania and I saw two pricing options that should make Ron proud. 

Value Pricing lesson 1 - Dodoma Dental Clinic

The dental clinic in Dodoma caters to all income levels but the real objective is provide low or no cost dental care to those most in need and least able to pay. However the dentist in charge, quite a remarkable man, is also required as best he can to bring the clinic to a cash flow breakeven position.

He has three-pronged pricing option available as there are three prices available for the same procedure. The strategy is also brilliant in that it has not only three pricing options, his strategy also takes into account the different high value points during the process.

The prices are very differing amounts for exactly the same procedure:

Premium (or fast track as he calls it)                                    $1,000

Regular                                                                                   $500

Free, based on financial capability (Tip Clause)                    $000

Premium is double the price of regular service and is available 24/ 7 because of the “importance” and “busy schedule” of the patients. These patients are ushered directly into the chair through a side entrance, not only is there no waiting there is no need to be seen as taking advantage of their status. The high value point, either because of pain or ego is at this point, price is almost no object. This is of course very profitable for the clinic.

Regular is in most cases for the insurance based client who is not troubled by waiting a reasonable time and wants to take full advantage of a health insurance policy so rarely will they select the premium service. This regular price is based on the maximum price of most insurance schedules. This price is also profitable for the clinic.

Free, after a financial resources review, is for those the clinic really wishes to help who otherwise would have no access to dental care. (One dentist for 170,000 people in East Africa according to the World Health Organization). However upon leaving the clinic after the “free” treatment, problem solved and pain free, the patient encounters a donation box on the wall and is encouraged to make a contribution (an extremely high value point, pain free and happy). For returning patients they are aware of the “tip” box and regular contributions are made.

The multilevel pricing allows an individual choice and the patients with the ability to pay almost always taking the most expensive option and which is presented to them at the high value point.

The clinic is presently in a positive cash flow and serving a significant needy population. The premium service is a tax on the rich happily paid to subsidize dental care for the poor.        

Pricing Lesson 2 - College Dorm Rooms

Education is very prized in Tanzania and many students and their families struggle to pay the costs of tuition, materials and room board.

One university has a very creative structure in place for accommodation. This pricing structure, as with the first example, has been done taking into account the culture in the country, as crowded accommodation is the norm.

Each room contains two bunk beds, (sleeping room for four) two fairly large tables and two closets

The accommodation is priced as follows:

One person per room                                                             $1,000 per person

Two people per room                                                               $600 per person

Four people per room                                                               $480 per person

This is perfectly priced to maximize the return for the university while keeping the parents who are writing the checks also happy.

Firstly no parent (in this culture or any other, I would hope) will agree to $1,000.00 amount

Some parents may agree to the second choice of $600.00 however now the total revenue for the university is $1,200.00 so everyone is still happy. 

Most parents will insist on the third option which maximizes the return for the university at $1,920.00, almost double option one and yet all stakeholders are pleased except the student, although in this culture the student likely has more space than at home and is probably ecstatic to be away.   The costs for the university are virtually the same in any of the three options as the fee is for accommodation only.

The interesting point is that both these pricing strategies work because of the cultural context. I suspect for a variety of reasons, including spoiling our children, they might not work as well for our culture.

Our firm formed a charitable foundation, Provision Charitable Foundation, and since 2009 have been involved in projects in Tanzania. We are very proud of having graduated our first three medical doctors this year and have a variety of other projects underway. However we have also begun the process of out sourcing basic accounting work to an office that we have opened in Kampala, Uganda. As a result we are providing well-paying white collar jobs that are desperately needed while increasing our own profitability.   

If you have are curious about what we do in Tanzania please visit our website or call and we would be pleased to discuss.

Regards

Kenneth A Morrison CPA CA

Cuban Baseball Crisis

From The Economist, December 19, 2015. 

Of the number of Latin Americans playing Major League Baseball (MLB) before 1959, two-thirds were Cuban, even though many were black and banned from MLB, until the color barrier was broken in 1947.

In2007, ten Cubans played MLB, and 27 today, earning $100 million annual salary. This has created an elaborate infrastructure of smugglers to get athletes out of Cuba, and they take a 30% cut.

Raul Castro, president since 2013, wants a “normalized” system, whereby the players travel freely, and returns to Cuba in the off-season. He also wants to impose a 20% tax (at least it’s less than the smugglers!).

The problem is the trade embargo with Cuba can only be lifted by Congress, and it precludes a tax on foreign earnings. The Economist claims MLB has much in common with Cuban socialism in its $9 billion per year business—it levies a tax on teams with high payrolls, etc.

However, Cuban players over 23 years oldwith at least five years in the National Series are exempt from the salary cap and can auction to highest bidder, which of course reduces team owner profits.

So, MLB is likely advocate a tightly controlled system of acquiring Cuban players, rather than a free-for-all.

Seems to be there’s two bootleggers and no Baptists!

Ed adds: Coincidentally, this week the New York Mets reached a contract agreement with Cuban native and slugger Yoenis Cespedes. The contract has an innovative structure in that it is a $75 million deal, front loaded with $27.5 million in the first and includes an opt out clause after that first year. At first pass is seems a bit odd, but as it has been analyzed it is possible that this is a bit of an innovation in megabucks sports contracts. 

