If you are going to charge for content

Posted on by Rags Srinivasan

If you are you going to charge for content it pays to start to with the customer segments that value your content (more than other alternatives available) and are willing to pay for that value. Recently Mathew Ingram of GigaOm wrote about a proposal that involves dynamic pricing

A model could work like this: The piece costs $1.99 for the first 5,000 articles sold, garnering $10,000 in revenue [and] once that threshold hits, the price adjusts dynamically to maintain at least $10,000 in overall revenue, but adjusting downward against the paying population as more and more readers commit (which also earns Esquire additional advertising revenue). A ‘clearing price’ is set, perhaps at 50 cents, after which all profits go to Esquire.

Let me tell you at the outset that I do not like this for one primary reason – it ties price to your revenue goals vs. value to customers. That is as bad as cost based pricing. I does not merit further discussion just for that reason but let me dissect it anyway.

For the sake of this article let me call this proposal as Group Buying Pricing.

This is not new. In fact it is almost hard to find anything new in pricing. Recently a variation of Matthew’s proposal was studied by researchers from Kellogg School of Management. And that method itself is a variation of really old Dutch Auction. Kellogg study called their pricing Purple Pricing. This fixes two flaws in Matthew’s proposal,

  1. Those who wait (till others buy) for the price to drop (sideline issue)
  2. Those who paid higher price than those who came behind them (fairness issue)

Purple pricing works like this

  1. Start with limited number of units to sell or set a time after which the product has no value
  2. Start with a set high price and periodically drop the price
  3. Anyone who buys the product at a given price is guaranteed they will only have to pay the lowest price the last unit is sold for

So if you like the product at a given price you should pay. You may not have liked it at $2.99 but when it drops to $1.99 you might find it attractive. You should agree to pay that price. The scheme guarantees you will not pay more than the lowest price someone else who buys the product after you pays. If the last price is $0.39, that is the price you will pay even if you bought in at $2.99. So it does not suffer from sideline or fairness issue.

In many ways a magazine fits well for Purple Pricing. While there is no limit on number of digital copies, its relevance is lost after the week. So Purple pricing will work and it is not operationally any more complex.

In addition Purple Pricing helps us find the distribution of customer willingness to pay (and hence the demand schedule) while Mathew’s Group Buying Pricing says nothing on that front. Customers have no reason to reveal their true willingness to pay with Group Buying Pricing.

If you are asking, “doesn’t that compromise revenue goals?”, you should recognize that you will not be dropping prices if what you get from new sales is not enough to lose the price premium you captured from all the previous buyers. In fact the proponents of Purple Pricing recommend that only as a method to find the demand schedule and use it to set a price that maximizes profit.

Both schemes do suffer from one common problem – What if the value for the content increases as more people read it?

As long as we are coming up with proposals for pricing for content let me also tell you about another old method – Becker-DeGroot-Marschack (abstract only) method. Here is how you do it

  1. At the time customer tries to read the magazine ask them to quote a price they are willing to pay – give them a range low and high
  2. Let them know right there that you will pick a random number between low and high right after they state their price
  3. If the price they quoted is greater than the random number you picked they only have to pay the lower number you picked and happily read the magazine.
  4. If the price they quoted is lesser than the number you picked, they don’t get to read (I assume your engineers can figure out how to enforce it so that people don’t try many times until they get lower price)

It is in everyone’s best interest to quote the price they are willing to pay – not high-ball (that would be silly) not low-ball (No magazine for you!). And you get to find the demand distribution as well.

All is well. But imagine all the complexity in the buying process when a customer goes to read a magazine. Think of all the cognitive costs. You surely do not want this to be the buying experience every time someone wants to read a magazine do you?

By all means do pricing experiments but use those experiments only to find the demand distribution. Then set a price that will maximize your profit and make it very easy for your customers to do business with you.