PRICING 2002: CAVEAT RAPTOR

      (Note: An update of Mr. Arnold's December 2001 lecture on Pricing at International Online.)

The need for hard cash is forcing many Web site operators to charge their visitors for access.

In January 2001, Yahoo! announced a deal with Divine Inc. (Chicago, Illinois) to make Northern Light's for-fee content available on a fee basis. Yahoo! now charges for real-time quotes, online personals, Web hosting, and auctions. More for-fee services are likely to follow as the company's demand for new revenues increases. "If you build it, they will come" has morphed into "if you come, we will bill you."

Most consumers--even those with modest Web experience--understand value-based pricing, bundled services pricing, special discount pricing, and the many other types of "pricing." These approaches to pricing means a charge, often multiple fees for content.

One less optimistic than I would view "value based pricing" as the marketer's statement, "We don't know what to charge, so let's see if this fee works." A skeptic might view "bundled services pricing" as a monopolist's effort to undercut the competition. An emotionally bankrupt K-Mart shopper would interpret "special discount pricing" as the penultimate signal of fiscal collapse. Not I. I believe that most Web site operators offering content for a fee are trying to stay in business. Online pricing is a tricky, little-understood business practice.

An up front pricing policy is a take-it-or- leave-it proposition. Such a policy gives the customer a measure of control. Most online users including the professionals who do online research for a living are blissfully unaware of for-fee back link deals, bounties, multipart click through splits, Web bugs, iframes, and active cookies. If such pricing "enablers" exist in an Internet-centric service, they are below the surface, lurking like an ice burg built from olecules pre-billing of credit cards and automatic debits from cash advance cards. Pricing can hide 9/10s of its functionality. The Web surfer can get snagged in the hidden pricing schemes as the sun shines on the publicly available price list.

When creative pricing functions reside in a site, some users may have no way to determine what information costs. A better way to look at pricing is to think in terms of what revenue overt and covert metric devices can generate. (Keep in mind that "information" as I am using the term may apply to content, software, or information services such as a person selling an answer or a consulting firm extracting a sales lead for the right to download a report on a specific topic.)

WHAT MAKES PRICING TRICKY

Pricing challenges are due to the interaction of at least four factors. First, the nature of information creates a massive upfront cost and then highly unpredictable pricing spikes. High usage translates to extra fees from telecommunications companies. These pricing spikes are difficult to predict. Second, the competitors usually imitate innovations. The pressure to do something new translates to more costs. Third, the information providers-whether specialist aggregators like Thomson Corp. or ProQuest or individual authors led by Mr. Tasini--up the stakes for copyright missteps. The legal challenge is expensive win or loses. Finally, the customers are very difficult to attract and keep. Marketing, an imperfect science at best, is perhaps the only Internet business function other than the engineering services group able to spend every pence in the cash box.

Little wonder that free is being edited to read "fee" at Web sites worldwide.

Information may want to be free but most online information providers need cash. Forget free. With VCs and creditors treating site operators like insects in an etymologist's laboratory, the only way for the hapless victim in the venture etymologist's laboratory to avoid skewering is revenue generation.

Professional librarians and documentalists do look for information bargains but have remained realistic when it comes to online information. The major vendors of what is called "branded content" leave them little choice. When information matters, high-value content costs money, often-significant amounts money.

So, how can Web sites offering online information generate cash from an unwilling and skeptical user base? The trend seems to be to use what I call "historically proven" pricing tactics. These are ploys that would be familiar to the pre-Christian Roman wine merchant cutting his product with water or the13th century butcher in Bruges putting his thumb on the scale to assist revenues. The difference today is that the Internet makes it more difficult for some people to spot the gimmick.

BIG NAMES IMPOSE USAGE FEES

Some high-profile information-centric sites have begun to figure out how to make the pound and euro coins fill the cash tills. Some examples include:
  1. 1. An understated, almost apologetic e-mail arrived on February 10 from "Net surfer Digest". The point of the e-mail was that access would cost $20 per year.
  2. 2. 10KWizard implemented an aggressive e-mail campaign to registered users in late 2001. The e-mail urged registering for a $99 special offer before the discount expired.
  3. 3. Hoover's, long a provider with a multi-tier pricing scheme, simply upped individual subscriptions to $99 with announcements I never quite received.
  4. 4. Northern Light shut its free service. Only for-fee services are available.
  5. Others seem content like the Financial Times to use the Web as an impermanent type of brochure ware. Our focus, however, is on the sites trying to pry cash from the convulsed fingers of a skeptical market. At this time, millions of online information newbies are laboring through the seven stages of fee denial. The first stage is anger, expressed as "How can this site charge me for what I can get free elsewhere." A small fraction of the online information consuming world has reached the final stage in the death of free information, "Online information costs money. Get over it."

