Pricing Strategies: Apple & WKU

On the Freakonomics blog, Steve Levitt writes about Apple’s i-Phone pricing strategy — start high ($599) and come down ($399 two months later). As he notes, a strategy to increase profits by identifying and targeting consumers based on willingness-to-pay is standard economics (price discrimination), if you can effectively do so. (Supposing that this was, indeed, Apple’s plan, and not a response to poor sales).

In contrast, ESPN’s Pat Forde describes the complete opposite strategy employed by my institution (WKU) in its jump to I-A football.

Athletic director Wood Selig rolled back the cost of season tickets to a dirt-cheap $25 for all five home games and made them all general admission — first come, first served. The plan is to get them in the door, then hope they’ll re-up when the prices inevitably increase.

Of course, the NCAA 15,000 minimum attendance requirement imposes a strong incentive to adopt such a strategy. Even without this constraint, WKU’s approach makes sense when the demand is low, when price discrimination won’t do much for revenues. Low ticket prices get people in the door, so that the “experience” will increase the interest in football over the long haul. (The idea got off to a good start last Saturday with a crowd of 17,000 even for a cupcake opponent; last year’s average attendance was about 9,000).

These Apple-WKU highlights the importance of determining whether pricing is taking place with demand given or in a dynamic demand context. Sports decisions makers have sometimes not assessed the difference correctly. Many owners fixate on dividing the pie versus increasing the pie, when over the long term demand growth (or decline) will swamp the effects of small differences in the slice. The destructive outcomes such as the CART-Indy 500 dispute comes to mind. The short term lure of a few more dollars swamps the longer-term view.

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Author: Brian Goff

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