Nieman Foundation at Harvard
The other day at RJI’s conference “From Gatekeeper to Information Valet,” at George Washington University, the final presenter on the formal schedule was Albert Sun, a University of Pennsylvania math and economics student who happens also to have a strong interest in journalism.
On his blog, back in March, Sun posted a remarkably confident essay entitled “Price discriminate! The economics of charging for online content,” complete with some nifty graphs.
Now, we know that from the newsroom to the board room, math and economics are not widely held skills. So get out your old Samuelson and try to follow along. This just entails supply and demand and a few special wrinkles, all from Econ 101.
Here are Sun’s PowerPoint slides from GWU:
If you like, you can also listen to his entire talk here (starting at 35:00) although you may need to let it load for a while to skip forward. So let me take a stab at paraphrasing him (with slide numbers in parentheses), after the jump:
Sun points out that in many industries including airlines (1), different customers pay different prices, depending on the value they place on the products or services, and companies pursue that pricing strategy to maximize profits. Online, the value of content may be different for different users ranging from financial professionals to social networkers (5). One price doesn’t fit all. If the price is simply set at the point where supply and demand curves meet (7), producers don’t derive the maximum possible revenue they could get if they price-discriminated, selling to different consumers at different prices all along the demand curve (9) (including, at the tail end, free content).
In the currently prevalent online news pricing model — as much as you want, free — the consumer surplus (value gained above price paid) is maximized, while publisher revenue is minimized (11). But this does allow the publisher to add advertising revenue across the spectrum (12). Once a subscription price is imposed, however, the publisher loses all revenue from the lower (right) end of the curve where consumers are not willing to pay the price for content (13), so overall revenue is reduced. In Sun’s final graph (14) he shows how total revenue from advertising and subscriptions can be maximized with price-discrimination.
As Sun points out (15), right now the model lacks quantification — we don’t know the shape of the curve, or the scales of the axes, so this needs further research. He suggests a hypothetical way to set up payment tiers for various content packages (16).
If we look around in the real world of news publishing, we can find the beginnings of such a pricing strategy emerging, and perhaps this points to the possibility of a real-world application of Sun’s suggestion. To examine this, I think it’s necessary to look at the entire spectrum of content publishing from print to online to mobile, as a single demand curve.
Near the high (left) end of the curve, certainly, there will be print. Paul Gillin at Newspaper Death Watch comments on the recent print price increases by various publishers as representing a “sunsetting strategy” for their print products — milking them for whatever they may still be worth, and “winnowing out their low value customers.” This may be true in the long run, but it’s also possible to see it as part of a shift toward print becoming a high-cost niche tier in the pricing scheme. When a news organization decides to become a digital enterprise, that’s exactly how they should be viewing print. The Times, at something close to $900 per year for a year of single copies, or $550 home-delivered (within the New York metro area), is certainly targeting the high-end readership niche with its pricing, but most other papers are still trying to hang on to market penetration in print with much lower pricing.
A second pricing tier is represented by subscription via e-readers like Kindle (typically under $200 per year), or online facsimile delivery (well under $100 per year).
Beyond that, most U.S. newspapers have not figured out price discrimination, but there are options to look at that can help to fill in the price-discrimination curve. For example:
Fairfax, incidentally, has found routes to online profitability that U.S. newspaper groups should explore in person Down Under before erecting their paywalls. They’ve done this by building their own vertical information channels like Weatherzone, and by aggressively pursuing lucrative affiliate and lead generation deals — something that’s almost entirely absent from the usual lineup of “monetization options” in the U.S.
To pursue revenue maximization through price discrimination, U.S. publishers need to be conscious of the nature and the subtleties of the strategy. Establishing a single price point for online content (the Little Rock solution) might work for a time but is not revenue-maximizing in the long run. The right way entails the exploitation of a variety of niches all along the curve — and therein lies the problem, since the culture of newspapers is still mainly that of a monolithic, one-size-fits-all daily product, whether in print or online.
The options for price discrimination are plentiful. Imagine a grid of green checks and red X’s outlining a multi-tiered price-discrimination system for content that includes variables like:
Note, June 18, 2009: I belatedly corrected Farley Media to Fairfax Media.
