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Versioning1 Wen Zhou Versioning What’s special about information products’ cost structure Implication of the cost structure for pricing What to do How.

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Presentation on theme: "Versioning1 Wen Zhou Versioning What’s special about information products’ cost structure Implication of the cost structure for pricing What to do How."— Presentation transcript:

1 Versioning1 Wen Zhou Versioning What’s special about information products’ cost structure Implication of the cost structure for pricing What to do How to provide different versions The news industry

2 Versioning2 Wen Zhou Outline Cost structure Implication for pricing What to do How to provide different versions The news industry

3 Versioning3 Wen Zhou Cost structure Large fixed cost, very small marginal cost  if delivered on the internet, marginal cost is even smaller Fixed costs tend to be sunk  once investment has been made, the seller will behave very competitively Marginal cost stays flat even for very large quantities  capacity not constrained – behave very competitively

4 Versioning4 Wen Zhou Outline Cost structure Implication for pricing What to do How to provide different versions The news industry

5 Versioning5 Wen Zhou Implication for pricing Monopoly: can charge very high price  Microsoft enjoys gross profit margins of 92% Competitive market: price will be driven to marginal cost  what matters is not the value customers place on the product; it’s the cost  and it’s the marginal cost

6 Versioning6 Wen Zhou Pricing under competition Electronic phone books  first electronic phone book in1986: all phone numbers in NY area on CD  $10,000 a copy, sold to large commercial and government organizations  executive set up his own company, trying to cover the entire US  phone companies refused to license digital copies of their listings  Chinese workers hired at $3.50 a day to type phone numbers: 70 million phone numbers  cost well below $1, but sold for hundreds of dollars  competitors rushed to the business: no product differentiation: soon the CDs were sold for only a few dollars

7 Versioning7 Wen Zhou Pricing under competition Classics delivered on the internet  attempt to charge people or force readers to register: will not succeed Encyclopedia Britannica  used to sell for thousands of dollars  now free access to its web database

8 Versioning8 Wen Zhou Outline Cost structure Implication for pricing What to do How to provide different versions The news industry

9 Versioning9 Wen Zhou Versioning Definition: create different versions of the same core of information, and charge buyers accordingly  indirect price discrimination Particularly relevant for information products  have to version: p=mc=0  easy to version: costless to create different versions

10 Versioning10 Wen Zhou

11 Versioning11 Wen Zhou Internet Easy to identify consumers  IP address  registration to use many online services  Amazon’s attempt to discriminate backfired Customized products: not easy to compare price  re-configure, real-time/delayed stock prices, professional/regular software  online auctions Individualized price:  change price depending on stocks  randomly vary price over time (intertemporal price discrimination) Easy to search and compare prices

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14 Versioning14 Wen Zhou Outline Cost structure Implication for pricing What to do How to provide different versions The news industry

15 Versioning15 Wen Zhou Differentiation based on Timing/delay:  books: hard copy versus paperback  movies: theater watching versus CD rental six months later  stock quotes: real time versus 20-minute delay  academic articles: Jstore 5 year delay newer articles more valuable  news articles: New York Times and Business Week: current edition free, archives not free newer reports less valuable current edition has many substitutes no substitutes for old articles: writers, researchers

16 Versioning16 Wen Zhou Differentiation based on Function  Lexis-Nexus: viewing free, download, store, duplicate, print are not  speed Mathematica computing speed IBM printer: 10 pages per minute versus 5 pages  TaxCut Deluxe highlights entries likely to catch the attention of IRS  user interface: Photoshop ($600), PhotoDeluxe ($50)  image resolution: value-subtracted versions

17 Versioning17 Wen Zhou Differentiation based on Community: chat rooms, discussion boards, online computer games:  reading messages is free network effect: charge more for advertising when more people visit the site  pay membership fees to post a message, view photos, or other members

18 Versioning18 Wen Zhou Differentiation based on Others  support: Netscape: instruction manual and a free phone call to a support technician for $40  convenience: online access: unlimited versus three hours per month  annoyance: pay to turn off annoying ads

19 Versioning19 Wen Zhou Pricing / versioning Lock in Network effect Compatibility / standards

20 Versioning20 Wen Zhou Outline Cost structure Implication for pricing What to do How to provide different versions The news industry

21 Versioning21 Wen Zhou News industry “The standard system of reporting, in which a journalist files a story that is broadcast or printed once and then put on a single proprietary website, is inefficient. The marginal cost of distributing the story more widely is close to nil, but the marginal benefit can be considerable.” “Tossed by a gale,” The Economist, 5/14/09

22 Versioning22 Wen Zhou Free or not Wall Street Journal: charge for certain types of news rather than charging certain types of user Free  news about swine flu  review of the new “Star Trek” film  report on looming cuts at car dealerships Not free  Cigna Corporation’s pension plan  Lockheed Martin’s quarterly lobbying expenditures  lawsuit against a bottling company: improperly held board meeting

23 Versioning23 Wen Zhou Free or not The fun articles are free; the dry, obscure stuff costs money  broadly appealing articles draw readers to the website, where they can be tempted by advertisers and by the Journal’s more selective wares  most people do not care about pensions in a Philadelphia health-insurance company, but those who are interested in such information are very interested  people’s willingness to pay for a story is inversely correlated with the size of its potential audience


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