Why Scummy Businesses Fail
You know a scummy business when you see one. The high-pressure sales tactics. The hidden fees. The conversations where you feel the infuriating futility attempting to get straight answers that never arrive. The disempowered automaton in customer service who reads from a script because their boss hasn’t yet received the funding required to replace them with a chatbot.1
And though you feel that visceral unease when confronted with a scummy business, you probably haven’t taken the time to try to put your finger on exactly what makes a business scummy, and what places it into that less objectionable category of “trying to turn a profit.” Turning a profit is required for a business to continue to exist. The businesses that exist the longest, generally, are those that generate the most value for their customers (and often, the most profits as a result). The scummy ones cause us to view the others cynically - how are they different?
Let’s start with an example of a business we might generally agree is on the up and up. You walk into a restaurant, the hostess seats you, menus are placed on the table, and shortly thereafter, a server approaches and asks if you’d like to start with something to drink. That inquiry is delivered with the intention of extracting profit from the individual (higher bill, higher tip) and for the business. Clearly, this is an upsell. And yet, my guess is that you aren’t cringing at the question, nor are you looking for a way to exit surreptitiously.
Why is this kosher?2
Well, for one, there’s a list of items on the menu with prices beside them. For another, if you ask for one of the items, the probability that you receive what you requested is high. And of course, the price charged (plus tax and tip) will be predictable. But none of these are the real reason a restaurant, from the greasiest of spoons to the finest of white-linen establishments, is an ethical business.
Restaurants announce themselves to the world as establishments that sell food and beverages at a profit. You enter their doors, and once inside, they do exactly what you’d expect—they sell you food and drink. Their profits arrive, largely, as you’d expect—the revenue from food and drink sales exceeds costs of labor, real estate, and ingredients.
Designing a Scummy Restaurant
Now what if we decided to open a restaurant in a chic, gentrifying neighborhood of some random urban area. Adjacent sits a parking garage, which unbeknownst to the diners, we own. Being unscrupulous operators3, we price parking at $5 for the first two hours, and $25 as the full-day cost (2-24 hours).
Then, we time the entry of our diners, and slow their service when we believe they are likely to breach the two-hour threshold, thereby netting ourselves an additional $20 for which we provide, essentially, no service.4
Now, recognizing our opportunity to exploit, we lower our menu prices slightly, thereby enticing additional diners, presuming that we will more than recover those losses in the form of surreptitious inflation of parking charges.
This is obviously scummy, but it also outlines what I might argue is the defining attribute of scumminess—the obfuscation of how exactly the business makes its money. Now we’ve got a restaurant filling its coffers with nefarious parking schemes… not by selling cocktails and lettuce wraps.
Some Real-Life Scummy Businesses
Unfortunately, in the real-world (the one that occurs outside the cyber-realm of snarky blogs), there are businesses that are similarly inclined to earn their keep, then hide how exactly they manage to pay their bills.
At a glance, a rental car business is fairly straightforward. Buy some reliable, reasonably-priced vehicles, then rent them out at airports at prices that cover the costs of insurance and maintenance. Advertise your services. The implication is that “sure, we make a profit, but it’s great that you can have access to a vehicle of your own for a few days while you’re traveling.”
Ah, but is that really where a sizable proportion of their profits arrive? Between the option to pre-purchase the first tank of fuel5, the daily insurance charge that likely rivals the monthly bill for your personal vehicle6, and the forced upgrades when a vehicle in the class you reserved is unavailable7, you’re talking about a business that generates a non-trivial proportion of its profits in a manner wholly separate from providing temporary access to vehicles.
Whether it's your cable company8 spending more money on lobbying to preclude competition and hoard broadcast rights than to improve download speeds or an airline that generates more revenue from selling frequent flier miles than from seats on its planes9, it is the deception regarding how the entity profits that is scummy.
A stripper is an honest merchant. A hidden-fee-laden financial planner is not. You understand how the stripper is leveraging her capital. The financial planner taking 1% of your assets annually while pocketing referral fees from the funds into which he places you is leveraging capital in a manner entirely opaque. In one case, you part with your cash in the most transparent way imaginable.10 In the other, the transfers occur digitally, abstractly, and in a manner designed to confuse.
The suit covers up more than just skin.
In The Long Run
While longtermists are more concerned with existential risks from nuclear war, pandemics, and malevolent AI, longtermism applies to business models as well, given a sufficiently long horizon. Rental car companies are now struggling to compete with disruptions from ubiquitous ride-sharing services. Cable companies are threatened by the emergence of streaming services. Financial planners are losing ground to low-cost robo-advisors. Even the great and mighty Amazon is likely to face the wrath of antitrust proceedings sooner rather than later.
But restaurants and strippers? They seem to be doing just fine.
Want to build relationships with customers? Start with clarity on how exactly you’re planning to make money! Customers will not recoil at the idea of a business that intends to profit—chances are, they’re employed by one themselves!
They will, however, run for the hills when (not if) they discover that they’ve been deceived.
The arc of history is unkind to scummy businesses.11
1 “And you can bet they’ll try to replace you with AI / A bot will do your job for half the pay / Shareholders overjoyed, loads of minions unemployed / They’ll automate your living away / They’ll call it ‘taking care of business’…”
2 Even if the bacon-wrapped shrimp are not.
3 Or, in the words of Leo Bloom to Max Bialystock “let’s assume, just for the moment, that you are a dishonest man…”
4 Technically, the finite resource of parking spaces are utilized for a slightly-longer duration, but the marginal cost of the extra ten minutes of parking is infinitesimal compared to $20.
5 The car is provided with a full tank anyway, the discounted rate is on the order of 10%. Unless you think you’re skillful and brazen enough to return the vehicle with a tank with less than 10% of its fuel capacity, you’re going to be buying gasoline for the rental car company, not your own trip. In all likelihood, you’re giving them free money in exchange for them spending a couple minutes filling up the car for you.
6 And depending on your credit card, you might have coverage anyway!
7 Standard policy is to provide that upgrade free of charge, but then, if you’re foolish enough to pay the upcharge, they’ll happily take your money. Read more in Forbes.
8 If I could cough the word “Comcast” in written form, I would!
9 This has been discussed at length, but the synopsis is basically that between selling credits in-flight, upselling miles at kiosks, and so on, they’re actually generating a sizable chunk of their revenue doing something other than providing transportation from one city to another.
10 A literal transfer of green paper to another human being.
11 By this standard, the oldest profession is actually not scummy at all!