Hum, I disagree with this "Users expect software, music, and other digital goods and services to be free because they know it costs zero to copy and distribute the digital goods to them"...
We're not anymore in a "production-lead" economy, but rather a "market" economy where prices are set-up by the ratio "demand/offer" : the greater the demand compared to offer, the greater the price.
Your restaurant example is good and consumer will go the "cheapest" place, even if it is way above the actual "cost" of a cheesecake... I even believe that they do not really care about the actual cost of a making cheesecake! Same, your caveman wants to buy the cheapest of the available furs, whichever the cost to get them for the seller!
However, I would say the economy of dematerialized goods (music, software...) responds to another theory because the market theory holds only when the resource is "limited".; but which one?
Maybe it's simply due to the fact that listening to music is "simple", that downloading a software on your computer is simple... etc, and most of the time, people don't want to pay for things that appear "simple" (see this twit' : http://twitter.com/sacca/statuses/860432283 )
I would also say that "habits" play a great role... Our generation has been used to download music for free, but also ti use freeware, and it's hard to come back to a paying model, the same way it's hard to pay $4 for a gallon of gas while we could pay twice less 3 years ago!
Q dub
· 1 year ago
I disagree strongly. Cost-based-pricing is not an economic fact, it is the terminal point of an industry that has been commoditized, or full of players willing to sacrifice margin for market share (largely due to Metcalfe's N^2)
It is every strategist's biggest challenge, to move a business away from cost-based to value-based pricing and I don't think any business could ever truly considered a cash cow if it still depended on cost-based pricing. Content and services are free or close-to-free today because there is always either a desperate competitor or pirate willing to offer it for free, and even the most solid product can't risk losing market share at this point in the game. Both of these problems will fade as the industry matures.
gregorylent
· 1 year ago
whichever way it goes, money itself is going to be seen as a shaky measure of value ... as much because "what is valuable" is changing, as pricing strategies ... and anything embracing manipulation of perception as something to ride on will have difficulties ...
until now our understanding of cause and effect have been quite crude
Ian
· 1 year ago
I disagree for several reasons.
1. "Users expect software, music, and other digital goods and services to be free because they know it costs zero to copy and distribute the digital goods to them. Users expect to pay the marginal cost of a good, especially when it created for the purpose of being distributed at mass scale."
I understand the point you are getting at, but to presuppose that users "know it costs zero to copy and distribute the digital goods to them," and that that is their main motivation to demand priceless goods, gives the average consumer too much credit. I know that the marginal cost of me attending the Frida Kahlo exhibit at the SF MOMA is 0 (much more than I know the marginal cost of my software), but I would venture to say that no consumer would demand free-admission based on this knowledge. I admit that I used your membership card to get in free anyway, but that is neither here nor there. There is very little actual research done on the topic; the closest thing I've found is a study done at the Chicago GSB which found that consumers felt more comfortable stealing items with lower marginal costs, than those with high marginal costs (i.e. I'll steal digital music, but not a diamond). An argument for marginal cost pricing for digital goods might be that enforcement is too ineffective or expensive to charge any other price but 0.
2. Marginal cost pricing is an hypothetical situation, created by economists to isolate offsetting influences, kind of like learning physics in the absence of friction:
"One was a model of "perfect competition," a model in which there are enough buyers and sellers that no individual can influence price; when information and transaction costs are zero, prices in this model fall to marginal cost. Such models have some explanatory power. They help us isolate factors that influence the tendency for prices to approach cost over time in real markets. However, the models were not intended as a normative model of what the world ought to look like. If perfect competition obtained in the real world, economic activity would grind to a halt, because no seller could profit from selling."-- Solveing Singleton .
3. (And I've borrowed from Singleton's wording generously, though I have similar thoughts) Marginal cost pricing does not take into account dynamic and repeated interactions between producers and consumers. Marginal cost pricing is a useful static concept, but fails to take into account "what pricing structure is needed to support future creativity in a real economy where events are spread out over time and where investors observe what happens to past investments."
4. I am a firm believer that if pricing were to equal marginal cost, the this would halt the production of new ideas. In effect what is happening with some free electronic goods, like Gmail, is that while the good is being provided for free to the consumer nominally, Google is obtaining an economic benefit from visits, access to keywords, brand development, and end-user exposure to its targeted adds. While the price to me as an end-user might be zero, Google would not offer this good if it were not monetizing it else where. The advertisers are paying for my Gmail; the price is certainly not 0.
andrewparker
· 1 year ago
touche!
