2875280000Faculty of Business and EconomicsSeminar PaperOnline Content Pricing: How Can Companies Make Profit? Submitted to:Chair of Marketing Submitted to: Prof. Dr. Martin EisendSubmitted by: Charlotte Croce?August Bebel Strasse 49/7.
1, Frankfurt Oder 15234 [email protected]?Matriculation number: 92842 Submitted on:25/06/2018 Table of contentsTOC o “1-3” h z uII.
Introduction PAGEREF _Toc517686098 h 4III.Definitions PAGEREF _Toc517686099 h 51.Defining online content pricing PAGEREF _Toc517686100 h 52.Defining profits PAGEREF _Toc517686101 h 6IV.How online content are priced, how to make profits from them PAGEREF _Toc517686102 h 71.How online content are priced PAGEREF _Toc517686103 h 72.How to make profits from online content PAGEREF _Toc517686104 h 10V.
Conclusion PAGEREF _Toc517686105 h 12VI.References PAGEREF _Toc517686106 h 13IntroductionSince its creation, the Internet media has constantly evolved. From a US-funded network aimed at linking Defense Department resources, the Internet has become a global information, communication and trade network, mostly privately funded.
The rise and evolution of web technologies have opened doors to online businesses. When an Internet connection and a website become sufficient to reach an audience, then it is possible for even a small business to run and generate profits online, without ever having to open a physical office.One can then wonder how this specific market works. How can companies make profit, via online content?Understanding the process of creating money via the Internet can seem relatively complex and abstract.
There seems to be a multitude of different ways to make money online, in small or large quantities, for an individual or a business. Several authors have been interested in the pricing of online content, particularly following the debates on the Net Neutrality. Europeans are fortunate to have access to the Internet without discrimination, blockage, strangulation, slowdown or prioritization, thanks to a regulation of the European Parliament of 2015 reviewed on 2 March 2018. But unfortunately, very few academic writings explain how businesses create profit through the pricing of online content.
It is in this perspective that we will explain how companies make profits online, thanks to the content pricing. Firstly, it is essential to clarify and define the concepts of online content pricing and profits, and to observe the methods used to measure these indicators. Secondly, we will study how online contents are priced, and how companies can make profits online. Finally, we will conclude this study on online content pricing and online businesses profits, and we will talk about the limits of this work. DefinitionsDefining online content pricing It is crucial to understand the term “online content” before defining more precisely its “pricing”. According to Koiso-Kantilla (2004), online content also called “digital products” are conceptualized as bit-based objects which are distributed through electronic channels, meaning that the distribution process for online content is also digital (Strader and Shaw, 2000). In her article “Understanding digital content marketing”, Rowley (2008) lists some examples of digital products: “online news, electronic journals, e-books, virtual pets, online health advice, databases, online directories, mobile micro movies, games, music downloads, and software package updates”.
Alternative words can refer to online content and digital product: Kosio-Kantilla (2004) suggests terms such as “electronic information products” and “informational goods”. Some authors or Internet users have included e-services (services sold and/or provided online) to information products (Rust and Lemon, 2001), because the main value exchanged is information regardless its form (Ducoffe 1996; Eighmey 1997; Molesworth and Jenkins 2002; Schlosser et al. 1999). Information products have been defined by Rowley (2002) as any product (good or service) “whose core or primary product is information or knowledge”.
Following her definition, online content can be called “information content” or “knowledge content or products”. Stiller (2004) sees the Internet as a place where people and machines communicate to share information coming in a wide range of types. Information contents can be sold and bought by everyone, whereas much of the content is posted and consumed without any fee. Thus, the web constitutes a major issue for providers of contents trying to have a revenue from it. But the author highlights the fact that many factors influence the content demand, including technical, economic, business, and policy factors, and mostly user behaviors and preferences.
That explains why online companies are constantly adapting their content offer (in terms of types, pricing, etc.). The challenge is therefore to offer differentiated pricing, to distinguish competition from online companies and their contents, for example by adapting the pricing to customers’ preferences, subscription or location. Following Stiller opinion, online content pricing is a major challenge for the Internet’s future, and companies need to define pricing providing profits “since existing models appear to be unworkable”.
Defining profitsAccording to Roberts (1988), the term “profit” refers to some types of income associated to the expansion of capital. Thus, profits are revenues that exceed incurred costs.Littleton (1928) separated the several definitions of “profit” depending on the different point of view of three groups of people.
The economists appear to consider profit as a “social phenomenon” associated with the problems of income distribution from productive activities in a society, among the factors responsible for this production. According to the author, the courts link profits to income tax and dividend declarations, and define it as “all of the proprietorship except the original contribution”. Finally, business men and accountants see profits as “a measure of accomplishment”, a managerial information indicating the operating income.Afuah (2001) assumes that finding the sources of profits and understanding them allows the companies to define optimal strategies. Determining the origin of revenues and profits from online businesses is according to the author even more complex than in offline markets, because of the potential externalities. Moreover, being known as successful doesn’t always come with profits.