    Web users, however, may find their journey to acceptance painful. Subscriptions, license fees, per use charges, and invisible revenue gimmicks such as selling search words are increasingly commonplace. Few sites-including the revered Google--are able to keep commercialism out of their online service offerings.

    It is useful to recall that in late 2001, "Interactive Week," listed Enron as the number one online service in its year-end roundup of industry leaders. If Enron could not figure out online pricing, what's the answer? Happily "Mbusiness Research," a print publication focused on wireless, promises to reveal "17 new ways to charge for data" in it's "Profiting from Option Rich Networks." Most mobile phone users have experience with charges on their monthly bill that appear as if by magic. Yet, there are 17 new ways to charge. Good news for purveyors of wireless information and services.

    Clear pricing is not in vogue. Specific, explicit prices make it easier for a competitor to craft undercut a rival. The present management wisdom is that fuzzier, fluid prices are harder to figure out. Fuzzy pricing is better. We have moved to a marketplace where caveat emptor has yielded to caveat raptor a better deal.

    Tiscali is in the process of learning that pulling off an "AOL play" in Europe is tricky. At this time, Microsoft, Mindspring-Earthlink, and the Darth Vader of online itself can make this algorithm into a mantra: 32 million * $25 * 12.

    UPFRONT PRICING

    There are some good pricing citizens in the Internet world.

    Upfront pricing is the milieu of governmental sites. An example is the National Climatic Data Center PDF of price lists updated in December 2001.The price list may be perused at ( http://http://lwf.ncdc.noaa.gov/oa/documentlibrary/pricelists.html.) There are some who may be uncomfortable paying for information that has been generated at taxpayers' expense. With the global slowdown, governmental entities need cash. Let the taxpayers pay... more than once.

    Charging for information or software is an exercise in balancing opposing forces, good and evil, day and night, yin and yang. The forces of good--the "yins"--spell out prices for a document, a program, or some other information object.

    Note that I used the word "good", not the word "ideal" or "perfect". The customer can decide on the spot to buy content online using a credit card. True some documents such as those on Dialog Information Services costs a few pence and others 25 or more. Within the explicit pricing model is considerable wiggle room. Prices, like pants for those over 60, are best left with a generous amount of excess fabric. The vendor may offer the content on the spot or offer an option to a physical instance of the content in the form of a printed report.

    Furthermore, the price may be tiered; that is, a one-time customer pays a higher fee than a regular customer. Fixed pricing also expands to embrace add on, premium or regular versions, special handling, and so on.

    The dark side of pricing--the "yang"--is a fuzzy price. The actual cost is almost impossible to determine prior to making the purchase. Fuzzy pricing uses one or more algorithms that accommodate interaction among variables. A good example is the pricing for a site license for third-party content when bundled with content management software. There is a price for the program, a price for the configuration (which may be a combination of such factors as seats, central processing units, commitments to for-fee training, integration services provided by the consulting unit of the information provider, and so on. There is, in fact, no price until the variables are plugged in with assumptions valid at a specific point in time and punching the "recalculate" key. Lexis Nexis pricing works like this for certain site licenses.

    The process of determining the range of likely prices requires a management process called "soliciting bids." A request for proposal, meetings, an exchange of data about the details of the potential customer's operation, legally binding proposals, and then a comparative financial exercise is needed to figure out the estimated total cash exposure will be given a set of assumptions).

    As annoying as these pricing approaches are, they can be figured out. A careful customer can avoid sites with inflated extra charges or shop on eBay where the market sets the price. A copy of Word Perfect 2002 garners one-fifth the fee charged in a High Street shop.

    GOTCHA 2002

    Pricing nuances make In Kentucky English, these are "gotchas". The charges simply appear. Fees appear. The customer may have no idea where a charge came from. Please, note that specific sites are intentionally not identified.

    Increasingly popular gotchas include: Sleight of hand pricing--the seller changes the pricing rules, sends the bill, and assumes the buyer will pay. This is a variation of the venerable bait-and-switch pay in retail. A good example of this is the pricing model in dating sites. Without mentioning a specific site, the person looking for a mate can browse the available soul mates. To answer e-mail requires a subscription. Then if one wants to post a "soul mate wanted" advert, another fee is assessed. The sequence of extra fees can be continued indefinitely.