$400 to Eat at Olive Garden?

Article from Money.cnn.

The interesting thing to me about this article were some of the comments. They completely understood the logic behind this pricing, and didn’t complain about “gouging,” as people tend to do with Uber’s Surge Pricing.

Ed adds: You would have to pay me to eat at the Olive Garden. 

Corporate Social Responsibility and Tax Avoidance

From The Economist, January 2, 2016, Schumpeter, “Social saints, fiscal fiends.”

Pfizer prides itself of its corporate social responsibility, but that didn’t stop it from seeking a tax inversion $160 billion takeover of Allergan, and moving its headquarters to Ireland. It would have saved $1 billion in corporate tax had it done this Companies that do most in CSR also the biggest tax avoiders, and spend more on tax lobbying

Economists says both CSR and tax avoidance is done to maximize profits. CSR also helps attract talent.

Another theory is that taxes and CSR are substitutes; the less tax a company pays the more for CSR.

Here’s a thought: How about the USA lowering the corporate income tax, the highest in the world?

Ed’s Topics

David Bowie Bonds

David Bowie was not only an innovative musician, he was also a financial wiz. In 1997 he raised $55 million by selling bonds secured by the future revenues from his music catalogue. Turns out that with the advent of Napster and iTunes, this was pure genius. 

Here is my favorite Bowie song:

Koch Brothers’ Wealth Doubles During Obama Term

Premise A: During the Obama Administration the net worth of the Koch brothers went from $19 billion in 2008 to $41 billion today.

Premise B: The Koch brothers are money grubbing bastards who will stop at nothing to increase their fortune. 

Conclusion: The Koch brothers must be about to launch a campaign to repeals the XXIV Amendment to the US Constitution to help secure a third term for POTUS. 

This is not happening so one of the premises is wrong. Listen to the episode to find out which one and why?

Bitcoin’s Blockchain

Ed’s link/article:

Ron mentioned that the SEC approved Overstock.com CEO Patrick Byrne’s plan to issue stock using blockchain technology. Overstock did issue private bonds using blockchain previously (from the Mises Wire, December 16, 2015).

The Economist calls the blockchain technology a machine for creating trust, “The trust machine,” in its October 31, 2015 issue:

The spread of blockchains is bad for anyone in the trust business—the centralized institutions and bureaucracies, such as banks, clearing houses and government authorities…

The blockchain is essentially a public ledger (sometimes called a distributed ledger). It doesn’t sound sexy, but neither did double-entry bookkeeping.

NASDAQ will start using blockchain for trades of privately held companies. Everledger uses blockchain to protect and verify luxury goods: diamonds, rare art, etc.

Russ Roberts has an excellent interview on his EconTalk podcast with Nathaniel Popper, author of the acclaimed book, Digital Gold.

CIA OSS Manual

In January 1944 the Office of Strategic Service (forerunner of the CIA) published the Simple Sabotage Field Manual. In it they make suggestions on how ordinary citizens behind enemy lines can help in the war effort. To me, part of this reads like a advisory column to folks who fill out timesheets. See pages 28-30. 

Episode #76: Lessons from the Trading Game

Peter Drucker taught that “Business is society’s change agent. All other institutions are designed to conserve if not to prevent change.” Companies exist to create wealth, no other institution can do it.

By playing the Trading Game, participants in this session will learn the subjective nature of value, and how increasing the availability of goods and services your company offers leads to prosperity, happiness, and a higher standard of living for all.

Participants will come away with a deeper understanding of how business is a serious moral enterprise—not the simplistic idea it is based on greed—and that cooperation is far more prevalent than competition.

The game begins when the participants randomly draw a card from a deck, each one containing an item they will now own (each card will contain an electrical item you’d find at Best Buy, of approximate equal price, such as an electronic gadget, Coffee Maker, memory stick, cell phone, DVDs, etc.).

The group is then divided into, say, ten groups of five participants each. They are instructed to rate how much they like their gift, using a scale of one to ten. The total score for each group is then summed.

Then the instructor allows the participants to trade only within their group of five, allowing them to exchange for a gift they value more. The gifts are then scored again, and the total score increases.

Then the instructor allows the entire class to trade, expanding the number of potential trading partners from four to forty-nine. With many more options, the complex trades that take place would make an economist proud.

We have discovered some people don’t trade after discovering their gift is very popular, but they do increase its score (the Bandwagon and Endowment Effects). Other scores may actually decrease after an exchange, as Buyer’s Remorse sets in. Overall, though, the total score goes up again.

This may be a simple game, but it does a wonderful job illustrating complex economic principles in a way that a child can understand. There are at least seven lessons to take away from this game:

1. Trading freely can add value even though the traded items remain physically unchanged.

2. The more trading partners there are, the better—wealth and happiness are increased.

3. A free exchange is a win-win game, not zero-sum.

4. The game is win-win because of the rules set up beforehand—theft and coercion are not allowed, nor does anyone have to trade if they don’t want to.

