Dr Joern Meissner

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Meissner Research Group — Operations Strategy and Pricing Management Blog

The Price of the Digital Revolution

February 24th, 2010 by Joern Meissner

While it’s common knowledge that the music industry was forever altered when iTunes, with its over 125 million customers, came onto the scene and allowed music fans to download songs for only 99 cents. In the past few years, it was the publishing world that has been changed, with digital book eaders like the Kindle and Nook, and online newspaper programs, like the recently mentioned Times Reader. Now it appears, it’s TV’s turn.

According to the article ‘Networks Wary of Apple’s Push to Cut Show Prices’ by Brian Stelter (New York Times, February 16th, 2010), Apple executives are in talks with the heads of all the major television networks to plan a widespread price decrease for downloading TV episodes from iTunes.

Each TV show episode, with the exception of a few promotions from PBS, currently sells for a $1.99 per download. But for Apple, the magic number has always been 99 cents. It was the 99-cent price point that allowed iTunes to nearly overnight become the world’s main, and in most peoples’ eyes the only, place to buy music. iTunes’s 99 cent price point could very easily be said to be responsible for the end of the CD and probably helped lead to the end of nationwide electronic store Circuit City.

Apple executives are said to believe that by lowering TV episodes, released on iTunes only the day after their original broadcast on television, to the 99 cent price point could allow the mainstreaming of TV episode downloading, just as it did for music. With several new, cheaper models of digital and portal TV quickly becoming available, like Apple’s upcoming iPad, Apple believes this is its next goldmine waiting to be harvested.

TV executives on the other hand are not so sure. TV shows can cost millions of dollars to produce, and it normally takes hundreds of people (all of whom need to be paid) to produce a single episode. Unlike songs, which are often created in studios by a handful of professionals, TV shows will need far higher sales to return profitable returns.

On the other hand, if lowering the price point does help buying TV episodes become part of the mainstream world culture, as buying songs from iTunes has, then it might be worth it. Consumers have purchased over 10 billion songs from iTunes, while they have only purchased 375 million TV episodes, a huge difference in profits. And considering that there will also always be fewer episodes available then songs, this difference could translate into the change being well worth the risk for TV executives.

As with most digital products, there is little additional cost, so this situation is not about profit maximization, but simply revenue optimization. The refusal of the TV executives to lower the price indicates that they believe the market is not elastic, e.g. they do not believe there would be a volume gain sufficient enough to compensate for the lower price. In this particular case the calculation is easy, as a price decrease from $1.99 to $0.99 must result in doubling the volume to make sense. Apple, on the other hand, would probably be satisfied if it breaks even, as long as this fuels hardware sales.

A $0.99 price point could lead to a large demand raise, probably even of 100 percent. On the other hand, it could be that TV content is already bought by users that are less likely to download files from a peer-to-peer file sharing network, and demand is not actually elastic, which would be required if the demand was to raise high enough. In any case, it will be interesting to see what is going to happen.

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Why there are no Winners in a Price War (other than the customer)

February 23rd, 2010 by Joern Meissner

In a price war, where competitors with similar products, designs, and incentives compete for customers by having the lowest price, the only person that wins is the customer. Always.

When allowing your sales staff to use price as their main tool to meet quotas for the month, week, or even year, you, as the executive, are actually making it harder for them to achieve the company’s goals. When competing on price alone, your customers will quickly realize that all they have to do is signify that some other company’s pricing is just a little bit better, and your prices will fall.

Don’t think this affects your bottom line? Not only will your profit shrink, there’s a good chance that if your sales team doesn’t have a bottom price range, the customers will manage to convince them that the only way to get the sale (which salesmen see as their one, main priority) is to dip below cost. Customer loyalty and all those other things the customer will promise your salespeople once that below cost sale happens will disappear the moment your competitor decides it is going to keep the war going.

So, playing the price war is a lose-lose situation for you, your brand, and your sales team, because your sales numbers may go up but your revenues will go down. You might even have happy customers – happy customers that will happily jump ship to your competitor with a lower price. Essentially, price wars are a no win situation, especially if you want to be at the top of your field.

Customers, especially in this recession era, have become very savvy at the pricing game. To them, only one thing matters in a market where everything else is equal: price. By choosing not to play their game, by pricing your products on value, your company can still win. While your competitors are eating away at their profits, focus your company on figuring out how to make your products different and worthwhile and showcase that value to the customers.

By pricing on your products’ value, your customers will realize the differences between you and your competitors. If you succeed in showing your customers a reason to pay just a little bit more, you can also create customer loyalty with a superior product. So instead of allowing your salespeople to empty warehouses below price, tell the rest of your company to create products and promotions that customers can actually see tangible value in. And avoid that price war altogether.

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The New York Times: Internal Struggle over Pricing of iPad Edition

February 19th, 2010 by Joern Meissner

The New York Times may be the world’s most recognized newspaper, but even they cannot withstand the changing times forced upon the journalism sector by the internet. With free news available to all online, newspapers are trying to find a way to remain both relevant and profitable.

According to the report ‘Turf War at the New York Times: Who Will Control the iPad?’ at Gawker.com, a New York City-based media rumor and news website, The New York Times has just entered into a battle against itself over the not-yet-released iPad. The central tenant of this argument is the pricing for the new Times app for the iPad. The print circulation team wants the price to be $20 to $30 per month per customer, while the digital side wants both control over the app and the pricing to be placed at $10.