I love that word.
In all seriousness, I hear you, and agree with much of what you say. My rant is probably too much informed by my own behavior from which I extrapolate to all consumers too broadly.
All Comments
We're not anymore in a "production-lead" economy, but rather a "market" economy where prices are set-up by the ratio "demand/offer" : the greater the demand compared to offer, the greater the price.
Your restaurant example is good and consumer will go the "cheapest" place, even if it is way above the actual "cost" of a cheesecake... I even believe that they do not really care about the actual cost of a making cheesecake! Same, your caveman wants to buy the cheapest of the available furs, whichever the cost to get them for the seller!
However, I would say the economy of dematerialized goods (music, software...) responds to another theory because the market theory holds only when the resource is "limited".; but which one?
Maybe it's simply due to the fact that listening to music is "simple", that downloading a software on your computer is simple... etc, and most of the time, people don't want to pay for things that appear "simple" (see this twit' : http://twitter.com/sacca/statuses/860432283 )
I would also say that "habits" play a great role... Our generation has been used to download music for free, but also ti use freeware, and it's hard to come back to a paying model, the same way it's hard to pay $4 for a gallon of gas while we could pay twice less 3 years ago!
It is every strategist's biggest challenge, to move a business away from cost-based to value-based pricing and I don't think any business could ever truly considered a cash cow if it still depended on cost-based pricing. Content and services are free or close-to-free today because there is always either a desperate competitor or pirate willing to offer it for free, and even the most solid product can't risk losing market share at this point in the game. Both of these problems will fade as the industry matures.
until now our understanding of cause and effect have been quite crude
1. "Users expect software, music, and other digital goods and services to be free because they know it costs zero to copy and distribute the digital goods to them. Users expect to pay the marginal cost of a good, especially when it created for the purpose of being distributed at mass scale."
I understand the point you are getting at, but to presuppose that users "know it costs zero to copy and distribute the digital goods to them," and that that is their main motivation to demand priceless goods, gives the average consumer too much credit. I know that the marginal cost of me attending the Frida Kahlo exhibit at the SF MOMA is 0 (much more than I know the marginal cost of my software), but I would venture to say that no consumer would demand free-admission based on this knowledge. I admit that I used your membership card to get in free anyway, but that is neither here nor there.
There is very little actual research done on the topic; the closest thing I've found is a study done at the Chicago GSB which found that consumers felt more comfortable stealing items with lower marginal costs, than those with high marginal costs (i.e. I'll steal digital music, but not a diamond). An argument for marginal cost pricing for digital goods might be that enforcement is too ineffective or expensive to charge any other price but 0.
2. Marginal cost pricing is an hypothetical situation, created by economists to isolate offsetting influences, kind of like learning physics in the absence of friction:
"One was a model of "perfect competition," a model in which there are enough buyers and sellers that no individual can influence price; when information and transaction costs are zero, prices in this model fall to marginal cost.
Such models have some explanatory power. They help us isolate factors that influence the tendency for prices to approach cost over time in real markets. However, the models were not intended as a normative model of what the world ought to look like. If perfect competition obtained in the real world, economic activity would grind to a halt, because no seller could profit from selling."-- Solveing Singleton .
3. (And I've borrowed from Singleton's wording generously, though I have similar thoughts) Marginal cost pricing does not take into account dynamic and repeated interactions between producers and consumers. Marginal cost pricing is a useful static concept, but fails to take into account "what pricing structure is needed to support future creativity in a real economy where events are spread out over time and where investors observe what happens to past investments."
4. I am a firm believer that if pricing were to equal marginal cost, the this would halt the production of new ideas. In effect what is happening with some free electronic goods, like Gmail, is that while the good is being provided for free to the consumer nominally, Google is obtaining an economic benefit from visits, access to keywords, brand development, and end-user exposure to its targeted adds. While the price to me as an end-user might be zero, Google would not offer this good if it were not monetizing it else where. The advertisers are paying for my Gmail; the price is certainly not 0.
I love that word.
In all seriousness, I hear you, and agree with much of what you say. My
rant is probably too much informed by my own behavior from which I
extrapolate to all consumers too broadly.