Transcript The Future of Commerce

Pricing Information Goods
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Cost of Producing Information
Information is costly to produce
but cheap to reproduce.
large up-front sunk costs
minimal capacity constraints
low marginal cost
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Market Structures for
Information Goods
 “Information
don’t work
commodity markets”
 Two
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sustainable market structures
differentiated product market
dominant firm
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Basic Competitive Strategies
 Differentiate
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don’t let your information product
become a commodity
 Achieve

your product
cost leadership
Reduce average cost by increasing
volume through reuse and resale
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Retain the Leadership Position
 Don’t
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limit pricing strategy
 Play

be greedy
tough
establish a reputation as a
formidable opponent
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Valued-Based Pricing
Three types of differential
pricing (Pigou, 1920)
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Personalized pricing
Versioning
Group Pricing
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Personalized Pricing
 Personalize
your product and
personalize your pricing
 Know
the customer
 Differentiate
possible
 Use
your prices when
promotions to measure demand
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Reasons for Group Pricing
 Price

sensitivity
on-line product now may not be
priced internationally differentiated.
 network
effects
 Lock-in
 Sharing
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to sell or to rent
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Versioning Strategy
Offer a product line and let users
choose the version most
appropriate for them

principle of self-selection
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Issues of Concern
 Design
the product line
 Adjust price and quality
 On-line and off-line versions
 How many versions?
 Bundling (a special form of
versioning)
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Design the Product Line (I)
Product Dimensions Susceptible to Versioning
 Delay
 User
interface
 Convenience
 Image resolution
 Operation speed
 Format
Patient/impatient
Casual/experience
Business/home
Newsletter/glossy
Student/professional
On-screen/printed
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Design the Product Line (II)
Product Dimensions Susceptible to Versioning
 Capability
General/specific
 Features
Occasional/frequent
 Comprehensiveness Lay/professional
 Annoyance
High/low -time-value
 Support
Casual/intensive
users
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Adjusting Price and Quality
 Reduce
version
the price of the high-end
 Reduce
the quality of the low-end
version (even though it may incur
additional costs to do so)
 Make
sure that the quality
adjustment cannot be undone
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On-Line and Off-Line Versions
 Difference
in Quality
 Difference
in delivery
 Understand
whether they are
complements or substitutes
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How Many Versions?
 Analyze
the market
 Analyze
the product
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
design the product from the top
down
comparing the incremental value
of features with the incremental
development cost
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How Many Versions?
If the market does not segment
naturally, choose three versions


Goldilocks pricing
extremeness aversion
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Bundling is a form of Versioning
Bundling will generally reduce the
dispersion in willingness to pay,
thereby enhancing revenue.
Example:
Mark
Noah
Word
Spreadsheet
$120
$100
$100
$120
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More on Pricing
 Quantity
discounts can play the
same role as bundling
 Promotional
pricing is valuable
only if it segments the market
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