What a $2.50 New York Times means to the future of Starbucks

This week the New York Times raised newsstand prices by 25% to $2.50 per issue. Home delivery prices were increased less than a dollar per week so this sizable change only impacts the daily buyer. Pricing is a fascinating art and science since it blends economic revenue maximization with a number of emotional considerations from our irrational human minds. Looks like this increase was driven by two realities:

A) The Times knows that general print advertising is decaying quickly and not coming back
The Times’ operations are funded primarily by two revenue sources: what the consumer pays for a newspaper and what advertisers pay to reach those consumers. Theoretically, the lower the price of the paper, the larger the circulation would be. Historically advertising revenue has helped offset rising costs of production and distribution for the Times print copy (someone once told me that gasoline, not paper, was the Times #1 expense – don’t know if it’s true or not). A 25% cover price increase means that consumers need to step up and pay because advertisers are fleeing print. 
But by raising only newsstand prices and not home delivery, the Times is also looking to aggressively migrate folks from a relationship that’s decided day-by-day to a longer-term model. One where they know the customer’s name and address. One where they have your credit card number or other billing information. Where they can market and cross-sell to that person. Where they can bill you in advance for six months of papers. And where they are likely already driving through your neighborhood to deliver a paper next door. In a home delivery model you go from being a faceless consumer to a very specific line in their database.
B) Their elasticity curve is particularly interesting and they just screwed Starbucks & The Wall Street Journal
The switch to $2.50 might price out more cost conscious consumers, which is fine. Per above, general interest advertisers aren’t knocking down the Times’ door. But they still do a healthy amount of upscale advertising to the educated, urban, wealthy Times reader. Those folks can afford to pay .50 more per day and still be delivered at premium CPMs to Barney’s, Tiffany’s and Lexus. Someone at the Times concluded that the elasticity of demand supports an across the board 25% price increase and this would be tolerated by a % of their newsstand customers. Would love to see those models.
But perhaps even more interesting – and this is pure speculation – i bet those models don’t look at New York Times purchases in a vacuum. They research how people buy the paper and what this means for the Times’ share of wallet. That is to say, where and how are you buying the Times on a daily basis. Let me suggest that if you’re already pulling out a $5 bill to buy a Starbuck drip coffee and the Times, or the Times and the Wall Street Journal, you don’t care if you get back .85 in change or .35. It goes in the tip jar or a bowl on your desk. So look at these two scenarios
Pre NY Times price increase
Coffee and a newspaper
Coffee: ~$2
NYTimes: $2
Total: $4
In a state with sales tax on the paper: ~$4.16
Times and the Journal
NYTimes: $2
Journal: $2
Total: $4
In a state with sales tax on the papers: ~$4.32

Post NY Times price increase
Coffee and a newspaper
Coffee: ~$2
NYTimes: $2.5
Total: $4.5
In a state with sales tax on the paper: ~$4.67
Times and the Journal
NYTimes: $2.50
Journal: $2
Total: $4
In a state with sales tax on the papers: ~$4.88
Ok, so stick with me — in both of the “post price increase” scenarios you can still get your two items for a $5 bill. The Times price increase – which substantial on a % basis – didn’t push you to pay any differently than you did before so there’s no perceived price increase. You didn’t need to get out another $1 bill or pay with a $10. But when the Journal or Starbucks go to raise prices next you will likely hit the $5 barrier which triggers consumer awareness of a price change. And who will the consumer associate with that pain? Not the Times – last one in gets blamed – either the Journal or Starbucks will be the asshole.
This is what’s so fascinating about pricing – you need to consider the circumstances of purchase in analyzing consumer reaction.
Would love to hear from some retail pricing specialists to tell me whether I’m crazy or not.

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