How Tech Companies Are Changing The Way They Price Things
Chances are you've changed the way you spend your money. This year from the tech companies have noticed everyone from apple to amazon. Zoom has been experimenting with the way they price their products to try and entice and keep customers joining now to talk about. Some of their strategies is our personal columnists nicola wedding. Hey andy cole. Thanks for being here. We're going to run through the specifics in a minute. But i want to start by asking. Why look at tech. Companies pricing moves this year. What are these decisions. Tell us about the company's cigarette question. I was curious about whether or not the economic downturn prompted by this very unique pandemic would prompt companies to consider new pricing models. Or in what ways would test traditional pricing schemes. And the reason why it's unique is because economic downturns sometimes forces prices down until in this case. No one was flying into some flight. Prices went down some airlines offered. Buy one get two free seats deals. But in other cases prices went up because grocery van was higher because supply chains were in disarray. Because operational costs were higher for places like restaurants so is really interesting. Look at how companies are reacting. To this unique time i think we often think about economics and pricing models as firm that nothing is new and that there are no real experiments and pricing. But the truth is when there is a moment like this one. Nobody really knows how consumers are going to react. And so in a way a lot of these companies conducting experiments and we saw a lot of companies. Take some different approaches to that. So let's run through some of the examples we saw and we'll start with entertainment reminded us how hollywood adjust in the world of closed movie theaters. Obviously it was a huge hit. Two movie theater industry because being locked in a closed room for two hours isn't exactly cove friendly disney to interesting approach. It launched disney plus very recently and that was probably a saving grace for the company because there are lots of areas of the company that were not doing well like parks for example and mulan was. One of its biggest blockbusters this year to two hundred million dollar. Movie is the remake of a classic. A favorite of mine and they decided instead of releasing it exclusively in theaters which is normal to charge thirty dollars for early access to milan with called premier access and it was an interesting move because they were going to charge thirty dollars which is a pretty high price for streaming service as an add on to what you're already paying which is six ninety nine month for disney plus and offer that early access for three months and then make mulan apart of the larger library in december for centrally free included near subscription. So kind of just charging the price that it would cost to go see the movie at the theater but from your couch now. Milan might be a bit of an anomaly. Because of a number of factors including concerns over where the movie was filmed which was in a part of china where the government has been accused of committing some human rights abuses but batted mind. How was milan received the gamble. Pay off it fell flat. Most analysts say because of two reasons one is because there was a lot of controversy around the filming location. The ceo admitted this himself. And the second reason is that the price is really high and instead of framing the premier access price as discount for disney plus subscribers so they could have charged forty dollars for non-subscribers and thirty or twenty five dollars for subscribers to make feel like. You're getting something out of it. You know a deal. The church this premium price too subscribers. So milan didn't quite work out. It sounds like but is this something that streaming services and entertainment more. Broadly make testing. Interestingly disney's biggest rival one of disney's biggest rivals warnermedia decided to release. Its entire twenty. Twenty one slate of films included with hbo. Max not opting for the premiere pricing model and disney's next release which is pixar soul will be included in the disney plus subscription and not as premier. Add on. so you know that sort of indicates that move london. Do super well for disney. But i do suspect that if we are staying away from movie theaters well into twenty one well into twenty twenty two that they will try this again for another blockbuster release maybe with a lower price. Got it okay. So let's move on to apple. They released ton of new products this year and played on what you have dubbed the. Goldilocks effect. Can you tell us what that means. Goldilocks refers to a good better best pricing strategy. So this means you get three options or three buckets of options that represent sort of like the budget the mid tier and then the expensive model for those who have a very high willingness to pave the latest and greatest features apple for a long time has released new models one or two and then discounted previous models older models to sort of represent that good better best strategy so the budget option was always like last year's iphone this year. They released a record number of new iphone models so five in total and actually the budget option is a new phone. That was released this year. So i think what that says about apple said moving forward. They want their entire lineup their new lineup to represent more pricing tiers to appeal to wider swath of people so even those who are willing to spend just a couple hundred bucks at a phone can feel like they're getting a new iphone sort of expanding their addressable market. And as you mentioned. This is a tactic that apple has used since long before the pandemic but is there a reason sort of doubling down on this in a year like this one. Yeah you know. One of the pricing consultants. I talked to says that more pricing tiers kind of a protective measure for some companies apple is a premium brand so they can get away with selling a multi thousand dollar iphone in during an economic downturn but the lower end iphone. se. That's just a couple of hundred bucks you know. Three three between the four hundred bucks allows them to keep the customer that has a tighter budget in their brand. And hopefully that person will upgrade to a more expensive iphone in the future got it and in a similar pricing move. The fitness company peleton introduced another more expensive stationery bike and lowered the price of the existing model by about three hundred fifty dollars. So what fa logic with this move. Eso not exactly good better best because two tiered pricing system. A lot of economists called this committee classic price discrimination where someone who has ohi willingness to pay more features will pay for the very expensive two thousand four hundred ninety five dollar by plus with all the bells and whistles