Can Prices for a Declining Product be Raised? When?

You might not think it is logical that prices for a declining product climb, rather than drop. But it does happen. Consider prices for public switched network voice lines.

“Harvesting” is a time-tested business strategy for products in a declining phase of their product lifecycle, and typically involves a number of tactics that seek to reduce costs and investment in those products. 

What might seem odd is the possibility that prices for a product with declining demand actually can be raised. Among the best examples in the connectivity business is prices for traditional phone lines. Despite declining demand, prices actually have climbed since about 2002, in the U.S. market, for example. 

Year	Price without taxes and fees	Price with taxes and fees	Inflation-adjusted price (2023 dollars)
2001	$21.47	$25.75	$36.52
2002	$22.27	$26.69	$37.96
2003	$23.11	$27.67	$39.47
2004	$23.98	$28.68	$40.99
2005	$24.88	$29.73	$42.57
2006	$25.81	$30.82	$44.21
2007	$26.77	$31.93	$45.91
2008	$27.75	$33.09	$47.67
2009	$28.76	$34.28	$49.49
2010	$29.80	$35.53	$51.37
2011	$30.86	$36.83	$53.31
2012	$31.95	$38.17	$55.31
2013	$33.06	$39.57	$57.37
2014	$34.19	$40.99	$59.49
2015	$35.35	$42.46	$61.67
2016	$36.53	$43.96	$63.91
2017	$37.74	$45.50	$66.21
2018	$38.97	$47.06	$68.57
2019	$40.22	$48.66	$71.00
2020	$41.49	$50.29	$73.49
2021	$42.78	$51.96	$76.04
2022	$44.09	$53.66	$78.65
2023	$45.42	$55.39	$81.32

Some of the price increase might be attributed to reduced scale, as fixed costs must be amortized over a shrinking customer base, leading to higher per-account costs. And though higher prices lead to reduced demand, putting pressure on ability to raise prices, it also is true that customers who do not value the service are the first to leave.

The remaining customers often have good reasons for retaining service, especially business customers. 

Some would make similar observations about the cost of traditional home security systems or linear TV subscriptions.

In many cases, though, even when retail prices drop or remain flat, the business model includes other measures to reduce the costs of providing the product. The harvesting strategy might often feature:

• Reducing marketing and advertising spending

• Cutting back on product development and innovation

• Reducing customer service and support

• Eliminating unprofitable channels or markets.

All of those measures might help to preserve profits when sales volume and customer demand for a mature product is falling, and additional investment is not deemed likely to support renewed demand growth.

How Will Most Firms Monetize Generative AI?

Some firms will make money from generative AI by selling the enabling infrastructure, including graphics processing units and licensing of models. But what are the revenue models for the typical business that does not sell GPUs or license GenAI models?

In some cases, there are direct models.

Revenue Model	Description	Example
Subscription	Users pay a recurring fee to access the generative AI service.	Adobe Creative Cloud, Netflix
Pay-per-use	Users pay a fee each time they use the generative AI service.	Google Cloud Text-to-Speech, Amazon Rekognition
Advertising	The generative AI service displays ads to users.	Google Search, Facebook
License fees	Businesses pay a fee to use the generative AI technology.	OpenAI GPT-3
Selling data	The generative AI service collects data from users and sells it to third parties.	Google Analytics, Facebook Ads
Improved customer experience	The generative AI service can be used to improve the customer experience, such as by generating personalized recommendations or creating customer support chatbots.	Amazon Personalize, Drift
New product development	The generative AI service can be used to develop new products or services, such as by generating new designs or creating marketing materials.	DALL-E 2, Noun Project
Brand reputation	The generative AI service can be used to improve the brand reputation of a business, such as by generating positive reviews or creating viral content.	The New York Times, Coca-Cola

In other cases, the payback will be indirect. 

Direct Revenue Models	Indirect Revenue Models
Subscription	Reduced costs
Pay-per-use	Increased sales
Advertising	Improved customer experience
License fees	New product development
Selling data	Brand reputation

In the early stages of a technology change cycle, the firms that benefit the most are those that provide the enabling platforms. These are the firms that develop the basic technologies that other firms will use to build new products and services. 

In the generative AI business, that means Nvidia selling graphics process units. That fits an older pattern of new technology opportunities, where infra has to be built first, before use cases, apps and industries can develop. 

By 2030, $79 billion will be spent annually on specialized applications designed to improve automation and increase productivity, especially in the security, health, and content marketing industries, according to Forrester Research analysts Michael O'Grady, Mike Gualtieri and Michael Kearney.

