Price elasticity and profitability

¶ … free Internet site is a good use of microeconomics. The price of the Internet site is zero, would should stimulate demand to the maximum potential, give or take a few customers who do not have the Internet. The price elasticity for just about any site on the Internet, however, is high. Users are unlikely to pay for news online. With that high degree of elasticity, the Sun-Times can only attract sufficient demand to earn a profit by offering the service for free. The underlying theory, however, seems flawed. The cost of supplying maximum demand is also at its highest, and it is questionable as to whether or not sufficient profits can be generated from a service provided free of charge through ancillary revenues alone to render the project profitable.

In terms of profitability, however, the Internet site generates little revenue. Online advertising is not a strong revenue generator unless traffic is very high. In terms of profit, this requires the cost to be very low. As the Sun-Times organization is presently constituted, the Internet costs appear to be low, since it merely requires the repackaging of existing content. However, the content would not be available so cheaply if the Internet site was a stand-alone entity. Thus, when the true costs of the content are included on the books, the Internet site would not likely be profitable.

The seventy-five cent newspaper is also good use of microeconomics. The price elasticity of the daily paper is relatively low. The purchase is habitual for many consumers, and impulse. The price is not sufficiently high as to trigger a strong impulse against purchase. Judging by the cost attached to the monthly subscription, the 75 cent price tag is well above cost. The variable costs, therefore, are likely quite low. The Sun-Times is pricing the paper, however, at the high end of the range where elasticity is relatively low. If the daily paper were more expensive, the elasticity would increase.

In terms of profit, the daily paper is a strong proposition. Clearly priced well above the variable cost, the daily paper takes advantage of the low price elasticity of demand to generate a strong contribution margin.

The $1.99 Sunday newspaper functions similarly to the daily. This paper, however, is packed with far more features. Thus, it is sought out by consumers rather than purchased on impulse. As a result, the price elasticity of demand for the Sunday paper is lower than for the daily editions. The significantly higher price reflects that.

In terms of profit, the Sunday paper is the key driver of contribution margin. The high price, combined with high circulation and strong ad yields, makes the Sunday paper the big earner for the Sun-Times. Low price elasticity of demand contributes to this contribution.

The monthly subscription has a higher price elasticity of demand than the papers purchased at the local distributor. In part, this is because the ticket is higher, which triggers additional consideration on the part of the consumer with respect to the value proposition. As a consequence, the Sun-Times prices its monthly subscription sufficiently low as to overcome that additional consideration.