Page 167 - Electronic Commerce

Chapter 3

each unit (as opposed to the design of the prototype), the key to making a profit is to
reduce the costs of manufacturing.
The basic economics of selling digital products are different. Digital products have large
up-front costs. Once those costs are incurred, additional units can be made at very low
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additional cost. For example, a software program can cost thousands (or even millions) of
dollars to create because it requires many hours of expensive programmer time to design,
code, and test. But once the software is in production, creating additional units costs very
little (especially if those units are distributed in digital form, online). Making minor changes
in the program so that it works better for different types of customers can be relatively
inexpensive, too. Thus, the profitability of digital products depends on factors that are quite
different from those that determine the profitability of physical products.
The result of Anderson’s logic is that businesses can find it profitable to offer a digital
product to a large number of customers for free, and then charge a small number of
customers for an enhanced, specialized, or otherwise differentiated version of the product.
If a company can charge the small number of customers enough to cover the cost of
developing the digital product and yield a profit, it can give away many copies of the
product, especially if those free copies lead to connecting with more customers willing to
pay for the enhanced product.
For example, Yahoo! offers free e-mail accounts to site visitors. This draws visitors to
the Yahoo! site and allows the company to sell some advertising on the pages that display
the e-mail service. But some e-mail users will want an enhanced version of the service.
Perhaps they want pages with no advertising, the ability to send large attachments with
their e-mails, or more storage space for their e-mails. Yahoo! charges for a premium
version of its service that offers these features. It costs the company very little to offer this
service, but selling it generates considerable revenue.
You learned about another example of this revenue model earlier in this chapter. The
subscription music services (such as Pandora, Internet Radio, Spotify, and Rhapsody)
offer free, but limited and ad-bearing versions of their subscription services to introduce
potential customers to their services.
In the physical world, this free sample logic works in reverse. Companies selling
physical products have often used a mixture of free and for-sale products. For example, a
bakery might have a plate of cookies available for customers to taste. The bakery hopes
that enough customers will be impressed with the taste of the free cookies that they will
buy cookies or other baked goods. They give away a small number of physical products to
boost overall sales of that identical product. This is the opposite strategy used by sellers of
a digital product; that is, to give away a large number of digital products to entice other
customers to buy a small number relatively expensive versions of the product.

CHANGING STRATEGI ES: R EVENUE M ODELS
IN TRANSITION

Many companies have gone through transitions in their revenue models as they learn how
to do business successfully on the Web. As more people and businesses use the Web to
buy goods and services, and as the behavior of those Web users changes, companies often
find that they must change their revenue models to meet the needs of those new and

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