Zenefits ordered to stop offering free insurance software in Washington state
techcrunch.com
techcrunch.com
> “The inducement law in Washington is clear,” Commissioner Kreidler said in a statement accompanying the order. “Everyone has to play by the same rules.”
> As a result of the order, Zenefits has worked out a compromise with the State whereby it will offer its software on a paid basis, at a rate of $5 per employee per month.
I don't get it. So the rule is that you have to charge your customers something? Why can't businesses get free services off the fat of VC capital? Who's being protected by this besides existing insurance companies that are getting their lunches eaten?
Note that I'm not defending any of the other shenanigans that Zenefits has done. I'm just curious what the rationale is for requiring them to charge customers a fee. Anti-dumping laws?
That being said, I also think this is overkill.
There should be some sort of regulation about starting off free and jacking up prices once the competitors are driven out of business. Or if such already exist, it must be enforced and made more stringent.
* If you aggressively price to extract almost all of the value of your product or service because of an unnatural (i.e. not market based) advantage then you're price gouging.
* If you purposefully operate at a loss with the intended path to profitability being raising your prices later then you're being anti-competitive. We want to reward companies for real efficiency, not just who happens to have the largest VC war chest.
* If you charge the same as your competitor in good faith and don't find yourself in the first bullet because of collusion then there's no problem.
Eh, there's a strong political element to all these things. Political risk can't be ignored. Case in point: Uber versus Airbnb.
Now they may both "win" in the end and make many billions, so the end story may be "focus on growth not playing by the rules, if you have enough money you will eventually win anyway"
I understand why this might appear to be the case, but that's not what this [0] HN front page article analysis asserts.
The article asserts that 'Uber’s actual financial results, which show no meaningful margin improvement through 2015 while the limited margin improvements achieved in 2016 can be entirely explained by Uber-imposed cutbacks to driver compensation. It is also contradicted by the fact that Uber lacks the major scale and network economies that allowed digitally-based startups to achieve rapid margin improvement'.
Interesting read.
[0]http://www.nakedcapitalism.com/2016/11/can-uber-ever-deliver...
Isn't that almost universally true for everything? Is it an acceptable reason to stifle open market competition? I mean think about any other industry. Say a new airline wants to get into business. Is it okay for them to offer $1 tickets (while writing off taxes/airport fees as losses) until they gain enough market share? What would that do to other competitors in that industry?
As over 70% of business transactions in the US are done by small businesses, then most businesses can profitably exist at a small scale.
When something is only profitable at large scale, typically what's done in the western-style economic nations is to (a) make a public company like the US Post Office (b) tightly regulate the market so the inevitable large actors has to serve the public good as is done for insurance currently or (c) hand out monopolies at the local level as is done for telecom companies.
No "until", the point is that they would offer $1 tickets forever, it's just that they would only lose money while they scaled. So competitors would still be screwed even after the "dumping" part.
And in a sense, isn't any new business temporarily "dumping" its products? If you're a solo founder writing and selling a SaaS product for $20/month, your income won't pay for the costs (e.g. your salary) until you get enough customers. Is that dumping? What if the competitors' products all cost $1000/month?
And then, very quickly, realizes to the surprise of no economist that they are no longer a monopoly.
No new roads, no new ports, no mineral leases, etc.
And while there might be some competitors that come in (no guarantee of that), it'll still take time. Time which the entrenched monopoly can use to entrench itself further.
[1] edit: or want -- the loss of platform size plus transaction costs might outweigh the extra revenue it would bring?
Or they go belly-up and leave people without insurance. Because selling things below cost isn't a sustainable business model, despite how that looks from the confines of Silicon Valley.
So... Uber? They aren't exactly "giving away" their product but the rides are massively subsidized.
Is Facebook, or Hacker News, or reddit "price dumping" its free software?
The customer is the insurance companies, not the users. The users are the product, so of course they give it away for free.
Perhaps an explanation of Zenefits' business model is in order. The explanation of it's software being free is and has always been that they don't make money from the software but from the brokerage fees from insurance which is sold through the software.
