How to price virtual products such as App?

This article comes from knowing "what is the basis for pricing virtual products for app".

Economist Varian's definition: "All digital products or can be digitized products, can be regarded as information products", traditional information products in books, movies as the representative, now talk more of course is software, APP, website category.

Cost of information products

Talking about pricing must talk about cost, the cost of information products is characterized by high fixed costs (such as the money and manpower spent on developing Windows 8), but the variable cost of increasing copies is very low or even 0 (for example, the development of Windows 8 is carved into a disc, or the network sold directly). This cost structure leads to:

1, the fixed cost of information production is the most sunk cost, that is, if the production stop can not recover the cost. If you invest in an office building but change your mind about it, you can sell it to recoup part of the cost. But if your movie fails, there's no second-hand market that lets you sell the script to recoup the cost.

2, the variable cost structure of information products: Marginal costs will not be increasing trend, even if a large number of copies have been produced, the cost of producing more than one copy will not increase. Unlike manufacturing companies, Microsoft does not have to face depreciation and productivity constraints: if you can produce a copy, you can produce 1 million copies or 10 million copies at the same unit cost. The information industry has created an unimaginable scale economy for the real economy: the more you produce, the lower the average cost of production. It is this low incremental cost and massive operation that allows Microsoft to enjoy 92% of its gross margin.

Economics generally believe that the price of a product in a fully competitive market is equal to its marginal cost. This is evident in the information industry-for products that have zero marginal cost, such as phone numbers, stock quotes, maps, are often free, and can be easily accessible on the portal site.

4, information products are generally experience-oriented products, and its low variable cost for marketing provides a huge opportunity. Toothpaste sellers may have to pay one or two of dollars in production, packaging and distribution for each customer when they promote their products, but the cost of sending more copies of a free sample to a seller of information is almost Nil. Copies of information products are free for both producers and consumers.

II. Pricing of information products

Generally speaking, the traditional theory of cost-based pricing method for information products is difficult to apply, which requires enterprises more to stand in the consumer's perspective to consider pricing strategy. Generally speaking, the aim of the company's pricing strategy is to maximize product profit through perfect price discrimination. As part of the 4P, pricing seems to be the easiest part of the company to ignore, and it's very rare in the teaching of marketing in business schools. It is true that the core of any enterprise competition is in products and services, it is impossible to achieve a sustainable leading position only through price strategy, but the price strategy is the model of enterprise management "empty gloves White Wolf", almost without cost, but can significantly improve profits. The characteristic of the marginal cost of information products makes the enterprise pricing get rid of a lot of shackles, in recent years, the development of pricing theory has benefited greatly from the pricing strategies of companies such as Microsoft and IBM.

1. Consumer Division and price discrimination

Next, the pricing of price discrimination is how to operate. For information products, we can interpret price discrimination in economics as follows:

Personalized pricing: Sell to each user at a different price.

Group pricing: Setting different prices for consumer groups with different price sensitivities.

Version partitioning: Provides a product line that allows users to choose the right version of their own and consumption.

Personalized Pricing

The advent of a highly interactive internet makes personalized pricing (ie, full price disambiguation) possible. Because prices can be changed instantaneously, sales, selling, and other forms of promotional pricing are easy to achieve on the Internet. Airlines use dynamic pricing on their websites, or auction seats, and last-minute sales even spawned a business model such as the http://weipiao.com. Online data providers such as Thomson Reuters have a different price for each customer, the price you pay may depend on what type of entity you are (companies, small businesses, governments, academic institutions), the size of your organization, the time you use the database (day or night), the amount of data you use (with discounts), What database do you use, do you print it out or just look at it on the screen?

In general, personalized pricing is mainly based on the data support of consumers to understand the use of habits, so that products and prices are differentiated at the same time. Product personalization relatively easy (for example, watercress personalized page and RSS service), but the personalized pricing is more difficult, the company generally can not estimate the user for more than a few features of the advanced version of software, the willingness to pay will rise, so often need to pass the market test to consider the premium version of the software than the free version of the premiums.

Group Pricing

The ideal condition for a manufacturer is, of course, personalized pricing, but this requires an accurate understanding of the consumer's willingness to pay, often costing too much. Sub-optimal choice is the group pricing, that is, according to the different groups in the price sensitivity of systemic differences, to provide them with different prices, expand the consumer group. For example, students generally high price sensitivity, Windows 7 Professional edition of college students discount price is set to 199, at that time I really have students around because the feeling that the price can be accepted, bought a genuine Windows.

Version partitioning

Vendors provide a product line that allows users to choose their own version and consumption. The advantage of this kind of pricing method is that the supplier can not cost to understand consumer's demand characteristic, but the consumer chooses the product which it thinks is most suitable according to own demand, so that the supplier achieves the goal of maximizing profit, and can understand its requirement characteristic from the consumer's purchase behavior. For example, common English economics textbooks tend to have the Indian version and the American version of the two versions, in fact, the difference is not very small, the United States to write textbooks in India after the "localization", in the rupee and India's GDP as an example of the economic textbook for the U.S. market is not attractive, so that consumers are perfectly separated, In India, prices are set at low prices and the North American market to set high prices of genuine books will not be goods, publishers achieve price discrimination.

2. Other Pricing methods

Jump out of the price discrimination logic, combined with the characteristics of information products, common pricing methods are:

Bundled pricing

Because the marginal cost is extremely low, the production is not limited, the enterprise often can carry on various combinations to the information product, realizes the biggest profit. Look at the following example:

Xiaoming and Xiao Li are willing to pay the price for two Microsoft software.

