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Recently I read this great post on Knowledge@Wharton. They ran an interview of Jagmohan Raju and John Zhang, the authors of 'Smart Pricing
'. As the book suggests, pricing when done right can contribute to the success of a product like nothing can! Competition-based Pricing and Cost-Plus Pricing are the popular concepts used by FMCGs but there are many more strategies in the marketplace, both online and offline. This led me to think about content-pricing on the web. What is the best way?
Since most web-content is free, websites have to develop new and innovative ways to make money. Hulu.com, the second most viewed video site (Youtube being no.1) is struggling to make money. Few months back, Adage claimed "Hulu is a towering success, just not financially". Its network backers are not happy with all the free episodes being streamed. Although Hulu does have an innovative ad concept where they interact with the viewer. Right at the beginning of the program, viewers are given the option of choosing the ad they would like to see. Good tactics but still not good enough to make profit.
Google doesn't charge the user, it charges the advertiser. Same with webmails, twitter and social networking tools. Twitter figured out its revenue model just a week back.
The New York Times is free online. Why would you "buy" it from a news stand? The Times is not charging us for reading its online content. Instead, its charging the advertisers. You know, the annoying rollovers that pop up just when you are about to read something.
This is another challenge for free web-content providers. How to make money without spoiling the user-experience? The ads got to be unobtrusive but at the same time you want the target audience to see and click on the ad-link. Only then can the website make money. More clicks = more money. That's how most affiliate programs work on the net.
Some of the very premium or very niche news websites tease the reader. The Wall Street Journal for example. You go to their home page, you see some previews, you click on an article you want to read and then they hit you with the following - "To continue reading, subscribe now". You have to subscribe for full-site access.
It's easy for location-based social networks like foursquare and gowalla. They can easily latch on to the local businesses and keep their service free for users. Geo-targeting is an effective marketing tool when it comes to services like hotels, restaurants, concerts, games etc.
Content and concepts may differ but the goal remains unchanged. Making money. Twitter did it best. They played it slow. Only after they had established a dedicated user-base (close to a billion!), they began revamping their revenue model.
Slow and steady - that's the way to go!
Say you want to buy a set of cheese from the pack shown in the picture? Which set will you choose?
If books like Nudge
by Richard H. Thaler and Prof. Cass R. Sunstein or Predictably Irrational
by Dan Ariely are to believed, our mind plays quite a few tricks on us, and those tricks actually influence our day to day decisions!
This piqued my interest in the subject and I realized along the way just how invaluable this field of study, known as Behavorial Economics, is for the advertising industry.
Rory Sutherland via campaign.co.uk says: "Behavioural economics provides us with an intellectual framework, which allows us to better justify (and charge for) the ideas we already generate as well as generate new and better ones."
"The nine examples below are merely an indication of some of the concepts so far revealed in experiments. Significantly, many of these non-rational behaviours affect us unconsciously, and hence will not be revealed by conventional market research."
1. Loss aversion
2. I'll have what she's having
3. The power of now - and of instant feedback
4. The power of channel preference and interface
5. Scarcity value
6. Goal dilution
7. Chunking
8. Price perception
9. Choice architecture
I will concentrate on Price Perception and Choice Architecture for now.
Think about those Jimmy Choos you bought because the price said $300 in a collection where most of the pairs were worth $1000? Would you splurge similarly on a pair of Faded Glory boots at Walmart? No way. High-end brands and designer stores are all about Price Perception. The higher the price, the greater the perceived value. But ad agencies almost never have a say on the price. So let's move on to Positioning and Choice Architecture instead. Choice Architecture as applied to marketing is the influence of the surrounding options while making a decision.
Did you by any chance choose the $7 cheese in the picture above? Studies have shown that most people tend to choose the second most expensive item on the list. Even though we rarely go for it, the highest price on a list does raise the average. Do you detect a "nudge" from marketers there?
On one hand we find cheap things to be of poorer quality but on the other hand, we stay away from the super expensive. So the best way to market a product will be to price and package it reasonably and place it amongst some very exorbitantly priced products.
As Rory Sutherland says in the campaignlive.co.uk article "In an ingenious exploitation of framing effects, one salesman sold Rolls-Royces at a yacht show. Seen alongside a $10 million yacht, a $500,000 car seems like a bargain."
Is it a coincidence that the home page of Amazon.com is promoting the Kindle
as "easy to read in sunlight" and "thin and lightweight" when the recent nytimes review of the iPad says "You can’t read well in direct sunlight. At 1.5 pounds, the iPad gets heavy in your hand after awhile"?