Stewart and Zhao (2000) took the examples of Amazon.com, Yahoo, and eBay who have created strong brand names, but their fame has not always guaranteed profits. Now that the terms of content pricing and profit are defined, we understand the issues of these notions for online businesses. In a second part, we will study the pricing process for online content, and then how companies can make profits from this content.How online content are priced, how to make profits from themHow online content are pricedFirst, it is important to remember that, as said before, a great part of online content is free for the consumer. Internet has allowed web users to have access to free information thanks to online content. Lambrecht and Misra (2016) highlight that online content companies can make the choice to offer all contents for free (washingtonpost.com for example), they can charge the users for all contents (thetimes.
co.uk for example), but companies can also create a strategy mix and choose to offer some contents for free but to charge some of the (exclusive) contents (ESPN.com, nyt.
com for example) (Kumar ; al. 2013). Moreover, Rowley (2008) recalls that for these types of content, and especially on the Internet, the price is not perceived as an indicator of the value or quality of the information. But other authors like Rangan and Adner (2001) identify price as one of the main indicators of the value of digital content. Other indices of this quality and value have to be considered such as accuracy, timeliness, completeness, attractiveness and interactivity (Rowley, 2008).
Moreover, while in real life price can be correlated to the cost incurred, the relationship is not exactly the same online. Indeed, the main advantage of information products and contents is their marginal costs, which is close to zero (Rowley, 2008). Indeed, each e-book or video course sold additionally does not cost more to produce than the first one produced: they are only additional digital copies. However, their price hardly ever decrease. In addition, informational products are non-rival goods. Their purchase does not have the effect of reducing the available quantity of the stock in the company.
We understand that the scarcity and the limit of stocks does not exist when we talk about a number of e-books, online tutorials’ or softwares’ downloads.Rowley (2008) explains that the price can also depend of what is offered in exchange of the payment. It can be for example a transfer of ownership, or a contract securing the access to digital contents, for a specified period of time, under conditions of use specified in a license, etc.In that respect, we will review the different strategies used to price online contents.Item based pricingItem based pricing is used mainly in Business to Consumer markets. It concerns the purchase of particular contents of which we can count the consumers’ views. In the case of online readings, videos or audios, pricing for viewing and downloading is referred to pay-per-view or pay-per-download (Rowley, 2008). But this pricing includes competition and similar online contents can be sold at different prices, depending on the format in which it is delivered, or the strategy the company is following.
Subscriptions Subscription is a successful model in the offline world. It aims to create a commitment to the company. This model has been a great type of pricing for online companies, wanting a certain insurance to keep customers through their subscription to magazines, newspapers, databases and other contents. Rowley (20078 remind that early pay-per-download models in the digital music industry have been replaced by subscription based models.Contracts and licenses access Access to online contents through contracts and licenses is increasingly suggested to the web user.
Contracts include price and licensing agreements and specify how the information from the online content can be used. Licensing agreements involve controls on the use of information, ensuring the protection of the intellectual property (Nilsen, 2004). Types of licenses can be attached primarily to online reading, like academic or scientific journals, newspaper, e-books, etc. In this case, the web user can have access to content through a company who owns the contact and pay the license, so which function is intermediary between the information and the consumer. According to Stiller & al. (2004), in an e-business market, companies producing contents have a great opportunity to quote flexible prices to individual customers on Internet.
Indeed, the authors explain that in most of the cases, the price which is quoted to one customer cannot be visible to others. Thus, the sellers have three options: static pricing, discriminatory pricing, or dynamic pricing.Quoted-price Model, Static pricingThe first model is called a Quoted-price model, or Static pricing (Stiller & al., 2004).
The customer just should agree with the price to have access to the content. Quoted prices are the most common pricing in offline markets. DVD’s are rent and Books and CD’s are sold in stores using this model. According to Afuah and Tucci (2001), sellers in such markets have a great expertise in pricing these forms of content.
With a quoted price, which does not change a lot, customers know what to expect from a content, and the price is fair to all the customers. But strategies from conventional markets cannot always be applied on Internet markets. And finding the optimal price to fix is a complex task, because firms must consider the threats of Internet (competitors and expectations of customers) in the aim to maximize profits. The author admits there are few reasons for this complexity.
The first one is the wide and the diversity of the customers online, coming from all over the world with their wills and demands, contrary to conventional market with more local customers. The second reason is that consumer behavior appears to be quicker on Internet according to the authors. An event could influence customers really quickly, and online companies would have to change their pricing strategies as soon as possible. Discriminatory pricingThe different settings for the online pricing strategies explain the existence of a second model opposite to the Quoted-price model. In the second model, several customers quote what they are willing to pay for the same content at the same time. The content can be offered to the only winning bid, or can be sold to everyone at the highest price settled (Afuah and Tucci, 2001). Or the company can ask different prices to the different customers based on their profiles and the price they were willing to pay (Stiller & al.
, 2004). If the company can approach the customers’ price, the content can be sold and the company can expect to make profits. But since customers can have access to the same content at different prices, discriminatory pricing can seem unfair to web users. Discriminatory pricing can be great for profits and may maximize them in short term, but in the long term, the number of unsatisfied customers risks to increase and be bad for the revenues of the company (Stiller ; al.
