Strategy applied to information goods
This book is not about vocabulary. We are not going to invent new buzzwords [...]. Our goal is to introduce new terms only when they actually describe a useful concept; there will be no vocabulary for the sake of vocabulary. We won't talk about "cyberspace", the "cybereconomy", or cyber-anything. [...] this book is not about analogies. We won't tell you that devising business strategies is like restoring an ecosystem, fighting a war, or making love. Business strategy is business strategy and though analogies can sometimes be helpful, they can also be misleading. Our view is that analogies can be an effective way to communicate strategies, but they are a very dangerous way to analyze strategies. -- Carl Shapiro, Hal R. Varian I love these guys. Three major themes dominate strategy for information goods: vanishing marginal cost forcing differentiation, positive feedback in network markets, and lock-in.INFORMATION GOODS
Information is costly to produce, but cheap to reproduce. The production of an information good has high fixed costs, the cost to set up production originally by collecting the information and organizing it, but neglibile marginal costs, the cost of producing another copy and distributing it. Copies are basically free so the more copies you sell, the lower the average cost to produce each, and the cheaper you can offer them.Information goods that become commoditiess (undifferentiated products that are exchangeable) are dismal. Traditional economics teaches that once the original investments have been made, competition among sellers of commodity information pushes prices to zero, the marginal cost.
A marginal cost of zero does not bode well for the producer of information goods, and makes it clear that the competitive strategy for them must be differentiation. If you can not differentiate your product, try to get as much market share as possible to drive down average cost and be able to offer lower prices.
Fortunately, information goods are cheap and easy to customize and even personalize. Create different versions for different users based on what they value maximize the overall revenue. Marginal production cost for all versions will be the same once the customization system is set up.
Try to learn about your users from marketing tools like promotions, and from information in your log files. One advantage of information goods over traditional ones is that they can collect information, either by requiring accounts or by observing usage behavior. By collecting customer information you can gain powerful insights into who they are, and what they look for.
Information goods need to be experienced. This problem can be overcome by branding and reputation, to build trust. Free trial versions can come as versions with restricted period of use or restricted functionality or nags and provide users with experience suggesting the value of the full version. They are an extreme of differential pricing for people who at first may only be willing to spend time on it. Value of information goods lies not in the raw data (there is more than enough), but in locating, filtering, and organizing what is useful. Strong, intuitive tools to manipulate data are a competitive advantage.
Pricing
To discourage entry avoid greed in the form of large margins, and send credible signals that you are ready to destroy profits by aggressive pricing.You can either do personalized pricing, negotiating the price with each individual customer (makes only sense if the price is high enough to pay for the negotiation effort), or group pricing, offering for different prices to different groups (based on price sensitivity, e.g. academic rebates, or lower rates in poor countries), or version pricing, offering a number of versions with differing features.
Bundling - give discounts for combination sales can increase overall revenue if it reduces variation in willingness to pay. For example, if Max and Tom are willing to pay as much for soap and lotion:
| Soap | Lotion | |
| Max | $1 | $2 |
| Tom | $2 | $1 |
Offering single unit access to a library might therefore significantly reduce overall revenue, as many items will have some value for users, but not enough to make them pay the relatively high price. In that case quantity discounts could help, as nonlinear pricing helps customers to build their own bundle.
Identify dimensions very valuable to some customers but less important to others, and you will be able to charge them different prices, maximizing the overall revenue. This leads us to versioning.
Versioning
Identify dimensions very valuable to some customers but less important to others such as:- timeliness/delay
- user interface. Simple and less expressive for casual users, more powerful/complex and harder to use for high end users and experts who profit from investing them
- completeness. Partial datasets, missing sections, lower resolution images
- depth. Specific add-on data sections for specific user groups
- convenience. Adding nags or obstuctions or use limitations for cheaper versions, or slower speed for them. Important for customers are transaction costs. Passwords, registration, rights managements add hassle and increases these. More liberal terms increase theft, but also value and thus sales, price. Because they can be easily copied, it is difficult to enforce property rights for information goods. Try to maximize value, not protection.
- flexibility. Ability to store, copy, print, modify the information
- support
- privacy. Customers hate giving away data about them, so not collecting this is a differentiating factor
- accesibility. Online/Installed
Standards
Standards define markets and change competition for a market to competition within a market.Standards shift competition away from features to price, as the standard limits features to the common denominator, makes it harder to differentiate and still adhere to the standard. Standards are good for consumers, complementors, groups of innovators (as they build trust) but they really hurt incumbents.
NETWORK ECONOMIES
Network externalities occur when the value of a product for each user grows with the number of users. These demand side economies of scale are a form of positive feedback, they are self-reinforcing, unlimited, and, once a critical mass is reached, can lead to a winner-takes-all outcome, a near monopoly.They are called so because a typical example are networks, and they are external to what the company does. Others are operating systems, online markets, chat platforms (also a form of market or network).
Metcalfe's law: the value of a network grows as the square of the number of users.
If you fall behind, target a market niche or interconect with the larger network. Survival pricing doesn't work, at least for mass market items, it just signals weakness. The purchase price of software is minor compared to deployment, training, support cost. People are more concerned about picking the winner than about a few dozen bucks.
LOCK-IN
Lock-in occurs when customers face high switching costs. Total switching cost = cost customer bears + cost new supplier bears = extra profits available from customer. Lock in happens whenever information is integrated with other systems because of dependencies and specialized know-how to change it. The first mover advantage is powerful and long lasting in lock-in markets, just as in network economies.Typical switching costs: training, format conversions, the amount of legacy data, psychologial stress, search cost, specialized suppliers, loyalty programs, long term contracts, durables. The first few rise over time, investment in durables falls over time. Google lives from the fact that making yourself easy to find and others hard manipulates search cost. Dual sourcing is usually in buyer interest to avoid lock in.
The lock in cycle consist of: brand selection - sampling and entrenchment - lock-in, and then from the start. In perfect competitive setting extra value from lock-in only just recoups the up-front investment for winning the customer. A lock in strategy for sellers looks as follows:
- brand selection. Invest to build an installed base. Offer discounts to influential buyers. You can offer deep discounts to new customers; the problem is that it annoys old customers and entices them to pose as new; it also does not mix with loyalty lock-in programs.
- entrenchment and sampling. Help customers depend on your product and be commited to it; add proprietary improvements, loyalty programs and cumulative discounts - they artificially create lock in barriers for intense users. Get customers to extend before contracts expire.
- lock-in. Leverage by selling complimentary products and services for the base, and acces to these customers to other suppliers.
Bibliography
Competitive Stratregy, by Michael E. Porter.Information Rules.
