Electronic Pricing

In developing and pricing new electronic products and services, journal publishers may consider many factors, including (in random order):

• the cost of creating and maintaining the service;

• the possible effect of this product or service on other things you sell ("cannibalization" or substitution);

• the ability to actually implement the pricing (site or user community definitions, estimates of the anticipated usage or number of users, security systems);

• provision for price changes in future years;

• what competitors are doing;

• the functionality actually being offered;

• the perceived value of the content and of the functionality;

• the planned product development path (in markets, functionality, content);

• the ability of the market to pay for the product or service;

• the values that the market will find attractive (e.g., price predictability or stability);

• the anticipated market penetration and growth in sales over time;

• the market behavior that you want to encourage;

• and, not inconsequentially, the effect on your total business if you fail with this product or service.

To make informed judgments, you have to build up experience and expertise. Pricing has long been an important strategic variable in the marketing mix for more mature electronic information players. They have more knowledge of how a market will react to new pricing models. For example, more than five years ago, you would see at an Information Industry Association meeting staff from business, financial, and legal on-line services with titles such as Vice President, Pricing. Nothing comparable existed within the journal publishing industry. A price was set, take it or leave it, and there was little room for nuance or negotiation.

This situation is now changing. Many large journal publishers are actively involved in either negotiating pricing agreements or, under fixed terms, negotiating other aspects of the licensed arrangement that relate to the effective price being paid (such as number of users, number of simultaneous accesses, etc.). At Elsevier in 1996, we engaged consultants to make a rigorous study to assist us in developing pricing models for electronic subscriptions and other electronic services. What we found was that we could not construct algorithms to predict buying behavior in relation to price. That finding has not stopped us from trying to pursue more sophistication in pricing-and indeed, we have now hired our own first full-time Director of Pricing-but until we build up more experience, our pricing decisions are still often a combination of tradition, strategic principle, gut feeling, and trial and error. We do have, however, a view on the desired long-term position and how we want to get there.

Too often, some buyers argue that pricing should be based solely on cost (and often without understanding what goes into the cost). They sometimes express the simplistic view that electronic journals are paper journals without the paper and postage and should therefore be priced at a discount. That view clearly is naive because it overlooks all of the new, additional costs that go into creating innovative electronic products (as well as maintaining two product lines simultaneously). Indeed, if you were to price right now on simply the basis of cost, the price for electronic products would likely be prohibitively high.

It is equally doubtful whether you can accurately determine the value added from electronic functionality and set prices based exclusively on the value, with the notion that as more functionality is added, the value-therefore, the price-can be automatically increased. Some value-based pricing is to be expected and is justified, but in this new electronic market there are also limited budgets and highly competitive forces, which keep prices in check. At the same time, it is not likely that the "content" side of the information industry will totally follow the PC hardware side, in other words, that the prices will stay essentially flat, with more and more new goodies bundled in the product. Hardware is much more of a competitive commodity business.

Pricing components are now much more visible and subject to negotiation. In discussions with large accounts, it is assumed that there will be such negotiation. This trend is not necessarily a positive development for either publishers or libraries. I hope that collectively we won't wind up making the purchase of electronic journals the painful equivalent of buying a car ("How about some rust proofing and an extended warranty?").

There is and will continue to be active market feedback and participation on pricing. The most obvious feedback is a refusal to buy, either because the price is too high (the price-value trade-off is not there) or because of other terms and conditions associated with the deal. Other feedback will come via negotiation and public market debates. Over time, electronic journal pricing will begin to settle into well-understood patterns and principles. At the moment, however, there are almost as many definitions and models as there are publishers and intermediaries. One need only note the recent discussions on the e-list on library licensing moderated by Ann Okerson of Yale University to understand that we are all in the early stages of these processes. An early 1997 posting gave a rather lengthy list of pricing permutations.