Pricing Information by Manuel Mayrhofer

Manuel MayrhoferPricing Information Goods for Digital Libraries 2 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

Manuel MayrhoferPricing Information Goods for Digital Libraries 3 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

Manuel MayrhoferPricing Information Goods for Digital Libraries 4 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

Manuel MayrhoferPricing Information Goods for Digital Libraries 5 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)

Manuel MayrhoferPricing Information Goods for Digital Libraries 6 Microsoft combination of low incremental costs + large scale of operation = 92 Percent gross profit margins enjoyed by Microsoft

Manuel MayrhoferPricing Information Goods for Digital Libraries 7 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

Manuel MayrhoferPricing Information Goods for Digital Libraries 8 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

Manuel MayrhoferPricing Information Goods for Digital Libraries 9 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

Manuel MayrhoferPricing Information Goods for Digital Libraries 10 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

Manuel MayrhoferPricing Information Goods for Digital Libraries 11 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

Manuel MayrhoferPricing Information Goods for Digital Libraries 12 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

Manuel MayrhoferPricing Information Goods for Digital Libraries 13 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)

Manuel MayrhoferPricing Information Goods for Digital Libraries 14 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

Manuel MayrhoferPricing Information Goods for Digital Libraries 15 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

Manuel MayrhoferPricing Information Goods for Digital Libraries 16 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)

Manuel MayrhoferPricing Information Goods for Digital Libraries 17 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

Manuel MayrhoferPricing Information Goods for Digital Libraries 18 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)

Manuel MayrhoferPricing Information Goods for Digital Libraries 19 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

Manuel MayrhoferPricing Information Goods for Digital Libraries 20 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

Manuel MayrhoferPricing Information Goods for Digital Libraries 21 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

Manuel MayrhoferPricing Information Goods for Digital Libraries 22 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

Manuel MayrhoferPricing Information Goods for Digital Libraries 23 Vocabulary royalties – Tantiemen, Abgaben an den Autor, Lizenzgebühren incumbant – Amtsinhaber ZAG – zip code, age, gender