Thursday, September 27, 2012

Your Price May Vary

Re-post from November 19, 2009

I was enamored with the airline industry as I grew up and close readers will know I’ve always traveled a lot. Out of business school I interviewed with three airlines in their pricing departments where newly hired MBA’s went to learn the business. In that role, staff managed pricing of airline seats to maximize revenue per flight. Remembering that once a flight left the gate any open seat amounted to zero revenue for the airline, this activity was potentially highly stressful as the job also required close comparison with competing airlines’ pricing.

All this activity is now done with sophisticated real-time analytics and people rarely enter into the equation. Contrast this reliance on deep data analysis that helps the airlines maximize their revenue and the approach that media companies have used to price their products. For the most part, in the media business pricing is homogeneous across format with little consideration to the popularity (or lack) of the artist, author or show in question. Rather than a pricing model constructed on maximizing the revenue from individual products the content owner places a band of pricing across the range of their content. This is particularly the case in trade publishing, and in this model each artist is considered equal in their ability to generate revenue. Historically, publishers and other media companies ‘jimmied’ this lack of sophistication by assuming long backlist life, format sales – trade paper, mass-market, video rental, etc. – but those options look increasingly unworkable as the market migrates to e-Content.

Publishers in particular are gun shy about experimenting with pricing; opting to use the blunt instrument of scarcity rather than more sophisticated options. Numerous big name titles this year have been ‘held back’ from ebook distribution in deference to their print versions. This approach has already caused consternation among the consumers who have already made the transition to eBook content and want the newest titles when (even before) everyone else gets them. At some point many of these e-Book owners will look upon this situation as a ‘first mover’ penalty.

As e-content becomes more ubiquitous pricing should become more science than current practice would dictate. For the health of all parties in the publishing supply chain, it is vital that the price paid by consumers maximizes revenue. Understanding how the demand curve arcs is critical to pricing accurately and many factors (some more important than others) play into this calculation including the author’ brand, time from publication, exclusive content, competition, etc. Obviously, knowing how much someone is willing to pay for something (at a point in time) is difficult but think about how airlines do this: A seasonal traveler has far different characteristics than an executive who just has to get to Miami tomorrow. They both end up on the same flight but pay significantly different prices.

Publishers can be forgiven for a lack of understanding of the metrics of pricing in a print based world with many intermediaries and little ability to gather empirical data. Online things have changed and The Economist recently reported on research published by two economists at the University of Pennsylvania which examined pricing for on-line music. In this research, the authors looked at iTunes and attempted to determine whether students would be more or less willing to pay a different price per song than the rigid 99cents per tune. (There may be some correlation here between what Apple did with music and what Amazon is attempting to do with Kindle titles, and maybe Publishers should ask the researchers to expand the analysis.) The authors of this study found that the market could sustain a higher uniform price and knowing (via the results) the higher uniform price they were then able to expand their analysis to look at per song pricing and make some other extrapolations. The authors also experimented with a subscription type model that had a fixed price component with a per-use fee, and this model appeared to be more effective at maximizing revenue and value for both retailer and consumer.

Pricing is complicated: publishers can approach this in an unsophisticated manner but in doing so they are unlikely to maximize their revenue. More analysis is likely to show that a variable approach to pricing and packaging will generate more revenue. For example, in an approach the authors suggest for music, a publisher with a selection of 10 political/legal thrillers could generate more revenue selling the package for $29.95 than relying on selling each separately for a total of $79.00. The other advantage for both publishers and consumers is that more content can be purchased thereby increasing the market and customer base. Regardless, the decisions around pricing are worth spending more time on rather than reactively applying old pricing models to new circumstances. Perhaps we will see ‘Pricing Analyst’ as a new publishing job title.

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