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MKTG373 Monetization

Class Outline:

(Bolded the most important lecture slides to review for a good summary of the class)

  • Class 1, Intro and Overview
  • Class 2, Business Model Fundamentals: Understanding and Extracting Value
  • Class 3, Economic Value to Consumers in Practice (The Medicines Company)
  • Class 4, Building a Business Model (OpenTable)
  • Class 5, Refining a Business Model (ZipCar)
  • Class 6, Using Data to Inform Pricing - Part 1 (Price Experimentation at ZipRecruiter)
  • Class 7, Using Data to Inform Pricing - Part 2 (Catalogs Pricing)
  • Class 8, Monetization of Data (Alex Hooshmand of BlueKai)
  • Class 9, Monetization of Risk: Auto Insurance in a world of telematics and autonomous driving (Shobana Sankaran of Nauto)
  • Class 10, SaaS, Fremium, and Enterprise Software (Dennis Woodside, COO of Dropbox)
  • Class 11, Managing Partners and Affiliates in Monetization, Complementary Goods, Network Effects (Keurig)
  • Class 12, Monetizing Online Content and Strategies in Ad-driven industries and two-sided markets (The NYTimes Paywall)
  • Class 13, Experimentation and Monetization: Native Advertising (Native Ad Experiments at Zomato)
  • Class 14, Understanding Enterprise Software Markets (Diane Greene, Founder of VMWare and SVP Google Cloud)
  • Class 15, Monetizing Audiences and Modern Advertising Markets (Neal Mohan, Chief Product Officer at Youtube)
  • Class 16, Class Review
  • Class 17, Business Model from perspective of investors (Guest VC Panel)
  • Class 18, Student Presentations

Class Takeaways

Framework for effective business model design:

  • Understand source of value delivered precisely defining the “product” broadly
  • Critical! Understand the difference in WTP across target segments
  • Critical! Be able to measure the difference in WTP intelligently
  • Devise a mechanism such that more revenue can be extracted from those of higher valuations
  • Choice between “second-best” mechanisms will be influenced by firm’s capabilities, fit, context, regulatory environment
  • The critical input is the assessment of differences in WTP
    • Best way to judge: current usage, past usage

Product Design + Monetization go hand in hand

  • Part of the product design (creating a great experience), is in building perceived value
  • Perceived value is more important than actual value. Good branding, a good experience, great word of mouth, great reputation can greatly increase the WTP of your customers.
  • Think about monetization from day 1 of designing your product
  • Matching the product to the different segments / WTP of your customers is extremely important

The essence of an effective business model arises from a deep understanding of the source of the value that a venture creates for a heterogeneous set of target customers

  • Think of the business model as a way to extract that value while aligning monetization with other business imperatives
  • 1. We can articulate what the set of “good models” worth considering will be for different situations
  • 2. We can think deeply about the factors that make one model good or bad in one situation or another
  • Philosophy of class is that a deep understanding of these two aspects will help you make the right choice when confronted with competing options in an uncertain future world
  • The goal is not to give you a “cook-book” of business models or a formulaic “how-to” guide that can be applied in all possible scenarios that could conceivably be encountered

BUSINESS MODEL DESIGN COMES DOWN TO:

  • understanding the value you create for heterogeneous customers
  • (It’s all about customer segmentation) And managing that segmentation to maximize profits to your firm

Thinking + Measurement play a huge role in successful monetization

  • Thinking - from the shoes of the buyer (being customer-centric in understanding their needs, preferences, choices, substitutes, etc)
  • Measurement - of the customer’s willingness to pay (WTP)
  • Market research, experimentation, outcome data

In an ideal world, you would have personalized pricing!

