The basic theory of pricing is quite simple: If you expect that you will sell less units of your product or service when the price goes up and more units when the price goes down and combine it with the cost of each of these units, you can optimize the equation and find an optimum. This optimum is where you place the price. The bad news is: It’s not so simple in real life. That’s why there are tons of books on pricing strategy and millions of people working on pricing in companies all around the world.
On the one hand you lack information: You don’t know how much more or less your customers would buy at a lower or higher price, you don’t know how your competition would react, etc.
On the other hand the model is too simplistic to lead to a real optimization. If you fix a price at a certain level, you miss out on the potential of those ready to pay just a little less than your price and at the same time you won’t capture all you could get from those customers that would be willing to pay even more. That’s where the idea of price differentiation was born. The problem is that you can’t ask all of your customers what they would be willing to pay and expect them to answer correctly.
Though, wait a minute! Why not?
The NHL’s Florida Panthers are actually doing exactly that this week. In their “Name Your Price Campaign”, they ask customers to propose a price for a season ticket (there’s also half seasons and quarter seasons available). They will get back to the customer within 24 hours and either accept the offer or reject it. The idea is not perfectly new, it’s been used in the travel industry (basically Priceline.com is built on that model) and even in sports, where the St. Louis Blues offered a comparable promotion two years ago. Over in the music industry, British rock band Radiohead shocked the record labels in 2007, offering their album for download and only asking users for a donation of whatever amount they thought was appropriate.
I believe it is no coincidence this model can be found in the sports, travel and music industries, as they have a lot in common. They are all about entertainment, they are all about creating experiences (in the case of the travel industry I think it’s fair to expect that Priceline.com and comparable offers are used relatively more by leisure travelers than business travelers).
I was talking about the perception of value of a product before and yes, it’s a fuzzy thing. However if a product or service has a clear objective utility (yes, I know it will never be fully objective…), it is easier to estimate how much value most customers perceive. But in the entertainment industry, we’re not talking about selling a bottle of cold water in the desert, so how do you want to quantify the utility?
If you go to a match you will feel entertained, but you would have learned the result by reading the newspaper the day after as well, so there’s got to be more, there’s got to be an emotional value. And it’s obvious that this emotional value strongly differs from one customer to the other, which is why so many marketers are completely lost when asked to set the right price for an entertainment product.
The challenge is how to make people pay in relation to the emotions they feel, to the emotional value they capture.
At the same time for most entertainment products, selling additional units in many cases only adds very small or no cost. However most pricing models, even in entertainment, are still related to the number of units sold. There’s a disconnect that the customers have identified. The music industry can tell, because that’s the reason behind the problems it has experienced during the last few years.
To find the key, let’s look at the etymology of “entertainment”. In it’s original form in the 16th century, “entertainment” referred to a “social behavior”, the “provision of support for a retainer”, which was later transferred into “the amusement of someone” (source). The interesting part about it is the social factor. Entertainment always has a social component. Watching a game alone is not too much fun, the same applies for going on vacation or to a concert.
I will not be able to solve the problem of pricing entertainment products in its entirety in a short blog post, but I believe the notion of the social factor of entertainment can help to answer it. I’m convinced successful approaches will be based on an entirely different model that price per unit produced, and pricing cannot be divided from the design of the product.
Here are some rough ideas which might not all be applicable in this form, but that can surely help you to try thinking into new directions and of new designs of your offering:
To get started, what if a music company wouldn’t charge for downloading a song, but for sharing it? Doesn’t work? Well, just think about Youtube and advertising in music videos. See: It’s not as impossible as you might have thought. But let’s think about more “exotic” ideas:
What if you offered special, exciting hotel rooms that can only be booked if the invoice will be split in four parts that have to be paid with four different people’s credit cards? What do you think how those people would behave at the bar at night and how many drinks you would sell more?
And what if you were a pro sports team, let’s say the Florida Panthers, and started to put up a list of the “Superfans” on your web page. To qualify, fans could earn points for visiting games, buying merchandise, sharing their experiences with other on social networks, buying hot dogs, etc. Those fans for which it has a great social value to show others how much they support their team would be able to display more of that support if they paid more money to the franchise. What sounds like a pretty straight forward plan actually offers a solution to one of the key pricing problems mentioned at the beginning of this post: You could capture more value from those customers that would be willing to pay more. In exchange you offer them social value, or, in the basic sense of the word, more “entertainment”. Sounds like a deal to me.