Pricing Information by Manuel Mayrhofer
Mar 31, 2015
Pricing Information
by Manuel Mayrhofer
Manuel Mayrhofer Pricing Information Goods for Digital Libraries
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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 Mayrhofer Pricing Information Goods for Digital Libraries
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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 Mayrhofer Pricing Information Goods for Digital Libraries
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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 Mayrhofer Pricing Information Goods for Digital Libraries
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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 Mayrhofer Pricing Information Goods for Digital Libraries
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Microsoft
• combination of low incremental costs+
• large scale of operation =
• 92 Percent gross profit margins enjoyed by Microsoft
Manuel Mayrhofer Pricing Information Goods for Digital Libraries
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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 Mayrhofer Pricing Information Goods for Digital Libraries
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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 Mayrhofer Pricing Information Goods for Digital Libraries
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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 Mayrhofer Pricing Information Goods for Digital Libraries
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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 Mayrhofer Pricing Information Goods for Digital Libraries
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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 Mayrhofer Pricing Information Goods for Digital Libraries
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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 Mayrhofer Pricing Information Goods for Digital Libraries
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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 Mayrhofer Pricing Information Goods for Digital Libraries
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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 Mayrhofer Pricing Information Goods for Digital Libraries
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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 Mayrhofer Pricing Information Goods for Digital Libraries
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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 Mayrhofer Pricing Information Goods for Digital Libraries
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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 Mayrhofer Pricing Information Goods for Digital Libraries
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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 Mayrhofer Pricing Information Goods for Digital Libraries
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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 Mayrhofer Pricing Information Goods for Digital Libraries
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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
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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 Mayrhofer Pricing Information Goods for Digital Libraries
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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
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Vocabulary
• royalties – Tantiemen, Abgaben an den Autor, Lizenzgebühren
• incumbant – Amtsinhaber• ZAG – zip code, age, gender