    Prying by the always-changing bundle--the buyer discovers that signing on for a new information service includes a specific number of documents or access to particular resources. Then, the bundle is redefined. The scope of the original deal is narrowed. The dynamic bundle creates situations where the researcher may have to upgrade or pay an extra fee to access information that was originally part of the license agreement. The information seller then recalculates the price based on the customer's requirements. When the bill arrives, the customized product costs more than the bundle. Online systems can report these reconfigured prices. Some online vendors, however, choose to present the price with certain fees omitted.

    Free government information--may not be free. In Canada, for example, certain types of reports based on data gathered by Statistics Canada are not available directly from the government agency. The customer must work with a third party able to process the Statistics Canada data for an extra fee. A bit of probing may reveal that government agencies enter into quasi-exclusive relationships in exchange for a lump sum prepayment. The buyer of the information finds that the price for the data is not under the control of the government agency.

    Reaction pricing--Once a customer signs a contract, the vendor announces a price change. A good example of this was Yahoo!'s roll out of analyst reports at a monthly fee. Less than one year after the roll out, the service was discontinued and a new for-fee program for businesses was introduced with a different pricing schedule. The switch by Yahoo! Prompted Walt Disney Co. to back out of its deal with Yahoo! The reaction pricing is usually tied to an event related to a financial issue. Reaction pricing can be a signal of a changing financial climate at an organization.

    Time-and-click pricing--The idea is for the customer to pay a fee to sign up. Then as different information is retrieved, metrics are applied to clicks, information objects, and the time the person remains in the site. The time-and-click model gives the site operator an opportunity to charge for a password.

    Users must log in, so the session is "stateful"; that is, the actions of a particular user can be tracked overtly. Time-and-click pricing can be so complex that figuring out an invoice may require a full-scale audit and then the auditors may be unable to determine how a company charges for its information. Obfuscation makes it easier to calculate royalty shares and other usage-based payouts. Commercial online services are expert at this type of pricing.

    Any stateful pricing model allows the site operator to sell user data on the back end. Data about a user's or a cluster's clicks allows a Web site operator to sell [a] a back link, [b] a search term, [c] meta-information about the user, and [d] a combination of functions. The result is that new revenue streams flow to the site operator and some users are none the wiser. In fact, secondary revenue streams are properly kept from the eyes of outsiders.

    Partial pricing--This tactic is one that some skilled auctioneers on eBay-like sites use. A seller offers a software or information product at a great price, for example, software to find out anything about anyone. The price paid is set by the market, but the buyer may find that additional for-fee services are required to make the research software functional. The supplementary service may be priced unreasonably.

    Qualification pricing--Many sites delivering special content require a proof of the user's age. The user happily plugs in a credit card number, provides the requested data, and plinks on the submit button. The site using qualification pricing may ignore the trial period and begin billing the unsuspecting user immediately. The maker of one popular game uses the proof of age ploy to get a potential customer to download a "free demonstration" of the program. The game developer has the customer information and the credit card data. Billing for special services can become an easy way to supplement cash flow.

    SNAKE BITE PROTECTION

    How does an online user protect himself or herself in this reprise of Dodge City.

    First, ask. Bulletin boards, newsgroups, even a visit with a live human at a library can be remarkably useful.

    Second, enter into competitive bids for online information agreements. If that is not possible, shop around, compare prices, and avoid buying an information service because the deal looks okay. The deals are rarely "okay."

    Third, another tactic is to pay online using a credit card with a fixed limit, for example, 500. No matter what purchase decisions an online buyer makes, the damage is contained.

    Are these three suggestions enough?

    No, they aren't. Keep in mind that the people working for online information services know more about what their customers will pay and under what circumstances than the customers themselves. In 2002, remember the catchphrase, "Caveat raptor."

     

    Stephen E. Arnold
    President
    Arnold Information Technologies
    Postal Box 320
    Harrod's Creek, Kentucky 40027
    Voice: 502 228 1966
    E mail: sa@arnoldit.com
    Web site: http://www.arnoldit.com

    Mr. Arnold is an independent consultant working from Harrod's Creek, Kentucky. He resides in the USA with two boxer dogs and 13 servers. His most recent book is "The New Trajectory of the Internet," published by Infonortics, Ltd., Tetbury, Glou. Mr. Arnold specializes in competitive intelligence and technology analysis.

    For more information about pricing online services see http://www.arnoldit.com/speeches/IntlOnline/PricingModels.doc

     


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