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Sunday, 08 January 2017 18:42

Pricing strategies – what makes sense?

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How do you price an information or digital product? Lets imagine you think there is a business opportunity in cataloging all the pizza places in the neighborhood. This short blog is not about whether such a database is profitable or a viable business in the age of easy google information but rather how do you price such a product.

 

The interesting fact about any information product is that it costs significant money to create the product. Yeah, that is true of most products! But then, making a copy of the new product is relatively cheap. Or providing access to the product is relatively cheap. So lets say it costs you $10,000 to create such a database. Now, you have a customer who says they would like to have access to the product. What would a company sell the access to the database for ? It costs nothing to the company to provide access except some server or storage costs which are essentially negligible.

 

Would your company allow access for $1? Cheap!

Would it allow access for $10,000? Expensive!

 

So how do you come with the right pricing? The company cannot base the selling price based on the price that it costs to make a copy. $0.01. In an older economy, the way to price it was to say that it costs me $x to make the product and I will sell it for $x + 30% margin. All very well.

One complication would be that your customer can probably get the list for free from Google. In which case whatever you charge is a premium. Which means that your company needs to provide the data in some nice way, qualified, or with some value add that Google does not provide.

 

However, assume that in this case your company does not have any free competition but paid one. That makes it easy – you can price your company very competitively and hope to snatch some business.

 

One way that economist suggest is that the price should be based on what the market can bear rather than the inherent value…. Which means that charge as much as possible which the customer will pay… This does not sound right… but what do you think?

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