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Pricing Information Goods

Pricing Information Goods. Cost of Producing Information. Information is costly to produce but cheap to reproduce. large up-front sunk costs minimal capacity constraints low marginal cost. Market Structures for Information Goods. “ Information commodity markets” don’t work

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Pricing Information Goods

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  1. Pricing Information Goods

  2. Cost of ProducingInformation Information is costly to produce but cheap to reproduce. • large up-front sunk costs • minimal capacity constraints • low marginal cost

  3. Market Structures for Information Goods • “Information commodity markets” don’t work • Two sustainable market structures • differentiated product market • dominant firm

  4. Basic Competitive Strategies • Differentiate your product • don’t let your information product become a commodity • Achieve cost leadership • Reduce average cost by increasing volume through reuse and resale

  5. Retain the Leadership Position • Don’t be greedy • limit pricing strategy • Play tough • establish a reputation as a formidable opponent

  6. Valued-Based Pricing Three types of differential pricing (Pigou, 1920) • Personalized pricing • Versioning • Group Pricing

  7. Personalized Pricing • Personalize your product and personalize your pricing • Know the customer • Differentiate your prices when possible • Use promotions to measure demand

  8. Reasons for Group Pricing • Price sensitivity • on-line product now may not be priced internationally differentiated. • network effects • Lock-in • Sharing • to sell or to rent

  9. Versioning Strategy Offer a product line and let users choose the version most appropriate for them • principle of self-selection

  10. 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)

  11. Delay User interface Convenience Image resolution Operation speed Format Patient/impatient Casual/experience Business/home Newsletter/glossy Student/professional On-screen/printed Design the Product Line (I)Product Dimensions Susceptible to Versioning

  12. Capability Features Comprehensiveness Annoyance Support General/specific Occasional/frequent Lay/professional High/low -time-value Casual/intensive users Design the Product Line (II)Product Dimensions Susceptible to Versioning

  13. Adjusting Price and Quality • Reduce the price of the high-end version • 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

  14. On-Line and Off-Line Versions • Difference in Quality • Difference in delivery • Understand whether they are complements or substitutes

  15. How Many Versions? • Analyze the market • Analyze the product • design the product from the top down • comparing the incremental value of features with the incremental development cost

  16. How Many Versions? If the market does not segment naturally, choose three versions • Goldilocks pricing • extremeness aversion

  17. Bundling is a form of Versioning Bundling will generally reducethe dispersion in willingness to pay, thereby enhancing revenue. Example: Word Spreadsheet Mark $120 $100 Noah $100 $120

  18. 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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