Title

The Shared Economic Logic of SiriusXM and Higher Ed

Price discrimination, transparency and frustration.

July 1, 2019
 
 

Dean Dad’s voice was ringing in my ears (it often does) as I was wrestling with SiriusXM over my satellite radio service.

Matt Reed is doing all of us parents of college-going (or soon to go or have gone) kids a great service.  His writing on his efforts to make sense of college financing let us know that we parents are neither alone or crazy.

A quick digression: How is it that Dr. Reed is not a college president yet?  I mean, come on trustees and search committees and recruiters.  I’d donate money to any school that Dean Dad (President Dad) was running.  Wouldn’t you?

Back to SiriusXM.

Question: How are the economics of satellite radio and higher education the same?

Answer: Price discrimination.

Before we get too upset, however, we need to define what price discrimination is.  The name makes it sound worse than it is.  All price discrimination means is that sellers will try to sell their product or service at the price that the customer is willing to pay.

Price discrimination is not illegal.  Or at least seldom ever illegal.  (Gender or race-based price discrimination is, though tell that to hair salons and dry cleaners).

Price discrimination is also everywhere.

Book an airline ticket, and you will be charged based on your willingness to pay - as indicated by how far in advance you buy the ticket, how direct a flight you want, and what level of service you require.

Got to Starbucks, and the barista will make a coffee for you based on your willingness to pay for one.

Frugal coffee drinkers will choose a tall iced coffee ($2.25).  A customer treating themselves to a therapeutic beverage can order a Venti Pumpkin Spice Latte with an extra shot and extra vanilla syrup, forking over $6.50.   The cost of ingredients between these two drinks is not all that different.  The price difference is based some on the time it takes the barista to make the drink, but mostly on the willingness of the customer to pay.

We are okay with price discrimination if we feel that we understand the reason behind the price differences.  When it comes to pricing, we want transparency, and we want fairness.

The problem with SiriusXM is not that they price discriminate, but that they do so in what feels like a sneaky way.

The question is, does higher ed do the same thing?

The way the SiriusXM price discriminates is that the internet satellite company bases its pricing on the willingness of its customers to invest time in negotiating the service.

Like almost all satellite radio subscribers, my subscription came with a car purchase (in 2015).  Subaru gave us a year of SiriusXM (or more accurately that year was reflected in the purchase price), and from there on out, I’d need to subscribe to keep listening. The XM All Access subscription costs $20.99 a month.  The XM Mostly Music service comes in at $10.99 a month.  Sirius is counting on its customers going with the default subscription, rolling over their service each year.

For those willing to do some work - to call SiriusXM - the price can be much lower.  Call SiriusXM and tell them you will be stopping the service, and they will offer you a “deal.”  The catch will be that they will want to keep your credit card on file.  Tell them no.  Be willing to walk away.  Anyone willing to walk away (and play their music through their phones in the car) will get a much better deal.

The reason that SiriusXM will discount its price is that satellite radio is a high fixed cost business.  It costs lots of money to put satellites into orbit and to sign talent.  The marginal cost of each additional satellite radio subscriber is close to zero.

So how is higher ed like satellite radio?

We have high fixed costs in people, buildings, and everything else that it takes to run a university.  Cramming an additional student into a classroom or a dorm (the marginal cost) is relatively low.  The traditional higher ed bundle is one of high fixed and low variable costs.

Tuition discounting - otherwise known as scholarship -  is a form of price discrimination.  A school’s goal is to set each tuition package at the highest amount that a student is willing to pay.

This is not a bad thing.  Having some full-pay students allows schools to offer assistance to other students.  This pricing system can be frustrating to students (and their parents), as Dean Dad found out, in its lack of transparency.

In the short run, SiriusXM’s pricing policies probably make sense for the company.  They are maximizing their revenues, with its customers paying the maximum they are willing to pay to keep the service.

In the long run, I’m not so sure. 

I don’t think very highly of SiriusXM as a customer.  It feels like a game of chicken at each renewal period.   If streaming services get easy enough to use while mobile (they may be at that point), then I’ll listen to Amazon Music (or Pandora - owned by SiriusXM) on my next road trip.

Colleges and universities should maybe be doing everything they can to build goodwill.  At some point,  some other competitor with transparent pricing and a good product will come around.

Okay…where am I getting this wrong?

How would you connect satellite radio and higher ed?

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