Transcript Pricing Strategy

Selling and pricing strategies
Versioning
Quantity discrimination
Bundling
Renting
Versioning
Quality discrimination
HEC MONTRÉAL – MBA
53-751-03 IT and E-Commerce
Versioning
• The production of informational goods requires
high fixed costs, but the costs of reproduction are
generally very low.
• When an advanced version of an informational
good exists, it is not less expensive to produce
less powerful versions. Nevertheless several
versions are marketed. Why?
• What versions should one put on the market?
And at which prices?
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-03 IT and E-Commerce
Examples
• The IBM LaserPrinter series E prints 5 pages per minutes
rather than the 10 pages per minute of the standard model.
A chip was introduced there to force the printer to wait;
• The editors delay the publication of the books in
"paperback" for months after the publications of the
“clothback";
• Films shown first in theatres before been released in video
or DVD.
• PAWWS Financial Network sells a subscription of stock
exchange data with 20 minutes of deadline for 8,95$ per
month. Subscription for data in real times is 50$ per month;
• The airplane tickets requiring one Saturday night are less
expensive.
• Other examples?.
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-03 IT and E-Commerce
Numerical example
The model’s structure
• A good produced by a firm with various possible
qualities;
• The cost is null, independently of quality;
• 2 consumers (a guy, a girl) each one having different
preferences for quality;
• The firm chooses the qualities marketing and the prices.
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-03 IT and E-Commerce
Numerical example
The numbers
Willingness to pay
Quality 1
Quality 2
Quality 3
Jane
20$
13$
8$
John
12$
10$
6$
•Which qualities should be marketed and at which price, in
order to maximize the firm’s profits ?
•The firm chooses the qualities marketed and the prices.
Jacques Robert & Jean Talbot, HEC Montréal
Willingness to pay
HEC MONTRÉAL – MBA
53-751-03 IT and E-Commerce
quality 1
quality
2
quality 3
Numerical
example
Calcul
des
profits
Jane
20$
13$
8$
John
10$
6$
12$
Jane
John
Profit
P1=20,
20
0
20
P1=12,
12
12
24
P1=20, P2=10
10
10
20
P1=17, P2=10
17
10
27
P1=18, P3=6
18
6
24
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-03 IT and E-Commerce
Willingness to pay
quality 1
quality 2
quality 3
Jane
20$
14$(+1)
5$(-1)
John
13$(+1)
10$
6$
Jane
John
Profit
P1=20,
20
0
20
P1=13, P2=13
13
13
26
P1=17, P2=10
10
10
20
P1=16, P2=10
16
10
26
P1=20, P3=6
20
6
26
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-03 IT and E-Commerce
Quality discrimination :
Conclusion
• It can be advantageous to produce a quality lower even
if it is less expensive to produce.
• It is necessary to propose a price structure which
respects the self-selection constraints :
– Those which are ready to pay for the high quality
must find it beneficial to buy this quality;
– If one wishes to sell to the others, it is necessary is
to lower the price of high the quality or to offer a
lower quality to the others;
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-03 IT and E-Commerce
Strategies
• How to create different qualities:
– Time and safety of delivery
– Possibilities of guaranteed update,
– priority access to the technical support,
– Various functionalities and variable
performances
– Licenses limited in time
Jacques Robert & Jean Talbot, HEC Montréal
Non-linear pricing
Quantity discrimination
HEC MONTRÉAL – MBA
53-751-03 IT and E-Commerce
Non-linear pricing
• Quantity discrimination: the price paid per unit
depends on the purchased quantity.
• Examples:
–
–
–
–
–
–
Licences of groups
Non-linear fees for financial transactions
Pricing of electricity
Pricing of long-distance calls / mobile phones
Bonus for "frequent flyer“
“QuickTax", personal version and professional version.
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-03 IT and E-Commerce
Conditions allowing non-linear pricing
• Presence of market power or economy of
scale.
• Absence of resale markets
• Capacity of measuring quantities
purchased.
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-03 IT and E-Commerce
Different types of tariffs
$
Spending
Three-tier
Linear
Two-tier
Fixed rate
Blocks
quantity
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-03 IT and E-Commerce
Optional pricing
(self-selection)
$
Spending
Self-selection occurs when
agents can choose the tariff
which are appropriate to
them given their needs.
quantity
Jacques Robert & Jean Talbot, HEC Montréal
« Bundling »
Joint sale of products
HEC MONTRÉAL – MBA
53-751-03 IT and E-Commerce
Bundled goods
• The informational goods are often sold bundled.
• A newspaper or a magazine contains several
jointly sold sections or articles. This is the case
for many other examples.
