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The publishing industry is going through a major
transitional period as it tries to come to terms with the
Web as a delivery platform for content. How can publishers
keep their digital content from cannibalizing the market for
printed material yet still provide new options to customers?
P.K. Kannan, Harvey Sanders Associate Professor of
Marketing, helped the National Academies Press (NAP) develop
a strategy that would maximize the revenue from both its
traditional and new media offerings. Kannan and study
co-author Sanjay Jain, from Texas A&M University, worked
with Barbara Kline Pope of the NAP on a study that resulted
in a new pricing model for the NAP’s printed and online
content. The paper based on the study won the coveted
INFORMS Society for Marketing Science Practice Prize
competition in October 2007.
One option the organization considered was to continue to
sell printed material, but to distribute the PDFs online for
free to meet one of NAP’s goals to disseminate scientific
knowledge widely. But Kannan found that this option would
effectively cut the organization’s revenue in half.
 Customer purchase data was gathered from NAP’s Web site
based on an online experiment. The study examined the
choices made by more than 1,000 customers over a three-week
period. The study focused on customers who showed interest
in purchasing a book. Customers who had a printed book in
their shopping carts and who pressed the checkout button
were randomly intercepted with an offer for a PDF format of
the title in their shopping cart. These customers were given
information on the quality of the PDF, a clickable button to
view the sample PDF, download time, and the price of the PDF
format in U.S. dollars.
One in four customers who were browsing a book title were
also intercepted at random after perusing five pages of
content and presented with details of the PDF in the same
way.
PDF prices were set at six levels relative to the price
of the printed version of books, at 110 percent, 100
percent, 75 percent, 50 percent, 25 percent, and free. If a
customer didn’t choose a PDF format at the initial price
level that was displayed, it was dropped to a lower level
and the offer was repeated.
Rather than viewing differing forms of content as
substitutes for each other, consumers sometimes viewed
different forms of content as imperfect substitutes or even
complements to one another. The degree to which a customer
viewed the print edition of a book and its online PDF as
substitutes or complements varied from customer to customer.
Using data from the study, the authors created a model
using an innovative measurement technology to determine
customer preferences for the various forms of content and
recommend various pricing strategies by controlling for the
marketing mix and introduction of new titles.
One result was surprising. “We found that many customers
would pay more for the PDF than they would pay for the
printed book,” says Kannan. “You can’t make generalizations
about what consumers want. And you have to be creative as
you think about ways of providing value and extracting
consumer surplus.”
Kannan applied that creativity to the NAP’s pricing
problem by bundling its content in a variety of different
ways to take advantage of differing consumers’ needs and
desires. “If you can come up with a bundle option and price
it appropriately, many people will end up buying the bundle
rather than just buying either the printed book or the PDF
version of the book,” says Kannan.
This was a winning strategy for the NAP, which
implemented Kannan’s recommendations. In the two years that
followed, Kannan continued to gather data on the sale of
books and PDFs on the NAP Web site. The NAP was able to
charge higher prices for printed books in the presence of
PDF versions of the same books, resulting in higher
revenues. PDF sales also increased from 7 percent to 13.6
percent, which led the NAP to increase the prices of PDFs
relative to printed books. NAP plans to continue to
implement policy changes using suggestions derived from the
model.
The music industry, which has struggled with the impact
of digital content on traditional CD sales, could benefit
from re-examining its pricing models in light of this
research. Consumers are already effectively unbundling
content by purchasing just one or two songs from an album
rather than the entire album. Kannan says, though, that it’s
possible the music industry could bundle content in a way
that would be attractive to users and would expand the
market.
Kannan’s study was funded in part by a grant from the
Mellon Foundation. For more information about this research,
contact pkannan@rhsmith.umd.edu.
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