Competing without scarcity: How Microsoft failed to gain control

Over the past couple years the sales of iPods by Apple have skyrocketed. One of the many reasons for the success of the iPod is the success of iTunes. iTunes emerged as the leader in legal music downloading after the public uproars about music pirating and sharing led to serious punishments. iTunes is an example of an information good. It costs a great deal of money to acquire the songs but once it has the rights it costs almost nothing to sell one additional song to a customer. This is also a non-rival good, which means that there is not a limited supply. Just because I bought a song doesn’t mean that there are none left for you. The supply is endless. This makes it difficult for other competitors to compete. Since the songs aren’t scarce, consumers will not be willing to pay more than the lowest price. Apple solidified its control over the industry by making songs purchased from iTunes compatible only with iPods.

Once the iPod and iTunes gained a foothold, their market share boomed. This created several challenges for Microsoft who sought to launch their version of the iPod called the Zune. Daniel Westlake wrote in a blog article called "Zune Pricing Strategy" that Microsoft’s best option was to take a huge loss on the Actual device in order to steal market share from Apple. Microsoft can’t get the discounts that Apple can and therefore cant price the individual songs lower than iTunes. Therefore their only choice was to sell the Zune for $150 cheaper than the iPod. This strategy relies on the thinking that once people buy the Zune they will be forced to buy the songs from Microsoft’s program that is compatible with the Zune. Microsoft estimated it would lose around $300 - $400 million dollars before they could gain full control from Apple and a profit could be made. While the Zune was cheap and had different features including a wider screen, the public stuck with what everyone else already had. The sales of iPods soon dwarfed that of the Zune and Microsoft sealing the coffin on the idea of ever stealing market share.

- Randy Abbott, Jeanette Elliot and Dan Furey

The Digital Music Business: Upward and Onward

Over the course of the last few years, the online music market has had its fair share of battles, and has left music marketers wondering what the next step toward securing sales should be. According to the IFPI Digital Music Report 2010, there is a ton of growth potential in the market and “one way of realizing this potential is to generate value from the behavior of the vast number of people who currently do not pay for music they consume.” How can this be done? Some retailers in the industry have turned to bundling practices to help secure sales. They bundle music with services and devices that one could not necessarily secure via a file sharing website. In essence, by differentiating the services provided they music retailers are able to position themselves above other providers and they are able to legitimize the costs associated with purchasing their products. In addition to bundling, some music retailers offer their music at reduced prices and subsidize the costs with the money raised through advertising. This helps to lessen the financial effects on the consumers end, yet earns enough profit to pass along to the respective record labels/artists.

Other pricing methods that have been utilized out in the trade, center upon release dates similar to DVD pricing. Establishments, such as iTunes, charge more money for new releases (much like Target would charge more for a new DVD) than they do for songs that have been on the market for an extended period of time. In addition, some markets have shifted to a second degree price discrimination type model, where consumers get quantity discounts for buying multiple songs. It will be interesting to see what innovative methods emerge as music retailers continue to try to capture that large chunk of the market that continues to embrace piracy over legal means of attaining the music they love.

- Katie Tretter, Courtney Hayward, and Laura Heslop

Airline Overbooking and the Appeasing of Customer Frustration

As the means for traveling have gotten progressively more and more sophisticated over the years, people find it easier to book flights for various rates either through the airline itself or through a price search website (Priceline, Travelocity, Kayak). But as the act of traveling itself has become easier, why has the organization and customer service stayed the same or gotten worse? In a recent article in Tampa Bay Online titled "Making the Best of Getting Bumped", this problem is questioned. In an industry that is so unprofitable relative to the amount of business they actually do, airlines have become more and more likely to bump (dropped from your current flight schedule to a later one) passengers from their flights in an effort to maximize profits. There is a problem though: as we have moved forward, it appears as though the airlines have taken a step back. The rates at which customers are getting bumped have increased from 49,000 in 2008 to 54,000 through the first nine months of 2009. This is happening largely in part to overbooking.

