Top pricing consultant Frank Luby shares three rules for building a thriving media business in the age of free content.
When the teams played again the next afternoon, only 15,176 fans showed up.
The Blue Jays’ management wanted to know why. Once they figured out the reason some games sold so much better than others, they believed they could use that information to price tickets in a way that would increase overall revenue without decreasing attendance or alienating fans. My job as a pricing consultant was to help them do that.
Nowadays, pricing tickets based on demand has become widespread in professional sports. It’s easier these days because teams have far more data, as well as the ability to analyze it — think “Moneyball” for marketing. Back in 2003, though, hardly anyone was looking at how the value of stadium seats fluctuated between one game and the next.
In my firm’s first brainstorming session with the Blue Jays’ management, we considered two hypothetical extremes. First, we suggested, the club could charge a different price for every single seat in Rogers Centre, since each offers a different view and thus a different experience. But this would be impractical, to say the least: With a maximum price of $100, coming up with around 50,000 different price points would become an exercise in absurdity.
At the other extreme, the club could charge one flat rate — say, $20 — and let fans sit wherever they wanted. General-admission concerts work this way, with varying degrees of success. But it didn’t make sense to let someone sit right behind home plate for the same price he’d pay to watch the game from the last row of the upper deck.
Yet that is what media companies do.
Think about it. The approach of one price for everyone, which we’d find absurd in other circumstances, is the way most media companies still charge for content. Worse, those flat-rate prices tend to be low. If ad revenue can’t cover costs, publications will have to make more money by selling content itself. And they’ll have to do it in a smarter way than they’re doing it now.
“Just raise prices” sounds like an easy solution, right? It’s not that simple. I spent more than 15 years working as a pricing consultant for about a dozen large media companies, and met at length with about a dozen more. Some produced content — print books, e-books, magazines, music. Others included media retailers, portals, and access providers. But simply raising or cutting prices across the board wasn’t the strategy I recommended to any of them. Our approach was to find the right mix of prices, which was what I was hired to do for the Blue Jays.
Media companies now reach more consumers in more ways, with more devices, and on more occasions than ever. They can now figure out what individual customers want and give it to them. But few of them offer products and services that are differentiated by device and occasion, each with its own strong value proposition which customers — and advertisers — reward by paying real money. If the traditional media business was built on scale, the new one could be summarized as follows: “Differentiate or die.”
Almost any media company can apply the principles that drove my consulting work, and they’re just as valid today as they were when I billed my clients hundreds of thousands of dollars for advice, analytics, and research. And they work equally well for established media companies as they do at startups.
Content isn’t exclusive because it costs money — it’s exclusionary because it solely targets a well-defined group. You can’t create, communicate, and charge for value unless and until you know who your audience is — what they want, what they expect, and what they have in common. Those who are part of the community you serve want your content, and they’re willing to pay for it (sometimes after some convincing). Everyone else doesn’t matter. Stop chasing them, especially by lowering prices. Following this rule can be hard for executives that grew up in a business where scale drove revenue.
“We know that the number of people around the world who believe in our mission is limited,” the CEO of a major magazine publisher told me in the midst of a digital transformation. “And we don’t have them all as subscribers yet. But that’s how we need to balance getting more subscribers with making more money.” The publisher had defined the audience: a relatively small group of consumers who wanted certain information to enrich their professional lives. The company’s publications delivered that, in a consistently outstanding way. Chasing other consumers would have been a waste of time, and an expensive one at that. Wisely, the company decided to focus on being a valued resource for a smaller community rather than just another publication that tried to offer something for everyone.
How do you know who your audience is? Start by looking for your best, most enthusiastic customers. If all of your readers rated content on a scale of one to 10, these are the nines and 10s. They want what you do the most, so they’re willing to pay for it. One of my clients revived an entire product line when the company saw that that more than 90 percent of the responses to a customer satisfaction survey were 1, 2, 9, or 10. A lot of their customers hated this particular product, but a good-sized minority absolutely loved it. Had they only looked at the average rating — a disappointing 3.8 — they would have killed the product. Instead they created a special program for the nines and 10s and stopped trying to sell it to such a broad audience.
Those insights are easier than ever to get, as I learned last year while attending the annual conference of the Music Business Association. One of the most eye-opening revelations was that music streaming services now track exactly what individual subscribers listen to. Twenty years ago, record companies had no idea whether consumers played the CDs they bought, much less how often or what songs they listened to most. Today, streaming services can deliver all that information by artist, genre, or whatever data-cut you desire.
Online publications can get similar information — data about who reads which articles and when, which provides insight into the value that content delivers. How does your content fit into an individual reader’s day? You may get looked at or clicked on, but do you own their day’s first look? Do you own their day’s last look? What about the commute or lunch time? What can you offer your target group — and only that group — which makes you their primary resource, not a second- or third-tier source used on an ad-hoc basis?
When you do this, you have moved one critical step closer to delivering exactly the content your audience needs, and one step away from trying to be everything to everyone, which leaves no one fully satisfied. Now, you just need to get your dedicated audience to pay for it.
To succeed in today’s media business, most companies need to provide a range of products. This is a classic marketing tactic: A free product serves as a tease for a paid one. But it only works if it promotes something consumers will pay for. It also requires a careful balance: Too few freebies won’t attract enough people, while too many won’t bring in enough money.
Michael Bloomberg is a master of this game. Bloomberg’s free and premium offerings work together to generate more profit than either could alone. In Bloomberg’s case, 85 percent of the company’s $9 billion annual revenue reportedly comes from its terminals — the devices that Wall Street traders rely on for up-to-the-second financial information. These cost about $25,000 apiece annually, although companies that use a number of them pay less for each. Some high-level executives use two or three terminals at once.
