Beginners guide to price elasticity

I promised that I would report back to you, the reader, the results of the price increase at iTunes. And after the first week, the results are in:

Of the top 100 selling songs, 33 were increased to $1.29 while 67 remained at the old price of $0.99.

• Sales of the 33 songs at $1.29 where down 12.5%
• Sales of the 67 songs at $0.99 where up 9.9%
• Leading to an overall a drop of 0.5% sales volume
• Resulting in approximately 9.5% increase in revenues

It certainly appears, from this first week, that the labels and Apple did the right thing, Worries that the price increase would force people to migrate to file sharing sites appears to be unfounded as overall track sales (not only the top 100) where up 3%.

Remember that this price change was forced by the labels, which thought that the $0.99 price was too low and did not fully maximize their revenues. With these results, Apple and the labels made an additional $450,000 in just one week on this price change.

So… do you know the price elasticity of your product or service? If you don’t, there’s no way you can know if your prices are optimized to maximize revenues or profits. You may well be leaving significant money on the table, and you are definitely shooting in the dark.

With whistling late Friday regards,

Per Sjofors
Founder/CEO
Atenga Inc
per@atenga.com
818 887 4970

Stirring the music download pricing pot

The music industry has been stirred up once again this week. After years of pressure from the labels, Apple finally gave up on its one-price-fits-all strategy for iTunes and introduced a three tier pricing model -- with downloads now available for $.69, $.99 and $1,29.

So among the three largest sellers of downloadable music, it creates an interesting competitive environment:

• Apple, the clear market leader with a premium product, with the highest priced downloads, a claim to better sound quality, and complete integration with iTunes and iPods
• Amazon.com, with a single price of $.99, “standard” high bit-rate MP3 files and an application that can integrate with iTunes and therefore iPods
• WalMart.com, with a $.05 lower price per song than Apple’s pricing scheme ($.64, $.94 and $1.24) and “standard” high bit-rate MP3 files.

So it will be interesting to follow:

• Will Apple lose some of its market share to Amazon - thus proving that a lower one-price-fits-all approach is the preferred consumer way to buy downloads.
• Or, will Amazon follow Apple and WalMart with three-tiered pricing?
• Will WalMart’s strategy to copy Apple’s tiered approach (but at a lower price) pan out? Will they gain market share?

What will the three-tiered pricing strategy do for the business results of Apple and the big music labels they’ve partnered with? Will it drive more revenue and profits or will consumers migrate back to the illegal file sharing sites that created the digital music market in the first place?

I will keep an eye on these developments and be sure to report back to you soon.

>>Update at 2pm 4/9/09: It did not take long. Amazon just introduced some songs at $1.29

With singing regards,

Per Sjofors
Founder/CEO
Atenga Inc
818 887 4970
per@atenga.com

It’s the Autobahn...or the Highway

Anybody who’s missed the current woes of the US car makers is either living on a different planet or not living at all.

With emergency life support in the form of billions from taxpayers and bankruptcy likely in the near future for both GM and Chrysler the car industry looks like a sure bet for losing money.

But wait! What if I told you that you can still run a profitable car business despite the global recession and the precipitous drop in automobile sales? Impossible, right? Well, not at Porsche. Let’s compare the first 6 months of Porsche’s sales data for 2007/2008 and 2008/2009.

Financial Year: 07/08
Total Number of cars sold: 46,600
Revenues from operations (Euro): 3.5b
Average Selling price (Euro): 75,107
Profits from operations (Euro): 1.658b

Financial Year: 08/09
Total Number of cars sold: 34,266
Revenues from operations (Euro): 3,04b
Average Selling price (Euro): 88,718
Profits from operations (Euro): 0.5b

So what do these numbers tell us? It is obvious that Porsche is not insulated from the global decline in car sales, and sales are down considerably. But, as opposed to almost every other car manufacturer out there, they have been able to fight back and increase the average selling price of their cars. As they say in their financial press release from March 31st:

“The substantially better development in revenue compared to the development in sales is primarily due to a changed model mix.”

So what can we all learn from Porsche? I think the following:

1. Ongoing discounting that is used by most other car manufacturers (especially the “Big Three”) detracts from the perception of value of the product and creates downward pricing pressure. Prospective buyers also quickly learn to buy on regular promotions (Presidents Day Sale!) and delay their purchase for some time. To my knowledge, Porsche never discounts its products, never runs “employee pricing” schemes, or anything of that nature. Thus, they never suffer from self-inflicted value perception wounds.

What do you do? Do you train your customers to buy at the end of the quarter or end of the fiscal year? Do you always discount to close the deal?

2. Porsche has done a spectacular job of increasing the average selling price of its products, raising their average sale price to €88,718 from €75,107. An 18% increase - in this economy!

It is a demonstration of how changing the product mix can be a powerful way to increase your revenues.

Have you thought about what you can do to change your product (or service) mix to drive your customers to a more expensive or maybe just more profitable mix? What programs do you have to have in place? What knowledge of your customers purchase decision behavior will ensure these programs have the maximum success rate? Can you do as good a job as Porsche? In this economy? Why not?

With speedy best regards,

Per Sjofors
Founder/CEO
Atenga Inc
818 887 4970
per@atenga.com