To break down the argument on both sides, the print circulation team represents old school journalism and the control of the Times print edition – the edition that is quickly becoming unprofitable. They want to use the higher pricing on the app to leverage the costs of the print edition and to keep it running as it always has. This would also mean a portion of the control over the app’s finances and features would be in the hands of the print circulation team.

Their opposition, the team in charge of the Times’ current digital content, is saying that the price is far too high when compared to other online newspapers, especially considering two major factors. The first is that several other major newspapers have agreed to hold off on forcing online customers to pay subscription fees until 2011. The iPad will be out much sooner than this. The second is that current Times subscribers to the Times Reader (which can be downloaded onto any computer, unlike the iPad version, which will be exclusively for the iPad) currently only pay $15. The digital team doesn’t want that much of a difference between pricing.

Unfortunately for the digital content team, it appears to Gawker that New York Times Media Group President Scott Heekin-Canedy is currently siding with the print circulation team. In another report by Gawker titled ‘The New York Times’s iPad Fight Was Part of a Longer Civil War,’ the answer is given that this is all to try to protect the failing print edition at any costs.

Essentially, this battle is not new for the Times. When the Times Reader was introduced, insiders reported that the digital team wanted a price of $6. Instead, the price was kept significantly higher to stop customers from ending their subscriptions to the print edition of the paper.

In a journalism world where magazines and newspapers are shutting down every day, why would the industry leader back away from new technologies and try to impose yesteryear’s pricing on today’s digital models? Customers in today’s market can easily realize that the production costs to create a web or app version of The New York Times is far below the production cost of the printed model. The customers aren’t going to pay for what they see as too high a price.

Essentially, if the Times goes with a $30 iPad subscription fee, why would anyone bother to pay for it when they can get the real thing for just a little more? The move could be self-sabotaging or it could prove that customers are willing to pay for the convenience and quality of the New York Times when so many other free sources for news are available. In short, only time will tell which route the Times will take and which one it should have taken.

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The Life Cycle of Products

February 16th, 2010 by Joern Meissner

To understand how to best set prices, manager first must understand that all products go through four distinct periods in their life cycles: emerging, growth, mature, and decline.

Emerging products have just been released to the public; perhaps they’re even in trial form and only available to select customers. During the next period of growth, the products have entered in the market at full-force and with each passing period, sales continue to grow at a steady rate. This is different from emerging in that your product is now part of the everyday, standard business – not necessarily the newest product on the market anymore. Once your product enters the mature phase of its life cycle, the sales growth has evened out. A large portion of your customers already own your product and only come to you for problems or repairs. And finally, your product will enter into decline – it becomes obsolete (hopefully because your company has already put its replacement into the market) and its sales dwindle to a few stragglers who are behind the times or devoted fans of your product that simply don’t want an upgrade.

Each of these periods of the life cycle change how your product is viewed in the marketplace. Unfortunately, most sales teams are not equipped and don’t even realize when each of these periods happen and the effect they have on your product and pricing. As an executive, it is your duty to recognize the shift in life cycles and to guide your sales staff in pricing accordingly.

Most executives unfortunately don’t like to think of their products having any sort of cycle to them; they prefer to think of their products as entering the market and remaining in the same growth phase forever. This simply is not the case. While it is true that you continually want your profits to grow, a single product cannot manage growth indefinitely. It is up to the executives to watch for signs that a product is entering a maturity phase, or even its decline phase, and react. New products should enter the market, starting new emerging and growth phases for your company. Without adherence to this law of entropy in business, your company will suffer.

A good example of this is the yearly nature of car manufacturers, or the ever-changing nature of Apple’s iPods. The moment one version of the iPod becomes obsolete, or even before (allowing Apple to control when a product enters its own decline phase), a new version appears on the market. Use your knowledge of product life cycles to shepherd your business into continual growth phases.

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Double Cheeseburger Pricing at Burger King

February 9th, 2010 by Joern Meissner

Franchises have long held the power when it comes to pricing, but after a ruling in 2008 that opened the door for more pricing mandates by corporations, Burger King and several other companies have decided that pricing is their concern and should be under their control.

The current argument between Burger King and its franchise chains is the price of a double cheeseburger (strangely, the same menu item that caused McDonald’s and its franchises issues in 2008). Burger King says that the double cheeseburger should be no more than a dollar, which allows it to be placed on the already corporate-mandated and corporate-priced Value Menu.

Franchise holders say that the move not only cuts into their profits but also into their control, as they previously had exclusive rights to price management. Michael Seid, a franchise consultant, said (Burger King Franchisees Can’t Have It Their Way, Wall Street Journal, January 21st, 2010),

When you’re talking about changing something as key to a business as what do I charge for my goods, that becomes an issue.

The case highlights the problem faced in transparent markets, namely that a single price must be found. This is caused either through the Internet and price comparison engines or necessitated by a nationwide advertising for a special offer.

Fast food restaurants are just one market among many facing these issues. While the airline industry has networking effects to consider, this is somewhat similar to the situation Arne Strauss and I analyzed the paper ‘Pricing Structure Optimization in mixed restricted/unrestricted Fare Environments’. Having a single price that is available for all customers will result with a high likelihood in some members of customer segments paying less for products they would pay more for. The Burger King case highlights the difficulties managers face when setting prices that have open availability and are without any fences in different locations and markets.

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