WORD EXCEL

Xiaoming 120 100

Xiao Li 100 120

Xiao Ming in law school, all kinds of papers to write, so word for him is the basic tool for survival, he is willing to pay high prices, but Excel is only occasionally used; the small Li Co is the accountant, obviously his situation is contrary to xiaoming.

We consider several pricing methods: If the two software are priced to 120 yuan, then xiaoming bought word, Xiao Li bought Excel, income of 240 yuan; if the seller decided to small profits and quick turnover, two software are priced 100 yuan, then xiaoming, Xiao Li a hard-hearted maybe two software have bought, So the seller's income rose to 400 yuan, already very good.

But this is not the limit of the seller's income, if the seller tied up the two software sales, pricing 220, xiaoming and Xiao Li will be willing to buy two, so the seller miraculously got 440 yuan of income.

This example is my pricing strategy "empty gloves White Wolf" the most intuitive understanding, in understanding consumers to pay the premise, reasonable pricing for the enterprise brought 40 of pure profit. In reality, bundled pricing requires a certain complementarity between the products, the target customer overlap. Bundled pricing often offers a larger discount to attract attention, and the most extreme example is when Microsoft used IE bundled with Windows for free to intercept Netscape, knowing that browsers were charging at the time. Bundling pricing has always been the focus of academic circles, and the bundling pricing of information products by monopoly companies has been proved to be Pareto optimal. (Hitt, Chen 2001)

Lock Price

One of the characteristics of information products is that it is easy to form a lock-in effect. For example, the General people will not easily change their mailboxes, QQ and Weibo, the company will not be willing to frequently change the ERP system. For the product that forms the lock-in effect, the consumer's conversion cost is high, the price sensitivity is very low, the enterprise often can overflow the price.

Share Pricing

Another feature of information products is sharing, which is easy to replicate and easily spread. This characteristic obviously will bring the huge loss to the company, but also through the reasonable pricing strategy opens up the new profit source. In the case of books, academic journals are often sold at high prices to university libraries and sold to individuals at low prices. Libraries are willing to pay higher prices because information is shared among many users. Companies can sell to people who have high ratings for their products, while allowing people with low ratings to share it. For ordinary books, if you're a fan of Harry Porter, you'll buy a hardback in the first of his books. If you are just an ordinary reader, you can wait until the school library has bought it and borrowed it to read it. There are many examples of software companies that quickly occupy the market by sharing pricing, perhaps most famously the Netscape Navigator of 1994, which at its peak had occupied nearly 80% per cent of the browser market and was considered a pioneer in the internet age.

Split Pricing

Easily bundled products are often easily segmented. Segmentation pricing refers to the key advantages of dividing products and services into components and pricing separately to attract customers ' attention to their products. A classic case for information products is to separate the anti-virus software itself from its virus database and sell it separately, allowing consumers to pay enough attention to the leading technology of the virus library and to enhance the willingness to buy. (It seems to be Norton, forget exactly which company it is)

Predatory pricing

Information products update faster, according to the product life cycle theory, the company generally take predatory pricing of new products to obtain the possible profits.

The pricing strategy is more advantageous in the following three situations: benefits are used early in the product lifecycle because early adopters are not sensitive to prices, such as those who buy Google Glass, which are more advantageous when there is a small competitive risk, and when there is a strong link between price and function ( The geek who is willing to buy Google Glass has a deep understanding of product functionality. Predatory pricing also gives companies a high degree of flexibility in reducing prices, looking at the price cuts per generation of Samsung Galaxy.

Competitive pricing

Pricing by reference to competitive products is the most common pricing strategy and is the most common pricing method for companies without pricing strategies. In the App store, for example, the prices of similar apps developed by our developers are often the same. This aspect is based on the game principle to make a lot of pricing model, here is not discussed in detail, a brief introduction of information products competitive pricing considerations of the main factors: market structure, market maturity and product functional characteristics.

If an enterprise enters a mature market with higher price elasticity (i.e., consumers are more sensitive to price), it will generally adopt a low-cost strategy to occupy the market share. In an emerging market, where entrants do not have a large enough market share, companies tend to fall into a price war. Even if the winner of the price war, the end will often be in a price-distorting market, and then want to increase the price to obtain normal profit level is very difficult, often can only take some change to price means. For example, the sale of books, price wars make today's consumers are extremely sensitive to discount rates. (Very interesting phenomenon, consumers to promote the intensity of the perception than the price itself to be sensitive) to raise prices means only to allow publishers to improve the original price of books, electricity dealers still maintain a low discount.

Companies tend to set high prices for richer products, but tend to overlook the ability to translate additional functionality into a language acceptable to consumers. If the company's marketing communication does not successfully translate technical features into product selling points, this high price strategy is undoubtedly a failure. More interesting examples, such as impression notes, include more upload capacity, off-line notes, history of notes, collaborative editing, password locking, etc. for their premium accounts, but they do not promote the features of the premium account, and it is difficult for consumers to perceive the benefits of an advanced account. After all, not every user has used Google Doc to understand the powerful and convenient editing, if you can make a video about a pair of remote couples with collaborative editing function together to develop travel plans or wedding planning, presumably will enhance the user's willingness to pay the upgrade account. (Evernote in the United States and China, I suspect that the current domestic buying of advanced accounts is not much)

These are just some of the points that are often taken into account in the pricing of information products, companies actually adopt pricing strategies that are often complex, such as selling a game in the App Store, making two versions of free and full editions, occasionally limiting (promotional pricing), and charging items and coins in app (split pricing), And the outfit is bundled with pricing. If the game quality is good enough to high, can sell at the beginning of the line to win high profits, heat past gradually reduce prices (predatory pricing).