Pricing and consumption of digital content

Table of Contents

1 Abstract

2 Increased Relevance of Pricing Strategies for Digital Content

3 Definition and Characteristics of Digital Content
3.1 Definition of Digital Content
3.2 Characteristics of Digital Content

4 Conceptual Framework of the Paper

5 Effects of Price on Consumption
5.1 Screening Effect
5.2 Sunk-Cost Effect
5.3 Timing of the Payment and Consumption

6. Influencing Factors on the Consumption of Paid Digital Content
6.1 Perceived Value
6.2 Perceived Quality and Reputation
6.3 Interaction Effect between the Factors

7. Pricing Strategies for Digital Content
7.1 Versioning
7.2 Sampling
7.3 Bundling
7.4 Micropayments

8. Discussion

9 Summary and Conclusion

References

1 Abstract

A lot of publishers start to charge for digital content and refrain to offer digital content for free. This resulted from declining advertising rates for online space and decreasing subscription rates to print content. But a lot of publishers fear, that price increases lead to a decrease in demand and revenue. In this paper, I address the question of how to successfully implement prices for digital content. However, little is known about how the users react to price changes and if price increases effectively decrease the demand for digital content. Also, applying behavioural theories, such as the mental accounting theory, on digital content is a rather new and unexplored topic. Therefore, this paper gives not only an overview of the existing literature on the pricing of digital content, but also the findings of the mental accounting theory and its possible implications for digital content.

I want to show, that the payment frequency, the screening effect and the sunk-cost effect influence the bundling and the micropayment model differently and that higher prices attract users with a higher willingness-to-pay, who increase consumption and could offset the loss in demand from users with a free-lunch-mentality. However, there are contradictory findings of the effects of price on consumption. For instance, the prospect theory from Kahneman and Tversky (1979) states that users are loss-averse and want to avoid payments as often as possible, which implies to decrease the payment frequency.

2 Increased Relevance of Pricing Strategies for Digital Content

In this section, I want to point out why the publishers need to develop pricing strategies for their online content. First of all, most publishers used to offer digital content for free and financed themselves with advertisement. But in the last few years, they experienced a decline in the advertising rates, what made advertisement as the only revenue source unprofitable (Dewan, et al., 2003). This resulted from the benefits digital content has for its users. Firstly, users can access digital content at any desired time, what makes it more convenient. Secondly, users can more easily obtain highly specific content that fits their needs. Lastly, users can access a lot of content and information for free on the internet (Choi, et al., 1997). Additionally, most publishers offer digital and print content, which are substitutes, at the same time. This caused a cannibalization of the paid print content due to the free digital content and further revenue losses for publishers. Progressively, more consumers start to use the internet instead of print medias to obtain information (Stahl, et al., 2004; Chyi & Sylvie, 1998). Due to this convergence of print markets towards electronic markets, a lot of publishers search for new revenue sources and consider to charge for their content. However, they fear that monetizing digital content will lead to a decrease in demand and revenue. Most publishers also fear that the users will substitute paid content with similar free content since they are not willing to pay for it. The aim of this thesis is to illuminate how the publishers can successfully implement prices for their content. In the beginning, I will give an overview of what digital content is and what unique characteristics it has. I will conclude, that most of its characteristics make it difficult for publishers to charge for it. Then I come to my research model and my conceptual framework. Here I will point out how price changes affect the consumption, based on the mental accounting theory, to show that price increases do not necessarily decrease the consumption. Afterwards, I will state the drivers that influence the consumption of paid content. Moreover, I want to present pricing strategies for digital content that consider the characteristics of digital content. In the discussion part, I will show how the findings of the mental accounting theory affect the different pricing strategies and under which circumstances the consumption of digital content can increase. In the end, I will state that my research is limited by contradictory of the prospect theory and explain that researchers can further illuminate which effect influences the consumption behavior of the users more strongly.

3 Definition and Characteristics of Digital Content

3.1 Definition of Digital Content

Literature gives a broad overview of what digital content is. Digital content is anything, that can be digitized. It is valued by the information it provides. Therefore, digital content is characterized as an information good (Shapiro & Varian, 1998a). Besides, digital content consists of metadata. As an example, a movie consists of information in form of the plot of the movie, but also provides metadata about the actors, the directors and publishing year (Stahl, 2005:41). Whereas non-digital content is tied to a certain transfer medium, all types of digital content are distributed over the internet. In order to obtain digital content, the users need a compatible device that can store or display digital it (Hass, 2003, p. 34). Digital content is divided into durable and non-durable content. Non-durable content provides valuable information within a limited amount of time, whereas the value of durable content is independent of the time. As an example, the operating system of an electronic device is durable. Its value may depreciate over time, but it can be permanently used (Clement & Schreiber, 2016, pp. 32-33). In contrast, investors value stock market data within a certain period of time. Afterwards, the market price will internalize all information and the data will no longer be valuable (Shapiro & Varian, 1998b, p. 110).

