In its most recent earnings report, Disney, one of America’s most beloved brands, changed its approach to its direct-to-consumer business, that is, its streaming business including Disney+, ESPN and Hulu.
Disney+ has never been profitable. It lost $1.1 billion in its fiscal third quarter. In the previous quarter, the loss was $292 million. According to Bloomberg Businessweek, Disney+ lost $7 billion since its inception in 2019. This past quarter, Disney+ added 14.4 million subscribers globally. But, for North America, the fiscal third quarter subscriber growth was only 100,000 users, with the majority of the growth happening overseas.
The response from Disney is to raise prices. Current customers will pay the price for this move. And, although Disney+ will now offer an ad-supported version of its streaming service, it remains to be seen if current customers stick with their current package or drop down to the ad-supported version or just go somewhere else. Current customer will automatically be switched to the ad-supported version unless they indicate they want the premium, ad-free level of service.
The Wall Street Journal states that the price of the current ad-free Disney+ tier will rise $3 a month from $7.99 to $10.99, or $109.99 per year. Disney announced that the new ad-supported Disney+ service would be $7.99 a month.
The premium Disney streaming package that bundles ad-free Disney+ and Hulu as well as ESPN+ with ads will stay priced at $19.99 a month. A version of this bundle that includes all ad-supported versions will increase its price by $1 to $14.99 a month.
Of course, Wall Street rewarded Disney upon hearing this news, sending Disney stock upward. But, Wall Street is never about the customer and always about the profitability. Analysts savor the idea that higher prices will result in higher revenues. This may happen. But, higher revenues may happen on a smaller customer base. Disney holds firm in the belief that customers will eat the higher prices. However, the higher prices do put Disney+ at risk for higher churn. And, as the current retail environment shows, higher prices have forced groceries to offer products with lower prices as customers have become fed up with name brand price increases.
One analyst quoted in The Wall Street Journal said, “Domestically, Disney+ is tapped out. Disney is operating under the belief that, just as in their theme parks, they can raise prices dramatically and count on customers not dropping the service.”
When sales volume slumps, a common tactic is to raise prices. With a strong brand, revenues increase. However, over time the outcome is to simply accelerate the decline in sales volume. Brands pay a price for higher prices that tend to cover slipping transactions. Raising prices to beautify a brand with increased value to shareholders is damaging to perceived value to customers.
Raising prices when your brand is not selling well is problematic. True, this approach makes leadership proud And, makes Wall Street happy. But, raising price on a troubled brand misdirects brand actions that could increase sales. Why are customers frequenting your brand less than before? Why are fewer people buying your brand? Why are customers abandoning your brand? Will customers stay with the brand even though the price is higher and the competition better?
Raising prices with less volume can work if it is part of a brand’s strategic vision for the future. A strategic decision to focus on a higher-priced market segment is different from a strategic decision to cover up volume declines with price increases. Clearly, this is what drives General Motors as it focuses on expensive vehicles abandoning the less expensive sedans.
When brands raise prices to cover-up for diminishing sales, brand problems become blurred. Across the board price increases to cover-up for sales decreases is a signal that the brand has lost its grip on the differentiated value of its benefits and features. It means the brand does not have a firm grip on its customers’ perceptions.
Yet, according to Disney’s CEO, Bob Chapek, there is nothing to worry about. This is because, as Mr. Chapek told investors, “We’re the best value in streaming. We believe that we’ve got plenty of price value room left to go.”
It is important to note that the marketing department or the CFO team decide price. The customer decides value. Disney+ will only be a great value if its customers believe that the total brand experience relative to the total costs (money, time and effort) is valuable.
Also, it is incredibly important to recognize that price and value are not the same. Price is the amount of money required to pay for something. Value is about worth. In fact, the actual word, value, comes from the Latin valere, which means, “to be worth.” Price means, “How much money does it cost?” Value means, “How much is it worth?” That is why we have two different words. Just because Disney+ will now have a variety of price points does not mean that it will morph into a great value in the customer’s mind.
For Mr. Chapek to know now that customers will continue to see Disney+ as a great value is a prediction that may not happen. There must be reasons why Disney+ is faring poorly in the US. Price may or may not be a reason. Excellent competition may be a reason. Cutting back on in-home entertainment services may also play a role. Of course, Wall Street loves the aggressive positivity of Mr. Chapek’s comments. And, Wall Street is happy that this cherished brand is now aiming for profitability.
Profitability, however, will hinge on whether current customers see Disney+ offerings as a fair value.
There are steps brands can take to craft the future when it comes to pricing and value.
Even a beloved iconic brand such as Disney needs to completely understand its customers’ minds. As a start, here are five things brands can do when it comes to pricing:
- Understand how your brand is differentiated from its closest customer-defined competitor
- Understand the customer-perceived value of this differentiation
- Understand customers’ willingness to pay
- Know what the price competitiveness is within the brand’s customer-defined segment
- Measure and track changes in price elasticity