Economics of $10 DVDs

[cmkeller]

When DVDs are first released, they cost somewhere in the $17-$20 range, but if one is patient, he can usually see them on sale at Best Buy or Circuit City or Target for $10 or less within a few months. Are these stores still making a profit at the lower price, or are they selling at a loss to get rid of excess inventory? And what's the likely consequence to consumers if most of us (as I already have) make a practice of only buying them when they get cheap - will retailers start reducing their initial orders so they no longer have the current level of excess inventory to get rid of?

[Shagnasty]

You may not realize it but this is one giant question. Supply chain economics and retail marketing are very sophisticated and complex topics. To answer your question the best I can, the supplier and the retailer know that some people want to buy the movie as soon as the can and they will pay a premium for that privilege. Other things like consumer electronics are like that too. A version of this is called "early adopters" although this case isn't a perfect fit for that. The supplier and retailer ride that wave as long as they can. After that, they know that some people will buy it at a lower price and the second wave works. They do make mistakes but the example you give is planned in order to get the most money out of consumer behavior. DVD's cost practically nothing to make and the cost would have to be very low before they didn't make anything on individual sales.

[treis]

The thing with DVD's is that the first one takes 100 million (the cost of filming the movie) to make, and all the ones that come after it take one, maybe two dollars to make depending on the packaging. If you want proof head over to the local Wal-Mart and check out their selection of one dollar DVDs.

What that means is that the manufacturer is not going to see significant savings on manufacturing by selling more DVDs. In other words, if I go from selling 100,000 cars to 10,000,000 cars I get significant savings on production. On the other hand if I go from 100,000 DVDs to 10,000,000 DVDs I see no significant savings on production.

That means I set the price of my DVD where (# of DVDs sold)*(Profit of DVD) is the highest. If I price my DVD too low, I may sell a lot of DVDs but my profit will be very low. On the other hand if I price my DVD too high I will make a lot of money per DVD, but I won't sell enough to generate a large profit. I want to hit the sweet spot where I sell enough DVDs, but have a high enough profit margin to maximize my profit.

Let's say that's 20 bucks. So I am selling my DVD for 20 bucks and making 19 bucks profit. Woohoo! We're in the money! But wait a secod. What about those people that would buy the DVD for 10 bucks? I still would make 9 bucks profit. But remember from before, if I sell my DVD for 10 bucks I will sell more DVDs but my profit will go down becuase I make less per DVD.

Now since we are smart we have a little thought. Let's price our DVD for 20 bucks now, becuase those guys that really want it will go out and buy it now. Later though we will price our DVD at 10 bucks to get all the guys that will pay that much for the DVD. In this way we sell to the guys will pay 20 bucks and the guys that will only pay 10. We still have to make the same calculation though. We don't want to sell the most DVDs, we want to make the most money. That means we want (# of 20 dollar DVDs sold)*19 + (# of 10 dollar DVDs sold)*9 to be as highest as possible.

As you note, some people that would have paid 20 are happy waiting and paying 10. The movie guys are guessing/calculating that most people won't, and by selling for a high price first, then reducing the price will maximize their profits.

[Thudlow Boink]

The OP is assuming that it's the store's decision to bump the price down a level. I'm not so sure that's the case. Don't the studios that release the DVD's designate them as "full price" vs. "budget" or whatever the designations are?

[Wee Bairn]

Does the DVD packaging cost more to make than the DVD?

[iamthewalrus(:3=]

Originally Posted by Wee Bairn

Does the DVD packaging cost more to make than the DVD?

Almost certainly. You can buy bulk burnable DVDs much cheaper than bulk plastic cases. And pressed DVDs are probably even cheaper to make than burnable ones.

[cstamets]

Also, don't forget all that "In stores this Tuesday!" advertising for new DVD releases. That initial $20 price is set, in part, to recoup that advertising.

By the time the DVD is down to $10, little to no advertising is being done for it. Most of what is done is the group shot "Look what you can get for $10" type advertising.

[Bryan Ekers]

Slightly relevant, I just bought Cours Lola Cours for $6.88. I find I can sometimes pay less (occasionally a lot less) for DVDs in the government-required French packaging, which is fine because the disks themselves have the English audio tracks. The French-packaged disks are less popular and get remaindered faster.

[Little Nemo]

Another factor is determining when and how many used copies will hit the market. Big rental chains like Blockbuster will start selling off their rental copies when they no longer justify the shelf space. The presense of a hundred thousand used copies selling for eight dollars is obviously going to have an effect on the sales of a different hundred thousand new copies being sold for ten dollars. It's like a big game of chicken - you don't want to mark them down too soon and cut into your first run sales but you also don't want to mark them down too late and lose your second run sales to the used copies.

