Why a $3 coffee beats a $500 hotel room
This is one of those blog posts which has little to do with diamonds or jewellery but is an observation about markets, or perhaps market failure.
I’ve just been to New York for 24 hours – one night in a hotel, one day of meetings, and straight back to London this morning on what I suppose I must call the ‘red-eye’ from Newark.
So what’s all this about coffee and hotel rooms?
Well, it all has to do with wi-fi (some of you may know where this is going…).
Here’s the deal: my hotel room, which came with a price tag of several hundred dollars, required me to go through a tedious login process and to pay a $10 fee to access their wifi network (which worked terribly, by the way, and had some sort of daily upload/download Mb limit).
But if I popped downstairs to a coffee shop just across the street (well done Gregorys Coffee, by the way) I could get a coffee for $3 and automatically pick up their excellent wifi service – no logging on, no fee, and all the bytes I could eat to go with my delicious coffee.
So how does this happen? How does a $3 coffee come with perks which you don’t get with a $500 hotel room?
I think of it as a market failure resulting from ‘groupthink’. The people who run coffee shops know that they are in the hospitality business – they’re not just selling coffee – they’re selling a place to catch up on the news, chat with friends, read a book etc.
These days that’s very often done virtually: we catch up on the news by going online, we catch up with friends through social networks, we download a book to read on a Kindle.
The hotel business hasn’t quite made that imaginative leap yet (of course there are some honourable exceptions), and old-fashioned businesses tend to follow industry norms, so if most hotels charge for Internet access, then, well, most hotels charge for Internet access. Groupthink, see.
Plus of course hotels used to make very tidy sums of money by charging exorbitant rates for phone calls, especially international calls, but that lucrative little sideline has been killed off by mobile phones and by applications such as Skype. In the hotel business, it makes sense to recover some of those lost revenues by charging for Internet access.
But let’s for a moment imagine that Internet access is an essential service, like say, water, or light or heat.
Can you imagine a 5-star hotel imposing a surcharge if you switched on the air-conditioning? Would they require you to feed coins into a meter to keep the lights on, or to get hot water from the shower? That’s what happens in a $5 campsite – you must pay extra for a hot shower – but in a $500 hotel room? Of course not, it’s unthinkable.
And the crazy thing is that it absolutely must cost the hotel more to deliver hot water to your shower, or to run the air-conditioning all night, than it does to provide an Internet service, even via wifi which has to be distributed throughout a large building.
And yet they get away with it. Why? Because they can, because it’s just accepted as normal practice in the industry even though a rational analysis shows that it’s barmy.
But most of all they get away with it because too many of us are too lazy to vote with our feet and to go elsewhere. We’re lazy, and we’re tied into corporate loyalty schemes, and we can’t be bothered to complain except by ranting about it after the fact – perhaps in a Blog.
I started out by calling it market failure. But it’s just as much about customer failure – it’s partly our fault, and we should demand better.
PS – In the end I did complain, not just in a Blog but at Reception as I checked out. But my issue wasn’t that it cost $10. I got my $10 back because the wifi reception was so poor, and I went across the street to spend my hard won dollar bills on Gregory’s most excellent coffee (with excellent free wifi).