First, Second, Third, Fourth Degree Pricing

Did you see the Barron’s article about Disney?  I thought it was pretty interesting.  Disney isn’t sitting on its hands.   It is pivoting the company to do streaming, and it’s being very transparent about it.  So much so that it’s going to show the cash flows between New Disney and Old Disney.

I love when companies are transparent like that and it shows that the leadership of the company is confident.

What’s really informative about the way Disney does business is the way it prices everything.  If you have small children the odds are pretty good that you have made your way to the Magic Kingdom.  It’s a magical experience for your kids but for adults you always feel like the mouse has his hands in your pants.

Disney is one of the best companies to engage in price discrimination to maximize producer surplus.

I think many startups can learn a lot from Disney and can integrate better price discrimination into their business models to generate more revenue.  Typically, they just give away stuff at a freemium model and then price on add-ons.  I am not sure they give enough thought to how they price.  The other alternative I see a lot is one size fits all pricing.  You leave a lot of chips on the table when you do that.

It starts with airfare.  It’s super cheap to fly from anywhere in the US to Orlando.   Sort of like Las Vegas. Disney and the casinos have leverage with airlines to do that.  Obviously, startups can’t and software startups aren’t about geographical place anyway.  Disney takes it from there to next level.  In order to price discriminate, they are really attuned to their customer and they really understand the elasticity of demand for those customers.

If you are a startup, do you understand the elasticity of demand for your clients?  If you don’t you should start to think about it.  As you do that, layer in some critical thinking on the cross-elasticity of demand.  The reason cross-elasticity is important for startups is that they are usually replacing “the way we always did it”.  Pricing too high will cause some customers to revert to the old ways or a potential competitor that is “good enough”.

In the new year, really look at your pricing structure to eek out more revenue from your customers.  It could mean the difference between survival and death in a down market.