[Excalibre]

This is pretty closely comparable to book sales. When books are sold, they're initially published in significantly more expensive hardcover editions; later, the paperback comes out for half the price. Of course, there's a more substantial difference between the two books - but the purpose behind it is the same. People who are anxious to buy a new book will pay $30 for the hardcover; people who aren't willing to pay as much will wait a few months for the $12 paperback. DVD sales work the same way. It all comes down to charging different prices based on people's willingness to pay.

If the store had a magical way to divine a shopper's willingness to pay (and if it were legal, which it wouldn't be), they would charge every customer exactly as much as they're willing to pay. If I'm willing to pay fifty bucks for a DVD, then, they'd charge me fifty. The cheapskate next to me who's only willing to pay seven bucks would get charged seven (assuming a profit could still be made at that price.) Since that can't be done, this is the next best thing: charge more for the people who want it really bad and thus won't wait four months, charge less for the people who wouldn't be willing to pay the original price. It allows the seller to sell to the largest audience possible, while still charging folks who really, really want it a few extra bucks.

[drachillix]

Originally Posted by Shagnasty

You may not realize it but this is one giant question. Supply chain economics and retail marketing are very sophisticated and complex topics.

I'll just springboard off of shagnasty's lovely intro.

Once upon a time was studying for CPIM exams steps in and draws his Hatori Hanzo spreadsheet of supply chain analysis.

Sophisticated and complex don't even begin to describe it. There are multiple tiers of advanced supply chain analysis and management certifications one can seek to learn just how to do it. Google APICS or CPIM for a few hits.

Something to consider is not only the price of the product but ongoing maintenance and storage of said product. Many businesses rate revenues per square foot to try and balance smaller stores against larger ones when determining performance. With revenues per square foot in mind as well as costs per square foot of store you can start to see trends developing. A CD rack of low priced CD's might be selling $100 per month and take up 10 square feet of floor space therefore $10 per sq ft per month. If your costs are over $8 per square foot of store you are probably going to be looking for more effective usage of that space or blowing out that product to put in something else because it costs you money just sitting there selling or not.

In addition, resale product is not costed out/deductible until it is sold (setting depreciation issues aside for a second). So if I pay $2ea for 100 DVD's retailed at $20 that occupy 1 sq ft of floor space you start looking at things as follows.



month 1
Sold 25
revenues $500
costs $58

cost of sales 11.6%

month 2
sold 10
revenues $200
costs $28

cost of sales 14%

month 3
sold 1
revenues $20
costs $10

cost of sales 50%

month 4
price dropped to $15
sold 3
revenues $45
costs $14

cost of sales 31.1%

The price of the dvd dropped to help offset climbing costs of sales with additional sales volume.

This is a very simplistic scenario for one SKU on one shelf. Doing this to a walmart is what computers are all about. It can be done and is done every day in the world of business with a hell of alot more accuracy and is often tracked as tightly as hourly. Money tied up in old inventory is also money that cannot be spent on newer, hotter, faster moving product.

Nobody ever thinks inventory work could be all that interesting or exciting, but there are definite challenges out there for those who seek them and the rewards can be immense. Errors or misconceptions in design of a single formula could shift how hundreds of thousands of product are bought and sold.

[drachillix]

Originally Posted by Excalibre

This is pretty closely comparable to book sales.

Heh, I did regional supply chain analysis work for Scholastic, it gets icky when you are talking about thousands of titles and thousands of copies of each title.

Alot of it is not just about selling for the maximum price possible but doing it in the shortest amount of time at the least cost. Don't make me start doing economic order quantity forecasting here please.

[Baffle]

Originally Posted by Excalibre

If the store had a magical way to divine a shopper's willingness to pay (and if it were legal, which it wouldn't be)

How is this any different from bargaining and negotiation, which is (as far as I am aware) still very much legal?

[FRDE]

To put things in perspective, in the UK newspapers often give away free DVDs

Circulation goes up, and they are not sure whether people are buying the DVDs and throwing away the newspaper.

It is also not unusual for paperbacks to be given away with magazines, generally one can sense some sort of deal with the publisher, a reprint being given away to stir up interest in a sequel or a film. Like DVDs printed books are very cheap to produce.

[Excalibre]

Originally Posted by Baffle

How is this any different from bargaining and negotiation, which is (as far as I am aware) still very much legal?

The gamma radiation involved is known to cause people's heads to explode. It's a bit of a problem, but we're confident we can significantly reduce it by the time we're ready to launch.

