Cost vs. Value-Based Pricing

Cost-based pricing would say that digital media streamed to the home should always be less expensive than the same media delivered on physical disks in boxes delivered by UPS.

Value-based pricing says that someone with a Roku who wants to see a show right now, not two days from now, and doesn't have a DVD player and doesn't want to hassle with putting disks in and out to get through a whole season of a TV show might pay more for the digital delivery.

Sometimes cost-based pricing rules.  Sometimes value-based pricing dominates.  Sometimes pricing is weird due to temporary scarcity or gluts.  Sometimes pricing is inexplicable.  Which is this (click to enlarge):

Entire Season on physical DVD's with free Amazon Prime delivery:  $13.99

Entire Season streamed digitally:  $22.99

Since I like to buy the disks and then rip them to my video server at home running XBMC, I was happy to get the disks inexpensively.


  1. Rob:

    Cost-plus seems to be leaving money on the table...

  2. jon:

    when it costs too much online some people will just download it for free. I don't, but I can see why sometimes. $3 just to watch a movie. $2 just to watch a single episode of a TV show?

  3. herdgadfly:

    It is difficult to project exactly how much money is "left on the table" until the effect of reduced volume is played against the benefit of increased prices. America loves its "sale priced" items and price reductions through coupons - but no one considers exactly how much the original sales prices had to be jacked up to accommodate the discounting.

  4. john mcginnis:

    Probably one of the best values in media right now is RedBox. The dispensers are nearly everywhere. Seldom, when I have an itch for a movie, do I walk away empty handed from the little red machine.

  5. LarryGross:

    similar price mis-match also occurs between paper and digital. where the digital download version actually costs more and what I've read is that companies still don't trust the digital rights protection on the downloaded material and compensate for suspected "sharing" and "copying".

    online digital subscriptions are also having similar issues with people sharing login info so that only one subscription is purchased but several may be using it.

    so I'm not sure it's a straight up issue between cost vs value pricing... at least in the digital world.

    the companies that are affected by this - call this digital theft.

  6. Doug:

    "Cost-based pricing would say that digital media streamed to the home should always be less expensive than the same media delivered on physical disks in boxes delivered by UPS."

    This *might* be true, but it's not as much of a slam-dunk assumption that you might think. Streaming the media does have a cost associated with it, and it puts a long term liability on Amazon (since you may want to stream it at any point in the future, and it will cost Amazon each time you do so). Amazon has to store the content on physical storage on their end and maintain the servers and network capacity to be able to stream it to you on-demand at any time. Shipping a physical item is a one-time cost, and any potential liability ends once the item is delivered and refund/return period expires. Essentially the digital product has a high capital cost and low marginal cost -- usually the assumption of how much it 'costs' Amazon to deliver a digital product only takes into account the marginal cost.

  7. bigmaq1980:

    Amazon is a unique phenomenon.

    Imagine the NYSE being an exchange for equities, but then gets to buy and sell equities on its own account, while maintaining a database of all the sellers and buyers, their past purchases and sales.

    We think auto trading software creates micro crashes and spikes on the NYSE, but I'm sure Amazon's algorithms are equally as busy (with frequent price changes vs competition), and error prone (but without the same level of impact).

  8. Mole1:

    That is ridiculous. We should get the government to do something about that.

  9. BGThree:

    I am completely outraged... That you went to the effort of making a home video server but you are ripping the standard def version instead of bluray.

  10. Phil:

    Maybe they bumped up the instant delivery price while the DVDs are temporarily out of stock to capture more of the surplus from impatient consumers. It would be interesting to see if the prices change when the DVDs are available for immediate shipment.

  11. Matt Landry:

    My bet is that the streaming price is set directly by the copyright owner, whereas the price of physical DVDs is set by the more typical method of Amazon buying wholesale and then deciding for themselves how much of their own markup to take. (One notes that the price of streaming is slightly less than the MSRP of the DVDs, despite being substantially higher than the Amazon retail price for the DVDs. And digital media owners typically demand the right to set final retail price themselves, for streaming.)

  12. LarryGross:

    this is even more interesting with libraries "loaning" digital books and other media.

  13. bigmaq1980:

    Just read in Bloomberg mag that RedBox is teaming with Verizon to offer online content, competing with Netflix, Amazon, Hulu, Vudu, etc.. Will be only $8/mth for access to both DVDs and online....seems like they are filling the hole that Netflix left open by separating their DVD business and online business (a long term mistake IMHO).

    Bloomberg also shows "relative" content to competing services (percentage overlap) and it seems RedBox is positioned rather favorably. When the online service is available locally, it will be rather compelling for only $8 (there is a RedBox kiosk less than a mile away).

  14. Garrett:

    Amazon maintains secure servers to stream the content to any of one's capable devices anywhere broadband is available for life which vastly increases portability while vastly reducing storage costs. Potential replacement costs for loss, theft, or damage are eliminated. One can eliminate some furniture and storage containers or the need for more. Less stuff means potential cost reduction/savings on housing, future moving costs, and personal property insurance. And it eliminates the need for buying, maintaining, and learning how to administer a home server.

    The increase in marginal utility shifts some marginal cost to Amazon who can shift that back to the consumer at a much smaller rate than before (in the long term aggregate). This entails costs for licensing content, putting the content into the proper format, implementing and maintaining Web services that work with third party services and devices, data centers, electricity, and the services of highly skilled professionals to make all of this happen. We've all read both the thing about the pencil and Hayek, so we know the depth of complexity exists and that our ability to really know all the relevant components limits our grasp of all the costs and utilities.

    Therefore, I believe the proposition that cost-based pricing necessarily concludes digital streaming content should be less expensive is lacking any objective proof and is merely an assumption.