Aside from the danger of losing good will with the customers by bumping them back a flight, airlines are apparently more worried about overbooking in an effort to sell out every flight and reduce the risk of flying at a loss. Therefore, the airlines sell over capacity for particular flights, knowing that approximately 50% of reservations get cancelled at some point in time, and if a problem arises then it is a small loss for them assuming they can get the bumped passenger to their desired destination in a timely manner. But where does it end? One would think that as technology has gotten better and airlines have become more experienced, they would have better solutions for these problems than bumping someone for anywhere from a $400 to $800 voucher. The airlines must re-evaluate their situation when it comes to overbooking if they are concerned with flying at a loss. Perhaps the cancellation fees need to be more stringent or the estimation of how many passengers they allow themselves to book should be adjusted. One thing is for sure though, another 9% annual increase in bumped flights may dissolve consumer confidence faster than they can bump someone onto another flight.

- Randy Abbott, Jeanette Elliot, Dan Furey

Price Matching Among Online Travel Agents

According to a recent article in the Wall Street Journal, Travelocity.com LP announced that "travelers who book hotels on its web site, and then later find the same reservation at a lower price online anytime before the day of check-in, will be refunded the difference between the prices." Travelers who are able to find a lower price after making his or her reservation would be required to send a screen grab or other types of proof to Travelocity to be awarded the refund. What Travelocity.com has offered is commonplace in the online hospitality sales industry and is similar to the "best rate guarantees" that other travel agents offer. For example, customers of Expedia Inc will be refunded the difference and awarded a travel coupon worth $50 if they find a better price online for the same trip within 24 hours. Hotels.com, on the other hand, will match the lower price "right up to the time of the property's cancellation deadline, whether that is three days after [its customers] make the booking or three months."

These price matching tactics, while seemingly competitive in nature, actually allows for tacit collusion or competition reduction to take place between the firms. The price matching offer, or "best rate guarantees," effectively takes away the benefit any of its competitors might gain from cutting its price. Having been offered the guarantee of a best possible price in the market, a prospective customer is more likely to make her reservation from the agent knowing that in the event she finds a lower price elsewhere, she's insured to be able to get the lower price. Since price matching removes any benefit from price cutting, firms are less willing to cut price and price competition is effectively reduced.

- Iwan Kurniawan, Curtis Anthony Roddy, and David Smola

Texting: Bane in the Classroom, Boon in the Waiting Room

The experience of spending two hours in a waiting room for five minutes with a physician is likely a familiar one for most Americans. The culprit responsible for the medical bottleneck is overbooking, a common profit maximizing strategy for those firms faced with low attendance rates looking to recoup revenue lost from no-show customers. Last minute cancellations result in lost revenue for the supplier when the unused spots cannot be filled.

According to the article entitled “IT Solution Saves Money by Helping Reduce Missed Appointments,” St. Vincent’s Hospital in Dublin, Ireland faced a 23% “did not attend” (DNA) rate. Under these conditions, the hospital could not remain profitable without resorting to overbooking, a policy they eventually implemented at a rate of 5 appointments per 3 slots. In the case of the medical profession, the services provided are often so necessary that patients will not simply leave their appointment. However, the intangible yet costly aspect of denying a patient his or her time is the ill will on the part of the patient who must wait hours for an appointment he or she has made well in advance. Intangible costs of overbooking also include the stress of on the part of hospital personnel who must deal firsthand with angry patients. However, if the hospital maintains an insufficient overbooking rate, they will essentially be paying for physician, nursing, and clerical staff that are underutilized.

In response to the need to maintain patient satisfaction while efficiently meeting fiscal obligations, St. Vincent’s has implemented a messaging system in an effort to increase appointment attendance while simultaneously reducing the need for overbooking. The Defero messaging system sends automatic text messages to patients reminding them of upcoming appointments and is expected to reduce the DNA rate at the hospital by up to thirty percent. In this way, St. Vincent’s hopes to minimize the probability of under-booking through direct appeals to the customer while simultaneously improving customer and employee satisfaction. Hopefully, in the future, other industries will be able to take advantage of improving technology to develop innovative solutions to high cancellation rates without resorting to overbooking.

-Courtney Hayward, Laura Helsop, and Katie Tretter

Best Buy, or worst buy?