and those are just starting to get into a stationary bike gang but really wanna peleton are willing to pay the eighteen ninety-five price. This one research paper. That i discussed in the peace looked at this williams sonoma case where two hundred seventy five dollar. Red baking appliance wasn't selling at all and then williams sonoma a more expensive model and then the cheaper model. She sales doubled. So you know. Peleton may have been drying from this classic case here we. We don't have exact numbers on its performance but in earnings calls peleton was very bullish on. It's cheaper model and said that it would continue to be its bestselling bike but what happened is during the pandemic people were more willing to pay for premium equipment because it was replacing their gym membership. And so wait times for this. Newer by plus are now up to ten weeks and wait times for the cheaper bike are know almost half that that time so it seems like maybe peleton should have priced. They're more expensive by maybe even higher or maybe they're less expensive lake even more affordable. So i think that brings us to the fourth big pricing strategy. We saw which is this trend of companies dropping walls and generally making more of their product or service accessible for free. You just right into some of what we saw there. Yes so early. On in the pandemic a lot of companies were responding to this very sudden turn towards work from home and being online and not really being able to communicate with with other people in person so zoom for example lifted their forty minute limit for k. Through twelve educators eighteen other service providers lifted data caps. Comcast made its network of xfinity Wifi access points free for everyone. You don't need comcast subscription. The list goes on and on what they're sort of taking advantage of is the fact that free is great advertising and free something really miraculous to our brains. Were very persuaded by zero dollars. There is this very famous study of students who had the choice between a one set. Hershey's kiss or twenty six cents lynch truffle and when given that choice most students picked the lynch truffle but when the researchers lowered the price of the hershey's kiss to free and the lynn truffle to just one cent below. Even at the price difference was the same. Most students opted for the free. Hershey's kiss so free has a very strong pull on our psyche and these companies. Think that in offering free services they spread goodwill but they also increase the amount of people who are using their service and the thinking is that potentially those people will pay for other things in the long term. so nike is a good example of this. They made their are trading club app. Free the premium subscription cost some amount of money to be able to work out with their very chiseled very good-looking trainers and These trainers are wearing like clothing. And there's a short cut in the app to buy nike apparel and so in making the free They're able to sell more naked goods so they're actually making it free permanently. Yes that nike move definitely worked on me but i wonder aside from that. What is the business case for this option. I think i'm still a free user of zoom for instance which is not making them any money. As far as i know we have seen some indications at this early working for some companies zoom was extremely well positioned to do well this year but in making their service free they got more people acquainted with the service and they started rolling out new products like this new pricing page for people like trainers to charge for zoom sessions. And so i think if you're used to using a service you're more willing to hand over your credit card to that service and their revenue shot up. You know something like over three hundred percent this year year over year that may have something to do with the fact that zoom was like the premier video conferencing tool that we all leaned on but also has to do with the fact that they have a really robust free tier that allows most people to use the service without paying for for extra stuff finally we have subscription model and it sounds like the grocery delivery market is a good example of this. Yeah so home. Delivery exploded this year. It allowed people to stay away from grocery stores which all of a sudden became dangerous activity and Walmart really capitalized on this moment by offering a subscription service It's called walmart. Plus and it includes free unlimited delivery from local stores. The thinking is that it pays for itself interest deliveries walmart says. What's interesting about this example. Is that you know. Walmart really rushed this program out and so they had very scant perks and the program cost ten dollars a so that easiest comparison the laziest comparison is is tames on prime which on top of free unlimited delivery offers you know this giant entertainment bundle free photo storage etc etc until i think it was is hard for people to justify the price between walmart plus and amazon amazon prime. But we don't have numbers for walmart plus yet and it may very well have been a success and walmart plus and amazon prime aim to do the same thing which is try to make walmart or amazon the default shopping choice in her mind and i think walmart plus is a good way for walmart to become more salient in people's minds. And let's just break that down a little bit more. How does the subscription model actually work to create sort of a stickier relationship with consumers. Yeah other examples are dash pass. Switches door dashes new membership tier which lowers delivery and service costs for its customers. These companies are trying to keep switching costs high. So you want to feel like the more you use this service. The more you safe if you delivery cost three dollars typically for every order the more orders you deliver the more you squeeze out of that thirteen dollars. A month subscription so they're trying switching costs high and trying to increase the willingness of customers to buy without thinking are those are the five strategies we said at the beginning that this is sort of a big experiment. So what are the takeaways here. Are there certain hypotheses that are clear winners and losers will i. I think one of the the clear winners is definitely more pricing options for customers. That said can self select into whatever tier. they're most comfortable. Paying and that maybe premium pricing wasn't the right move but the truth is this pandemic is to go on for several more months or potentially another year and Pricing changes all the time and in the course of my reporting the story had to change multiple times because the prices kept changing perks. Kept being added onto bundles into it. Seems like companies are still trying to figure this whole thing out as we all are very enough all right. Our personal tech columnist nicole new. Thank you so much for joining me.