The Oatmeal Doctrine

I judge a restaurant by the quality of its oatmeal.

Is the person making it wearing a well-worn apron?  Is she cooking with an equally well-worn pot on a stove that could tell a thousand of stories if it could talk? Is the cereal made from the quick and easy oats, or the slow-cooked kind? Is there a secret ingredient? The oatmeal can’t be too watery, but it can’t be too thick, either.  I don’t like a lot of stuff on top of my oatmeal, but I don’t mind a flavored accent.

Of course I also make oatmeal at home.  I have my weekday oatmeal, which is very different from my weekend oatmeal.  Occasionally, I have oatmeal as a late-night snack (mixed with some peanut butter) -- but eating oatmeal at night never feels quite right.

Earlier this week, I had oatmeal at Pershing Square Café here in Manhattan. It is a go-to breakfast meeting place for publishing executives.  The décor is frozen in time.  The bathrooms have full-length, to-the-floor urinals (TMI?), and you can just tell that back in the day, there were ashtrays everywhere. 



The back room is dimly lit to make everyone look even better.  The booths are deep and cushioned, with burgundy-colored leather seats supported by weathered mahogany wood that matches the wide tables. There is also a front room at Pershing Square with eighteen or so small marble tables with iron chairs that make a screeching noise when you move them.  This area is a little louder and fills up quickly, so these front-room tables are on a first-come, first-serve basis.

I had a reservation the other day, so I was seated at a quiet booth in the back room.  There, I enjoyed an exchange of ideas with a very talented publishing executive -- and of course, a very solid bowl of oatmeal.

The oatmeal at Pershing Square Café costs $14.  I can find better oatmeal at Scotty’s Diner on 39th & Lexington for four bucks, but at Pershing Square, you pay for more than a bowl of oats, you pay for the environment. You pay for the location (across the street from Grand Central Station). You pay for the company of the other patrons who reflect well on you. You pay for the service from professional waiters who know how to welcome a familiar customer, and who pour “bottomless” cups of coffee.

What would happen if Pershing Square Café decided to charge $14 for oatmeal at the booths in the back room, and charge $4 for that same bowl of oatmeal at the marble tables upfront? I like a booth as much as the next guy, but those tables upfront just got more attractive, so I would just wait for one to open up. 

Over time, customers now paying $4 for oatmeal would get very used to the screeching sound of the chairs and the noisier crowds sitting up front, and the idea of paying $14 for oatmeal will seem just plain stupid.  Over time, customers will stand and wait for tables upfront, and if the wait is too long, they will start heading south three blocks to Scotty’s, while the dimly lit backroom at Pershing Square Café would remain mostly empty. 

Now Pershing Square is making less money from roughly the same amount of customers. This NYC landmark café eventually becomes a showcase Starbucks that promises to keep some of the original booths.

When you sell the same product in two places at two prices, the cheapest option will get bought more often.  So prices have to go down. I am no math wiz, but I believe that prices will then stay down unless demand for oatmeal somehow outstrips supply.

Here’s the thing: This “barbell strategy” most publishers now employ, selling directly and selling programatically (private or open) at the same time, can’t work over the long haul.

To increase revenue from programmatic channels, you have to increase fill rates. To do that, you have to drop floor prices even further, and/or open the door on your private exchange to let unused inventory float out into the open market.  So prices will continue to decline on this end of the barbell. 

For this strategy to work, the other end of the barbell, with fewer advertisers, needs to increase prices. That’s not happening -- in large part because too many advertisers will give up their booths in the back for the cheaper oatmeal at the tables upfront.

Of course revenue is growing in programmatic. Lower prices will always increase revenue in the short term.  At some point, however, this barbell is going to tilt too far to the cheaper side, and publishing toes will get smashed.

As for Pershing Square Café, I am sure every morning they have unsold oatmeal. I am equally sure they are doing quite well despite any excess inventory.
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