, 2004).Dynamic pricingA dynamic price is a quoted price that can evolve with time. The main reasons for the price changes are the current system load, the request arrival rate, and some other external factors.
Contrary to discriminatory prices, when requests are made simultaneously, prices are the same for all individual customers’ valuations. This strategy of dynamic pricing appears to be the best strategy when the company does not have any specific information about its individual customers (Stiller & al., 2004). The author also explains that dynamic pricing is a great strategy to experiment with the consumer behavior to learn how web users react to the prices. Thus, dynamic pricing can be a good structure for a new online company or a new content or type of content. Moreover, testing prices can lead the company to learn which price is the best to maximize profits.
Companies have the choice between several business and pricing models. The choice of pricing strategy is depending on the type of digital content. This variability is mainly due to the quantity and quality of content information offered in return and what the consumer is willing to pay (Rowley, 2008).How to make profits from online contentOn the Internet, as in real life, the goal of for-profit businesses is to make profits to prosper. Companies that produce and offer online content to web users, whether free or paid, want to earn revenues, and the highest possible. As seen above, Afuah and Tucci (2001) state that defining sources of profit and incomes on the Internet is complex because of the different externalities that come into play.When a company offers its online content for free, the revenue it must make comes from sources outside of its main business.
Advertising can be its first source of income (Lambrecht and Misra, 2016). According to Stiller & al. (2004), revenues coming from advertising are not enough to cover the costs for network services. Companies can also promote other paid activities, or refer customers to more exclusive or specific content of its activity, which they will pay. The Freemium model, with free access to so-called “basic content”, but a need to pay a subscription or pay for each additional content, is a model that thrives on the Web.
However, Lambrecht and Misra (2014) add the theory that, when only “non-exclusive” content is offered for free, non-subscribers visits may decrease.Thus, profits of online companies are simpler to predict and to maximize when we know that revenues come from their paid online content. However, the studies from Lambrecht and Misra (2014), and Stiller & al. (2004) suggest that to increase revenues from online contents, companies need to analyze the web users and consumers’ behaviors. Indeed, analysis show that there is a fixed price for contents or subscription that maximizes revenue.
To find and quote this price, the company should understand how customers react to prices, by testing it as said before. If companies do not have access to precise information about the web users’ behavior, they should make general assumptions about the total customer population (Stiller & al., 2004). Moreover, online companies should identify if there are some specific periods of high or low demand on the contents, to adjust the amount of free or paid content. Lambrecht and Misra (2014) assume that customer behavior can vary in short time durations also: for example, online news consumption may be different on week-ends and holidays than on working-days.As we assume most of the online contents are not restricted by their stock in the companies, resources of the contents should not be a constraint for sale and profits. However, the company must be sure to manage the distribution channel of its content to ensure a maximal sale and maximal profits.
On Internet, the biggest threat in terms of resources can be memory, bandwidth and latency (Stiller & al., 2004). If server and storage resources are capable to be used by a multitude of web users, companies have a chance to maximize profits as sales can be maximized (Stiller & al.
, 2004) It is obvious that the content suggested must correspond to the market and must be approved by many consumers to make as many sales as possible, at a fixed price or not.To maximize their profits, companies should analyze whether their content would have a better impact on consumer if they are free, partially free, or paid. This way, businesses can more or less precisely know which pricing method and model can sell the most, and which price can maximize revenues and profits.ConclusionValue creation Internet is a complex concept that concern directly online content and its pricing. As products are online and not physical, the operations running their markets are difficult to set in place.
Trying to find the right price and the right way to sell online contents is sensitive for companies. Mainly because their first goal is to get revenues from their products, and to make profits from their sales.We wanted to explain with this paper how companies can make profits online, through the pricing of online content. In this perspective, we clarified the different concepts of online content, and its pricing, and we defined the term of profits. Then we studied how online contents are priced, with which models, free or paid.
After that we analyzed how companies can make revenues from their online contents, and how they can maximize their profits. We found out that companies have several models to price their online contents. They can suggest them for free, or they can ask the web user to pay. In this case, the customer can pay for a part of the content, or for all the content, with a price based on the content, through a subscription, or thanks to a license access. Moreover, we have seen that companies have the choice in theories for setting the price: they can fix a « quoted-price » which is static, they can choose to set a discriminatory price, depending on the profile of the customer, or they can set a dynamic price, flexible depending on the market, the period, etc.
To make profits, companies except from their free contents to make web user see advertisements to earn money, or to appeal customers to pay for something else, like other online content or products. But companies can maximize their profits by selling paid online contents (a part or all of them). To know which one of the models is going to make the maximal profits, online companies should analyze the web users and customers’ behavior. It will also help them to choose a price that appeal consumers, and that maximizes profits. Such a summary study necessarily has limitations. In order to answer the question in more details, each model of pricing should be looked at more closely in a bigger article, by studying consumers’ behaviors and reaction to the price and price model.
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