Creating and capturing value, Spark style

One of the key things that I teach in my ECONS101 class (which is a business economics class, rather than an economics principles class) is that pricing strategy is all about creating and capturing value: first you create value for your customers, and then you find (often creative) ways to capture that value back from them in the form of higher revenues (and profits). Spark provided a great example this week, as reported in the New Zealand Herald:

If you're not scratching your head over how to stream the Rugby World Cup on Spark Sport, the telco will now come to your home and hand-hold you through the process - for a price.

A new $149 Spark service includes a Spark rep walking customers through their broadband connection, testing their connection speed, setting up any streaming devices and demonstrating Spark Sport.

The service is for Spark customers only.

For those wanting to get connected but are not Spark customers, Noel Leeming, Harvey Norman and Geeks on Wheels have all set up dedicated in-home Spark Sport solutions, the telco says.

Each have teams that will arrange a time to visit the customer's home to discuss and set up Spark Sport. This includes internet speed tests, making sure the households tech is set up correctly, and then teaching the customer how to easily watch Spark Sport on their preferred device to ensure they will be comfortable to do it on their own.

So, Spark creates a valuable service (Spark Sport) that consumers are willing to pay for (which is accentuated by the fact that Spark Sport has the rights to the Rugby World Cup later this year). Consumers sign up for the service, but they want to make sure that it is going to work well for them (or maybe they aren't very technically savvy), so Spark offers them assistance. That assistance comes at a price, so Spark can extract additional profits from those consumers.

Add-on services, or up-selling, are a feature of many markets (e.g. "Is that a large combo?", "Would you like fries with that?"). Once a firm has attracted consumers to buy from them, the goal is to extract surplus from them, and this is a very effective means of doing so (if it wasn't effective in increasing profits, then firms would quickly stop doing it).

In this case, the additional service itself may be valuable, but $149? That seems expensive, especially when you consider that the price for the subscription to Spark Sport for the whole Rugby World Cup is just $90. It could be that Spark is also trying to price discriminate here - if consumers who are less price sensitive are also those who are less technically savvy, then this would be an optimal strategy, since you would want to set a higher price for the less price sensitive group of consumers. However, I would take some convincing that this is the case.

A more cynical reading of this situation might be that there is now an incentive for Spark to ensure there are reasonably frequent technical 'glitches' that disrupt coverage between now and the start of the Rugby World Cup (an even more cynical reading might suggest that this is already happening). Then Spark Sport customers start to become worried and start shelling out for the in-home assistance.

Far be it for me to be that cynical. I'm sure Spark wants to develop a long-term relationship with its subscribers, and gouging them for additional charges in the first few months is clearly not the way to achieve that.

[Update]: We had a great discussion on this over on the EDG Facebook Group, which highlighted one way that this could be price discrimination. If a consumer is not tech savvy, and they don't have friends or family who are tech savvy, then there are few substitutes for Spark Sport for that consumer. That is, they are also the sort of person who won't be able to find an illegal stream or torrent of the matches. So, there are fewer substitutes for having Spark Sport, which means that non-tech-savvy consumers will have more inelastic demand for Spark Sport (while tech-savvy consumers will have more elastic demand).

Therefore, if Spark is price discriminating here, the optimal pricing strategy is to set a higher price for the non-tech-savvy consumers (and a lower price for tech-savvy consumers). Since Spark can't directly ask their consumers "Are you good with computers?" and price on that basis, having an additional service that only the non-teach-savvy consumers would use is a covert way of raising the price for those consumers.