What is Wrong with XBox Live Pricing?

Microsoft announced today that they are increasing their price for XBox Live. In a nutshell, they started with a  mistake and are trying to correct it with more mistakes.

Value Tag: This article is worth $250,000 for the Microsoft Product Manger and $25,000 for an entrepreneur.

Customers do not have an internal value meter that tells them the price to pay or whether they price they pay is fair or not. What they have is an internal reference price that is framed by what they have usually paid for similar products in the past. If the price they pay increases over this reference price, customers feel it is “unfair” as we have seen before with airline unbundling. For new products it is so much more important to get the initial pricing right, else the marketer is either forced to forgo profits by sticking to low prices or face customer backlash from ill-executed price increases.

In case of new products like Xbox Live, the price customers were trained to pay from the beginning has become their reference price. Now Microsoft realized  that it was too low and decided to increase it by close to 25%. The problems? They are wrong with their initial pricing strategy, tactics and wrong with the way they are implementing the change.

Initial Pricing Strategy:

  1. There is no versioning. They offered one version at  fixed price and offered bundling discount for 3 month and one year subscription. Otherwise, the subscriber gets all features all the time (unlimited access). One version that  offers everything unmetered is almost always wrong and offering discount for longer term subscription is not versioning.
  2. They named this version Gold, but missed the opportunity to have bronze and silver.  One cannot simply toss together a set of features including the kitchen sink and call it  “Gold”. They should have done appropriate marketing research to find what benefits are relevant to which segments to offer versions at different price points. The versions could have easily been different either in hours of play, additional benefits or both. It is very important to allocate values across the versions and price them appropriately so that those with high willingness to pay will not be tempted by the lowest priced version.
  3. They say they have been adding new content and entertainment experiences continuously. But they kept adding these to the single version they have. They could have corrected the mistake of not having versioning by introducing higher priced versions with the new features and adding only crippled form of the new features to the current version.

Pricing Tactics:

  1. If all you have is one version it is not a good approach to name it as “Gold” or “Deluxe”. You run out of names for higher levels.
  2. In the absence of clear segmentation differences, as a versioning tactic,  offering three versions would have enabled them to capture larger share of value created  – those with higher willingness to pay or have extremity aversion would have self-selected themselves to the middle version.
  3. From behavioral pricing perspective, having a high priced version would have helped set a higher reference price for their customers.  Instead they set one low reference price and facing backlash from their price increase.

Implementing the price change:

  1. How the price increase is communicated, through the personal blog and using the word “increase”, is simply wrong.
  2. One cannot push price increase with a positioning of, “you are getting lot of value from new features we are adding and hence we are increasing the price”. Customers do not see the value as marketers see it.  It has to be made explicit in terms of $$ and they need to be convinced of it. There was no attempt of this value communication.
  3. They ignored the reference price. Even when customers get value and see the value in the additional content their reference price need to be changed before any attempt to price these additions.
  4. From a consumer behavior perspective, there is no word “because” in the statement announcing the price increase. (see the link for details)

What they should have done differently?

Tiers based on Hours of playtime: They should have looked at the mountain of data they have collected to determine the playtime distribution. This would have enabled them to introduce tiers based on hours of play. This is same as what AT&T did with their data plan pricing change. The way AT&T positioned it, they introduced a lower priced option which according to their data will fit the needs of more than 90% of their subscribers.

Introduce Versioning: Used this opportunity to introduce versioning with new features that are positioned as higher value to customers or limit the usage of certain features.

On top of all these, should have managed it with better communication and positioning.

No wonder we see a huge backlash from the price increase.

None of the mistakes listed above or methods to fix it are new but thanks to Xbox Live, this prominent example serves well to reiterate the need for effective pricing and versioning strategy for both enterprises and startups!

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