Efficient Pricing of Geomarketing Internet Services European vs. American Approach Alenka Krek Technical University of Vienna Department of Geoinformation

Efficient Pricing of Geomarketing Internet Services

European vs. American Approach

Alenka Krek Technical University of ViennaDepartment of Geoinformation

[email protected]

Overview

• Geomarketing service• Pareto efficiency• Marginal cost pricing• Nonlinear pricing• European vs. American

approach• Conditions for the efficient

nonlinear pricing

6th EC GI & GIS 2000, Lyon, France

Geomarketing Service

Geomarketing service is a service of providing geomarketing information to the user.

Geomarketing information is information which enables the user to take better and faster decisions about sales activities.


statistic

demographic geographic

Geomarketing DatasetsInternal company’s data are combined with external statistic, demographic and geographic data.


Geomarketing Service Provider


The service provider has to decide about:•Product: the Geoinformation product•Medium of delivery•Price

Motivation: How to set an efficient price for geoinformation services?

Pareto Efficiency

The situation is Pareto efficient if there is no way to make both the user and the service provider better off.

It can be also understood as maximizing the difference between economic benefits and costs.


Marginal Cost Pricing

Marginal cost pricing is pricing where the price is set to be equal to the marginal cost.

Marginal cost is cost of producing an additional copy of the product.


Cost of Information Products

High fixed cost of producing the first copy of the information product.

Low or zero marginal cost of producing an additional copy of the information product.


Pareto Efficiency of Marginal Cost Pricing

Marginal cost pricing may or may not be efficient: it depends on how the user’s total willingness to pay relates to the total cost of providing the good.

Marginal cost pricing of Geoinformation product does not cover the total cost and is therefore not Pareto efficient.


Nonlinear Pricing

Pricing is nonlinear when it is not strictly proportional to the quantity purchased.

Different prices are charged to different groups of buyers for the same product.



Two-Part Tariff

P = p0 + p1.q

p0 fixed fee (annual, monthly,

membership)

p1 price set for a volume transferredq quantity transferred


Is Two-Part Tariff Efficient?

P = p0 + p1.q

High fixed fee might exclude occasional users who are not willing to pay a membership or a license.

The necessary condition for Pareto efficiency is not satisfied.


Quantity Discounts

The provider charges a lower price for a higher volume purchased.

Pareto efficiency depends on the price-volume categories.

They might disadvantage users with low willingness to pay.


Term-Volume Commitments

The user agrees to pay a certain amount of money for the service in advance.

This strategy satisfies the Pareto efficiency requirement if the user can choose among different options which are designed indiscriminately.


List of Price Options

Different options can be combined and offered as a list of price options.

In geomarketing services, the two-part tariff is often combined with uniform pricing scheme.


List of Price Options

P = p0 + p1.q two-part tariff

P = p2.q uniform pricing scheme p0 fixed fee (annual, monthly, membership, etc.)

p1 price set for a volume transferred, membership option

p2 price set for a volume transferred, no membership option, (p2 > p1)

q quantity transferred


Pareto Efficiency of a List of Price Options

Each user can choose between at least two pricing schemes;

• the uniform but higher price or • the nonlinear, two-part tariff

This policy assures that the users with the low willingness to pay are not disadvantaged and satisfies the requirements for Pareto efficiency.


European vs. American Approach

The US and Canadian geomarketing services market has characteristics of oligopoly;

• several service providers• similar products • competition drives prices down

European market is determined by the high prices for base data and copyright restrictions.


Conditions for Efficient Nonlinear Pricing

• Self-selection among two or more different pricing options

• Geoinformation products should be carefully designed and differentiated to satisfy the needs of a particular market segment

• Low prices of raw datasets enable new investors to enter geoinformation market

• Should not be illegal


Thank you for your attention!

Questions?


Documents

Efficient Pricing of Geomarketing Internet Services European vs. American Approach Alenka Krek Technical University of Vienna Department of Geoinformation