Logically, no one would enter into a business relationship where anything that is better for one party is worse for the other. Such a zero-sum arrangement would quickly grow tiresome. Either one party is consistently losing in every transaction, or else every little change, every new opportunity, is the subject or maneuvering to see who will come out better.
It sounds like an unpleasant way to do business, but most of us enter into such arrangements on a regular basis. Some business models are build entirely around this type of structural tension.
Imagine that you are standing between two poles, with a bungee cord around your waist attached to each one. The more you try to move in one direction, the greater the resistance from the other. That’s structural tension.
When I worked in healthcare, a popular physician management model was to form a management company, and take a specified percentage of the practice’s income to provide all administrative services. The management company had little direct control over the revenues. Contracts with health plans, government reimbursement rates and the chosen workloads of each physician each had far more influence on how much came in the door.
So a management company had two ways to improve the bottom line. One was to take a higher percentage of the revenues, something the “customer” physicians (who bore the burden of any increase on a dollar-for-dollar basis) were not inclined to embrace. The second profit-improving strategy was to maintain the percentage, but provide fewer or cheaper services. That strategy, too, was poorly received.
Franchises are similarly constructed. Franchisors have a limited market. Their profits have to come from the franchisees. The way they make more money is to deliver lower cost services, or increase overall sales. Franchisors typically control advertising, so how a franchisee manages to deliver a $5 sandwich profitably in New York or California may be less of a concern than the impact of same-store growth numbers on the executive stock options.
Similar tensions occur more directly in the insurance and stockbrokerage industries. When a benefits broker announces that the health insurance carrier has raised rates by 25%, he or she seldom mentions that commissions usually increased by the same amount.
When a stockbroker recommends a trade, or switching mutual funds, it’s difficult for the customer to know whether he just needs some commissions to make the mortgage payment, whether the new mutual fund pays higher commissions, or whether his brokerage house is recommending the stock because they have an interest in its next round of funding. Of course, he could be doing it because the stock or fund is perfect for your objectives, but the fact that he earns a living by recommending trades casts everything into doubt.
Some of the “disruptors” in these industries are among the highest-valued startups in the world. Zenefits offers payroll and HR services for “free,” subsidized by their commissions on health plans. They are likely to reach $100 million in revenue this year, and are valued at $4.5 billion.
Wealthfront, the current leader in Robo-advisors, will manage your portfolio with automated trades according to your chosen profile. It’s fees start at .25%, cheaper then even the flat-fee trading available with online brokers. Wealthfront has over $2.5 billion in assets under management in its third year in business.
Even Uber, currently valued around $50 billion, is part of the transparency revolution against structural tension. Quoted pricing before pick-up and no tipping reduce rider concern about being overcharged, or a driver taking longer routes to pad the fare.
“But every business increases profits at the expense of its customers.”
To some extent that is true, but an open, competitive market limits how far you can pull in one direction without being snapped back in the other. In the healthcare example, raising management fees came with the risk that the customer would find another vendor. In franchising, hammering the profits of the franchisees makes selling new units more difficult.
In industries that work under protective regulation, like stockbrokerage or employee benefits; change is slower, but it is happening.