Defining Pricing

On the one hand, the obvious goal is to develop a pricing plan that will cover the $2.5 million in projected annual expenses plus whatever one-time productionrelated expenses are incurred in converting the journals. These production costs, of course, depend on the rate at which the content is being digitized. For projects designed to recover costs by collecting fees from users, it is also important to assess whether the value of the service to be provided justifies the level of expenditures being projected.

In JSTOR's case, we evaluated the benefits to participants of providing a new and more convenient level of access to important scholarly material while also attempting to calculate costs that might be saved by participants if JSTOR allowed them to free expensive shelf space. A central part of the reason for our founding was to provide a service to the scholarly community that would be both better and cheaper. That goal is one that remains to be tested with real data, but it can and will be tested as JSTOR and its participating institutions gain more experience.

Our initial survey of the research indicated that the cost of library shelf space filled by long runs of core journals was substantial. Using a methodology devised by Malcolm Getz at Vanderbilt and cost data assembled by Michael Cooper at UC-Berkeley, we estimated that the capital cost for storing a single volume ranged between $24 and $41.^[6] It follows that storing the complete run of a journal published for 100 years costs the holding institution between $2,400 and $4,100. In addition, operating costs associated with the circulation of volumes are also significant, and resources could be saved by substituting centrally managed electronic access to the material. Estimates of these costs for some of our original test site libraries indicated that costs in staff time for reshelving and other maintenance functions ranged from $45 annually for a core journal at a small college to $180

per title at a large research library with heavy use. These estimates of savings do not take into account the long-term costs of preservation or the time saved by users in finding articles of interest to them.

Although these estimates were not used to set prices, they did give us confidence that a pricing strategy could be developed that would offer good value for participating institutions. We set out to define more specifically the key components of the service we would offer and attempted to evaluate them both in the context of our mission and our cost framework. We found that deciding how to price an electronic product was extraordinarily complex, and it was clear that there was no correct answer. This list is by no means exhaustive, but here are some of the key factors that we weighed in our development of a pricing approach:

• Will access be offered on pay-per-use model, or by subscription, or both?

• If by subscription, will the resource be delivered to individuals directly or via a campus site license?

• If by site license, how is the authorized community of users defined?

• Will there be price differentiation or a single price?

• If the price varies in some way for different types of licensees, what classifying approach will be used to make the determinations?

In making decisions, we weighed the merits of various options by evaluating which seemed most consistent with JSTOR's fundamental objectives. For example, we wanted to provide the broadest possible access to JSTOR for the academic community. Because pricing on a pay-per-use model usually yields prices higher than the marginal cost of providing the product, we determined that this approach was not consistent with our goal. We did not want to force students and scholars to have to decide whether it would really be "worth it" to download and print an article. We wanted to encourage liberal searching, displaying, and printing of the resource. In a similar vein, we concluded that it would be better to begin by offering institutional site licenses to participating institutions. We defined the site license broadly by establishing that authorized users would consist of all faculty staff and students of the institution, plus any walk-up patrons using library facilities.^[7]

Another decision made to encourage broad access was our determination that different types of users should pay different prices for access. This approach is called price differentiation, which is very common in industries with high fixed costs and low marginal costs (like airlines, telecommunications, etc.). We decided to pursue a value-based pricing approach that seeks to match the amount that institutions would contribute with the value they would receive from participation. By offering different prices to different classes of institutions, we hoped to distribute the costs of operating JSTOR over as many institutions as possible and in a fair way.

Once we had decided to offer a range of price levels, we had to select an objective method to place institutions into different price categories. We chose the Carnegie Classification of Institutions of Higher Education for pricing purposes. Our reason for choosing the Carnegie Classes was that these groupings reflect the degree to which academic institutions are committed to research. Because the JSTOR database includes journals primarily used for scholarly research and would therefore be most highly valued by research institutions, the Carnegie Classes offered a rubric consistent with our aims. In addition to the Carnegie Classes, JSTOR factors in the FTE enrollment of each institution, making adjustments that move institutions with smaller enrollments into classes with lower price levels. We decided to break higher education institutions into four JSTOR sizes: Large, Medium, Small, and Very Small.

Having established four pricing classes and a means for determining what institutions would fill them, we still had to set the prices themselves. In doing so, we thought about both the nature of our cost structure and the potential for revenue generation from the likely community of participants. We noted immediately that the nature of JSTOR's cost structure for converting a journal-a large one-time conversion cost followed by smaller annual maintenance costs-was matched by the nature of the costs incurred by libraries to hold the paper volumes. In the case of libraries holding journals, one-time or capital costs are reflected in the cost of land, building, and shelves, while annual outlays are made for such items as circulation/reshelving, heat, light, and electricity. We decided, therefore, to establish a pricing approach with two components: a one-time fee (which we called the Database Development Fee, or DDF) and a recurring fee (which we called the Annual Access Fee, or AAF).

But what should those prices be? As mentioned previously, the long-term goal was to recover $2.5 million in annual fees while also paying the one-time costs of converting the journals to digital formats. Because it was impossible to model potential international interest in JSTOR, we limited our plan to U.S. higher education institutions. We conducted an assessment of the potential number of participants in each of our four pricing classifications. The number of U.S. higher education institutions in each category is shown in Table 7.1.

