Title: Pricing Information
1Pricing Information
by Manuel Mayrhofer
2The 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
Manuel Mayrhofer
Pricing Information Goods for Digital Libraries
2
3Examples
- 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
Manuel Mayrhofer
Pricing Information Goods for Digital Libraries
3
4Fixed 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
Manuel Mayrhofer
Pricing Information Goods for Digital Libraries
4
5Special 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)
Manuel Mayrhofer
Pricing Information Goods for Digital Libraries
5
6Microsoft
- combination of low incremental costs
- large scale of operation
- 92 Percent gross profit margins enjoyed by
Microsoft
Manuel Mayrhofer
Pricing Information Goods for Digital Libraries
6
7Differentiation
- Try everything to differetiate your procuct from
those of other competitors - Example
- Britannicas enyclopedia vs. Encarta (MS)
- Business directories GIS
- adding value e.g. by filtering and sorting your
information for customers
Manuel Mayrhofer
Pricing Information Goods for Digital Libraries
7
8Cost 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
Manuel Mayrhofer
Pricing Information Goods for Digital Libraries
8
9Reduce 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
Manuel Mayrhofer
Pricing Information Goods for Digital Libraries
9
10First-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
Manuel Mayrhofer
Pricing Information Goods for Digital Libraries
10
11Dont 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
Manuel Mayrhofer
Pricing Information Goods for Digital Libraries
11
12Play 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
Manuel Mayrhofer
Pricing Information Goods for Digital Libraries
12
13Personalizing 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)
Manuel Mayrhofer
Pricing Information Goods for Digital Libraries
13
14Know 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
Manuel Mayrhofer
Pricing Information Goods for Digital Libraries
14
15Collect 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
Manuel Mayrhofer
Pricing Information Goods for Digital Libraries
15
16Pricing 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)
Manuel Mayrhofer
Pricing Information Goods for Digital Libraries
16
17Price and Sales
- Perfect price discrimination
- Set the price at the consumers maximum
willingness-to-pay - Charge each custumer what he or she is willing to
pay
Manuel Mayrhofer
Pricing Information Goods for Digital Libraries
17
18Differential 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)
Manuel Mayrhofer
Pricing Information Goods for Digital Libraries
18
19Pricing 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
Manuel Mayrhofer
Pricing Information Goods for Digital Libraries
19
20Reasons 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
Manuel Mayrhofer
Pricing Information Goods for Digital Libraries
20
21Sharing 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
Manuel Mayrhofer
Pricing Information Goods for Digital Libraries
21
22Lessons
- 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
Manuel Mayrhofer
Pricing Information Goods for Digital Libraries
22
23Vocabulary
- royalties Tantiemen, Abgaben an den Autor,
Lizenzgebühren - incumbant Amtsinhaber
- ZAG zip code, age, gender
Manuel Mayrhofer
Pricing Information Goods for Digital Libraries
23