1. Pricing Digital Content Product Lines: A Model and Application for the National Academies Press
Kannan, Pope, & Jain, Marketing Science, 2009
Presenter: Gabe Gonzales
MKTG 555
4/4/2017

2. Context Publisher of scholarly books
No competition from other sellers
In 2003, NAP was considering charging for downloadable PDF files to supplement lower-quality web-viewable versions and print books
Not a traditional product line decision
Products here are potentially complementary…not substitutes
Baseline is free browsing
Heterogeneity in perceived complementarity (i.e., Venkatesh & Kamakura, 2003)

3. Research Questions How to optimally price PDF versions of NAP books?
Such files had been free or unavailable before the study period
Should PDFs be bundled with print books for a discounted price?
Are digital versions complements to (vs. substitutes for) print books?
What impact would charging for PDFs have on revenue, profits, and content penetration?
Publisher does not want to compromise readership

4. Model Utility function for customer i (j = {1 = print, 2 = PDF}):
Xi = Fit with customer i’s needs
Bij = Value of product form j
Bpi = Price sensitivity
pj = Price of product form j
Error is double-exponentially distributed
No purchase = zero marginal utility (free browsing)

5. Model (cont.) What if they buy both?
Xi = fit with customer i’s needs
∆Bi = marginal value of bundle
Bpi = Price Sensitivity
pb = price of bundle ≥ min(p1,p2)
If ∆Bi > - min(Bi1,Bi2), customer gains utility from second form
- min(Bi1,Bi2) < ∆Bi < 0  partial substitutes
Used finite mixture (FM) model to model this consumer heterogeneity

6. Optimization Problem k latent segments Print only PDF only Bundle
c = marginal cost
δk = estimated size of latent segment k
Maximize Π:
Where pb = p1 + p2 (no discount)
Where pb ≤ p1 + p2 (bundle discount)
Print only
PDF only
Bundle

7. Choice Experiment Price levels Survey question: 110% 100% 75% 50% 25%
(vs. printed book)
110%
100%
75%
50%
25%
Free
Survey question:
“Extent to which the content of this book fits [their needs]”
1 (poor fit) to 9 (excellent fit)

8. Data 1,027 participants in final sample Customer Choices
312 checking out (Group A)
715 browsing (Group B)
Customer Choices

9. Estimation/Results 2 models:
k = 4, with complementarity parameter (proposed model)
k = 2, print and PDF ‘bundle’ as separate purchases (benchmark model)

10. Results Printed PDF Bundle Printed PDF Bundle Printed PDF Bundle

11. Firm Implementation NAP chose to keep book prices the same (column 4)
Lower profits, but higher penetration
Used model to price all titles’ PDFs:
Implemented pricing policy,
analyzed sales data 1 yr before/after

12. Adding PDFs seems to have increased revenue
14% of units sold were PDF files or bundles

13. Impact Validation Persistence modeling accounts for endogeneity:
7-10 days of reduced daily sales
Stable positive effect of adding PDFs
~ 10% of daily revenue!

14. Further Implementation
Model suggested that making slow-moving “Compass- titles” free would not affect sales
This was found to be the case (at least in the long run):

15. Conclusions Successful implementation of a marketing model
Taking into account:
Unique aspects of the problem(complementarity of PDFs & print books)
Firm needs (hold print book prices constant)
Firm implemented:
Pricing policy for PDF launch (Apr 2003)
Giving away free PDFs for certain products (Oct 2004) and customers (Feb 2005)
Adjusted prices of printed books (Jan 2005) and PDFs (Aug 2006)
Used both aggregate and dynamic models to determine effects of a field experiment
*As of June 2011, all PDFs are available free of charge (nap.edu/content/about-pdfs)