“Those who use it buy it at a huge price — can’t live without it,” Rupert Murdoch said of Bloomberg’s terminals a few years ago. “Mike’s got a virtual monopoly there. When their costs go up a bit, they put the prices up, and no one cancels.”
The rest of Bloomberg’s media operation functions, at least partly, to keep things that way. The company publishes 5,000 stories a day, many of which contain market-moving information, and makes those articles available to terminal subscribers 15 minutes before they’re posted on the web. The media division also dramatically increases the profile of what would otherwise be a stodgy professional-services company. And that raised profile makes it easier to break news.
We can’t all come up with the next Bloomberg terminal, of course. But think about the range of value propositions Bloomberg creates for its customers, as well as how this strategy could be applied at your company. How do you materially improve people’s personal or professional lives? What makes your publication irreplaceable, or at least close to it? One way to figure this out is by dividing your content into its smallest marketable parts, and then dividing those into good, better, and best.
“Best” is the content that answers questions no one else can. It’s the core of your business, and it lets you charge users, advertisers, or both. “Better” is the content that competitors offer, but not as well; this content couldn’t drive a business on its own, but it provides significant value. Finally, what’s interesting but inessential? Think of tickers with the day’s top stories on a certain topic, for example: They’re nice to have even if not everyone notices them. You might think of this content as the napkins of the online world: They don’t draw consumers in, but they’d certainly be annoyed if they weren’t there.
Essentially, the items in that “good” bucket get publications attention, not money. They should be free. Combining them with some “better” content can make free a powerful way to draw in consumers without giving away the store. The “best” content is what publications should always charge for.
Media companies get into trouble when they put these items in the wrong buckets. Sometimes they misread the value of what they do and try to charge too much for content that’s not as important as they think it is — remember when the New York Times charged readers to access its opinion section, but not its news articles? Other times they charge too little because they decide to chase traffic instead of dollars. That’s when free devolves from a powerful tactic into a dumb strategy. It’s supposed to drive revenue, not replace it.
I used to begin my talks about pricing by saying that all prices are works of fiction. That doesn’t mean they’re just made up out of thin air, although this is true more often than you might think. It means they’re illusions that have little to do with the actual cost of a product. That’s why Spike Lee and Jack Nicholson pay a small fortune for their courtside seats at NBA games.
If prices are works of fiction, however, the most compelling ones are still rooted in reference points called “price anchors.” Think of that $70 steak on a restaurant menu: Part of the reason it’s there is to change your perception of the value of the $35 steak. Online, the default business model of giving away content has turned this idea on its head — the anchor price for media has essentially become zero. That anchor exerts a gravitational pull on prices, keeping them from rising too high. The only way to reverse this trend is to create high-end media experiences. Not only will they make money, they’ll serve as new price anchors for consumers. If a fantastic media experience is $70, a good $35 product seems more reasonable — just like the steak.
Ideally, the high-end media experiences of the future should be ones that couldn’t have existed in the analog world. Online game companies do this extremely well. It’s the difference between playing League of Legends online and playing Dungeons & Dragons on a table. Pokémon Go is the latest example. You could hide stuffed Pokémon dolls around your neighborhood, but it would never be as much fun as the augmented reality of the game on your smartphone. That’s the big difference between online game businesses and most traditional media firms: Too many media companies are trying to replicate their analog products in an online world rather than make new ones that take advantage of the latest technology.
Another hurdle is “mental accounting”: the way people assign different purchases to different mental “buckets,” or categories. Unfortunately, online content has become stuck in a small bucket with a very tight lid. Otherwise, why would people who think nothing of paying $5 for a Starbucks latte believe a $10-a-month music-streaming service is overpriced? Why do items in the Target bargain bin — dinosaur flashcards, Hello Kitty doo-dads, rubber balls — cost as much as a recent introductory subscription offer for the New York Times, which has won 117 Pulitzer Prizes over the last century? A $5 expenditure may seem exorbitant in one bucket but trivial in another.
The only way to pry that lid open is to offer a targeted group of consumers the value they demand — perhaps by emphasizing intangible benefits. Some of the value publications deliver consist of prestige, peace of mind, even inspiration. Think of having The New Yorker on your coffee table. Publishers need to think about these qualities when they price their publications. Some of this iconography gets lost when content is online-only, which is why YouTube stars such as Roman Atwood sell merchandise lines. If you don’t know who Atwood is, ask your nearest 12-year-old.
A price isn’t just a number wrapped in a value proposition. Context matters. You need to frame the value of your product the right way.
Pricing media will be far more complicated digitally than it was in the analog Golden Age, when companies didn’t know who their customers were. But the Golden Age isn’t coming back. These days, you need to focus on your best customers, charge them for what you do best, and use context to make your prices seem as attractive as possible.
That’s what the Blue Jays did in 2004 when they introduced their ticket-pricing strategy. Once they understood why fans went to certain baseball games, they raised some ticket prices modestly and cut others steeply. On some nights, fans could watch a Major League Baseball game from the cheap seats in the Rogers Centre for a mere $2.
The combination worked like magic. Their average ticket price went up, and so did attendance, even though the team finished in last place that year. The same pattern — higher average prices, higher attendance — continued for the next few years, even though the team never won its division.
But it wasn’t magic — just the results of a new perspective on what the team was selling and how. There’s no reason why media companies can’t do the same.
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