Abstract
This chapter challenges managers (and scholars) to think critically about pricing practices in entertainment. We review pricing theory and compare it to entertainment practice, stressing the dominance of uniform pricing (one price for all products, regardless of their respective quality) and blaming the “Nobody-Knows-Anything” mantra for it. We then discuss the pros and cons of differential pricing in entertainment, concluding that offering different products at different price points deserves closer attention, carrying the potential for better addressing consumer demand and providing higher revenues and profits for firms. We also make the case for looking for ways to price an individual product differently, considering three broad categories of price discrimination approaches and illustrating their applications in the context of entertainment. When doing so, we dedicate particular attention to “freemium” pricing models, a special kind of versioning.
The original version of this chapter was revised: Reference citations have been corrected. The correction to this chapter is available at https://doi.org/10.1007/978-3-319-89292-4_16
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Change history
13 December 2018
In the original version of the book, in chapter 14 (Entertainment Pricing Decisions) references on Page no. 745 and 783 are mentioned as “Managing price is an art, not a science…”—Vogel (2015, p. 252), “We find Harold Vogel’s quote to be an intriguing start to a chapter in a book entitled Entertainment Science—Vogel’s argument is based on the huge number of highly complex, and also Vogel, H. L. (2015). Entertainment industry economics: A guide for financial analysis (9th ed.). Cambridge: Cambridge University Press” have been corrected to “Managing price is an art, not a science…”—Ulin (2014, p. 252), “We find Jeffrey Ulin’s quote to be an intriguing start to a chapter in a book entitled Entertainment Science—Ulin’s argument is based on the huge number of highly complex and Ulin, J. C. (2014). The business of media distribution (2nd ed.). New York: Focal Press”, which is a belated correction.
Notes
- 1.
Please note that when we use the terms high or low price elasticities, we always refer to the absolute value of the elasticity, leaving out the negative sign (if we won’t do so, an elasticity of minus 3 would be much lower than one of minus 0.5, which would be counterintuitive).
- 2.
With tongue-in-cheek, Pearlstein calls the fact that this exertion of power happened for Francis Ford Coppola’s mafia movie a “coincidence” that would have made a mobster proud.
- 3.
See, for example, the section about prediction models in the innovation chapter of this book.
- 4.
We discuss systematic differences in consumer preferences and the reasons for them in our section on taste, and our review of entertainment markets in the business models chapter shows the heterogeneity of available products and types.
- 5.
Thompson (2012) reports about a case when in 1970 “some D.C. theaters cut weekday tickets by two-thirds and saw popcorn sales double. That’s a huge boost for theaters, since half of theaters’ income comes from amenities like popcorn.” He provides no details about the occurrence, though.
- 6.
The scholars’ VAR results do not allow us to report any elasticities.
- 7.
A screenshot of the website at that time can be found on various sites on the Internet, such as at https://goo.gl/e9KZ7F.
- 8.
In some ways, some kinds of versioning (which we discuss below) could be interpreted as a quantity-based pricing strategy—whereas the rented version only allows repeated consumption in a restricted time frame, the purchase version gives us unlimited consumption opportunities. In addition, one might also consider digital rights management measures (DRM) that reduce the number of consumption acts as implementations of quantity-based pricing. But such DRM, with reduced consumption quantity, is usually not offered for a discounted price.
- 9.
That is also why it would be less-well suited for non-digital/information-good offers such as concessions in a movie theater.
- 10.
See also our discussion of packaging in the context of owned entertainment communication.
- 11.
If the total net contribution of the “free” version across users is negative, it does not make sense to offer the “free” version at all.
- 12.
See also discussion of the social media firestorm that resulted from EA’s pricing of the game in the context of “pinball” communication.
- 13.
In the case of Battlefront and other games, the value of in-game purchases is further reduced by their combination with so-called “loot boxes,” which dispense rewards. So even if you pay for Darth Vader, you can’t be sure to get him. Lindbergh (2017) provides an anecdotal report about how consumers react to this kind of pricing model.
- 14.
In this simple example, each segment consists of one member only—but multiplying segment revenues with an arbitrary number of segment members does not change the logic of our calculation.
- 15.
Though album unit sales nearly doubled when only albums are available and the price for them was low, this did not make up for the lack of sales for individual tracks. Keep in mind that marginal costs are zero for digital music.
- 16.
Papies and van Heerde (2017), using data from 2003 to 2010 (thus spanning the periods studied by both Elberse and Danaher et al.) point at a different negative effect caused by mixed bundling: they find that the availability of individual songs dampens the positive impact live concert sales have on recorded music sales. Many people who go to a concert then want to acquire a digital or physical copy of the music to listen to later—it seems that, when consumers have the option to cherry-pick only the tracks they most want rather than having to buy the full album, customers tend to spend less on recorded music.
- 17.
Informal bundling shares some similarities with the concept of “customized” bundling, as analyzed by Hitt and Chen (2005).
- 18.
Such segmenting by latent consumer characteristics somewhat overlaps with the self-selection element of second-degree price discrimination. Whereas the latter practice involves changing the product (the quantity, the version, or by creating a bundle), segmenting according to latent traits means that the exact same product is offered at different prices based on time.
- 19.
As Mortimer (2007) points out, the dynamic part of this pricing approach was necessary in the U.S., as copyright law prevented producers from prohibiting rental firms from renting the cheaper “sell-through” versions to consumers.
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Hennig-Thurau, T., Houston, M.B. (2019). Entertainment Pricing Decisions. In: Entertainment Science. Springer, Cham. https://doi.org/10.1007/978-3-319-89292-4_14
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