A Blog by Jonathan Low


Dec 9, 2020

Why Pricing Became the Ultimate Pandemic Pivot Point

Companies have used a mix of premium and 'freemium' pricing to emphasize the value of their offerings to customers quarantined at home by the pandemic, but also offered lower priced options to maintain sales growth and brand affinity. 

These strategies have been very successful.JL

Nicole Nguyen reports in the Wall Street Journal:

Free Zoom, $13 unlimited Walmartdelivery, a $30 Disney movie, a $399 iPhone and a $2,495 Peloton bike: This year, companies used the lever of pricing in ways that managed the pandemic’s obstacles or even capitalized on its opportunities. Apple’s strategy to offer multiple price options keeps customers within the brand, for those who face economic pressure. Peloton released a new Bike+ for $2,495 and marked its original bike down to $1,895. Sales have jumped 172%. In Zoom's “freemium” model, the more users are exposed, the more likely some pay for extras. Zoom’s revenue grew 367%

Free Zoom, $13 unlimited Walmart WMT -0.56% delivery, a $30 Disney movie, a $399 iPhone and a $2,495 Peloton bike: This year, companies in tech and other industries used the lever of pricing in ways that managed the pandemic’s obstacles or even capitalized on its opportunities.

Ordinarily, an economic downturn causes a decrease in demand for many products and services. Yet the Covid-19 pandemic’s widely varying impact on different corners of the economy tested traditional pricing approaches. Companies played up conveniences, knocked down barriers and offered new services and new choices—with mixed results. Here’s a look at examples of intriguing price moves this year:

A Premier Experiment

“Mulan,” a $200 million live-action remake years in the works, was supposed to have a big theatrical release—but the coronavirus had other plans. Instead, Walt Disney Co. charged $30 for at-home “premier access” to the title, for people already paying $6.99 a month for a Disney+ subscription. After three months, “Mulan” became available on the service for no extra charge.

In the film industry, it’s common to charge a higher price for early viewing, reducing the price as time goes on. For some, the “Mulan” price was a bargain. Between popcorn, drinks and tickets, a family outing to the theaters easily exceeds that. For others, $30 was too high.

During its opening weekend, “Mulan” appeared as No. 10 on Nielsen’s U.S. streaming charts, with 525 million minutes streamed. The list was otherwise dominated by Netflix Inc. and topped by the streaming giant’s “Cobra Kai” series, which drew an estimated 2.2 billion streaming minutes.

In November, Disney Chief Executive Bob Chapek said he was “pleased with the results” of “Mulan” but didn’t divulge numbers. Mr. Chapek said that there is a future for newly released, pay-per-view movies on the platform.

However, the studio’s next big film, Pixar’s “Soul,” will be available to all Disney+ subscribers on Dec. 25—without a “premier access” price tag. “The idea was that it was a really nice gesture to take ‘Soul’ during the holiday period and provide that as part of the service,” said Mr. Chapek on an earnings call.

Another strategy, said Harikesh Nair, professor of marketing at Stanford Graduate School of Business, might have been offering “Mulan” at a discount to Disney+ members and at a higher price to nonsubscribers.

AT&T Inc.’s WarnerMedia is sticking with the all-you-can-stream approach. Also on Christmas, the studio will release “Wonder Woman 1984” to its HBO Max subscribers for no charge on top of the $15 monthly fee. The studio said last week that it plans to release its entire 2021 film slate on HBO Max and in theaters simultaneously.

In October, Netflix raised the price of its plans, with the goal of funding a new slate of shows and movies. “There is that opportunity to occasionally go back and then ask members, where we’ve delivered that extra value in those countries, to pay a little bit more,” said Netflix Chief Operating Officer Greg Peters on an earnings call.

The Goldilocks Effect

Apple Inc. this year released five new iPhone models, the most in the device’s history. Apple started in 2007 with one iPhone but soon established a “good-better-best” strategy, where budget and premium products flank “Goldilocks” options.

For years, the company did this by keeping older models around at slashed prices. In recent years, it has introduced more new options at various price tiers. This year’s lineup ranged from the $399 late-adopter-targeted iPhone SE to the feature-packed $1,099 iPhone 12 Pro Max—with a “just right” iPhone 12 in the middle. The company also gave Apple Watch shoppers three tiers of options for the first time.

While it may be more confusing for consumers to navigate the price and quality differences between the models, this kind of price ladder is strategic and ubiquitous—from airliner cabins to gas pumps.

The trick with offering multiple versions of a product is to offer enough to help people identify their own strike price but not enough to overwhelm them, says Rags Srinivasan, an independent pricing consultant. “Apple is best at this,” he said, “creating variation between models in the number of camera lenses and the different levels of storage capacity.”

While Apple’s strategy to offer multiple price options was in play long before the pandemic, one benefit of multiversion pricing is its resilience to hard times, said Mr. Srinivasan. “The ‘good’ option gives firms the opportunity to keep customers within the brand, for those who face economic pressure to downsize their lifestyle,” he said.