The goals will typically be productivity improvements, as almost always is the case when new technologies get adopted. That includes using generative AI to develop code as well as content useful for training, customer service and marketing. 

By 2030, $42 billion will be spent annually on generalized use cases, such as research, writing, and summarizing tools, Forrester also predicts. More than 50 percent of this spend will be on chatbot and communications platforms, which will drive substantial improvements in customer and employee experience, Forrester says. 

Logical questions already are being asked about generative AI revenue models. Perhaps the better question is “revenue models for whom?” Nvidia and others already have a revenue model: sell more graphics accelerator units. 

In a similar way, some firms that can generate GenAI models can earn revenues by licensing those models to end user firms. 

But that is not the question many are asking. Instead, they want to know how firms that do not sell GPUs or develop GenAI models are going to earn a return on the costs of creating such capability. And the generic answers are somewhat obvious: 

As RBC analysts note, there are several generic approaches for GenAI monetization. 

Firms can charging for GenAI solutions as a separate SKU, perhaps pricing on a 

per-seat or consumption basis. 

Also firms can add GenAI capabilities as a feature of an enhanced or premium tier, much as Netflix offers ad-free and ad-supported versions of its streaming service, or as linear video service providers offer multiple packages of channels. 

In many--perhaps most cases--GenAI will simply be incorporated into the base product at no extra charge, the financial returns being driven indirectly, such as higher market share or lower churn. 

For example, in the early days of the internet, the firms that made the most money were the ones that built the infrastructure, such as server suppliers, then internet service providers and the web hosting companies. These firms provided the platform upon which other firms could build their businesses.

As the technology matures, use cases will expand from “automation”  and “content generation” to “new products,” at least in some cases. 

But it is reasonable to expect that the revenue models in most cases will involve indirect monetization. Amazon might use GenAI to expedite or improve product descriptions, which will lead to boosts in sales volume.  Similarly, GenAI might enhance the product search process, or provide better previous-buyer feedback, which will also tend to boost sales. 

Generative AI can be used to create personalized experiences for customers, which can lead to increased customer loyalty and repeat business.

When Generative AI automates tasks, lower labor costs can result, reducing operating costs overall. 

Generative AI also can be used to create engaging content, which can help to increase brand awareness and attract new customers. That, in turn, might aid advertising sales. 

Personalized recommendations are an obvious way to produce more transactions, as well. Such capabilities should also lead to higher user satisfaction, which might reduce churn and stimulate incremental transactions. 

New Hybrid Models for Linear, Streaming are Certain to Develop

“Hybrid models” are common when technology changes. Among the examples are sailing ships that, for a while, were outfitted with steam engines as well. Hybrid automobiles using both electric and gas-powered engines provide a more-recent example. Some might place use of renewable and fossil fuel for electrical generation in the same category. 

And the whole hybrid fiber coax network architecture is foundational for cable TV companies. 

So, one might argue, the recent deal between Disney and Charter Communications ending a carriage dispute indicates a possible shift to hybrid models for video entertainment that might combine linear and streaming services in a new type of bundle. 

As part of the deal, the Disney+ and ESPN+ streaming services will be made available to Spectrum cable customers at no extra cost. Comcast, for its part, had for a time offered its ad-free version of the Peacock streaming service at no extra charge to Comcast linear video customers. 

The Charter deal with Disney also ensures that Charter customers will eventually receive the planned direct-to-consumer ESPN streaming service when it is launched. 

Disney gets a boost in its carriage fee from Charter, but Charter gains more flexibility in how it offers Disney content in packages. 

Among the key provisions:

• Disney will continue to provide its linear channels, including ESPN, ABC, and Disney Channel, to Charter customers.

• Charter will offer Disney+, Hulu, and ESPN+ to its customers as add-on services.

• Charter will market Disney's streaming services to its broadband-only customers.

• Charter will agree to lower penetration minimums for Disney's linear channels.

Lower penetration minimums--the minimum number of subscribers that a cable or satellite provider must have in order to carry a particular channel--will give Charter more flexibility in how it packages its programming and will allow it to offer more competitive pricing to its customers.

Charter has agreed to market Disney's streaming services to its broadband-only customers, helping Disney grow its subscriber base. 

Given the importance of sports programming in general and access to ESPN in particular, the deal helps both Charter and Disney preserve what remains of the value of linear video subscriptions. 

But the deal also provides more marketing push for Disney’s streaming services as well, and gives Charter a way to participate in the streaming revenue stream, as it will act as a sales channel for Disney streaming services. 

As so often seen when technology transitions happen, hybrid models are viewed as a prudent and logical bridge to the future.