FALL 2008 VOL. 9 NO. 2

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Online Pricing

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The publishing industry is going through a major transitional period as it tries to come to terms with the Web as a delivery platform for content. How can publishers keep their digital content from cannibalizing the market for printed material yet still provide new options to customers?

P.K. Kannan, Harvey Sanders Associate Professor of Marketing, helped the National Academies Press (NAP) develop a strategy that would maximize the revenue from both its traditional and new media offerings. Kannan and study co-author Sanjay Jain, from Texas A&M University, worked with Barbara Kline Pope of the NAP on a study that resulted in a new pricing model for the NAPís printed and online content. The paper based on the study won the coveted INFORMS Society for Marketing Science Practice Prize competition in October 2007.

One option the organization considered was to continue to sell printed material, but to distribute the PDFs online for free to meet one of NAPís goals to disseminate scientific knowledge widely. But Kannan found that this option would effectively cut the organizationís revenue in half.

Customer purchase data was gathered from NAPís Web site based on an online experiment. The study examined the choices made by more than 1,000 customers over a three-week period. The study focused on customers who showed interest in purchasing a book. Customers who had a printed book in their shopping carts and who pressed the checkout button were randomly intercepted with an offer for a PDF format of the title in their shopping cart. These customers were given information on the quality of the PDF, a clickable button to view the sample PDF, download time, and the price of the PDF format in U.S. dollars.

One in four customers who were browsing a book title were also intercepted at random after perusing five pages of content and presented with details of the PDF in the same way.

PDF prices were set at six levels relative to the price of the printed version of books, at 110 percent, 100 percent, 75 percent, 50 percent, 25 percent, and free. If a customer didnít choose a PDF format at the initial price level that was displayed, it was dropped to a lower level and the offer was repeated.

Rather than viewing differing forms of content as substitutes for each other, consumers sometimes viewed different forms of content as imperfect substitutes or even complements to one another. The degree to which a customer viewed the print edition of a book and its online PDF as substitutes or complements varied from customer to customer.

Using data from the study, the authors created a model using an innovative measurement technology to determine customer preferences for the various forms of content and recommend various pricing strategies by controlling for the marketing mix and introduction of new titles.

One result was surprising. ďWe found that many customers would pay more for the PDF than they would pay for the printed book,Ē says Kannan. ďYou canít make generalizations about what consumers want. And you have to be creative as you think about ways of providing value and extracting consumer surplus.Ē

Kannan applied that creativity to the NAPís pricing problem by bundling its content in a variety of different ways to take advantage of differing consumersí needs and desires. ďIf you can come up with a bundle option and price it appropriately, many people will end up buying the bundle rather than just buying either the printed book or the PDF version of the book,Ē says Kannan.

This was a winning strategy for the NAP, which implemented Kannanís recommendations. In the two years that followed, Kannan continued to gather data on the sale of books and PDFs on the NAP Web site. The NAP was able to charge higher prices for printed books in the presence of PDF versions of the same books, resulting in higher revenues. PDF sales also increased from 7 percent to 13.6 percent, which led the NAP to increase the prices of PDFs relative to printed books. NAP plans to continue to implement policy changes using suggestions derived from the model.

The music industry, which has struggled with the impact of digital content on traditional CD sales, could benefit from re-examining its pricing models in light of this research. Consumers are already effectively unbundling content by purchasing just one or two songs from an album rather than the entire album. Kannan says, though, that itís possible the music industry could bundle content in a way that would be attractive to users and would expand the market.

Kannanís study was funded in part by a grant from the Mellon Foundation. For more information about this research, contact pkannan@rhsmith.umd.edu.


Copyright 2008 Robert H. Smith School of Business