Pricing in the digital world

Abstract

Purpose: Businesses understand that digital technologies and applications can create value, but how to capture that value has been elusive. Particularly for established businesses, the practice of applying traditional price structures to new digital platforms has resulted in revenue, market and share deterioration. This article describes how to adapt price structure to digital migration and hybrid digital/pre‐digital product sets.Design/methodology/approach: Based on case studies from entertainment, publishing, education, avionics, gaming and software industries, the article observes how price structure directly transported from pre‐digital products have not been effective in maintaining revenues and margins. Successful digital product introduction requires careful examination of the new capabilities and price drivers of a digital context.Findings: This article shows that frequently the price drivers of digital products require a new price structure. In particular, the unit of measure (e.g. users, downloads, enterprise size, etc.) is critical to success. Typically when product developers choose a measure that most resembles the pre‐digital unit of pricing, results are sub‐optimal. Further, the overall structure must reflect the risks which are often implicit in digital migration – the benefits of sharing and increases in efficacy can often accrue to the buyer, and elude the seller.Originality/value: Product developers and pricers tend to focus on the similarity between pre‐digital and digital generations of product. Often, they wrongly assume that digital is better for all. However, the context of the product (workflow, applications, scaling, competitors, etc.) can be much more important than the product itself, and pricing must reflect that. As a result of poorly managed digital transitions, industries have seen billions of dollars of revenues wiped out – quite needlessly. This article identifies specific frameworks for minimizing the risk of revenue loss.