"reversed" price signals

http://www.joelonsoftware.com/items/2005/11/18.html

Sounds unusual, but might there be something to it? Trouble is I don't really know the entertainment industry that well, it clearly would not work with, say, computer hardware or cars, but maybe it might work with movies and music?

There was a funny story of Scrooge McDuck where he shows to his nephew Donald that he can create a fortune from nothing. He picks up a few flowers in the country side, and then tries to sell them in the city. Struggling to sell a single one of them, he tells Donald, that the problem is "we are selling them for too cheap". Needless to say, as he raises prices, he starts selling them like hot bread, and soon he gets a contract to decorate a party... ;-)

For sure, in the lack of more, and substantial information, people will try to make something out of the price. Generally, they have good reasons to believe that a higher price represents a higher quality product, because it tends to represent the utility of other people (price / quality balance). But if you start meddling with that, you'll easily get them to disconnect that trust. And btw, this is why I don't think this will ever happen, iTunes customers will easily get pissed off at them, if they feel cheated. People often forget that retailers don't neglect their function at assuring some quality assurance, because they know they'll lose customers if they sell out-of-date bananas -- it's not at Chicicita or whatever the brand is that customers will feel pissed at, because many times they won't even remember it...

Anyway, I am not sure how this applies to music. I can see how the Top Sellers could instigate further sells (I sometimes check the book top sellers at amazon), but not the price of the items. People may look at the price at the supermarket, if they don't want to bother looking much more time into research for a fondue or whatever, but that's because they don't have better info like the top sellers. Music and books is also something that you buy based on good experiences from the author, or recommendations from friends or reviewers...

I dunno why cinemas don't try to sell tickets for lousy movies cheaper. I think it's because that means that customers favorite movies will be more expensive than crappy ones, and that may alienate them. People don't like to feel ripped off for what they feel is the same service -- just displaying a movie in a room. So I guess cinemas just figure they'll make the some amount by putting good movies for a longer time, because people will recommend them, and might actually watch it more than once (e.g. for Titanic it was surprising the number of people that watched it several times). Here, cinemas sometimes also allocate more than one room for a good movie.

One interesting strategy that I've read on music selling is to make it more expensive as people keep buying it. You may of course want to keep it inside a certain threshold, and do some tweaks to make sure you're maximizing profits, but regardless, it's an interesting strategy, because you have no other way how to make the most out of a music before start selling and see the customers reaction.

Anyway, the goal of this article was to maximize profits, not really to try to generate hype or some marketing strategy as seems to be the suggestion here. I personally feel this kind of thing would only work for very limited use, because of all the bad advirtsment when people figure out how you are being greedy. ;) Retailers are very sensitive about this: they don't want to make a quick buck if it's at the cost of losing a customer.

Good point on cinemas. The way most people work is to relate everything to the best offer: they will see the cheap movie as the normal price and will be upset about the "premium" paid on the  better movie.

I.e. within a certain range the way the customer sees it the price is not based the value provided but the costs so if the cheap price can cover the costs then why is it higher. Of course outside that certain range it's either "hey no way will I pay so much for it, I don't care how much it costs for you" or "this one 3 pence, that one 2? who cares... both dirt cheap"

This is why you can get a better offer for your house if you advertise it at 494 500 instead of 500 000 - people will think you have a good reason for asking such an exact price. Again within a certain range - ultimately it's based on what it worths for them, but that's a range rather than a price and they will try to haggle it down anyway even if it's within their range, and this way they won't haggle as much.

BlackSheep:

it's not at Chicicita or whatever the brand is that customers will feel pissed at, because many times they won't even remember it...

Chiquita - bananas; Chiquitita - ABBA song

By the way, amazon.com used to use some algorithm to make things less expensive for a new customer, and start raising prices to the level they found they could get the most out of the customer. Price discrimination however can get your customers really pissed if they found out, so the only price discrimination companies do is very subtle things that nobody -- other than economists -- can really see beneath that what they are really doing is to maximize profits: things like cheaper tickets for kids, students and elders (while of course, making them more expensive for people that work). Walt Disney parks make the tickets cheaper for the locals, and more expensive for tourists, since the locals are more sensible to it. Executive class. Etc.

With regard to cinemas, one extra problem is competition. When people decide what movie to go to, those cinemas that practice price discrimination on the movies, may lose customers because they rather go somewhere where they already can expect how much they are going to pay.

Also when you do some price variation -- for how minor it may be -- your customers will get sensible to it. Instead of just deciding a few songs they like, they'll also have to take price in consideration as well, and that could reduce their enjoyment in the service. People don't like to have prices in their face, especially in entertainment. Businesses have software and economists that interpret their statistics to make sure they are doing the best for *them*, which means whatever makes the customer happy, because they want him to come back, and spend more money in them. ;)

Some cinemas here actually sell inscriptions, so you can go to whatever movie you want, how many times you want to. I have been told of an online music retailers that instead of selling music, you pay a monthly inscription, and then you can stream whatever you want.

I don't know why cinemas don't try to do price discrimination a bit different through discounts though... For instance, they could partern with stores for discounts on less popular movies. Maybe it's because those movies are too short lives for a discount scheme. Or it could be because they don't want to try to pressure people into seeing a movie that they'll likely dislike and then blame the cinema for the experience... (whether it is conscious or not, it's important people have a good image of your company, otherwise they will tend to go somewhere else, next time they are making plans.)

Something that should be noticed as well, is that in movies, the publisher has a lot of control over the retailer. There is very little elasticity here. Many times, people go to your cinema, because they want to see some new movie, and you aren't going to convince them to go watch something else because you couldn't get an agreement with the publisher. You not only lose customers this time, but in future too. So I think publishers pretty much set the prices in this business. (I don't think this is that true for music retail though because a lot of times, like iTunes, the retailer service is couples with the media player, so there is an extra price, in the form of effort, to check some other store...)