Getting Fair Share of Value vs. Offsetting Lost Revenue: Ad Free Hulu #Pricing

hulu-logoQuestion at the outset: Hulu introduced a new commercial free version of its subscription service for $11.99/month. Is the new pricing based on the share of value to customers or the need to offset lost Ad revenue?

For those cutting chords (figuratively speaking) – removing cable TV option and satellite TV – Hulu has been the go to option to catchup on TV shows. For $7.99 a month subscription fee Hulu offers its customers current and full season episodes of most popular TV shows (some network exceptions apply based on their content licensing agreement). Seems better option to customers than paying cable TV bill or struggling with Over The-Air Antenna.

What viewers get for the price is unlimited and on-demand streaming of TV shows. Just like a TV show is interrupted by commercials (even in the pay-Cable ones) viewers see commercials. Sometimes these are the same that aired with the show and other times different ones inserted. But the experience is the same – 30 minute sitcoms and 60 minute murder mysteries filled with 10%-20% commercials.

Some of those paying customers are not too happy to be interrupted by the commercials – limited or not. Clearly demand for such Ad free TV shows exists, Netflix and Amazon are quite successful even though they do not offer current episodes like Hulu does. Seeing this pressing customer need to be not interrupted Hulu is introducing a No Commercials version at a price of $11.99 per month.

hulu-versions

The price difference is $4 for no interruptions. I have always said many times before, “If one price is good, two are better“. So isn’t this better for Hulu and its customers? The answer is a qualified yes.

We need to consider the reasoning and logic behind the $4 price difference for no interruptions. Is that based on customer research and value they assign to for interruption free TV shows (hopefully done using some kind of conjoint analysis)? Or is the pricing done to offset the lost revenue from Ad sales from the premium version?

It is possible Hulu is using one of two revenue metrics

  1. Average Revenue Per User (ARPU)- measured as a sum of subscription fee of $7.99 and Ad revenue from the average user
  2. Total revenue measured as sum of all subscription revenue and sum of all Ad revenue

In case 1 it may see the need to keep ARPU the same and may simply came up with a price point of $11.99 which is likely its ARPU.

In case 2 it may see the erosion in Ad revenue, model possible uptake and come up with per user uplift in pricing needed.

Both cases are wrong as they start with Hulu’s costs over value to customers. In fact there is evidence to point out cost based pricing is how Hulu set its price of $11.99 according to this news article:

Hulu and its owners don’t want to encourage large numbers of existing subscribers to shift to the new ad-free service

That is they are using case 2 above and modeled in small enough uptake of new version and shaping that expected customer behavior with a higher price tag.

universal_express_logoIt is perfectly normal and acceptable effective pricing practice to shape customer behavior with higher price point. For instance amusement parks set a high price for Fast Pass and other similar options to skip lines to reduce uptake. After all if the price is low enough and many take it the lines at FastPass will degrade value to customers.

But using higher price point just to support a model assumption on Ad revenue loss without measuring customer value is simply not effective pricing.

When it comes to pricing your first version or the second version the right place to start is with customers, not your costs and revenue goals. If one price is good, two are better if both are based on customer value and not costs.

How do you set pricing?

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