• Why? What are the advantages of selling
products bundled?
• In which cases is this advantageous?
• Is the bundled offer compulsory or optional?
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-03 IT and E-Commerce
Bundled goods: examples
• Compulsory bundles
–
–
–
–
A newspaper
Subscription to cable Internet
Microsoft explorer and other software with Windows
Windows with a computer
• Optional bundles
– Tickets of season
– Windows Office
– Subscription to the newspapers and magazines
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-03 IT and E-Commerce
Numerical example
The model’s structure
• Two goods produced by a firm;
• The production cost of the goods is null;
• 2 consumers (a guy, a girl) each one having
preferences for the goods;
• The firm chooses the prices of the goods and
the prices of the bundle.
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-03 IT and E-Commerce
The numbers
Willingness to pay
Good 1
Good 2
Goods 1+2
Jane
20$
13$
33$
John
12$
20$
32$
Should the two goods be sold separately or bundled.
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-03 IT and E-Commerce
Willingness to pay
Calcul des profits
Good 1
Numerical Example
Good 2
Goods 1+2
Jane
20$
13$
33$
John
12$
20$
32$
Jane
John
Profit
P1=20,P2=20
20
20
40
P1=20, P2=13
33
20
53
P1=12, P2=20
20
32
52
P1=12, P2=13
25
25
50
P(1+2)=32
32
32
64
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-03 IT and E-Commerce
Willingness to pay
Good 1
Good 2
Goods 1+2
Jane
22$
13$
35$
John
9$
15$
24$
Jane
John
Profit
P1=22,P2=15
22
15
37
P1=22, P2=13
35
13
48
P1=9, P2=13
22
22
44
P(1+2)=24
24
24
48
P(1+2)=35, P2=15
35
15
50
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-03 IT and E-Commerce
Willingness to pay
Good 1
Good 2
Goods 1+2
Jane
22$
13$
35$
John
9$
12$
21$
Jane
John
Profit
P1=22,P2=13
35
0
35
P1=22, P2=12
34
12
46
P1=9, P2=12
21
21
42
P(1+2)=21
21
21
42
P(1+2)=34, P2=12
34
12
46
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-03 IT and E-Commerce
Conclusion
• It may be advantageous to sell jointly two or
several goods; in particular, when the willingness
to pay for these goods are negatively correlated
between the individuals.
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-03 IT and E-Commerce
Links and further readings
•
•
•
Bakos, Y. and Bryniolfsson, E.: "Bundling and Competition on the Internet: Aggregation Strategies
for Information Goods," Marketing Science (January 2000). [Acrobat PDF file 200K].
Bakos, Y. and Bryniolfsson, E.: "Bundling Information Goods: Pricing, Profits and Efficiency,"
Management Science (December 1999) [Acrobat PDF file 240K]. Winner of the 1999 J.D.C. Little
Award for Best Marketing Paper published in an INFORMS journal.
Chuang, J. & M. Sirbu, "Optimal Bundling Strategy for Digital Information Goods: Network Delivery
of Articles and Subscriptions." Information Economics and Policy 11(2):147-176 (1999).
Jacques Robert & Jean Talbot, HEC Montréal
Renting or sharing VS selling.
HEC MONTRÉAL – MBA
53-751-03 IT and E-Commerce
Renting and sharing of informational goods
•
It can be more profitable to rent than to sell
informational goods. If :
1.
2.
3.
the costs of sharing goods are less than the marginal
cost of production;
the contents are used little once and the costs of
sharing are low;
this makes it possible to segment the market.
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-03 IT and E-Commerce
Examples
•
•
•
•
Libraries, book clubs,
Video stores
Clubs of software
Resale markets
Jacques Robert & Jean Talbot, HEC Montréal
HEC MONTRÉAL – MBA
53-751-03 IT and E-Commerce
Numerical example
•
•
•
•
•
•
For example, suppose that there are 6 consumers with willingness to pay
given by [9,8,7,6,5,4].
If the price is set at 6, then 4 consumers will buy the product.
Suppose now that 3 groups of two people form, as in [(9,8), (7,6), (5,4)].
If each person contributes the same amount towards the group purchase,
and transactions costs are zero, then the producer will sell to one group if it
sets a price of 16 (= 28) and to two groups if it sets a price of 12 (= 2 6).
If the groups are [(9,6), (8,7), (5,4)] the producer will still sell to one group if
it sets a price of 14 (= 27) and two groups if it sets a price of 12 (= 26),
Illustrating that it is the minimum willingness to pay in the marginal club that
determines the price.
Jacques Robert & Jean Talbot, HEC Montréal