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.
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.