¶ … Bury Price Elasticity Service
Business Proposal for Will Bury Price Elasticity, Incremental Costs
Digitally recorded books (e-books) and digital content face several significant challenges from a price elasticity and market pricing perspective. The barriers to entry from digitizing content alone are low (Starkweather, 2004), with differentiation existing at the marketing, packaging, delivery technology and pricing strategy level. The intent of this proposal is to define how Will Bury will be able to increase revenues, determine the profit-maximizing quantity of music, use the concepts of marginal cost and marginal revenue to maximize profit, and also define a profitable mix of pricing and nonpricing strategies. Barriers to entry, product differentiation and cost reduction strategies are also profiled in this proposal.
Revenue Generation
Of the many options for defining a price for the digital goods including music and books, the two most prevalent are fixed-fee licensing (FFP) and per-copy licensing (PCP) (Starkweather, 2004). Fixed fee pricing can lead to great lifetime customer value and a relatively stable annuity revenue stream as is seen by the success of Netflix and their yearly subscription fee that is fixed. Netflix has overtaken traditional brick-and-mortar video rental stores in total volume as of 2011 as a result of their Internet-based delivery platform and fixed-fee licensing approach (Peers, 2011). As appealing as this strategy is for attracting and retaining a customer base that quickly translates into a recurring revenue annuity. Will Bury's business model is more suitable for the per-copy licensing (PCP) structure as it provides for differentiation of price by content of the book, the relative popularity of the book, and the uniqueness and newness of recent titles being more valuable than many older, less popular ones. PCP-based licensing is also a foundation for creating value-based pricing strategies over time (Wang, Webster, Zhang, 2011). Value-based...
one that seeks to normalize pricing over a long-term customer retention strategy as Netflix does with digital entertainment.
Profit Maximizing Quantity
The profit-maximizing quantity of the e-books is defined using the following series of assumptions. First, it is assumed that the pricing strategy will be on a per-copy licensing (PCP) to optimize value-based pricing based on the popularity of recent titles relative to those which have been in distribution for months and years. Second, it is assumed for purposes of this business proposal that the demand curve for digital content including e-books is flat, and that per unit pricing changes will have little if any effect on volume purchasing (McConnell, Brue, Flynn, 2009). Third, it is assumed that fixed per unit costs are the price of storage amortized across all titles and the $5 per title loyalty fee forecasted for each copyrighted title added to the series that are being sold.
The Profit Maximizing Quantity of the e-books is defined through the use of the Total Cost -- Total Revenue method as there are fixed costs per unit for copyrighted books, a small fixed costs measured in literally in cents ($.03) for storage of the e-books and a flat demand curve which equates to little variation in profit maximizing quantity. Assuming that there are initially 1,000 e-books offered for download at between $3 to $5 with the higher-end units being the most recent titles, and further assuming the target revenue of $200,000 per year is the revenue objective, the profit maximizing quantity is approximately 67,000 downloads in the first fiscal year of the Will Bury eBook Download Service.
In highly inelastic markets, there is greater flexibility to increase prices over time and gain market share as a result of the price/quality relationship (McConnell, Brue, Flynn, 2009). Raising prices will drive down the price maximizing quantity…
