At the end of 2012, we posted about some of the biggest pricing strategy successes and pricing strategy failures of the year. Now that we’ve passed the halfway point in 2013, we wanted to update you on the current state of events in the pricing world, particularly as they relate to some of the major pricing headlines that have been reported this year. Let’s walk through three of the most important successes and failures of 2013 and then dive deeper and explain what you can learn from each story.
Disney - Raising Prices at Walt Disney World and Disneyland
This past June, Disney raised prices for their popular Disney World and Disneyland theme parks. It now costs you $95 (up from $89) to spend a day being enchanted by Mickey Mouse and friends at Walt Disney World in Orlando. Spending a similar day at Disneyland in Anaheim will now run you $92 (up from $87). There was mild criticism in the news about the price hikes, but the complaints quickly dissipated with the next news cycle. The lack of public outrage shows that most people have accepted the price increase, which makes this one of the biggest pricing successes of 2013.
Photo Credit: Express Monorail
There are three reasons why Disney’s price increase is such a pricing success. First, Disney announced the increase right after Universal announced a similar price hike at its parks. This allowed Disney to position themselves as a company who was reacting to market pressure and prices, instead of a greedy corporation trying to milk profits out of their theme parks.
Second, they have very few true competitors in the world. Where else in the world can you spend the day singing and dancing with Snow White and Cinderella? Their lack of competitors suggests that they have an inelastic demand curve, which means that very few people will stop coming to their park because of the price hike. In the words of Disney spokesman Bryan Malenius, “A ticket to our theme parks represents a great value, particularly when you look at the breadth and quality of attractions and entertainment we offer and the special moments guests experience with our Cast.” Disney is obviously aware of this fact, which is why they were able to raise their prices without issue.
Photo Credit: Express Monorail
Finally, Disney’s price increase allows them to more effectively price segment their customer base. They offer less expensive bundle packages with their tickets and hotels as well as discounted resort tickets through third-party ticket vendors. With these offers, Disney caters to the price-sensitive segment of their market who are willing to work for a less expensive Disney experience. Therefore, the price increase will allow them to price skim and collect more revenue from their customers who aren’t price sensitive and are willing to pay full price, yet still satisfy the segement of their customer base who is.
The key takeaway here is that great pricing is about more than just finding a single number. Instead, great pricing combines a clear value proposition, a brilliant marketing strategy, and a deep understanding of your customer. Recognize that pricing is a continual process instead of a sprint and treat it as such. To really achieve great pricing, you need to look for opportunities to continually update and optimize your pricing and marketing strategies, like Disney did by raising it’s prices.
Apple - eBook Price Fixing Conspiracy
U.S. District Judge Denise Cote recently handed down a guilty verdict to Apple on charges that Apple colluded with the six major U.S. publishers to raise the prices of eBooks for consumers. Amazon had initially dominated the eBook market by selling it’s Kindle eBooks at a loss-leading price of $9.99 to encourage people to purchase a Kindle. The publishers thought that the $9.99 price point was too low and didn’t want consumers to become accustomed to that price, which is why they worked with Apple to strongarm Amazon into raising their prices. Eventually, the government got involved and sued the publishers and Apple for collusion, resulting in an ugly, and most likely expensive, guilty verdict for Apple.
Photo Credit: Johan Larsson
This scandal could have been avoided if Apple and the publishers maintained their pricing ethics and honesty. Maximizing revenue is important, but for most companies out there, it cannot come at the expense of customer loyalty or negative company PR. Apple might be able to get away with it because of it’s immense market power, but you most likely will not. This means you need to be upfront with your customers about pricing. Eliminate hidden fees, reduce your pricing complexity, and structure your prices in an ethical manner so you maximize the lifetime value of your customers. Like we’ve said before, your pricing should be a win-win situation so don’t chase after cheap tricks if you want your business to succeed in the long run. If you’re interested in learning more, check out our post on other pricing strategy ethics.
Microsoft - Xbox One Fiasco
At this year’s Electronics Entertainment Expo (E3), Microsoft and Sony both unveiled the latest iteration of their gaming console line. Sony released the Playstation 4, pricing it at $399, while Microsoft, the market leader, raised the price of their Xbox One to $499. The backlash was immediate. Many people were upset with Microsoft for charging more for the Xbox, which they viewed was an inferior product because of DRM (Digital Rights Management) restrictions, and were vowing to switch to the less expensive Playstation 4. Microsoft, responding to the outroar, has since eliminated the DRM requirement on games but still has not reduced the prices. This could prove to be a fatal mistake for it’s market share.
Traditionally, Microsoft and Sony have sold their consoles for a loss to attract customers to their platform in a razor-razorblade pricing strategy. They then make their money back by charging licensing fees to the video game creators. Consoles use this strategy to take advantage of network effects, which means that every additional person that joins the network adds more value than the person before them. After all, you wouldn’t want to buy a PS4 if all of your friends are on the Xbox because then you wouldn’t be able to play together. The "inexpensive" initial price for the razor (console) increases adoption rates and raises the overall value of the platform, which then encourages more console purchases and eventually generates more revenue. Therefore, console manufacturers obviously want to price low for adoption, which Microsoft clearly is not doing. Don’t be surprised if you see them lose much of their market share next year.
Photo Credit: netzkobold
The takeaway from Microsoft’s mistake is to clearly define your goals before you make a pricing decision. Pricing is only a means (although a very important means) to your end business goals. If your goal is to maximize your user base like Microsoft and Sony, then you want price slightly lower to attract more users. Similarly, if your goal is to maximize revenue or improve your product branding, you might need to price higher. Regardless, you need to figure out your ultimate goals so you can use pricing as a lever to help you reach them.
Pricing is continuing to heat up!
2013 is barely half over and already we’re seeing some major pricing successes and scandals emerge from some of the largest businesses in the world. Don’t be discouraged by the pricing failures of Microsoft and Apple; instead, learn from their mistakes and Disney’s successes so you can ensure you make the most out of your pricing strategy.