Best Buy is a well known retailer of electronics that is famous for its price match guarantee. However, the price match guarantee that they offer may be more of a deceptive trick than an actual good deal for consumers. In this article about a lawsuit against Best Buy for false advertising and deceptive practices, it quotes Best Buy’s website that says, “If you are about to make a purchase and discover a lower advertised price offered by a local retail competitor on the same available brand and model, let us know and we'll match that price on the spot.” However it also gives evidence from an internal company memo which says that an employee’s first priority should be to build a case against a price match. Best Buy uses every loophole they can think of to avoid actually giving the price match that they promise.

When a consumer sees a price match guarantee they are automatically attracted to that retailer, because no matter what other retailers charge, they can get the lowest price. This price matching strategy eliminates price competition in a market as well as eliminating any gains other firms can receive from price cutting. Best Buy uses this fact to gain customers over its competitors. However, Best Buy also realizes that it can of course earn more revenue if they do not actually match a competitor’s lower price in their sale. They find small details to refuse price matches such as differing model numbers, out of stock goods, internet prices, etc. to refuse a price match. They have also been known to charge high restocking fees if a customer then wants to return their item. Best Buy profits from this “false advertising” by using their price matching claims to attract consumers and then finding ways to still charge a higher price.

- Eric Barnum, Lauren Borowick and Mirza Klis

The Art of Alienating Your Fans: Two-Part Tariffs in Professional Sports

It has long been an understanding by the owners of professional sports teams that their fans are completely irrational about their favorite teams. What an advantage that must be when setting prices for season tickets. Even better, how about extracting extra revenues from those fans whose demand is trending towards being inelastic by requiring them to pay an entry fee in order to purchase season tickets? Well that is what the owners of the New York Jets are doing to their fans beginning in 2010 when they open up their new stadium. In an article titled "Playoff Run May Drive Seat License Demand" it is stated that, "More fans will be willing to pay these steep increases in admission costs for Jets games beginning next season thanks to the team's march through the playoffs..." Those steep increases are mainly due to the implementation of "Personal Seat Licenses": the dreaded entry fee paid by fans for each seat they demand for the ability to purchase season tickets to home games. The usage of personal seating licenses has taken place dating back to 1986, now being used in all professional sports ranging from the National Football League to the National Rugby League.

The concept of using personal seat licenses in professional sports is a perfect pricing strategy for their season ticket holders due to the unwavering demand by the fans for tickets to these live sporting events. Not only does the purchasing process separate the high demand and low demand consumers (personal seat licenses for the Jets range from $4,000/seat in the upper levels of the stadium to $30,000/seat for the absolute best seats), but it also extracts the most possible consumer surplus away from the fans. Although fans are predictably irrational, they also live within their monetary means. The front office for the Jets realized this and had an opportunity to lower the per-game price of tickets in some areas by 50%, further lowering the variable price of the two-part tariff to marginal cost. However, the personal seat license prices will remain the same. Some fans refuse to purchase personal seating licenses and have been extremely outspoken about the gouging of prices, but due to the recent success of the team there is little worry that every personal seat license will be purchased before the start of the 2010 NFL season.

- Randy Abbott, Jeanette Elliot, Dan Furey, and Jordan Smith

Bundling: Helping you get what you want and much more

Bundling products is a tried and true method of getting consumers to purchase certain goods, and it is no different for grocery stores. Recently, retailers have started bundling gas with their weekly grocery purchases. This has not always been an acceptable method to gain business. According to an Antitrust Law Blog article by Sheppard Mullin, grocery stores came under fire for the “practice of offering below cost discounts on gasoline conditioned on the purchase of a qualifying amount of groceries purchased in the store.” Concerns about this promotion centered upon loss-leader pricing, but this was ultimately thrown out as, “the court noted that the customer attracted to City Market's gasoline pumps was unlikely to be lured to buy other items in the store on the assumption that they were similarly low-priced. On the contrary, the structure of the program was such that the ability to buy discounted gas was expressly dependent on the prior purchase of a qualifying amount of groceries.” Since proven an acceptable practice, we have seen a surge in the gas and grocery bundling practices across the nation. It has become a method by which grocery chains are gaining brand loyalty. In the rough economic environment, pennies matter and if one retailer can offer gasoline for two or three cents less- consumers will flock and continue to frequent the retailer that can lessen the burden of filling up the tank.

