Digital Pricing Models

Pricing by definition is the process of determining what a company will receive in exchange for its product or service. Pricing products and services for digital sales has changed in quite a many ways from how it was done traditionally. Key trends which have impacted this shift include:

1. Reduction of intermediaries through digital channels: The two key reasons as to why people buy products online are convenience and cost. Also marketers are adopting and selling across digital channels as they see a chance to reduce intermediaries and provide the same product at attractive/competitive prices to more people than they are being able to do so presently through traditional channels.
2. Knowledge of customer buying habits and propensity: Helps create cluster/persona-specific and channel-specific pricing. Also products can be sold at a higher price with more value-added services to support individualized needs.
3. Economic pressures and possibility of instant price comparisons online: With economy paying a large role in price pressures and with internet medium providing the possibility of on-the-spot price comparisons, brands can no longer be complacent, as customers have a clear idea of both the competitor’s quote and firm’s product being sold on a discounting site, both of which would demand the marketer to be highly aware.
4. Ability for consumers to set and negotiate online prices: With sites like Ebay where customers can take part in online auctions and also with concepts like ‘Buy and sell’ platforms where customers can barter products at self-set prices, a large part of the pricing control is going into the hands of the customers themselves.
5. Concept of ‘Free Services’: The most prominent impact of online marketing is the way businesses are built these days with consumers wanting to test products and services for free before firms can start charging. In the case of online content and service, they are being run mostly through accompanying ad-models rather than a rate-card itself.
6. Customer’s demand for payment elasticity: Most of today’s youth who want to consume products and services instantly, need easy payment options being offered to them in terms of extended payment installments which impacts the way products and services should be priced and marketed.
7. Possibility of content modularity and digitization: With a large category of products like information, books, music, entertainment, games, etc., easily lending themselves a digital format, which can be customized and sold as modules, marketers need to develop accurate and predictive pricing models to make most use of it.
8. Possibility of innovative business models: With new forms of digital models emerging, marketers must utilize these trends to make revenue in varied and novel ways. Examples include—In-Game payment, App Subscription, Donation, Pay As you wish, affiliate sales, etc.

With the impact of the above trends, there has been a distinct shift in how companies today are managing their pricing for key products and services. Let us look at a typical process of developing a pricing model which companies have been following traditionally (developed by providing a digital context to ‘Setting the Price’ model shared in Marketing Management, 14^th edition, by Philip Kotler).

1. Selecting the pricing objective: Firms should look at their digital strategy and decide what offering mix (products and services) they would want to take online and the kind of revenue, market share, and profit objectives they aim with their presence. This would also depend on the type of channels being chosen, the kind of customer segments targeted, and how those services can be priced with regards to audience consumption patterns on those channels and sites.
2. Determining demand: Generally, there is an inverse relationship between price and demand and companies need to be careful of how they price different product categories and lines. The economics behind developing demand curves and their price elasticity (responsiveness of quantity demanded to a change in its price) is not being covered in detail here as it is an extensive area of study in itself. Firms going digital typically have a lot more data and more sophisticated ways to test changes in demand based on price and large firms deploy proper statistical techniques to arrive at varied pricing depending on the kind of site, audience, landing page, and even the day and time they are selling their multi-portfolio products.
3. Estimating costs: As it is important to develop pricing techniques, in the same manner, firms need to develop accurate cost models and apply them to each pricing scenario to be sure that they are profitable enough. With internet, though it seems that overheads should be lower because of reduction of intermediaries, there are other technology and infrastructure costs like website maintenance, server set-up, online security, partnership development costs which have to be borne if companies need to accurately estimate their fixed and overhead costs.
4. Analyzing competitor’s costs, prices, and offers: Since digital is a very price-sensitive medium and customers have access to even historic data points on each product’s price, it becomes crucial to build models which will not only predict and preempt key competitors’ price moves on their websites, but also make sure that for the multiple product categories being sold on e-commerce sites, the firms‘ products are competitive enough and are not losing out to bigger discounts or bundling options.
5. Selecting a pricing method: This stage involves the actual exercise of choosing different pricing models. We have further shared traditional pricing techniques and the ones which are being followed more commonly in the digital space.
6. Setting the final price: Once all the above factors have been considered, the final price is reached by including factors like impact of other marketing activities, company-specific pricing policies, impact of pricing on other parties, etc. The digital world offers marketers much more flexibility in adapting their prices since the medium itself is amenable to quick changes, which was not the case with physical pricing, where changing and labelling pricing could take days if not months. Also, a major impact on digital pricing comes in the form of promotions and deals which are very common to online landscape and whose impact we would see in the ‘fourth P’ on Promotions.

