Co-Opetition - Adam M. Brandenburger [126]
That’s a loss—both for those people and for Warner Bros. But there is a way to sell to the fourth group and not lose money.
What the studio did was to link the two games with a pricing rule: buy The Fugitive and get a coupon for $5 off Free Willy. It could just as well have said: buy Free Willy and get $5 off The Fugitive. In fact, the deal really is: buy The Fugitive and Free Willy and get $5 off the combined price.17
This discount has no effect on the first and second groups of customers. They’ll still buy one or the other movie at $19.95, but they won’t buy both. The third group of customers gets a price break: they were already buying both movies, and now they’ll save $5. That’s a hit to the studio’s bottom line of $5 on a hundred sales, or $500. The benefit to the studio is that it induces the fourth market segment to buy the package deal. On the retail price of $35, the studio gets $17 after the store’s cut on the two cassettes. The studio’s costs are $10, so it makes a margin of $7 on a hundred sales for a total of $700. Actually, though this is exactly the same benefit as before, the numbers add up this time. Making $700 while giving up $500 is the right decision.
If the studio cuts the price of each video separately by $2.50, it comes out behind; but if it cuts the price of the two videos together by $5, it comes out ahead. This sounds like magic. The explanation is that when it discounts the package rather than the individual items, the studio manages to get the same stimulation in demand while giving fewer people the discount. The benefit of the price break is the same, but the cost is halved.
In this example, both movies in the package were owned by one studio. But the pricing rule would work just as well if the two movies were owned by different studios. Since the combined profits on the two videos would be higher, there would always be a way to allocate the cost of the discount so that both studios came out ahead.
This principle is a very general one. There needn’t be any connection between the two products or the two companies selling them. Here are some examples of cross-company couponing practices we’ve seen:
• Buy a Rubbermaid Servin’ Saver and get 20 cents off Vlasic pickles.
• Open an account with Fleet Bank and get $100 off a Delta Airlines ticket.
• Shop at Stop & Shop and save between $50 and $100 off a Northwest Airlines ticket.
• Sign up with SNET Cellular and get AAA roadside assistance for free.
• Buy an AST Bravo notebook and get a ski package at Vail.
• Join National Car Rental’s Emerald Club and get $75 off the membership price of a Diners Club Card.
Package discounts are much more widely applicable than you might ever imagine. Pick any two products at random, and it’s a good bet that there’s more money to be made by offering consumers an option to buy the package at a discount. Package discounts really are magic. Although they aren’t rare, they aren’t that common, either. This strategy has a huge untapped potential.
Discounted Value
Increase sales without giving up as much margin by offering package discounts.
There are just two caveats. Package discounts are least effective when the people who like one of the products also tend to be the ones who like the other. Think of Star Wars and The Empire Strikes Back rather than Free Willy and The Fugitive. In such cases, most customers either buy both products or neither. A package discount is then more like a plain old price cut and doesn’t have any special effect.
The second pitfall to watch out for is resale. If a market for the coupons springs up, then the seller loses the ability to price the package. In effect, each item becomes priced individually once