Pricing Information by Manuel Mayrhofer. Manuel MayrhoferPricing Information Goods for Digital...

Pricing Information

by Manuel Mayrhofer

Manuel Mayrhofer Pricing Information Goods for Digital Libraries

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The Cost of Producing Information

• The most fundamental feature of information goods

• Cost of production is dominated by the – „first-copy-costs“

• Information is costly to produce but cheap to reproduce


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Examples

• Book – once the first copy has been printed, the cost

of another is only a few dollars

• CD– cost of stamping out an additional CD is less

than a dollar

• Movie– Production costs can be enormous


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Fixed Costs and Variable Costs

• The fixed costs of production are large, but the variable costs of reproduction are small

• This cost structure leads to substantial economies of scale– the more you produce, the lower your average

cost of production


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Special Structures

• fixed costs of producing information– Mainly sunk costs (=not recoverable)– have to be paid up front– additional marketing an promotion costs

• variable costs of producing information– the cost of an additional copy typically does

not increase (e.g. royalties)


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Microsoft

• combination of low incremental costs+

• large scale of operation =

• 92 Percent gross profit margins enjoyed by Microsoft


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Differentiation

• Try everything to differetiate your procuct from those of other competitors

• Example: – Britannica´s enyclopedia vs. Encarta (MS)– Business directories + GIS– adding value e.g. by filtering and sorting your

information for customers


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Cost Leadership

• If it is hard to differentiate your product, you can at least try to sell a lot of it

• Distribution skills, marketing expertise, and channel control are critical in this type of pricing game


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Reduce average cost

• Reduce average cost by – increasing volume through reuse and resale

• Good thing– you can sell information over and over again

• Example: TV-Show– Baywatch is the most watched show in the

world, 110 countries, 1 billion viewers


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First-Mover Advantages

• The best way to secure a leadership position is through an early presence in the market, combined with

• a foward-looking apprach to pricing– market share and access to raw information is

not enough


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Don´t be greedy

• Willingness to sacrifice some short-term margin by dropping prices thus

• making your market less attractive to would-be entrants

• = „limit pricing“ … not encourage others to invest the sunk costs necessary


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Play tough

• The key is to find a way to send a credible signal that entry will be met with aggressive pricing

• This can start a price war– you should do it only when you think you can

win


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Personalizing Your Product

• Customize your product to generate the most value for your customers – Adds in search engines for related products

• Capture as much of that value as possible by establishing suitable pricing arrangements– „hot words“ for premium price (targeted)


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Know your Customers

Ways to get user information• Registration and billing

– you can ask for demographic information

• Observation– get information about customer behaviour

search queries

clickstream


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Collect Information

• Consumers are often reluctant to provide information

• 94% of Web users refuse to provide information

• 40% give fake information• HTTP protocol ist „connectionsless“

– hard to track clickstream


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Pricing your Product

• The Internet makes it easy to personalize your price

• If the information products you sell are highly tuned to your customers´ interests you will have a lot of pricing flexibility– example: research reports (= detailed and

personalized information)


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Price and Sales

• Perfect price discrimination• Set the price at the consumer´s maximum

willingness-to-pay• Charge each custumer what he or she is

willing to pay


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Differential Pricing

• Personalized pricing– sell to each user at a different price (e.g

airlines)

• Versioning– offer a product line

• Group pricing– for different groups of comsumers (e.g.

student discounts)


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Pricing on the Internet

• Offering sales and other forms of promotional pricing is easy on the Internet since– prices can be changed instantaneously

• Market response to price changes can be estimated and thereby the demand for your product (= cheap market reseach)– airlines offer unused seats on the Net


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Reasons for Group pricing

• Price sensitivity differs in different groups– localized versions of software and dubbed

movies

• Network effects, when other members of the group use the product (MS Office)

• Lock-in, when you standardize on a particular product (switching costs)

• Sharing Arrangements


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Sharing Arrangements

• Academic journals sell at a high price to libraries and a low price to individuals

• Libraries are willing to pay a a higher price because they share among many users

• By offering the product both for sale and for rental, the producer can segment the market – Example: Video store, rental and purchase

arrangements coexist


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Lessons

• How much to invest in producing and selling your information

• Be aggressive but not greedy if you have to compete

• Differentiate your product by personalizing information and price

• Use the information you can gather about your customers

• Analyse the profitability of selling to groups


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Vocabulary

• royalties – Tantiemen, Abgaben an den Autor, Lizenzgebühren

• incumbant – Amtsinhaber• ZAG – zip code, age, gender

Pricing Information by Manuel Mayrhofer. Manuel MayrhoferPricing Information Goods for Digital...

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