Strategic Movements: February 2019


Tim J. Smith, PhD
Founder and CEO, Wiglaf Pricing

Published February 27, 2019

Hulu Manages Version Pricing

Hulu is dropping the price on its basic plan to $5.99 from $7.99 while raising its price of live streaming from $39.99 to $44.99.  Its mid-tier plan without advertising remains at $11.99.  Basic rules of Good-Better-Best versioning:  Good will cannibalize sales of the Better version but will increase the addressable market at a lower price point.  Tradeoffs are inherent.  Hulu’s Basic plan was dropped precisely to expand its addressable market.  As for its Best version, the price hike is aimed at a less price sensitive segment that values live TV streaming.  Key numbers to watch: (1) subscribers at Good and Better versions to monitor growth vs. cannibalization; (2) subscriber growth at Best version differences after the price hike to estimate elasticity and value of the price hike.  The strategy seems well based on past promotion experience yet measurements are necessary to prove the value of the strategy.  Expect shareholders to pay close attention.

GM does EV Cadillac Style

Prior electric vehicle (EV) strategy of GM focused on low-end cars like the GM Volt and Bolt.  New EV strategy focuses on the high-end Cadillac badge.  Why?  Because EV cars are expensive to make and premium marques like Cadillac can be associated with higher prices and the market will consider it normal.  Low-end badges target budget-constrained customers that may not be able to pay for EV tech.  Watch the trajectory of other high-volume automakers (Volkswagen, Toyota, Ford, Hyundai) with respect to high-end vs. lower-priced EV badges. Green is good but it isn’t free.  The auto industry is facing turbulence with this transition.

Price Hike at Netflix

Netflix is raising its prices from $8 to $9 for its “good” version that allows for streaming to one device at a time and from $11 to $13 for its “better” version that allows for streaming to two devices at a time.  They justify it to customers by claiming it is for the development of better content (good PR plan).  The streaming providers (Disney, Netflix, ATT, CBS, Hulu, and others) are in a war for subscribers.  Content ownership builds a mote entrapping customers to an otherwise commodity intermediary supplier. Strategically sound.  Key question: does the price hike slow subscriber growth?  Can’t answer with direct numbers in the US because the overall TV subscriber numbers are slowing as the market approaches maturity.  Will need to look at relative market share and “hours watched”.

Testla Cuts Price Again?

Elon Musk dropped another $1100 on the price of the Tesla Model 3 to $42,900.  With what research?  Do the cost savings associated with higher volume production justify this price cut?  Is the market sufficiently bigger at this lower price? Gut thinking may work much of the time, but research and experience demonstrates that collaborative, fact-based decisions are better when it comes to pricing.  Tesla could afford the research and the time it takes to make an informed decision.  Argh Elon!

Lime Testing Surcharges

Lime, the e-scooter sharing company, has started charging customers penalty fees (reportedly $100 for holding onto a scooter after using it, for instance) for breaking the rules.  From a pricing perspective, surcharges and penalty fees should be applied to discourage behavior whereas upcharges should be charged with higher-value activities.  (Notice, both surcharges and upcharges could be the same amount for the same differential benefit/behavior, but one discourages the behavior and the other encourages it.  Semantics matters when it comes to pricing.) On this issue, Lime has framed the challenge correctly but: What will do to their brand?  To their growth trajectory?  How much more costly will customer service be?  I suspect Lime can manage this transition and the charges can make sense, but expect turmoil.  Lime PR is on notice.

About The Author

Tim J. Smith, PhD, is the founder and CEO of Wiglaf Pricing, an Adjunct Professor of Marketing and Economics at DePaul University, and the author of Pricing Done Right (Wiley 2016) and Pricing Strategy (Cengage 2012). At Wiglaf Pricing, Tim leads client engagements. Smith’s popular business book, Pricing Done Right: The Pricing Framework Proven Successful by the World’s Most Profitable Companies, was noted by Dennis Stone, CEO of Overhead Door Corp, as "Essential reading… While many books cover the concepts of pricing, Pricing Done Right goes the additional step of applying the concepts in the real world." Tim’s textbook, Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures, has been described by independent reviewers as “the most comprehensive pricing strategy book” on the market. As well as serving as the Academic Advisor to the Professional Pricing Society’s Certified Pricing Professional program, Tim is a member of the American Marketing Association and American Physical Society. He holds a BS in Physics and Chemistry from Southern Methodist University, a BA in Mathematics from Southern Methodist University, a PhD in Physical Chemistry from the University of Chicago, and an MBA with high honors in Strategy and Marketing from the University of Chicago GSB.