Xm Radio Pricing

1) What is the optimal price and pricing scheme for subscription (assume a five-year lifetime for a customer, if you need to)?

XM Satellite Radio (XM) is one of two satellite radio services in the United States which provide satellite radio services for home and car consumers. Towards its planned product launch, XM needs to set its pricing scheme.

The following factors should be accounted for when evaluating the optimal price and pricing scheme of XM:

1. Target market

2. Competitors and competitor's pricing

3. Competitive advantage of XM

4. Strategic partners and hardware manufacturer

5. Return on investment by XM

6. Market penetration

Based on the data provided in the article (Exhibits 9, 10), XM should focus its efforts on a market segment, comprised of male adults (18-45) which are technically oriented (friendly/seekers) and live in metro areas. This segment includes potentially early adapters of the new technology which are likely to have medium-to-high income and will be willing to pay a subscription fee for this new service. Data shows that XM may price the radio at 200$-300$ and charge as high as 12$ per a monthly subscription for consumers in this segment.

When evaluating their pricing scheme, XM must also take into account their competitors and their pricings. While XM has only one competitor in the satellite radio market, SIRIUS, FM radio and internet radio providers must also be considered as relevant competitors. XM should first identify its advantage over the traditional FM radio market. First, it provides a superior audio quality and a large variety of music channels. However, the main advantage of the satellite radio market, which will be appealing to the majority of radio listeners, is the lack of advertisements. As such, XM should avoid including advertisements in their broadcasts. This strategy, initially committed to by SIRIUS, is the major or sole competitive advantage of satellite radio of the traditional FM radio.

Once the question of whether to use advertising or not have been answered, the competition is narrowed down to XM versus SIRIUS. It is in my opinion, that XM should limit the per month subscription fee to no more than 10$, which was set by SIRIUS. The benefits that XM can have over SIRIUS will probably be in the variety of channel offering, and this will not be evident in the beginning to justify a higher price.

With regards to the radio equipment pricing, XM should set a price which will optimize the tradeoff between a higher price, which will reduce the risk for the hardware manufacturers, which are not eager to invest in new technologies, and a low price which will attract more price-sensitive