lecture 5 Flashcards
what are the Properties of digital goods
- Digital goods can be easily replicated
- Digital goods can be easily distributed
- Digital goods have an unusual cost structure
explain the point that Digital goods have an unusual cost structure
- High cost of producing the first copy (high fixed costs)
- Low or zero costs of producing the second, third,… (low variable costs)
- Creation costs are ‘sunk’ (and not easily recoverable)
- No capacity-based limitations on production
So, digital goods are costly to produce but inexpensive to reproduce
what are the Forms of Differential Pricing
Personalized pricing
Versioning
Group pricing
what is Personalized pricing
– Sell to each user at a different price
– IT can better enable personalized pricing (e.g., purchasing pattern)
what is Versioning
– Offer a product line and let users choose
what is Group pricing
– Based on group membership/identity (e.g., student discounts)
further explain Personalized Pricing
Know your customer
– Directly (e.g., registration) and indirectly (e.g., clickstream)
Personalize both product and pricing
– How travel agents personalize: put together a travel package for clients
interested in deep sea fishing that includes luxury hotels and services.
Use promotions to measure demand – Market research is inexpensive on the Internet
further explain Versioning
Different products, different prices
LexusNexus offers a different price to each class of users (corporate, small biz, gov. edu) time of access (evening or day), how much you use the database (volume discount)
Different products with varying product quality (offer full product line with different versions matching different needs)
Maximize both value to customer (y-axis) and your share of this value (x-axis)
what are the Common dimensions of versioning
Comprehensiveness (all vs. selected features; v. low incremental cost
Timeliness (current vs. delayed stock quotes; hard-cover vs. paperback; early adopters willing to pay more)
Access channel (web-based vs. offline)
Convenience (full-week rental vs. two days)
Resolution or sound quality (e.g., basic vs. gold subscription to networking site)
Annoyance (nagware in shareware to remember to pay)
Speed (IBM installed chip to slow printers!)
Support (commercial OSS vs. free OSS)
So you need to version and price information products according to factors that discriminate among customers
further explain Group Pricing
Same product, different prices for different groups
Identifygroupswillingtopayless,offerthemlowerprices Need to be able to identify group membership easily
Examples of group pricing
Wall Street Journal, Microsoft Office, movie tickets, magazines,…
explain Group pricing and digital piracy
Piracy lowers a consumer’s willingness to pay
Identify ‘high-piracy’ groups, offer them lower prices
what is Bundling
Offering two or more products where at least one
product is provided at an incremental price less
than its stand-alone price
Different customers value different features
differently - willingness to pay for the bundle is less dispersed than the willingness to pay for the components
If you can’t figure out who values what, bundling is useful…
explain Network Effects
The value of a product or service increases as the number of users grow (more users = more value)
When network effects are present what happens
– The value of a product or service increases as the
number of users grows
– They’re among the most important reasons you’ll pick one product or service over another