Information Rules

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• Information Rules

Shapirio and Varian Harvard Business School Press
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Topics to be covered ---

• The Information Economy
• Pricing Information

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The Information Economy

• Information
• Technology
• Policy

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Information

• Cost of Producing
• Costly to produce but easy to reproduce
• High fixed low marginal costs
• Managing intellectual property
• Goal should be to choose terms and conditions
  that maximize value - not maximize protection

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Information

• Information as an experience good
• Consumers must experience good in order to value
  it
• Strategies Free samples testimonials
• The economics of attention
• Use customer information for one-on-one marketing

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Technology

• The technology infrastructure makes information
  more accessible and hence, more valuable
• Systems competition
• Focus on collaborators and complementors not
  just competitors
• Examples Alliances like Microsoft Intel
• Lock-in switching costs
• Once you chose a technology, switching is
  expensive
• Exploit when you offer service avoid when you
  buy
• Examples LP vs. CD, Lotus 1-2-3 vs. Excel

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Technology

• Positive feedback
• Positive feedback makes large networks get larger
• Manage expectations Pre-announcements
• Network externalities
• Establish critical mass example -- AOL
• Standards
• Promote unilaterally or make your technology
  open as de facto standard
• Standards change competition for a market to
  competition within a market

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Policy

• Anti-trust
• Microsoft browser trial
• Privacy
• Collecting distributing information about
  individuals
• Universal service
• Disadvantaging locales or groups

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Pricing Information

• The cost of producing information
• Information is costly to produce but cheap to
  reproduce
• Information goods have large fixed but small
  incremental costs
• Multiple copies can be produced at roughly
  constant per-unit costs
• There are no natural capacity limits for
  additional copies

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Topics to be covered --

• Costs and competition
• Personalizing products
• Pricing products

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Costs and Competition
Pricing Information

• When information is a commodity
• Information commodity markets dont work
  because competition of sellers of commodity
  information pushes prices to zero
• Example CD phone books
• Information on the Web is selling at a marginal
  cost of zero -- thats why it is free!

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Costs and Competition
Pricing Information

• Market structures for information goods
• Only two sustainable structures exist
• Dominant firm -- e.g. Microsoft
• Differentiated product -- many firms produce
  varieties of same kind of information
• Strategies
• Dominant firm -- cost leadership
• Differentiated product -- distinguish yourself
  from the competition

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Costs and Competition
Pricing Information

• First mover advantages
• Use scale economies to achieve market leadership
  through aggressive pricing
• Two pronged approach for information leaders
• Dont be greedy -- drop prices to make markets
  less attractive to would-be entrants
• Play tough -- send a signal entry will be met
  with aggressive pricing

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Personalizing Your Product
Pricing Information

• Customize to achieve customer value
• Example Yahoo
• Establish pricing arrangements to capture this
  value
• Know your customer
• Registration
• Observe online behavior
• First mover advantages

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Pricing Your Product
Pricing Information

• Personalized Pricing
• Sell to each user at a different price
• Tailor to customer characteristics
• Versioning
• Offer a product line and let customers choose
  most appropriate version
• Group Pricing
• Set different prices for different groups

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Maximizing Revenue
Pricing Information
60
60
60
50
50
50
40
40
40
PRICE
PRICE
PRICE
30
30
30
20
20
20
10
10
10
1
2
3
1
2
3
1
2
3
QUANTITY (Millions)
QUANTITY (Millions)
QUANTITY (Millions)
Charge 60
Charge 20
Differential Pricing
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Reasons for Personalized Pricing
Pricing Information

• Traditional industries already do this
• Lexis-Nexis
• Smart cash registers
• Personalized Pricing in the Internet
• Virtual Vineyards offered deals based on
  customer behavior
• Catalog writers specials based on purchase
  behavior
• Internet auctions

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Reasons for Versioning
Pricing Information
Product Dimensions Susceptible to Versioning
Product Dimension
Likely Users/Uses
Delay
Patient/Impatient Users
User interface
Casual/experienced Users
Convenience
Business/home Users
Image resolution
Newsletter/glossy uses
Speed of operation
Student/professional users
Format
On-screen/printed uses
Capability
General/specific uses
Features
Occasional/frequent users
Comprehensiveness
Lay/professional users
Annoyance
High time-value/Low time-value users
Support
Casual/intensive users
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Reasons for Versioning
Pricing Information

• Different versions appeal to different groups
• Power users vs. normal users
• Incorporate barriers in less expensive versions
  -- design high end product first the remove
  features for low end
• Delays
• Image resolution
• Make sure users cant turn low end into high end
• Add on-line information to distinguish it from
  hard copy

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Reasons for Versioning
Pricing Information

• Design product line to match market segments --
  if market segments naturally
• Example Reuters News Service
• If market does not segment naturally
• Chose three versions -- Goldilocks strategy
• Plan to make most money on middle version
• Use bundling
• Option bundles Microsoft Office
• Information bundles Magazine articles
• Customized bundles CD Mixes
• Design promotions to exploit market segments
• Examples Coupons and sales
• CD sites problems with Bargain Finder

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Bundling Example
Pricing Information

• Mark works in marketing and Jamie works in
  accounting. Their willingness to pay is --
• Case 1 Charge 120 each Revenue 240
• Case 2 Charge 100 each Revenue 400
• Case 3 Bundle at 220 per bundle Revenue
  440

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Reasons for Group Pricing
Pricing Information

• Price sensitivity
• Different groups may be willing to pay different
  amounts -- you can profitably offer them
  different prices
• Examples
• Student discounts
• Senior citizen discounts
• Textbook price differentials

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Reasons for Group Pricing
Pricing Information

• Network Effects
• The value a person places on a good depends on
  how may others are using it
• Creates rationale for standardizing a product
• Examples
• Microsoft Office Suite
• Site licenses for software
• Instant Message on AOL
• Napster

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Reasons for Group Pricing
Pricing Information

• Lock-In
• When an organization standardizes on a specific
  product, switching is difficult
• Examples
• Microsoft
• Wall Street Journal student discounts
• Creates product addiction

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Reasons for Group Pricing
Pricing Information

• Sharing
• Individual finds it hard to manage all the
  information goods to be consumed
• Information intermediaries are used
• libraries
• systems administrators
• Transaction costs determine whether it is better
  to share or rent