1. PRICE DECISIONS
Sec. 12.2

2. Price Decisions in the Ent. Industry
Types of entertainment revenue:
Ticket sales
Merchandise sales
Concessions sales
Advertising income from selling radio or tv spots
Money for product placement – appearance of a product as a prop in a film or tv show, in exchange for a fee paid by the product’s advertiser

3. Revenue, Profit and Loss
Revenue is the total income brought in through the sales of goods and services.
Profit is viewed in 2 ways – gross profit and net profit.
Gross profit = revenue – cogs
eg. Film production, actors’ salaries, etc.
Net profit = gross profit – expenses (those costs beyond the costs of production – e.g. taxes, advertising, etc.)

4. Pricing Strategies and Goals
Pricing in the entertainment industry is similar to retail for goods and similar to sports for services.
Marketers must determine their goals:
Recovering costs
Getting a specific return on investment
Hitting profit goals
Meeting or beating the competition

5. Recovering Costs
Most projects in the entertainment industry struggle to get back the money they put into the project
As a result, prices must be set high to recover costs
E.g. movie ticket prices, concert ticket prices

6. Return on Investment
For every $ the company puts into a project, the goal is to get the maximum return.
Ex. – Ent. company has the following 2 choices:
1 $ put in bank may bring a return of 2 to 4 cents but with LOW risk. OR
1 $ could be invested in producing an album by a new band which may bring a return of 5 to 10 cents but with very HIGH risk but chance to earn millions.
Film marketers must look at a variety of pricing goals b/c failure rate is so high!

7. Net Profit Pricing
Ent. companies set net profit pricing goals so that their prices will bring the desired net profit, providing they sell enough units.
Ex. – Theaters do this when they plan to take 70% of the ticket revenue after the movie has been at the theater for 2 weeks.
Businesses can estimate their profit margin – which is the difference between the expenses and the retail price, expressed as a percentage or a dollar amount – when they know their estimated costs and expenses.

8. Competition Pricing Goal to meet or beat the competitor’s price.
Ex. – Music industry had to reevaluate pricing strategies when consumers began to download music illegally. Many recording companies lowered the prices for their CD’s, taking a hit on income but hoping it would get customers back who were downloading.
The danger in slashing prices is that if it doesn’t work it’s hard to increase again especially if people aren’t buying at the lower rate.

9. Pricing in the Television Industry
General rule is that if a series can stay on the air for 3 years and/or 60 episodes, it is a financial success.
Profitable reruns and syndication is next step and very profitable b/c production costs have already been paid and product is known to the public.
How many shows do you think actually last long enough to not be cancelled?

10. Pricing in the Television Industry (cont.)
For media-ad purchases, reach and frequency are the key elements to consider in planning.
Reach and frequency – the number of people exposed to an advertisement and the number of times they are exposed to it.
On average, it takes 3 exposures to have a successful ad.

11. Pricing in the Television Industry (cont.)
What is the most expensive commercial each year?

12. Pricing in the Radio Industry
Record labels pay radio stations up to $1 million in promotional airplay costs before a record is a hit.
Radio stations can make more from these payoffs than they do in ad revenues.
Radio airplay is considered a public performance which generates performance royalties for songwriters. Radio stations do not pay performers or sound recording copyright owners; they only pay the songwriters.

13. Read the article “is it pay for play in the music industry
Read the article “is it pay for play in the music industry?” and answer the following questions:
What is your opinion on how radio stations decide which songs to play?
Do you think this is ethical? Why or why not?
What does this mean for artists who aren’t on a big label or have money to pay to the radio stations?
Do you think listening to songs on the radio influences your purchase or downloading decisions?
Are the record labels in essence, controlling what we purchase or download by paying for their songs to be on the radio and ousting artists who can’t pay?

14. Pricing in the Music and Recording Industries
The average cost of producing a popular album (including studio time, equipment, and staff) is a minimum of $125,000.
Costs can include:
Marketing and promotion (including junkets = one or more publicity trips that band members take to major market centers or cities), t-shirts, posters, billboards, in-store displays.
In addition, profits from the high profile, successful artists, help pay for the losses of the unsuccessful ones
1 successful album may have to pay for 20 unsuccessful ones
There must be enough money left from the gross revenue after covering the large production and marketing costs to pay for the artist’s royalties (about 15% of retail price of album) and profit for record company.

15. Read the article, “How Much Does It Cost to Release an album
Read the article, “How Much Does It Cost to Release an album.” Get into pairs and answer the following questions:
What are the 3 main costs associated with recording an album?
What are the different ways to record?
What is a way to save on recording costs?
What is the largest expense?
What are the different ways to manufacture?
What is the cheapest way to manufacture?
What is a common mistake made when manufacturing that doesn’t produce a return?
What is your most important cost?
what are some examples?
So how much does it cost?

16. Pricing for Concerts
Pricing relies on estimating public demand and trying to match what others are charging for the same basic entertainment product.
Other factors:
Size of venue
Cost of production, staging, transportation, and employees
Contract agreements with arenas or theaters can include a guaranteed performance fee plus a % of the ticket sales and sometimes a % of concessions to be paid back to artist or record label.
Artists may also have total control of the merchandising sales.

17. Pricing for Concerts (cont.)
The risk for some artists is booking a location, or venue, that has too many seats for the act’s expected draw = audience.
If this occurs, then costs will far exceed the gate = ticket sales.

18. Pricing in the Film Industry
Sources of revenue:
Ticket sales, rentals, DVD sales, foreign distribution, toys, music soundtracks, books, video games, merchandise, tie-ins, and other spinoffs.
Due to extremely high costs of producing a movie, 7 out of 10 films don’t make a profit in the theater.
As mentioned before, only 10 to 20% of that ticket $ goes to the house = theater. This is why concession sales are so important.

19. Brands and Pricing in the Ent. Ind.
Customers’ perceptions of an entertainment brand identity can affect purchasing decisions and the price of an entertainment product.
Cost will be determined by what the customer is willing to pay.