Information Pricing

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Information Pricing by Mind Map: Information Pricing

1. First-Copy Costs

1.1. Information goods are expensive to produce but cheap to reproduce.

1.1.1. There is no limit to the amount of copies that can be produced with an information good.

1.2. Once the first copy has been produced most costs are sunk and cannot be recovered.

1.2.1. Sunk costs: not recoverable if production is halted before product is finalized. Once several firms have sunk the costs necessary to create the product, competitive forces tend to move the price toward marginal cost. Marginal cost: the cost of producing one additional good.

2. Unusual Cost Structure

2.1. High fixed costs and cheap reproduction of information goods create a unique cost structure that can make it difficult to value the good for sale.

2.1.1. Goods must be priced according to consumer value, not production cost.

2.2. Additional production and distribution costs are close to zero which leads to substantial economies of scale.

2.2.1. The more you produced, the lower your average cost of production.

3. Marketing Strategies

3.1. Information goods are experienced goods, meaning for the most part, the goods are associated with some type of visual experience.

3.1.1. Once a product hits the market there will be several copy-cats trying to get in on the market as well. For this reason, creating a unique and differentiated product is crucial. Creating a custom and unique experience for the consumer will help your product stand out and have an advantage over your competitor. For example, if your product is a book, giving the consumer the choice between an e-book and a hard back provides two different prices that will appeal to different customers and yield more sales by giving the customer a more customized experience.

3.2. First mover advantages can be powerful and long lasting in lock-in markets.

3.2.1. Lock in markets are those which have high costs associated with switching products. I.e., switching from a VHS player to a DVD player. Be weary, however, being the first mover is often much riskier. With high sunk costs, if your product does not sell well it may be increasingly difficult to make back any money.

3.2.2. Other companies are watching! Often times, first movers have to spend the most on research and development for new products that can be reverse engineered by other firms when the product hits the market

4. Know Your Customer

4.1. Creating a personalized experience requires knowing whom you are personalizing it for.

4.1.1. The internet can make or break a product or company. Consumers have an easy outlet to voice any concerns they may have with your product. At the same time, they can also praise and help promote a good product.

4.2. The internet has provided a great tool for two way feedback between the firm and the consumer.

4.2.1. The internet is also a necessity in modern day customer acquisition. Internet data allows the firm to tailor emails and ads to their exact demographic and ensure ads are being used as effectively as possible

5. Volatile Pricing

5.1. There is no finite cap on the amount of times an information good can be reproduced. There is also no natural price floor because the cost of inputs is close to zero. For this reason, it is easy for a price war to break out between two or more firms.

5.1.1. A price war is a fierce competition between firms to take market share. If two firms sell a good at the same price one will slash the price and sell the same good for less hoping to win more customers and gain market share.

5.2. Firms late to enter the market can take advantage of lower first-copy costs and drastically undercut market prices.

5.2.1. If a price war goes on long enough, the information good will approach its marginal cost which is close to zero. This is why we see so much free information on the internet because at this point they are not selling the actual good, they are selling the ad space.

6. Network Effects

6.1. With information goods, the more people using the good or service, the more beneficial it is for the user.

6.1.1. As an example, if more people adopt a technology or product such as a DVD player, there will be more DVDs made available for purchase.

6.1.2. The internet as whole benefits positively from network effects. The more users the internet has, the more content will be produced, making the internet have more to offer each individual user.

6.2. Challenges presented by the network effects include gaining traction. Often getting the ball rolling to a point of hitting critical mass can be difficult. Once critical mass is hit more users will flock to the service because of the added benefits it creates for them if everyone else is using it.

6.2.1. Congestion can be a common problem with information goods online. Too many users can slow down a website creating a negative experience for everyone.

7. Market Structures

7.1. The dominant firm model doesn't necessarily always produce the best product, but it uses its size and scale economy to create a cost advantage over smaller competition.

7.1.1. Microsoft is great example of this. Windows may not be everyone's first choice for an operating system but it controls the market for desktop computers.

7.2. Differentiated product markets operate with several firms producing the same kind of information but with several varities.

7.2.1. This is the most common market structure for film, television, publication and some software.

7.3. It is common for software companies to take advantage of both structures