Determining an Efficient Video Service Pricing Strategy

Continuing on from my previous post, one of the key influencers of the success of any video service launch is going to be the pricing strategy employed. Determining an Efficient Price is a tricky proposition at the best of times due to the surfeit of factors that drive it. Pricing is one of the fundamental aspects of any business model and is one of the key determinants of revenue or business value along with customer base and loyalty. 

When one needs to price a video product in a cluttered market with several players, standard offerings and a poorly defined customer segment it can become a major cause for headache. So a good price should do three things:

1.      Achieve the financial goals and ROI set out in the business model

2.      Factor in the realities of the marketplace in terms of customer demands, competitive landscape, regulatory environment and supplier considerations

3.      Be cognizant of the costs involved in designing, manufacturing, distributing and promoting the video service to achieve its desired positioning

A good pricing strategy would be the one which could balance between the Floor Price and the Ceiling Price. So how does one measure the efficacy of the pricing strategy employed by a video or content service provider? One of the ways of doing that is to measure Customer Value. Customer Value can be defined very simply as the difference between the cash flow (revenue) generated by a video subscriber and the cost of acquiring that subscriber. The price charged for any video product or service needs to ensure that all current and prospective new subscribers are adding to the Business Value of the project.

Business Value for a Product (or Service) (BV) = Revenue generated per subscriber (R) * Number of current and future subscribers (S)

  

Any pricing strategy for a video service needs to strike a balance between the value derived per subscriber and the number of subscribers. Varian (2002) & Goolsbee (2002) independently estimated that the demand for broadband based services (including video) is very elastic with cross price elasticity for dial up and ADSL based services ranging from -1.3 to -3.1 and -2.15 to -3.76 respectively. This shows that a small change in price can have a significant effect on the quantity demanded or in this case the number of subscribers that join in. In this backdrop it becomes even more important to balance the price set with the estimated subscriber numbers that the service hopes to attract.

The above figure shows the relationship that price has with the number of subscribers and the revenue generated per customer, we get an Inflection Point I. Theoretically, Business Value for the video service should be greatest at this point and hence pricing a service as close to this point must be the aim for any strategy. Combinations before or after this point may lead to an inefficient utilization of market potential or addition of subscribers with negative customer value.

While we have attempted to evolve a measure of an effective pricing strategy we still need to figure out the determinants of this strategy? How does the market environment affect price? One way of doing this is by segregating and classifying these factors under a few distinct and logical heads but more on that in my next post.