Think of it like Expedia, they doesn't charge you for flight search and booking software. They make money as a "broker" for the sell of flights. Without any data, I can't nor could a government entity, say whether or not Zenefits is "dumping" using VC money. Zenefits have had their missteps and have paid for them. This case though feels like pure protectionism of existing players.
Again, I'm saying that absent the data. Maybe, this seems unlikely, running the business actually does take more money than could potentially be made from brokerage fees. A reasonable measure, in my mind, could be a look at their average(mean) customer lifetime value. All new customers are going to be negative (cost of acquisition being fairly high for a sales driven company) but over time it should recover unless the average customer churns quickly. VC dollars _should_ reasonably be spent on increasing up front spend in order to acquire customers more quickly. If Zenefits have increased that spending so dramatically that the average customer isn't profitable then perhaps it should count as dumping.
(1) OK, well in the large group segment you could make an argument that a sufficiently large broker could use that pressure to negotiate better rates with the insurance companies, but I don't know if that's the tack being taken here.
But to actually answer your question, a broker is a tool for the consumer / provider to facilitate sales. If there's a better replacement tool, we don't need brokers. For example, travel agents used to be the best tool to find and purchase flights, but they have been replaced by Kayak and competitors.
In fact, you could probably make a real case that middlemen are directly responsible for substantial markup on healthcare insurance costs!
For example, take 3 insurance shoppers. One has asthma, the second diabetes, and the third has MS. The three have vastly different needs for care and coverage, and the key to matching up the needs is the broker.
The need for brokers could theoretically be eliminated, but that would take some government software and regulation and whatnot to get done.
The first says, "I sold my goods for more than my competitors, and was found guilty of price gouging "
The second says, "Well, I sold mine for less, and was accused of dumping."
To which the last responded, "And I sold mine for the same as everyone else, and I sit here for collusion!"
Free software is fine with Washington state. Attaching an illegal revenue stream to "free" isn't.
[1] https://www.insurance.wa.gov/about-oic/newsroom/news/2016/12...
Edit: Here's an article on the same thing happening in Utah, which explains the law and Zenefit's defense: http://beehivestartups.com/blog/utahs-attempt-shutdown-zenef...
The insurance industry is so messed up that they have made it illegal to give customers good deals and have made it illegal to compete.
Imagine that a bunch of companies got together and decided that everyone should increase their prices. In the normal world that would be called illegal monopolistic pricing. In the insurance world, charging people less money and giving consumers a good deal is the illegal thing.
A broker who gives a 10% discount to a company saves the company money which allows them to get their employees a better plan (or higher profits or whatever).
A kickback of steak dinners and free golf for the HR manager is more like a bribe: no benefit accrues to the company itself.
Is the issuance industry so messed up that choosing to not screw over consumers is considered "unethical".
You definitely want insurance companies competing on price, but you may not want insurance brokers arbitrarily giving out rebates.
Imagine (and this is totally made up) that the insurance companies give brokers higher commissions at higher volumes; if that were the case, and brokers could give rebates, there are times a broker would push one insurance company's plan over another's simply to hit a sales incentive. That's probably not good for the people buying insurance. Part of the broker's job is to give good advice.
This was driven initially by Walmart, which has a similar policy, because executives at Walmart realized that if manufacturers were bribing their buyers, the cost of those kickbacks was being built back into the price of the product. By loudly (and actually) having and enforcing a "no taking anything" policy, they could then demand further price reductions. This is now widespread.
A broker offering kickbacks or discounts is recouping the cost somewhere. If the product is the same but they're cheaper by the broker, then it's likely that the product isn't the same in fact--perhaps there's some special rider in the contract, or maybe the broker just knows how to slow-walk or otherwise chip away at claims. The insurance industry is famous for some parties failing to provide the future service you're purchasing on technicalities or just bureaucratic abuse.
In a market where expert assistance is needed, and end users can't fully protect themselves with informed purchasing, requiring parties offering the same service to charge the same price is a way of forcing honest dealing. That's the idea, anyway.
No, it's not. It's another word for bribing the person in the company in charge of selecting insurance.
This feels a bit much.
Kicking people when they're down is just bad karma.