How Digital Disruption Changes Pricing Strategies and Price Models

Abstract

The digitization of the economy leads to significant changes in the way companies determine their prices. Technological changes (availability of the Internet, digitization of production, product innovations) basically influence the corporate environment, since the basis for pricing can be improved. Companies can collect and analyze more relevant information and hence optimize their prices. However, these causes accelerate competitive reactions. On the one hand, consumer behavior changes (more information is available online, search engines and price robots help to find best offers); on the other hand, market structures become fragile (market entry barriers for new competitors are lowered, traditional products are cannibalized by digital products). Due to these factors, the pricing strategy must undergo a complete rethink. In addition, this has consequences for the types of pricing models applied in the digital age. In this context, this paper focuses on four pricing models. Firstly, the digitization makes it possible to offer products and services for free to the consumer (Facebook and Google are particularly profitable examples), while at the same time other sources of revenue streams (here: advertising revenue) are generated. Secondly, freemium models are especially popular with start-ups, which are also free of charge for a basic service, but for upgraded services (full range of features, no ads), users pay a fee. LinkedIn, Dropbox, and Spotify are prominent examples of this pricing model. Thirdly, subscription models have a strong boost. Since production costs drop when new business models are based on digitization, subscription models (like Netflix)—which have a long tradition—become more attractive, nowadays. Fourthly, pricing models with flexible prices, which are dependent on demand and customer profile, will be discussed. Dynamic pricing has a growing importance in online trading, but is also being applied more frequently in retail stores.

This paper examines the implications of digitization on strategic and operational pricing decisions and shows examples from various industries (retail, media, music) and enterprises. The limits of technological changes are also discussed, mindful of both aspects the company perspective and the perspective (and perception) of the customer.