Online Pricing

Question 1

Business Models

Answer 1

1. Digital goods (e.g., news, music, movies):
   a. Non-rival
   b. Zero marginal cost
   c. Low marginal search costs
   d. Low transaction costs

Question 2

Revenue sources

Answer 2

a. Content: Selling the service (Example movies: EST, TVoD, SVoD)
b. Advertising: Selling eyeballs
c. Information: Selling data

Question 3

Moving from Free to Fee

Answer 3

Monetary Effects

1. Free subscriptions (per day):
   a. Direct effect of move: -208
   b. Marketing communication effectiveness: -71
   c. Conversion (blasts): -752
2. Move from free to fee:
   a. Revenue loss from advertising: $4.64 per day (1,031 * $0.0045)
   b. Revenue gain from paid subscriptions: $277 per day (2.06 * $4.94 + 5.55 * $48)
3. Blasts:
   a. Revenue loss from advertising: $1,224
   b. Revenue gain from paid subscriptions: $2,454

Question 4

Competing Against Free

Answer 4

Should companies react to a new competitor who offers a free product?

1. Assess the threat:
   a. Entrant‘s ability to cover its cost quickly
   b. Rate at which number of users of free product is growing
   c. Speed with which own paying customers are defecting

Question 5

React to threat

Answer 5

• High defection rate (> 5%/year)
  1. low growth rate (<40%/year)
• -> Immediate threat, launch free product
  2. High growth rate
• -> Business model threat, Change business model

Low defection rate

1. Low growth rate
   - -> Minor threat, monitor situation
2. High growth rate
   - -> delayed threat, coexist or delay launch of free product

Question 6

Strategies

Answer 6

a. Upsell – introduce free basic offering to gain widespread use and then charge for a premium version Freemium
b. Cross-sell – sell other products that are not directly tied to the free product
c. Charge third parties – provide a free product to users and then charge a third party for access to them
d. Bundle – offer a free product or service with a paid offering

Question 7

Freemium Pricing

Answer 7

1. Freemium business model: Combination of “free” and “premium”
2. Goals:
   a. Attract new users without costly ad campaigns / big sales force
   b. Attract significant ad revenue
   c. Allow customers to sample quality
   d. Generate paying subscriptions
3. Examples: Dropbox, XING, Spotify, NYTimes.com

Question 8

Making Freemium Work

Answer 8

1. Right amount of free offerings
   a. Find a balance between traffic and paying customers
   b. Attract new customers with free offerings, but at the same time give incentive to upgrade
2. Communication of added value: Customers must understand the benefits of upgrading
3. Moderate conversion rate: Typically 2% to 5%
4. Adjustments over the life cycle / Ongoing Innovation: Early adopters are less price sensitive
5. Management of Referrals: Incentives