A recent article in the Wall Street Journal (“Hollywood: The Price is Wrong” ) highlights the growing difficulties that movie studios are facing in making a profit from home movie rentals. DVD sales have long been one of Hollywood’s most profitable ways of selling movies – it costs less than a dollar to print a DVD, and the marginal cost of producing thousands of DVDs is very small.
Unfortunately, Hollywood’s DVD cash cow is under pressure from lower-cost options like Netflix’s Video on Demand (VOD), Redbox’s low-cost DVD rentals, and other online streaming media that deliver movies directly to people’s computer screens, wherever and whenever they want. Industrywide DVD revenues fell 15% during 2010, with overall home entertainment revenues down by 3.8%. This is a red flag for Hollywood that their recent years of making big profits on DVD sales may be coming to an end.
In response, Time Warner is proposing offering movies on demand directly to viewers’ home TV screens, only 2 months after the movie has appeared in the theaters – but their proposed price point of $20-$25 per movie is much higher than what most people are paying for their monthly Netflix subscriptions. It seems like Hollywood is out of touch with what people really want – and what people are really willing to pay for its products.
Lesson 1: Don't Wait to Compete. The Competition is Brutal.
No matter the industry, the lesson is the same: prices can only stay high if what you are selling is what your customers demand – and if you have a sustainable competitive advantage that makes customers willing to pay a premium for what you sell. Few companies devote the time and effort to doing market research and discovering exactly what their customers want, so instead they spend time playing “catch up” when their profit margins take a hit from increased competition.
In this case, Hollywood is scrambling to figure out how to maintain their margins on home entertainment revenue. Their competition (Redbox, Netflix, other online video streaming services) are offering cheaper prices, and consumers are taking a back seat and waiting to see who the winner will be.
It’s easy to see why a video-on-demand option would be appealing to consumers, especially as smart phones and tablet computers become increasingly powerful and widespread. After all, why spend $15 on one DVD when you can stream unlimited movies on your iPad, TV, smartphone, and computer via Netflix who offers a low monthly payment (currently $8-$10)? No more bookshelves full of DVDs cluttering up your living room - Now you have freedom to watch what you want, when you want, wherever you want.
Hollywood does not want to compete with low prices, but they should have figured out what their consumers wanted before the competition became so powerful. Hollywood grew complacent with its existing distribution model and its highly profitable pricing structure. Meanwhile, upstarts like Netflix and Redbox were figuring out how to stream videos online and how to put DVD rental kiosks outside grocery stores and on street corners.
The big movie studios could have done this – they could have invested the time and money to figure out what the next “big thing” was going to be and what customers really wanted from their home movie viewing experience. But instead, as so often happens, the incumbent players got complacent, while the scrappy outsiders figured out a new way of doing business. Now, Hollywood is going to have a difficult time holding on to its fat profit margins from DVDs.
How to Compete? Have a Competitive Advantage.
Another lesson from Hollywood’s DVD “mission impossible” is that every business needs to constantly rethink and re-evaluate its competitive advantages. Why are people buying from you? What makes them willing to pay a higher price for what you sell? And how can you keep your competitive advantage from going away in the face of stiff competition?
Learn from Hollywood, and start becoming proactive instead of reactive. Don’t let your profit margins crumble to competition– spend some time and effort now to doing market research, understanding your true competitive advantages, and discovering what it takes to keep your customers happy – and buying from you at a price that makes you happy too.
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*Blog photo from Mobilemag.com
We’ve written before that companies need to be careful when offering deep discounts through group buying sites like Groupon – but the story of Groupon itself presents some interesting lessons for companies.
Groupon has become one of the most popular and well-funded group buying sites, offering daily deals from local businesses in 150 cities, 3,000 employees, and annual revenue estimated at $2 billion. Google recently offered at least $5 billion to buy Groupon, an offer that Groupon rejected.
As happens in any industry, competitors have seen Groupon’s success and want to get a piece of the action. Groupon copycat sites have become a growth industry – as of March 2010, there were nearly 150 Groupon clones online, with some sites basically copying Groupon’s coding and design. And the worst part is this statistic is from a year ago - who knows what the number is now.
Success = Copycats. How to Stay on Top
Groupon is particularly vulnerable to “copycats” because the Groupon service is easy to duplicate: it was founded as basically a mass mailing list, offering only one deal per day in each city that they cover.
What will Groupon do to ensure they maintain their market share? If all these copycats offer the same thing as Groupon, will Groupon be able to differentiate themselves, or will they become just another “coupon site?”
There are lessons here for any company that faces intensifying competition and the threat of “copycats.”
Here are some ideas for how Groupon (or any business owner/ company) can continue to capitalize on its success:
- Choose your business partners wisely. Groupon prides itself on offering deals from only the best local businesses – they do extensive research on Yelp and other customer review sites to make sure they’re working with businesses that people love. Groupon wants to protect its brand by only offering deals from top quality businesses that people will be happy to buy from – this is good for Groupon in the long run, even if they leave money on the table in the short run. By being more exclusive about which deals they choose to promote on their site, Groupon is enhancing the value of their brand and strengthening their competitive advantage.
- Offer added value for your customers. As our previous blog post warned, some businesses have had mixed results from using group buying sites – if you’re not careful, deep discounts can hurt your business more than they help. As this article states, Groupon has worked to avoid creating “a community of penny pinchers” – in fact, Groupon claims that their users tend to spend 50% more than the value of their deal.
- Know your customers – and be prepared to personalize and customize your offerings. Groupon has become much more than just a mailing list. With their detailed knowledge of where their customers live and what they like to buy, Groupon has introduced personalized deals offered to customers based on prior purchases, ZIP code and other identifying details. By having deep relationships built on trust (and cemented with successful purchases), Groupon can do more than a simple copycat site.
- Ask yourself, “what business are you really in?” Groupon is working to position itself as more of a “merchant discover/city guide” site, rather than a simple coupon/discount site. Groupon wants to attract affluent, well-informed buyers who are motivated by more than just discounts – Groupon wants customers who are eager to try new things, to find out what kinds of interesting things are happening around town – or discover an exciting new restaurant, event or shopping experience. It’s much easier to copy a “coupon site” than it is to duplicate the trust and cachet of a “city guide.”
No matter what you sell, if you are successful, your competitors are going to try and find ways to copy what you have to offer. It’s important to solidify your position by focusing on your key Competitive Advantages – find out what you can do better than anyone else on the market. The best competitive advantages are the ones that are hardest to duplicate.
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