Sky's strategy provides food for thought on pricing

While the timing of the announcement was irritating for us pub industry journalists, the announcement itself will have been welcomed by the pub industry as a whole — especially as many operators had expressed a real fear that Sky would hike its prices for commercial customers following its acquisition of live Premier League football rights from 2013/14 for £2.28bn, an increase of 40% on its last deal.

With the various discounts now available to pubs based on their location, their wet:dry split and their beer supply (courtesy of Sky’s partnership with Molson Coors), it is theoretically possible for outlets to achieve 73.3% off their Sky bill. We’re standing by to find out if any pub is actually able to take advantage of this maximum saving.

It would be churlish of me — in the face of what is a good-news story — to find any fault with Sky’s announcement. However, there remains a degree of cynicism in the market, as evidenced by one tweet we received in response to the news: “Sky price freeze next season, so what? It’s 2013/14 that the 40% rise in price paid to FAPL [Football Association Premier League] kicks in.”

So Sky’s ‘generosity’ will have to be seen in the context of what it does with prices in the three years covered by its new deal.

By pure coincidence, I was speaking with a business leader last week on the subject of pricing. He told me: “The worst thing you can do in business is not put through a price increase. Because you’ll lose it forever.”

His argument was that if you forego, say, a single 3% annual inflationary price increase, you’ll remain at a baseline of 100 and your competitor will go to 103. Next year, with a price increase reinstated, you’ll go to 103 and your competitor will go to 106.1. “You’re playing with the future of your business forever,” he said.

Of course, you could impose a catch-up price rise, but they’re never popular. Equally, you might argue that a price freeze will stimulate more trade — and maybe that’s Sky’s calculation.

This is a function of the ‘price elasticity of demand’, which is a measure of the change in sales volumes that are stimulated by changes in price. If I sell 100 pints at £3 or 80 pints at £3.50, which is best? Well, the former in terms of total revenues (£300 v £280), but probably the latter in terms of profit.

It’s relatively simple mathematics (though it may require some trial and error), and it merits careful consideration — especially in situations where customers do not demonstrate significant price sensitivity (at least when it comes to small, marginal increases).

Are you maximising revenues and profits from your pricing strategies? Do you actually have a pricing strategy? Maybe it’s time to dust off that old calculator.