Sirius XM lowered their prices from $10.99/month to $9.99. This is a 9% price reduction. And, odds are good; this is a very costly decision.
First, I recognize they have more information than I do. They’ve probably spent money on market research that I haven’t seen. Everything below is speculation … but I bet I’m directionally right.
Sirius XM has a 16% profit margin. So, if they have $100M revenue on this product (they probably have much more), then $16M of that is profit. If they lower the price 9% and sell the same number of units, their profit immediately drops from $16M to $7M. Ouch.
So how can they make up that $9M? It looks like their cost of revenue is about 50%. As an estimate then, they need to win an additional $18M in new revenue to make back that lost $9M in profit. That’s about 22% additional new customers just to make the same profit. (I have a tool called the Breakeven Volume Calculator on my website to help you do these calculations for yourself.)
It is EXTREMELY unlikely that a 9% price reduction will yield a 22% increase in customers for Sirius XM.
Which brings us to a rule: Never lead a price decrease! It rarely pays off. Sometimes you have to follow your competition when they stupidly lower price, but don’t be the one to start it. Especially when you have no competition, like Sirius XM, it is rarely a smart decision to lower prices.
I speculate that Sirius XM is losing subscribers due to other ways of listening to music becoming prominent. But even on a downward trend, it is unlikely that the price decrease is wise.
What’s funny is people are scared to raise prices but seem comfortable reducing them. However, raising prices is much less risky than lowering them. Right now, companies are getting nervous about the economy, and I’m hearing more talk about lowering prices. Just don’t do it. At least don’t lead it.
I’d love to hear your thoughts.
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Now, go make an impact!Tags: pricing, pricing skills, pricing strategy