After thorough analysis of various combinations of prices, participation levels, and cost assumptions, we arrived at a pricing plan that we felt offered a reasonable chance of success. One other complicating aspect that arose as we developed the plan was how to offer a one-time price for a resource that was constantly growing. To deal with that problem, we defined our initial product, JSTOR-Phase I, as a database with the complete runs of a minimum of 100 titles in 10 to 15 fields. We promised that this database would be complete within three years. Prices for participation in JSTOR-Phase I are shown in Table 7.2.

These prices reflect the availability of the complete runs of 100 titles. For a Large institution, perpetual access to 80 years of the American Economic Review (1911-1991) would cost just $400 one-time and $50 per year. For a Small institution,

the cost would be only $200 one-time and $30 per year. For comparison, consider that purchasing microfilm costs more but offers far less convenient access. Also, institutions that find it possible to move print copies to less expensive warehouses or even to remove duplicate copies from library shelves will capture savings that consists of some or all of the shelving and circulation costs outlined earlier in this paper. (For 80 volumes, that analysis projected capital costs between $24 and $41 per volume, or $1,920 to $3,280 for an 80-volume run. Also, annual circulation costs were estimated as $180 per year for a Large institution.)

We purposely set our prices low in an effort to involve a maximum number of institutions in the endeavor. We are often asked how many participating institutions are needed for JSTOR to reach "breakeven." Because the total revenue generated will depend upon the distribution of participants in the various class sizes, there is no single number of libraries that must participate for JSTOR to reach a self-sustaining level of operations. Further, since our pricing has both one-time and recurring components, breakeven could be defined in a number of ways. One estimate would be to say that breakeven will be reached when revenues from annual access fees match non-production-related annual operating expenditures (since the production-related costs are primarily one-time). Although this guide is useful, it is not totally accurate because, as mentioned previously, there are costs related to production that are very difficult to segregate from other expenses. Another approach would be to try to build an archiving endowment and to set a target endowment size that would support the continuing costs of maintaining and migrating the Phase I archive, even if no additional journals or participants were

added after the Phase I period. Our plan combines these two approaches. We believe it is important to match the sources of annual revenues to the nature of the purposes for which they will be used. We require sufficient levels of annual inflows to cover the costs of making JSTOR available to users (user help desk, training, instruction, etc.). These inflows should be collected by way of annual access fees from participants. There is also, however, the archiving function that JSTOR provides, which is not directly attributable to any particular user. Like the role that libraries fill by keeping books on the shelves just in case they are needed, JSTOR's archiving is a public good. We must build a capital base to support the technological migration and other costs associated with this archiving function.

Like our approach to other aspects of our organizational plan, we remain open to making adjustments in pricing when it is fair and appropriate and it does not put our viability at risk. One step we took was to offer a special charter discount for institutions that chose to participate in JSTOR prior to April 1, 1997. We felt it was appropriate to offer this discount in recognition of participants' willingness to support JSTOR in its earliest days. We also have made minor adjustments in the definitions of how Carnegie Classes are slotted into the JSTOR pricing categories. In our initial plan, for example, we included all Carnegie Research (I and II) and Doctoral (I and II) institutions in the Large JSTOR category. Subsequent conversations with librarians and administrators made it clear that including Doctoral II institutions in this category was not appropriate. There proved to be a significant difference in the nature of these institutions and in the resources they invest in research, and so an adjustment was made to place them in the Medium class. Any such adjustments that we have made have not been for a single institution, but for all institutions that share a definable characteristic. We strive to be fair; therefore, we do not negotiate special deals.

There is a component of our pricing strategy that needs some explanation because it has been a disappointment to some people, that is, JSTOR's policy toward consortia. JSTOR's pricing plan was developed to distribute the costs of providing a shared resource among as many institutions as possible. The same forces that have encouraged the growth of consortia-namely, the development of technologies to distribute information over networks-are also what make JSTOR possible. It is not necessary to have materials shelved nearby in order to read them. A consequence of this fact is that marginal costs of distribution are low and economies of scale substantial. Those benefits have already been taken into account in JSTOR's economic model. In effect, JSTOR is itself a consortial enterprise that has attempted to spread its costs over as much of the community as possible. Offering further discounts to large groups of institutions would put at risk JSTOR's viability and with it the potential benefits to the scholarly community.

A second significant factor that prevents JSTOR from offering access through consortia at deep discounts is that the distribution of organizations in consortia is uneven and unstable. Many institutions are members of several consortia, while some are in none at all (although there are increasingly few of those

remaining). If the consortial arrangements were more mature and if there was a one-to-one relationship between the institutions in JSTOR's community and consortial groups, it might have been possible for JSTOR to build a plan that would distribute costs fairly across those groups. If, for example, every institution in the United States was a member of one of five separate consortia, a project like JSTOR could divide its costs by five and a fair contribution could be made by all. But there are not five consortia; there are hundreds. The patchwork of consortial affiliations is so complex that it is extremely difficult, if not impossible, to establish prices that will be regarded as fair by participants. JSTOR's commitment to share as much of what it learns with the scholarly community as possible requires that there be no special deals, that we be open about the contributions that institutions make and their reasons for making them. Our economic model would not be sustainable if two very similar institutions contributed different amounts simply because one was a member of a consortium that drove a harder bargain. Instead, we rely on a pricing unit that is easily defined and understood-the individual institution. And we rely on a pricing gradient, the Carnegie Classification, which distributes those institutions objectively into groupings that are consistent with the nature and value of our resource.