Meanwhile, Apple’s smartphone competitor Samsung Electronics Co. Ltd. launched its flagship Galaxy S20 5G phone in February. As the pandemic months rolled on, the company scrambled to develop a cheaper version, the Samsung Galaxy S20 FE, to appeal to customers on tighter budgets.

One Is the Loneliest Number

A seminal 1992 research paper looked at a $275 bread-baking appliance sold by Williams-Sonoma. When the retailer added a second model, similar to the first but larger and more expensive at $429, sales of the cheaper model doubled.

Peloton Interactive Inc. employed a similar strategy with its new two-tiered bike offering. In September, when the at-home fitness company released a new stationary Bike+ for $2,495—with a bigger screen and more powerful software—it marked its original bike down to $1,895, from $2,245. Covid-19 has led to an explosion of demand for connected bikes as gyms closed. This year, Peloton’s sales have jumped 172% compared with last year, and the company posted its first-ever profit.

“It was really important to lower the price of our bike by $350,” said Jill Woodworth, Peloton chief financial officer, in a September earnings call. “Obviously that has an impact on our gross profit margin but does increase the accessibility of our products.” Ms. Woodworth said she believed the original bike will be the company’s bestselling hardware due to the more accessible price.

Since then, the demand for the Bike+ exceeded Peloton’s internal forecasts, resulting in longer wait times, currently as much as 10 weeks, a company spokesman said. The first-generation bike is available in as little as four weeks.

“I think Peloton is focused on growing its subscriber base as quickly and durably as it can, and part of that is to drive the price of its connected-fitness device down over time,” said Edward Yruma, managing director of KeyBanc Capital Markets. During the company’s most recent investor call, it laid out plans to sell preowned bikes, but didn’t specify timing.

Free Advertising

In March, shortly after stay-at-home orders swept the country, Zoom Video Communications lifted the 40-minute meeting limit on free accounts for K-12 educators. And recently, the videoconferencing company removed meeting limits for Thanksgiving Day virtual feasts.

It was a pandemic trend: For a time, AT&T and other internet-service providers removed data-usage caps. Comcast made its network of Xfinity Wi-Fi hot spots available to noncustomers. Coursera opened its catalog of 3,800 courses to college students. The Sling TV streaming service made some live TV channels available without a subscription.

“We see free as an acquisition strategy, an alternative to advertising,” said Ayelet Israeli, an assistant professor of marketing at Harvard Business School.

Zoom Chief Operating Officer Aparna Bawa acknowledged that the service’s influx of free riders is part of a plan. “For us, it’s a long game. The more and more we can build our user base and establish trust,” she said at WSJ Tech Live in October, “the more legs we have as a company.”

In the popular “freemium” model, the more users are exposed to a product, the more likely some will pay for extras. In the most recent quarter, Zoom’s revenue grew 367% year over year.

Nike Inc. pulled the subscription fee for its $15-a-month Nike Training Club app early in the pandemic, and soon reported an 80% increase in-app workout activity. Users see chiseled trainers wearing Nike clothing and a dedicated shop where they can buy their own. As a result, apparel sales increased. Nike said the company is making Training Club free, permanently.

“Someone may only buy footwear and apparel a few times a year but engaging with us each week, maybe even each day, brings Nike into their lives," CEO John Donahoe said on an earnings call.

Chasing Prime

Home grocery delivery has surged to unprecedented levels during the pandemic and Walmart Inc., which had charged from $8 to $10 per delivery, seized the moment to launch Walmart+, a $13-a-month program for “free” unlimited delivery from local stores. “Pays for itself in just two deliveries,” the website says.

One challenge for Walmart+, also available for $98 a year, is its apparent likeness to $119-a-year Amazon Prime. Prime offers more perks, including a vast library of streamed entertainment. “I think that Walmart’s got the right idea. But there is just no way that consumers aren’t going to compare Prime to the Walmart+ solution,” said Brendan Witcher, principal analyst with Forrester Research.

In its most recent earnings call, Walmart didn’t offer much detail about the adoption or pricing of Walmart+. “I do think Walmart+ can be helpful in a lot of ways over time,” said Walmart CEO Doug McMillon on the call. “The information that we’ll have about customers, the ability to personalize, I think we’ll be able to serve them better.”

In early December, Walmart+ added no-minimum free shipping from Walmart.com, which matches a longtime Amazon Prime benefit. “We know the pandemic obviously increased online shopping, so we made sure to get this out before the holiday,” said a Walmart spokeswoman.

Walmart’s strategy mirrors Amazon’s: getting customers to lay their money on a default retailer. This keeps switching costs high and gets people to shop more to justify their subscription. “Amazon Prime increases the willingness of consumers to buy without thinking,” said Dr. Nair. “If Walmart can replicate, it can be incredible for the company.”


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