Disney adopts a combination of menu pricing and block pricing for Disney+

My ECONS101 class covered price discrimination this past week. Menu pricing (or second-degree price discrimination) occurs when consumers are offered different options (that the firm knows appeal to consumers with different price elasticities of demand), and consumers select their preferred option. Specifically, the firm will offer a lower price to consumers who are more price-sensitive (those with a higher price elasticity of demand), and a higher price to consumers who are less price-sensitive (those with a lower price elasticity of demand).

So, it was interesting to read this story in the New Zealand Herald last week:

Disney+ has become the latest in a procession of streaming services to hike its rate - though those willing to live with fewer features can stick with the old pricing.

Disney+ currently costs $14.99 per month.

From members’ next billing period, the price will increase by 27 per cent to $18.99 as the service is renamed Disney+ Premium - while the pricing for those who choose to pay annually also increases by 27 per cent from $149.99 to $189.99.

But there will also be a new Disney+ Standard option, which will stay at $14.99 (or $149.99 annually) - but support for two screens at once (compared to the Premium plan’s four) and standard high definition (the Premium plan offers 4K or ultra high definition).

This is an example of Disney using menu pricing. The Disney+ Standard option has a lower price, and will appeal to more price-sensitive consumers, while Disney+ Premium will appeal to consumers who are less price-sensitive.

Interestingly, the annual subscription price also offers an example of block pricing, which I will be covering in class this week. Block pricing occurs when the firm charges a declining price on subsequent blocks of product. In this case, the monthly price for Disney+ Premium is $18.99. However, those who pay for the full year pay just $189.99. In effect, after the first ten months of the year, the last two months are free (for those paying the annual fee). In other words, the first block of ten months cost $18.99, and the second block of two months costs nothing. It is a similar story for Disney+ Standard ($14.99 for the first ten months, and then free for the last two months).

Block pricing tends to work best when demand is homogeneous (as I noted in this post). One way that firms like Disney can get homogeneous demand is to first use price discrimination to separate consumers into relatively homogeneous groups. So, the shift to menu pricing (offering Disney+ Standard and Disney+ Premium) will likely make the block pricing strategy even more effective (and more profitable) for Disney.