Traditionally, the following pricing methods have been deployed by companies:

1. Mark-up pricing: This is one of the most basic pricing techniques in which a standard mark-up is added to the production cost. This method typically works only if the marked-up price brings in expected level of sales.
2. Target return: The firm determines the price that yields its target rate of return on investment.
3. Perceived value: Involves basing the price on customer’s perceived value. It is made up of a host of inputs like buyer’s image of product performance, channel deliverables, warranty quality, customer support, etc.
4. Value pricing: Includes charging customers a fairly low price for a high-quality offering to win loyalty and become a low-cost producer without sacrificing quality.
5. Going rate: It is where the firm bases its price largely on competitor’s pricing.

With new digital structures in place, pricing models are being developed to serve these emerging business models apart from the ones shared above.

1. Comparative pricing: Similar to ‘going rate’, this type of pricing not only compares competitor prices, but also varies itself in relation to data on customer visits, their loyalty, influence of the channel, e-commerce site on which it is being sold, customer sentiment across social networks, keyword searches, etc.
2. Ad supported model: This is one of the core models on which digital business was developed wherein instead of charging the consumer, businesses and advertisers were charged for placing ads across most read content, or keywords searched in Google, or against reviews they liked across a social network. We would get into the dynamics of how advertisers are priced in the later chapters in detail.
3. Subscription model: With a large part of content being available in digital format, and customer’s problems being broken down into sub-processes and serviced through quick-reference applications (for example, mobile apps), there has been a surge of interesting subscription-based models where customers are paying for packages of information, entertainment, education, etc., on a time-bound fixed price basis.
4. Pay-per content/use model: It is now possible to charge customers for each content piece and even on the usage time for that content as digital medium can provide all of this information on a real-time basis to marketers.
5. Auction type: With multiple models being developed using auction techniques, this pricing technique has been democratized for consumers with such ease on digital platforms that it deserves to be a digital-led pricing model.
6. Last minute pricing: Possible only in online mode; either you can increase prices in case of high demand-low supply (online airline prices) or you can reduce prices in case of low-demand and high supply (for example, unsold event tickets on the day of the event).
7. Customized pricing/cart-based pricing: For loyal customers, who buy regularly from a site or a platform, digital technology can help marketers calculate discounts, provide bundling offers, share free coupons on regularly bought items as a part of their pricing strategy.

With the above discussion on most prevalent digital pricing models, let us see how some of them are being applied to the five digital offering states:

1. State A (pure tangible good): Goods sold through e-commerce, auction, and branded sites; typically comparative, mark-up, auction pricing are applied here.
2. State B (tangible good and related services): Bundling popular offline product with online services (Newspaper with its digital edition); this is generally a subscription model which can also include perceived value or customized pricing models.
3. State C (hybrid model): Products like B2B Information have an equal services aspect, wherein specific pieces of information can be segregated and provided in a customized manner to higher paying or niche segments. The most common pricing models for information being sold in such a modular fashion include subscription pricing, price per content, and price per usage.
4. State D (major service with few goods): Typical examples include productized service companies which essentially sell services in the form of products like Google or Microsoft. Target return and comparative pricing are typically applied here.
5. State E (pure service): Online industry mostly started out with content, networks, and sharing as its core models (for example, blogs, curated news sites, aggregators, social networking sites, etc.) which did not charge initially but developed delighted and loyal customers. They were then typically charged through advertising, subscription, and pay per content/use model. Most prominent examples include YouTube, Facebook, Twitter, which are mostly ad-supported apart from other models like LinkedIn, WhatsApp, Wikipedia which go either the subscription or donation way.