Demand Insensitive Pricing

by Krishna on August 9, 2011

Travis Houium makes a great point in this article from DailyFinance:

 I looked through the prices of on-demand movies, and I was shocked at what Comcast (CMCSA) charges for a movie. Why spend $5.99 for 127 Hours when I could purchase it from Barnes & Noble for $13.19 and own it forever? And why would I ever pay $9.99 to watch Burke and Hare?
Prices like that only push customers to competitors like Netlix (NFLX), whose pricing structure looks positively charitable compared to its traditional cable counterparts. You don’t even need a calculator to see that paying $7.99 per month for unlimited streaming videos beats shelling out $5.99 to Comcast for a single viewing.

The right question is perhaps: What should Travis be paid to watch “Burke and Hare” which has a 31% rating on the Tomatometer? There are some movies that most people would never spend money to watch. And even though the sellers of the good are aware of this information (that a movie has low ratings), they still continue to sell at the old prices.

To be fair, there is a possibility that $9.99 is the profit maximizing price for a movie! Maybe there are not that many consumers of on-demand movies and those customers do not care about the price or the quality of the movie. I am always surprised at the DVD movies lying around supermarkets selling for similar prices, when most of those movies are available for free at the local public library. (Of course, you have to go to the library, but that is a topic for another day.)

But the more likely reason is inertia and risk aversion. There must be cost centers at Comcast dealing with on-demand movies and businesses that sell DVDs at supermarkets. This is what they have always done and what they do now. It worked in the past and although it is not working so well now, it is probably bringing enough revenues to keep the lights on. Also no one is really that interested in experimenting with lowering unit prices that could potentially bring in more sales, but also could result in lower revenues that may shut down the business.

Ultimately, though, this is not going to fly. Entertainment media, being electronic, can have great flexibility with pricing. The prices need to be more dynamic to cope with demand. What we see now with Netflix is bundling in lieu of pricing. You get a vast collection of great movies and poor movies “free” at the rate of $7.99 per month. The good movies subsidize the poor ones. Of course, as things chug along, Netflix will decide not to renew movies that do not meet its ROI. So really bad movies will end up on the cutting block along with some blockbusters for which the license fees are too high.

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