October 19, 2012

Don't Price a Product as a Commodity if You don't Want it to Be Known as a Commodity


Service providers worry quite a lot about the danger of becoming known as suppliers of "dumb pipe," commodity services, while value is provided by third party application providers. The concern is warranted. But there are other problems. When service providers sell their products as a commodity, pricing being related directly to volume, it still is hard for a buyer not to see the product as a commodity.

While it is helpful to price based on access speed or amount of usage in a bucket, neither of those approaches really deviate much from a "volume of use" principle that also is characteristic of a commodity. In other words, there maybe not enough of what economists call "price discrimination."


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Internet pundit Cory Doctorow thinks the economist’s concept of “price discrimination,” the charging of different prices for the same goods, actually is a good thing in the world of digital and virtual goods. It might not be so easy to apply the economic concept of price discrimination so easily in telecommunications, but the principles are a mainstay of many common products, ranging from airline ticket and hotel room prices to delivery services.

Nor, in truth, is it so easy to apply price discrimination so fluidly in communications, if only because such pricing actually makes more sense for the third party app providers, not the “access” providers.

Price discrimination is a mainstay of the travel industry. For example, travelers who won’t endure an overnight Saturday stay are presumed to be travelling on business, charging the ticket to someone else, and therefore less price-sensitive. So itineraries with Saturday stays are often much cheaper than those without.

In essence, Doctorow proposes greater use of pricing based on value for digital goods, where incremental costs are hard to quantify.

The marginal cost of distributing a digital good – an ebook, a game, a video, a song, is virtually nothing, he argues. With digital goods, the object isn’t to make the maximum profit per customer, but to make the maximum profit overall.

In a “perfect market,” goods could be priced to exactly align with the amount customers are willing to spend. Rent for a day, use for a week, buy to own or price a base product low, with additional  features offered at incremental cost, as with a “freemium” model.

And though the practice is not widespread, there have been lots of experiments with donation models, or variable pricing. In 2010, a group of independent game developers launched an experiment in voluntary price discrimination. They called it the Humble Indie Bundle, and offered a collection of independently produced, DRM-free, Mac/Windows/Linux video games on a “name your price” basis, Doctorow says.

Customers were invited to pay whatever they thought the bundle was worth, and were allowed to come back later and pay more if they reconsidered. They were also given the option of diverting some (or all) of their payment to two named charities: the Electronic Frontier Foundation and Child’s Play.

Such systems often hinge on estimations of customer honesty and sense of fairness. Perhaps more important for those who think such an approach is too utopian, game-like mechanics do  encourage maximum spending.

A public leaderboard, listing the biggest spenders does encourage more spending.

An “over-the-average” premium that unlocked access to more games for any purchaser who’d put down a higher-than-average sum also worked to push up prices consumers were willing to pay.

Users also sometimes were grouped into teams by their operating system, with public rankings of the relative generosity of Windows, Mac and GNU/Linux users, encouraging platform advocates to stump up more money to prove their side’s virtue.

It was a tremendous success, garnering more than a million dollars in the first week alone. Humble has since issued bundles making nearly $5m (£3.1m) in its first week of release.

How well that could work for physical goods is another question, though people clearly understand the difference in value between same day, next day, two day, two to three day, one week or longer delivery periods for express mail and express package delivery.

For physical goods, “name your own price” might not work so well as for airline tickets or hotel rooms, on auction-based travel sites. But price discrimination, and value-based pricing, arguably has been too little considered in the communications business.

After all, if a service provider wants a customer to stop thinking about the product as a commodity, it helps when the product is not sold as a commodity.




Edited by Brooke Neuman



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