Using Digital Pricing to tame the “tyranny of choice”

Using Digital Pricing to tame the “tyranny of choice”

Using Digital Pricing to tame the “tyranny of choice”

How producers using the web can price more sensibly

 

The “tyranny of choice” has been used to describe the increasing availability of options (and associated user confusion) with regard to products, goods and services available on the web. An online presence for any producer is without question. Yet unless well-managed, an online presence poses threats to producers, their brands as well as established (real world) systems. The Internet can, and should be, a source of sustainable business revenues and even profits.

Yet few online participants have been able to translate their wares or business systems into the digital world in a viable fashion. Those that have fared better are children of the Internet. But even they now face  increasing challenges as the pace of change accelerates. To be relevant, companies and brand owners have been trying to manage Digital Content to proactively manage relationships with existing customers and potential users.

Many economic and behavioral laws need to be understood, respected and  if possible harnessed by Companies using the Internet.

There seem to be two hindering forces: a belief that well established economic forces do not apply and; that producers seem uncomfortable in the digital world.

 

Pricing is communication

Human wants, desires and behaviors remain largely unchanged. The Digital Revolution is giving greater freedom and expression to these behaviors. It is allowing extremes throughout the long tail. Trust, relevance, impact on persona and community membership are all important aspects of these behaviors.

The purpose of pricing is to build a dialogue with prospects purchasers and signal to competitors. Pricing is communication. By definition it must be dynamic.

 

Freemium is catchy neologism for centuries old practice

Freemium has become a buzz-word. Yet all it reflects is what has been an essential aspect of commerce. A producer cans induce trial by providing a sample of product for free. Even ‘free’ is a price point. The challenge is to ensure that the free trial leads to conversion at an acceptable cost and contain cannibalization risks.

Fore example, Apps are being used in the fashion, for this reason and reinforced by other practices and dynamics. Interestingly unlike other ‘products’ very few apps are priced, (less than 10 percent and with low price points). Apple users are more willing to pay than Android users.

This trend has led to an explosion of apps. For example on Apple’s i-store the number of apps went from 10,000 in 2008 to over 1 million today

 

Many curves shape behavior: producers and consumers

The implosion of the dot.com bubble underscored the fact that there is no new, “voodoo economics”. By and large, the laws of supply and demand exist in the virtual world as they do in the real world. The resulting curves are relevant, with successful Digital players adapting their pricing structures accordingly.

  • The Supply& Demand curves are relevant.
  • The bass of any strategy discussion is predicated on a producer’s Capacity Utilization, relevance to competitors and related share of relevant market.
  • The classic Pricing curve, with its steep inverted slope does hold true. Yet prices rarely a constant slope. They are discrete points along some imagined continuum.
  • In many cases the pricing curve is actually a series of discrete steps, that average out into a form of curve for conveyance. Hence the importance of “bundling”
  • Consumers can consider and make choices based on the concept of ‘Occasion and Benefit’. This is often captured and described in a grid, shown over time, with each cell having its own pricing curve
  • As consumers form part of a  community there is an inherent behavioural dynamic captured by network utility optimization which bears a resemblance to a ‘Laffer curve’.

 

Better practice

Theoretical considerations, supported by empirical evidence and better practice reveal that the most effective pricing structure for the digital world is to adopt a form of bundling (with controlled free element to induce trial) and super pricing for exclusive services. The nature of the bundling allows the traditional pricing curve to be shifted allowing producers to capture more value from more coherent communication with consumers.

Exhibit 1: Digital Pricing Curve (source – Raktas)

Raktas Digital Pricing Curve

This approach has been successfully applied by successful companies in many different online sectors: including: video, sports, TV, music, gaming, games, social networks and to a lesser extent newsmedia.

 

Summary

Companies need to adopt a relevant Digital Pricing structure to create a sustainable business. Feel free to contact us for further details: info@raktas.ee

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