3.2 Characteristics of Digital Content

The cost structure of digital content is rather different than the cost structure of non-digital content. Non-digital content usually produces high fixed cost of production and high variable costs of distribution and reproduction. In contrast, the first copy of digital content produces a lot of fixed costs, that are sunk-costs. However, the reproduction and distribution of digital content create low variable costs (Shapiro & Varian, 1998a, p. 10). Non-digital content is usually tied to a certain transfer medium. For example, the information a book contains is printed on paper. Thus, each book produces high variable costs of production. An e-book, however, is not tied to the paper as a transfer medium and causes low reproduction costs (Shapiro & Varian, 1998a; Hass, 2003). Usually, the publishers distribute non-digital content via other retailers, what creates extra distribution costs. In contrast, the users only have to visit the website of the publisher to obtain digital content. This reduces the distribution and time costs immensely (Bakos, 1998).

It moreover has experience characteristics. If the publishers offer free content, the users asses the content quality after they have used it. But if the publishers charge their users for digital content, they can no longer evaluate the content quality before they purchase it. This can decrease the demand for digital content, because the uncertainty about the content quality is high (Shapiro & Varian, 1998a, p. 12). Thus, digital content is considered as an experience good. Besides, the information paradox can be mentioned. It states, that the evaluation of the willingness-to-pay [WTP] depends on the perception of the content quality. However, the users can only evaluate the content quality after they have experienced it. But, after they have experienced the content, their need to obtain it and their WTP decrease. Publishers of digital content should overcome this information paradox to open up new electronic markets (Picot, et al., 2001, p. 358). By increasing their reputation, the publishers can overcome this experience problem (Shapiro & Varian, 1998a, p. 10).

Digital content is a public good. The content quality is independent of the amount of people who use it. Therefore, digital content is non-rival in consumption (Gläser, 2010, p. 146). However, rivalry in consumption exists for the device that displays and stores digital content (Kiefer, 2005, p. 146). Furthermore, the information provided by digital content can usually not be licensed. If a publisher of a newspaper charges its users, they will substitute him with a similar publisher who offers free content. As a result, digital content can be considered as a public good (Varian, 1999, pp. 6-8). These different characteristics make it difficult for publishers to charge for digital content (Shapiro & Varian, 1998a, p. 10).

4 Conceptual Framework of the Paper

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H1A and H1B can both be tested with an experimental study. The screening effect can be tested by increasing the offer price of the product and observing the usage behavior of the subjects (Ashraf, et al., 2010). The sunk-cost effect can be measured with a hypothetical experiment, where half of the subjects pay a high offer price and the other half of the subjects pay a low or no offer price. They are then asked about their propensity to consume it (Gourville & Soman, 1998; Gourville & Soman, 2002). The effect of the payment depreciation (H2) can also be tested with a two-group experimental design, where half of the subjects obtain the product with a delayed payment, while the other half of the subjects obtain the product without a delayed payment. They are then asked about their propensity to lend the product to other people (Gourville & Soman, 1998). The WTP (H3) can be tested with an incentive aligned vickrey auction, which avoids strategic behavior of the respondents (Coppinger, et al., 1980). In order to test the effect of the perceived value (H4), quality (H5) and reputation (H6) on the WTP, the same respondents evaluate the publisher based on these drivers (Lopes & Galletta, 2006).

5 Effects of Price on Consumption

5.1 Screening Effect

The screening effect states, that higher product prices attract more consumers with a higher WTP, who use the product more often (Oster, 1995). Ashraf, Berry and Shapiro (2010) showed, that an increased offer price of a basic health product attracted more consumers with a higher WTP, who increased their consumption and offset the loss in demand from households with a lower WTP. Shampanier, Mazar and Ariely (2007) found out, that products that are free of charge are evaluated under social norms, whereas paid products are evaluated under market norms. In context of digital content, charging for content can attract users, who effectively offset the loss in demand of users with a low WTP. But this will be more explicitly explained in the discussion.

5.2 Sunk-Cost Effect

The sunk-cost effect describes, that higher prices lead to a higher probability of consumption. Arkes and Blumer (1985) described the sunk-cost effect as the ‘‘greater tendency to continue an endeavour once an investment of money, time or effort has been made’’ (p. 124). They conducted an experiment where subjects mistakenly purchased a 100 $ and a 50 $ vacation at the same time and were told to choose one of them. Despite anticipating that the cheaper version would be more enjoyable, the subjects chose the expensive version. This effect bases on the risk-aversion of consumers. A higher price increases the perceived psychological costs of not consuming the product. The consumers perceive the purchase as a regret, if they do not use an expensive product more often than a product that is free of charge. The sunk-cost effect bases on the mental accounting theory. A mental account is opened at the payment, which negatively affects the mental account, and closed after the consumption, which positively affects the mental account. The consumers perceive a net gain, if the perceived benefits of the consumption are higher than the perceived costs of the payment. If a product has a high price, the mental account is highly negatively affected. This creates a high incentive to consume a product to offset the negative effect of the payment. But if a product was free of charge, no negative payments affects the mental account, and provides therefore no incentive to consume the product (Thaler, 1980). Additionally, higher prices increase the commitment to use a product more often (Parker, et al., 2006).

H1: Higher prices increase the probability of consuming due to (a) the screening effect and (b) the sunk-cost effect.

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