[Carnac the Magnificent!]

The industry is also well aware that: (a) It must compete with Netflix and pay-per-view subscribers (the latter of whom own TiVo/DVR systems) and (b) high-definition home theaters are gaining ground nationally, which will likely spark a second generation demand for HD DVDs.

[Drum God]

First of all, hats off to drachillix's reply. I thought that was excellent. It actually made inventory seem interesting.

One thing not mentioned, though, is price control and scarcity. Disney does this a lot. Retailers can only sell a Disney title for the specified price. The consumer doesn't need to shop around -- the price will be the same everywhere. Then, Disney builds in scarcity. Everyone knows that a Disney title will be on the shelves for a limited time, then it will go away. Extremely popular titles might come back years later as "Collector's Editions" or some such, encouraging second purchases. Again, though, these will have fixed prices and limited time of release.

If there is a Disney title you want, don't wait -- it'll never get cheaper and it will disappear. The question is, why don't all the studios do this?

On a related subject, I recently purchased a Sony Home-Theater-In-a-Box (HTIB) system. Before the purchase, I checked it out at Fry's, Circuit City, and Best Buy. The price was the same at all three places. There must have been some sort of collusion there. I know that video game systems are often set at a fixed price, too.

[Naughty Handkerchief Origami]

Originally Posted by Drum God

... Extremely popular titles might come back years later as "Collector's Editions" or some such, encouraging second purchases. Again, though, these will have fixed prices and limited time of release.

This seems to be the new way the &(%$ing studios are making us pay more - just how many times is Star Wars going to be released anyway???

[Stan Doubt]

I realize that many of the previous posters probably offered up hypothetical numbers with the intention of oversimplifying with regard to the "seller", but keep in mind that the supply side includes the producer/studio, sometimes a middleman distributor, and finally the retailer.

For example, it is often the case that big retailers will mark down a popular new release, whether a CD or DVD, as a "loss leader". The retailer might be willing to take a very small profit or even a loss to get people in the door. You weren't planning on going to Target on saturday, but hey, that new movie is out on DVD for only $14.99 and that new CD is only 9.99...Then you also buy a toothbrush, cereal, and some cat poison, etc., by the time you get to check out you've spent $60.

Generally, the studios make out very well on popular new releases, because they have confidence in the demand and can command a high price. Stores make out better on catalog titles, which the studios may be willing to push for next to nothing in some cases. The level of effort the studio puts into a reissued catalog title can tell you a lot about the economics. Crappy packaging, not remastered, 4:3 only, no bonus features means the studio put in no effort or investment and thus can't expect to charge the retailer much for the shelf space it takes up. The flipside to this are the "classics" that get re-released in special editions ad nauseum.

As others have noted, when you get into the economics of it it can truly be mind boggling.

[drachillix]

Originally Posted by Drum God

First of all, hats off to drachillix's reply. I thought that was excellent. It actually made inventory seem interesting.

TY always nice to get a Q in something you know alot about.

One thing not mentioned, though, is price control and scarcity. Disney does this a lot. Retailers can only sell a Disney title for the specified price. The consumer doesn't need to shop around -- the price will be the same everywhere. Then, Disney builds in scarcity.

Yup, but most products don't have the recognition or brand recognition Disney owns

If there is a Disney title you want, don't wait -- it'll never get cheaper and it will disappear. The question is, why don't all the studios do this?

Disney has been around for what close to 80 years now. Its not going anywhere soon so they can afford to take a little more long term view. They know that if they do a run of 100,000 copes of a title it could have sold 105,000 but they want it to sell out in a short period of time. If you are a new brand in the sea of video/movie production houses you don't want to miss out even on the $5 sale. Every dollar you bring in makes you more able to shoot another movie and stay in the biz.

On a related subject, I recently purchased a Sony Home-Theater-In-a-Box (HTIB) system. Before the purchase, I checked it out at Fry's, Circuit City, and Best Buy. The price was the same at all three places. There must have been some sort of collusion there. I know that video game systems are often set at a fixed price, too.

Plenty of them you are also looking at major retail chains buying at about the same price point, and selling at about the same price point. It might be $5 one way or the other but it will be within a few percent unless they learn something like Store X down the street only has 2 in stock at a really good price. Several people will check another store if they really wanted to pick up item X this weekend. If its turns out to be $10-$20 more no biggie, especially on big ticket items like large plasma TV's.

[Rigamarole]

Originally Posted by Naughty Handkerchief Origami

This seems to be the new way the &(%$ing studios are making us pay more - just how many times is Star Wars going to be released anyway???

3. Three more times. The owl told me so.