  15. bigmaq1980:

    Perhaps, but I'd put my money on the fact that Amazon has scale on its side like few other businesses.

    Consider this...Amazon already had huge server farms just to operate their business. The incremental cost for adding and managing the capacity to support digital media is relatively small...Economies of Scale. And, it is a good bet that the costs of the technology will continue to decrease.

    Some insight into the costs of managing and making available content for download can be inferred from their pricing of their extended service offerings of S3, Glacier, AWS. The prices we see when checking them out are the ones for "low volume". Imagine the discount available to a third party looking for the volume Amazon needs to supply to support their digital media service.

    No, the technology related costs for digital are bound to be cheaper than physical.

    I think Matt Landry is closer to the mark and it may have more to do with licensing costs setting a floor. Of course, that would be dynamic by title or sets of titles, time frames, volume thresholds, etc. before competition is considered. Then you get their home grown pricing algorithms playing some optimization game.

  16. morgan.c.frank:

    actually guys, this is really simple.

    dvd's are physical inventory. you paid to get them into the warehouse and they tie up capital. if you wan that capital back and they are not selling, you drop the price.

    this same phenomenon does not exist with digital delivery.

    amazon does not have money tied up in inventory there. they pay a royalty when content is bought/streamed.

    thus, the pricing behavior of the two formats works differently.

    this is compounded by thinks like advertising inserts and movie trailers attached to disk content that are not in the digital format.

    the question is not why the two would work differently, but rather, why anyone would expect them to be the same.

  17. obloodyhell:

    I hate the term "value" pricing. It's "convenience" pricing, not "value" pricing.

  18. marque2:

    As a fan of Weird Al yankovic, he long ago posted an blog note about the economics of the music industry. One of his comments was that he got much more in royaties from 1CD then he got from the equiv number of songs downloaded on a service like iTunes. It could be Apple is just "greedy" but the potential exists that paying for all that bandwidth and storage, and fuel for Jobs big head (at the time) is a bigger cost than one would realize.

  19. marque2:

    The more you buy, the more you save!

    I saved $500 on a suit awhile back. It was marked down to $250 when I purchased it, so I saved $250, then when I returned the suit, I saved an additional $250!
    I should do accounting for government :P

  20. marque2:

    I don't think Netflix works on a per view basis. On their streaming video service they pay a fixed amount for content, and if they end up streaming to 1000 paying customers do much better than if they stream to 100 paying customers - esp if those customers joined because they head Netflix now has Disney - or some similar reason.

    So to get their capital back, they need to sell more, just like the fixed inventory guys.

  21. marque2:

    That has been made illegal in California. At least loaning out tablets to read books. Young people like reading on tablets so some libraries purchased them to get young folk to read, but of course the ACLU sued because loaning out tablets violates the Americans with Disabilties Act. Because disabled can't used tablets as easily as non-disabled folks.

  22. marque2:

    It is true that several publishers have gotten mad at Amazon and try to dictate the price of the digital copies. It is harder for them to do that with print editions.

  23. marque2:

    The Netflix thing didn't really effect me. I still get both - and it is about $1 more. If I choose I can drop one or the other. Netflix is giving more choice now, yet people are complaining.

  24. marque2:

    Interestingly I got a DVD from netflix and it was so scratched it would not play in my player at all. We found out the whole movie was on Youtube - and so we just watched it there. It was a short movie, so we watched 3 10 minute segments. Eh.

  25. obloodyhell:

    Face it, the whole matter of Copyright is currently set up to favor the fatcat middlemen who do little and create nothing. That's the whole reason for the Bono bill, not to reward anyone who created anything rationally (why is patent, a MUCH more complex process to gain reward from, treated so differently.... you generally profit from copyright for up to 5x as long as you do from a patent). It's to make sure the coprolations sorry, "corporations", continue to get lots of money for doing nothing whatsoever except hinder the creative process.

    This quote is about two decades old but makes the point:

    "...the stated purpose of the [new digital recording equipment tax] law is to
    'compensate' musicians for home copying. But the law diverts FIFTY-SEVEN
    percent of the funds to record companies and music publishers, leaving less
    than half for the people who participate in the creative process. Most of the
    remaining funds will go to musical superstars, and thus do little to
    encourage or assist musical creativity."

    - Richard Stallman -

    'Nuff Said.

    There are makers, takers, and fakers, and the takers and fakers outnumber the makers by a large margin.

    Existing copyright law is ALL ABOUT rewarding middlemen who add nothing to the creative process. Yet another reason why it is an abortion needing to be demolished and re-written from scratch.

  26. marque2:

    I actually agree with you, for corps the copyright is 95 years or 130 years depending if published or not (130 = not) for regular folk it is 70 years after the death, with opportunities periodically the reup the copyright due to acts of congress (like the Disney Law) There are also bizarre rules for music recordings where the copyright will return to the family a certain number of years after the death, and after 35 years the original owner can demand the copyright back. So effectively you can have a copyright go on for 130+ years, Patent 20 years.

    Though when Al made his complaint It was when itunes was about a year old. I don't think his most popular(the eat it album) had reached the 20 year mark yet. I think iTunes should pay the musicians a fair royalty for their work for 20 - 30 years at least.

  27. marque2:

    I am not a big fan of Stallman, but I do think the long copyrights hinders saving works that are no longer published. There used to be a 28 year copyright renewal program otherwise the books would be public domain, but that is no longer the case. Might be good to go back to that system. A good example of a work that suddenly got new life is Its a Wonderful Life which was a flop in theaters, and ignored, but when it lost its copyright, became one of the most popular Christmas movies ever.