  • Customers value something at “v”, and you charge them exactly v.
  • However, this is rarely seen! Why? Because it is very costly / impossible

Examples: Bazaar with haggling - but transaction costs make it hard to scale Closest at scale would be insurance - the premium is the price Implicit assumption is that ‘risk’ proxies for value

  • Other difficulties with personalized pricing:
  • Trade! A buyer buys a cheaper product, and sells it to a customer with higher WTP
  • Customer antagonism if they see lower prices for other people
  • Government regulation - gov’s won’t let you charge diff prices if discriminatory

You can try to “build a fence” that prevents downstream trade

  • Examples:
  • Prices associated with unique identity: airline tickets, digital coupons
  • Quantity restrictions - thanksgiving sales restrictions
  • Product compatibility -
  • Figuring out the right fence is a key part of business model design

Since full personalization is generally not possible, WHAT TO DO TO CREATE AN EFFECTIVE BUSINESS MODEL

  1. Recognize that heterogeneity in valuations exist
  2. Find a sorting variable or proxy measure of value
  3. Find a way to induce profitable self-selection such that more revenue is extracted by the model from those of higher value

Heterogeneity in WTP of customers: You still want to make more money from customers that have a higher WTP. So, how do we do this?

  1. Create product lines!
    • Example: Gap Inc with GAP, Old Navy, Banana Republic.
    • The key: Customers are incentivized to ‘self-select’ into the products made for them!
    • The big risk is that customers with high WTP will just buy the cheaper product, because it is ‘good enough’
      • HOW TO PREVENT: FIND YOUR SORTING VARIABLE
      • “Damaged goods model”- Find an attribute that the customer highly values, and do NOT include it in the cheaper product
        • Ex: Airline tickets. First class very different than economy.
          • Sorting variables = seat size, leg room, service quality, food quality, etc.
        • Ex: Dropbox unlimited storage in paid, 2GB in free
    • “Freemium” is an example of the damaged goods model
      • The lower end product is priced at zero
      • Advantages of zero?
        • Facilitates trial (esp if product is an experience good)
        • Builds switching cost that induces trading up (all my stuff is on Dropbox now, not going to go anywhere else! Might as well just pay for it)
  2. Find a “proxy measure of value” and charge based on that!
    • Those with higher proxies have higher valuations for the product
    • Offer everyone a “two-part” tariff
      • A fixed fee for participation (meets fixed costs)
      • A variable fee that scales with the proxy variable
      • Example: Many SaaS models
        • Fixed fee to use it.
        • Proxy variable = # of seats
        • Customer 1 has more seats than client 2, so gets more value, so pays more
    • Usage is a great proxy variable!
      • Example: ZipCar. Charge based on miles driven
      • Example: Amount of storage space used
    • When the proxy variable is the usage of a secondary good: “Razor-Razor-Blades” Model
      • Examples: Printers + cartridges, Coffee machine + coffee pods, amusement parks (entry fee + per-ride fee), etc.
    • Applying Razor-Razor-Blades to “Experience Goods” - In-Game Purchases in video games
      • The RRB model is VERY effective with experience goods like video games. Why? In-game purchases
        • Because customers might not even know their own valuation before purchasing (IDK if this game is good or not! So pricing at $60 for a game is dumb..)
        • Also, addiction + an increase in WTP with more usage
        • Then, usage based models (like in-game purchases) allow skimming the increased WTP from users
        • Added advantage is the valuation of the in-game purchase may increase with play due to the need to signal status, open new levels, etc
        • The price of the in-game purchase is so low, it doesn’t ‘feel’ like a lot of money (.99)
  3. Platform Models (Ad-driven): Consumption/Usage of a secondary good is sold to third parties
    • Ex: Ad-driven models are selling “eyeballs, or ad-consumption” as their secondary good
      • Primary good = content (which is priced for free)
      • Secondary good = advertising (price paid = hassle cost for watching ads)
      • Platform makes money selling ad-consumption to advertisers
  4. Platform Models: Matching & Network Effects
    • The presence of two or more agents imply a role for matching
      • Ex: local businesses and the local community
    • Platform can make money by extracting some of the value it creates from matching (ex: participation fee, transaction fee)
    • Difference from razor-razor blades (selling based on usage) is network effects! It gets more valuable with more users on the platform.