I’m a fan of a certain Anime series called Tengen Toppa Gurren Lagann. It’s a motivational roller coaster of emotions and over-the-top action. I love it. Here’s how much an import of it costs online.
At the moment, you might be saying “Holy moly! You mean to tell me that a box of CD’s will cost you almost half a grand?! You must be nuts to even think about buying this thing!” And you’re probably right. Not many people in North America, save for the fanatics or the 1%, would ever dream of buying this glorious box. You’re probably thinking that the marketing managers messed up their pricing strategy. Now, here you’re probably wrong.
Let me introduce a fictional character named Cras.
Cras is your typical North American male. He’s 16 years old, talented but unmotivated, and enjoys playing video games in his spare time. He works part-time as a swimming instructor. There is no way that he will blow over $500 for an anime series he can watch online for free (legally, of course!).
Cras’ friends feel the same way as Cras. They’re pretty interested in explosions and giant robot fights, but they’re not going to spend a lot of money on this hobby when they can be out playing League of Legends or buying cheap games on Steam.
In fact, a large majority of North American males would probably fall under the same category as Cras and Co. They love the series and the concept, but wouldn’t be able to dish out $500-600 to pay for this product.
Now allow me to introduce George.
George is an Anime fanatic from Japan. He’s 16 years old, likes to hang out with his friends from school, and tutors Economics part time. His favorite flavor is vanilla, and just so happens to love the series Tengen Toppa Gurren Lagann.
George’s friends also love Tengen Toppa Gurren Lagann, and George is willing to save up money from his part-time job to buy the product. He’ll be so cool!
There are obviously some cultural differences between the two pools of people, effectively making them two separate market segments. The North American market is huge, and has an abundance of products to buy (like phones, cars, games, etc). The Japanese market, conversely, is very small. Consumers in this market also has an abundance of products to buy (phones, cars, games, etc), but the amount of Anime fanatics in this market is dramatically higher than those in North America. This is because Anime is made in Japan, and is more well-known there.
Since there are so many substitutes for Anime (as a hobby) in North America, and the amount of fanatics is statistically very small, the price sensitivity of this market is very elastic. This means that a lot more people will buy a product if it is comparatively cheaper, and a lot less people will buy a product if it is much more expensive (see terrible diagram below).
From this diagram, we see that if a product sold for $600 in the North American market, 10 people (only the most fanatical) would buy it. If the product were priced more reasonably, say $100, a lot more people (100 people!) would buy the product. Feel free to tag on a few extra zeroes in the Quantity axis if you want the diagram to be more realistic.
Let’s say the producer wants to make as much money as possible from the North American market. Let’s see the calculations:
$600 x 10 people = $6,000
$100 x 100 people = $10,000
If the producer wants to maximize profit here, he’s sell the product for $100 in North America. He’d make $4,000 more than pricing the product at $600, and making money is cool.
Now let’s look at the Japanese market.
Anime is made in Japan, and so the product gains more publicity and popularity here. The amount of fanatics is statistically greater per area in this region. The price sensitivity of this market is very inelastic (see shoddy diagram below).
This hastily-drawn diagram with incomplete labels implies that the fanatic-dense population is willing to pay *any* price for the product. Think of a rich Star Wars fan bidding to buy the original Darth Vader light-saber used in the movies. $30,000? $40,000? It doesn’t matter, he’s going to buy it anyways! Here we can see that even if the price dropped by $500, only an extra 100 copies of the product will be sold (because the 100 fanatics were planning the buy the first 100 copies, and the next 100 copies were bought by people who were interested but on a budget).
Here, if the producer wants to make the most money, the calculations would look like this:
$600 x 100 people = $60,000
$100 x 200 people = $20,000
Whoa, man! You’d better price that thing as high as possible in Japan! You’d make a lot more money than trying to sell lots of cheap copies, I tell you. And since Japan is the main market for Anime, the product is priced at $600.
“But, Chris!” you may ask. “Why don’t you do both? Sell the product for $600 in Japan and $100 in North America? you’ll make ALL THE MONEY!”
Well, sorry, but I’m afraid it doesn’t really work that way. Jonathan Clements in his talk about Anime mentions a peculiar phenomenon that occurs when you segment the market this way. I’ll try to explain it in as few words as possible.
Remember George? Well, he has internet. And an American credit card. And Ebay exists. You can guess what happens next.
George is pretty furious to see that his North American counterpart is able to buy the same product he is, for half the price (let’s say North America prices the product at $300 instead of $100 to make up for import costs). So he goes on Ebay and buys 100 copies of the product from North America and imports it BACK into Japan. Being the businessman he is, he sells it to his buddies and classmates for $400 each. Eventually, enough of these reverse-imports occurs so that 80% of the Japanese market can now access the product at the reduced price of $400. From a company perspective, these are the calculations that occur:
Sell product for $600:
$600 x 100 (Japan) + $600 x 10 (NA) = $66,000
Sell product for $100:
$100 x 200 (Japan) + $100 x 100 (NA) = $30,000
Sell product for $600 in Japan, $300 in NA, 80% of Japanese market opts to reverse-import the product from North America:
$600 x 20 (20% of Japan) + $100 x 220 (80% of Japan and all of NA) = $12,000+$22,000 = $34,000
“Uhhh,” says the producer of the product, “I think that I’ll make A LOT MORE MONEY if I sold this product for $600 instead of trying to segment the market.” And he would be right.
And this is why we can’t have nice things. (I’m joking).
Interestingly enough, the Anime industry is an interesting industry because although most of the money is made in Japan, a huge audience pool lies in Europe and North America. Some production companies have noted the untapped market in non-Asian areas, and have produced anime to cater to a more western audience (Cowboy Bebop). Others stick to Japanese-oriented humor (Haiyore!, Joshiraku). And some have decided to produce “good Anime” that fit their own tastes and dont’ conform to any particular norm (Neon Genesis Evangelion).
Next week, I’ll be talking about how such companies market their products for different audiences, and how their efforts have stacked up on the rankings.
Until next time, signing off!
-Chris