5. Scarcity is almost always real. You can’t have everything, so have to make tradeoffs.

6. Opportunity costs—that is, economics does not ask “What do you want?,” but rather “How much do you want it?” which involves making tradeoffs, not having final solutions.

7. Economic value is in the eye of the beholder.

8. People trade, not governments. The Trade Deficit is an accounting fiction that doesn’t describe the economic fact that individuals are made better off from trading.

If China invented a vaccine against cancer would you not buy it because it would increase our trade deficit?

By operating a company, you are expanding the choices available to the consumer. This is the real source of wealth in an economy—the variety of goods and services available. If it were otherwise, any country could achieve wealth simply by printing more pieces of paper money.

Perhaps this is better understood if we think of Nathan Mayer Rothschild, one of the founders of the international Rothschild banking dynasty, probably the richest man in the world at the time of his premature death in 1836 at the age of 58 from an infected abscess. Despite having the best medical care money could buy, he did not have access to antibiotics that today could be purchased from any pharmacy for a few dollars.

Would you rather have Bill Gate’s income in today’s world—with its abundance of goods and services—or during the time of Rothschild? Another way of articulating this is that the wealth of nations resides in consumer well-being, not profits.

That said, your company has to understand what customers truly value, since all economic value is in the eye of the beholder. How your firm monetizes the value it creates for customers is your business model.

Ed and Ron learned about the trading game from Jay Richard’s excellent book, Money, Greed, and God: Why Capitalism Is the Solution and Not the Problem.

You can download sample cards here.

Episode #75: Interview with Mark Koziel

Ed and I had the honor of interviewing Mark Koziel from the American Institute of Certified Public Accountants. He VP of Firm Services & Global Alliances at the AICPA.  He oversees the development, ongoing improvement and delivery of services to members in PCPS/Firm Practice Management as well as International relations with various CPA related groups. He frequently speaks on CPA issues around the country. Prior to joining the AICPA, Mark Koziel served as Director of Media Planning for a political consulting firm in East Aurora, NY serving Presidential, Senate, Congressional and Governor races around the country. 

Mark was one of the founding members of the Young CPAs committee and served as Chair for two years before being appointed to the Buffalo Chapter Board and serving as President for the 2003-2004 Fiscal Year, one of the youngest President’s in the history of the Buffalo Chapter. Mark earned a BS in Accounting from Canisius College. Mark has been named one to the Top 100 Most Influential People in Accounting by Accounting Today annually from 2008-2014.

Macro Issues in the Accounting Profession

• What are some of the major trends happening in the accounting profession?

• How about trends around the world?

• Rules vs. Principles debate?

• Big 4 Consulting revenue projected to be greater than the Big 3 (Bain, McKinsey, BCG) consulting firms.

• Auditor reform rotation in the EU.

Micro Issues

• What’s happening in firms with Value Pricing? Is it diffusing?

• What about timesheets?

• What about firm innovation?

• What about profession’s innovation?

• PWC’s HALO audit software—runs algorithms through entire data sets—no more sampling (100% of customer transactions)

We also discussed the book, The Future of the Professions: How Technology Will Transform the Work of Human Experts, and how it will impact the accounting profession.

What advice would Mark give to a young aspiring professional?

Thanks to Mark for a thought-provoking discussion, as always!

Episode #74: Interview with Daniel Susskind

Daniel Susskind is a Lecturer in Economics at Balliol College, Oxford, where he teaches and researches, and from where he has two degrees in economics. Previously, he worked for the British Government - in the Prime Minister's Strategy Unit, in the Policy Unit in 10 Downing Street, and as a Senior Policy Adviser at the Cabinet Office. He was a Kennedy Scholar at Harvard University.

Professor Richard Susskind OBE is an author, speaker, and independent adviser to international professional firms and national governments. He is President of the Society for Computers and Law, IT Adviser to the Lord Chief Justice of England, and Chair of the Advisory Board of the Oxford Internet Institute. His numerous books include the best-sellers, The End of Lawyers? (OUP, 2008) and Tomorrow's Lawyers (OUP, 2013), his work has been translated into more than 10 languages, and he has been invited to speak in over 40 countries.

We were honored to be able to interview Daniel Susskind about his book (co-authored with his father, Richard Susskind), The Future of the Professions: How Technology Will Transform the Work of Human Experts. 

The book is based on:

• 8 Professions (Doctors, lawyers, accountants, auditors, architects, journalists, teachers, clergy)

• 100 Interviews

• 800+ sources

It lays out two futures for the professions:

1. Technology streamlines the “print-based” industrial society

2. Technology based internet society, with increasingly capable machines, displacing the work of professionals

They believe that gradually scenario #2 will dismantle scenario #1

How long will this take? Daniel says: "We say that we think that will happen in the 'long run' but we do not commit to timing. This is for an important reason -- the pace of change is not in our hands!

They write the professions are increasingly:

• Unaffordable

• Antiquated

• Opaque

• Underperforming

The future of the professions is too important to leave to professionals.

Folks, we can’t recommend this book highly enough. Without a doubt, it is the most important book written on the professions in decades.