Pricing Strategy of Pricing Strategy of Digital ProductsDigital Products
동아대학동아대학 경영정보학과경영정보학과 김현수김현수
Table of ContentsTable of Contents
nn Traditional economic theoriesTraditional economic theories
nn Supply CurveSupply Curve
nn Cost CurveCost Curve
nn Quality and Customers’ valuationQuality and Customers’ valuation
nn Attention Attention
nn Pricing StrategiesPricing Strategies
MotivationMotivationnn Why eWhy e--business is so difficult to make profit?business is so difficult to make profit?
nn Easy to start eEasy to start e--business, easy to fail business, easy to fail
nn Developing web server is just like raising signboard Developing web server is just like raising signboard
nn We only know one star company but do not know We only know one star company but do not know thousands of fallen rocks.thousands of fallen rocks.
nn Need to know the digital product itself. Need to know the digital product itself.
nn Pricing digital product is difficult becausePricing digital product is difficult because–– Digital product can not be scarceDigital product can not be scarce
–– Unlimited supplyUnlimited supply
–– Quality uncertaintyQuality uncertainty
nn Different economy and management situation: Different economy and management situation: production, inventory, advertising, sales, marketing, production, inventory, advertising, sales, marketing, pricing, etc. pricing, etc.
nn Need new principles of Digital Economy, Digital Need new principles of Digital Economy, Digital Company ManagementCompany Management
nn InterInter--Disciplinary Disciplinary nn What’s after the era of eWhat’s after the era of e--business? business?
–– Efficient market, the dream of economists? Efficient market, the dream of economists? –– Or monopoly by a global enterprise? Or monopoly by a global enterprise?
nn Super highway Super highway --> virtual community > virtual community --> e> e--businessbusinessnn The key factors: electronic marketplaceThe key factors: electronic marketplace
What are digital products?What are digital products?
nn Information Information
nn Entertainment productEntertainment product
nn Symbols, tokens and conceptsSymbols, tokens and concepts
nn ProcessesProcesses
nn ServicesServices
Characteristics of Digital ProductsCharacteristics of Digital Products
nn IndestructibilityIndestructibility
nn TransmutabilityTransmutability
nn ReproducibilityReproducibility
nn Demand FunctionDemand Function–– DDnn = f (P= f (Pnn, P, P11, … P, … Pnn--11, Y, T, P, A), Y, T, P, A)
–– Quantity = f(Price) : ceteris paribusQuantity = f(Price) : ceteris paribus
nn Demand CurveDemand Curve
nn Law of demandLaw of demand–– Upper limit Upper limit
–– Shift of demand curveShift of demand curve
Basic economic theoriesBasic economic theories
Price
Quantity
nn Supply functionSupply function
–– SSnn = f(P= f(Pnn, P, P11, … , P, … , Pnn--11, F, F11…F…Fmm, T, G), T, G)
–– S = f(P) : ceteris paribusS = f(P) : ceteris paribus
nn Law of supplyLaw of supply
nn Upper limitUpper limit
nn Shift of supply curveShift of supply curve
nn The shape of supply curve of digital productsThe shape of supply curve of digital products
Price
Quantity
EquilibriumEquilibrium
Price demand supply
surplus
equilibrium
shortage
Quantity
Digital productsDigital products
Concerns of output level in terms of material and labor input is meaningless Only the first copy of digital product concerns resource allocationThere are not natural capacity limits for additional copies
Price
Quantity
Cost functionCost function
–– Fixed cost (sunk cost)Fixed cost (sunk cost)
–– Variable costVariable cost
–– Average cost ( Total cost / Quantity )Average cost ( Total cost / Quantity )
–– Marginal cost ( Marginal cost ( DDTC / TC / DDQ )Q )
–– Lower limitLower limit
–– When AC is increasing, MC > AC, when AC is decreasing MC When AC is increasing, MC > AC, when AC is decreasing MC < AC< AC
CostTC
» MCAC
Quantity
nn Digital product is costly to produce but cheap to reproduceDigital product is costly to produce but cheap to reproduce
nn Once the first copy of a digital product has been produced Once the first copy of a digital product has been produced most costs are sunk and cannot be recoveredmost costs are sunk and cannot be recovered
nn Incremental cost (marginal cost) of production is zero.Incremental cost (marginal cost) of production is zero.