Tops Markets is a perfect case in point: by bundling their grocery business with their gas business by means of their gas bonus points, they are securing consumer demand that otherwise may have been lost to the competition. They run promotions with their gas bonus points, which allow consumers to earn extra bonus points based on their expenditures during the specified time frame. The time frames encourage consumer foot traffic in the store, which help to sell goods around key events and holidays. Examine the Tops promotion above; it is no coincidence that they are running their gas bonus points special during the week immediately following Fat Tuesday. Typically, consumers hit the store midweek to prepare for their Mardi Gras celebration and they stock up on goods to get them through both their party and the remainder of the week. Tops gives their consumers a reason to make another trip by offering incentives that may convince those shoppers who are decently stocked with goods, to venture out to the store anyway so as to capitalize on the gas promotion.

- Courtney Hayward, Laura Heslop, and Katie Tretter

Wal-Mart vs. Wegmans: The Name of the Game is Differentiation

Wal-Mart, to many, is an industry steam roller. It enters a geographic market and quickly wipes out neighboring competitors, then continues on its way crushing retailers who simply cannot compete with the everyday low prices it can offer its customers. Wegmans has been able to hold its own, but it has not been an easy fight. According to an article entitled, Wegmans Sweet Spot, “Danny Wegman's liberation manifests mostly as being just about everything that Wal-Mart is not.” Each and every day Wegmans fights to own a position in consumers’ minds that clearly separates it from its competitor, Wal-Mart.

Realizing that Wal-Mart has the economies of scale to offer prices that dip much lower than what Wegmans can feasibly offer, Wegmans does its best to make its store more of an experience to compensate for the at-times higher prices. Wegmans offers an unparalleled produce section that embodies freshness and epitomizes the highest standards of quality. The gourmet food stations, meals-made-easy instruction based cooking lessons, and superior pharmacy are just a few of the components that makes Wegmans a stand out compared to Wal-Mart. Danny Wegman has done his best to create real differentiation between the two retailers. Aside from the retail environment, Wegmans is a community staple in that it donates and supports local charities and local people. Customers see local produce featured in its stores and sponsorship at area events, and they see some of their own dollars come back in the form of community programming that Wegmans supports, such as their scholarship programs. Wegmans is successfully coming to own a unique place in the hearts and minds of consumers, which has certainly been a key factor in its expansion down the east coast.

- Courtney Hayward, Laura Heslop, Katie Tretter

Can Apple Lead Consumers Down the Yellow Brick Road?

"An oversized iPhone that doesn't call." "Hilarious name." The iPad was revealed last week in a typical Steve Jobs presentation. An interesting article in a technology blog lists "8 things that suck about the iPad." Issues include the keyboard, seconded by Walter Mossberg of the Wall Street Journal, citing the trouble his keyboard-whiz colleague had using it. Negative reviews on the iPad are numerous, overwhelmingly focusing on the need for adapters. The device also lacks HDMI output, USB port and SD card slot, raising an interesting question: Why? To leave these functions off a “computer” is hardly an oversight. Take the lack of the flash player, for instance. Steve Jobs has publicly criticized Adobe for its Flash software, and has made clear his desire for a universal shift to HTML5. Unveiling a device lacking features consumers have come to require will be a test of Apple's market power.

The iPad is linked to iBooks, which will increase current prices of eBooks by $4. Can Apple entice consumers to pay this premium, even during a recession? Macbooks, iPhones and iPods are all successful highly priced products. Over the years, Apple has acquired an innovative position in the market, developing a cult following. During a sluggish economy, strong brands remain attractive thanks to inelastic demand. Apple customers are loyal to the Apple brand; Apple products are indispensable items in young and gadget minded environments. The lack of close substitutes with similar extrinsic characteristics and user experiences, coupled with the preference within budgets and the sex appeal Apple offers will offset technical shortages. Actually, these shortages might benefit Apple; it can rapidly develop second and third generation technologies building upon its customer base, and honoring its reputation as innovator and pioneer. Apple has become aware of its market power and is now exerting it.

- Jim Flanagan, Friso Klok, Kelly Mannix

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