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Information Rules

Information Rules. Shapirio and Varian Harvard Business School Press. Topics to be covered ---. The Information Economy Pricing Information. The Information Economy. Information Technology Policy. Information. Cost of Producing Costly to produce but easy to reproduce

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Information Rules

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  1. Information Rules Shapirio and Varian Harvard Business School Press

  2. Topics to be covered --- • The Information Economy • Pricing Information

  3. The Information Economy • Information • Technology • Policy

  4. 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

  5. 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

  6. 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

  7. 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

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

  9. 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

  10. Topics to be covered -- • Costs and competition • Personalizing products • Pricing products

  11. Costs and Competition Pricing Information • When information is a commodity • “Information commodity markets” don’t 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 -- that’s why it is free!

  12. 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

  13. Costs and Competition Pricing Information • First mover advantages • Use scale economies to achieve market leadership through aggressive pricing • Two pronged approach for information leaders • Don’t 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

  14. 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

  15. 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

  16. 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

  17. 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

  18. 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

  19. 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 can’t turn low end into high end • Add on-line information to distinguish it from hard copy

  20. 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

  21. 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

  22. 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

  23. 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

  24. 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”

  25. 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

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