nn Competition among sellers of digital product pushes prices Competition among sellers of digital product pushes prices to zeroto zero
CostTC
»
MC
AC
Quantity
(Decreasing)
nn Marginal costMarginal cost
–– MC= PMC= P–– MC curve = supply curveMC curve = supply curve
nn Marginal cost of digital productsMarginal cost of digital products
–– MC MC --> 0 ( Is it true ?)> 0 ( Is it true ?)–– PerPer--copy copyrightcopy copyright
Price
P
Q
MC
Price
P
Q
E
MC
nn Competitive situationCompetitive situation
nn Monopolistic(market power) situationMonopolistic(market power) situation
P
Q
AC
Demand
P
QQ(AC)
AC
Pricing strategy in competitive situationPricing strategy in competitive situation
nn Dominant firm model : achieve cost leadershipDominant firm model : achieve cost leadership
nn Reduce average cost by increasing volume Reduce average cost by increasing volume
through reuse and resalethrough reuse and resale
nn FirstFirst--mover advantagemover advantage
nn To discourage entry, avoid greed and play toughTo discourage entry, avoid greed and play tough
How to gain market power?How to gain market power?nn A monopolistically competitive firm can A monopolistically competitive firm can
choose a profit maximizing price level choose a profit maximizing price level instead of merely accepting the market price.instead of merely accepting the market price.
nn The steeper demand curve indicates The steeper demand curve indicates monopolistic market situationmonopolistic market situation
nn To gain monopolistic market power To gain monopolistic market power differentiation is necessary differentiation is necessary
nn Quality, user valuation, preference.Quality, user valuation, preference.
Experience goodExperience good
nn Consumers must experience it to value itConsumers must experience it to value it
nn Uncertainty regarding the quality of Uncertainty regarding the quality of
products can lead to the collapse of marketproducts can lead to the collapse of market
nn Branding, Reputation, Preview, Trusted Branding, Reputation, Preview, Trusted
third partythird party
nn QualityQuality
nn Product differentiationProduct differentiation
Cost/Price TC
Willingness to pay
Quality
Cost/Price C
PH
PL
SL SHQuality
Product differentiationProduct differentiationnn Transmutability , Minimize competitionTransmutability , Minimize competitionnn Product differentiation, different segment of Product differentiation, different segment of
customers customers nn Customize products and charge individualized Customize products and charge individualized
pricesprices
nn Perfect price discriminationPerfect price discrimination–– Different prices for different consumers based on detail Different prices for different consumers based on detail
consumer informationconsumer information–– Prices are individualized to extract all individual Prices are individualized to extract all individual
consumer surplusconsumer surplus–– Reselling among consumers must be preventedReselling among consumers must be prevented–– Online negotiation and auctionsOnline negotiation and auctions–– Transmutability of digital productTransmutability of digital product–– Consumers can be billed independentlyConsumers can be billed independently
Negotiation process and information gathering may be more Negotiation process and information gathering may be more
costly than extra revenuecostly than extra revenue
Price
consumer surplus
Demand curveD
0 EQuantity
AttentionAttention
nn Viewer’s attention Viewer’s attention
nn PortalPortal
nn TV advertising model vs. Internet TV advertising model vs. Internet
advertising modeladvertising model
nn PointPoint--toto--point matchingpoint matching
Pricing Strategy [Shapiro & Varian, 1999]Pricing Strategy [Shapiro & Varian, 1999]
1. 1. Personalized pricing: sell to each user at a different Personalized pricing: sell to each user at a different pricepricePersonalize your product and personalize your Personalize your product and personalize your pricingpricing–– Know your customerKnow your customer–– Differentiate your prices when possibleDifferentiate your prices when possible–– User promotions to measure demand ( price sensitivity) User promotions to measure demand ( price sensitivity)
2. 2. Versioning : Offer a product line and let users Versioning : Offer a product line and let users choose the version of the product most appropriate choose the version of the product most appropriate for themfor them–– dimension : Delay, User Interface, Capability, etc.dimension : Delay, User Interface, Capability, etc.
–– Three version strategyThree version strategy
3. 3. Group pricing : Set different prices for Group pricing : Set different prices for different groups of consumers, as in student different groups of consumers, as in student discounts.discounts.
–– Group price sensitivityGroup price sensitivity
–– Network effects ( the value one user places on a good Network effects ( the value one user places on a good depends on how many other people are using it )depends on how many other people are using it )
–– LockLock--in in
–– Sharing Sharing
NonNon--sale methodsale method
nn RentingRenting
nn LicensingLicensing
nn LeasingLeasing
nn BundlingBundling
nn MicrobundleMicrobundle
nn subscriptionsubscription
ConclusionConclusion
nn New principles of economy and New principles of economy and
management to deal with digital productmanagement to deal with digital product
nn Reduce average costReduce average cost
nn CustomizationCustomization
nn QualityQuality
nn AttentionAttention
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