Costing and pricing information services

When approaching the topic of pricing information services, there is a question to bear in mind: if mighty Dialog hasn't found a sensible way of charging for information after over 25 years, what hope is there for a lone information professional? This is over-stating the case a little, but it is sometimes reassuring to be reminded that no-one finds pricing information services a straightforward activity. Marketing textbooks tell us that marketing services can be a challenge, and a brief trawl of the Library and Information Science literature shows that LIS researchers have been debating ways of determining the value of information for decades (and value is extremely relevant to price!)

Nevertheless, it is possible to take control on the pricing issue, and use price creatively as part of the mix in marketing your service.

Pricing as part of the mix

In marketing terms, pricing is viewed as part of the marketing mix, along with Promotion, Place (distribution), Product (ie the product/service you are offering) and (for services) People and Process. Marketing textbooks all stress that is important to see price in this context, rather than in isolation. If clients are not using a service, you could consider altering the service and the way it is provided, reviewing the way that the staff are handling the service, promoting the service more effectively, - or altering the price. However, if you assume that people are not using a service because it is too expensive, and then put the price down, you could be making a mistake.

Philip Kotler, a marketing guru who has written extensively about marketing of services and marketing in non-profit organisations, has redefined the 'P's' of the Marketing Mix as 'C's'. In this new system, 'Price' becomes 'Cost to the user'. This is a useful reminder that a user will look at all the time, money and energy they have expended in order to use the service, not just the part you charge for. Therefore, users might be willing to pay extra for a service that delivered information directly to their door, because the overall cost to them is lower, rather than paying less and having to collect the information themselves. (This is a problem that online services have been struggling with: it took them a while to realise that the user included telecommunications and hardware etc. in the 'cost of online' - not just the host's connect and hit charges).

If you are starting out, or feel that a change in strategy is needed, it is important to get feedback from users and potential users, rather than jumping to conclusions. However, when drawing up questionnaires or handling focus groups, the question of price has to be approached carefully. On the one hand, a number of information brokers have commented that what people say they are prepared to pay in theory (ie when answering a pre-service questionnaire), does not tally with what they are prepared to pay in practice. In addition, users may prefer to say 'I didn't use the service again because it was too expensive' rather than giving the real reason (eg 'I didn't use it again because the person doing my search used a lot of jargon and didn't explain why she didn't find much') because the 'price' answer is less likely to be probed and challenged.

Therefore, you may not want to ask directly how much people are willing to pay for a service: it may be more useful to find out which services are valued most, and to analyse user needs and usage patterns, in order to identify what people would be willing to pay most for.

Knowing your objectives

Your pricing strategy needs to fit in with the overall mission of your organisation, and reflect your financial objectives: it will be part of your marketing or business plan. The usual advice about goals and mission applies: if your staff do not 'own' the objectives, then they may not work to support them. I know of one information service where reference staff (who disagreed with the policy of introducing charges for some types of enquiry) were advising users about ways to get round the charges and obtain the information for free.

The diagram below illustrates the process of deciding on pricing strategies.

At each stage, results of research may mean returning to, and revising, decisions made at an earlier stage.

Knowing your costs

In order to be able to price something, you need to know how much it costs. This means having Management Information Systems (MIS) which provide information on the separate services you provide. As well as different types of service, you are likely to want to track use by different individuals or groups of people. If you have set up your own business, this is something you can determine for yourself (possibly in conjunction with your accountant, and bearing in mind what is and is not tax-deductable). Even if you have your own business, though, you are likely to need more management information than is necessary for accounting purposes, in order to track performance of different parts of the service and different client groups.

If you work as part of an organisation, it is important to know what they mean by cost recovery: does this mean direct costs only, or all costs including overheads such as accommodation, heating and superannuation? Different organisations allocate overheads in different ways. A bluffer's knowledge of accounting terms and MIS jargon will be very useful.

A common way of distinguishing costs is to look at whether they are fixed or variable costs, and whether they are direct costs or overheads. Fixed costs are those which are the same whatever the usage (eg a journal subscription, photocopier rental): they may also involve an up-front commitment. Variable costs are those which vary according to usage (eg online searches, photocopy paper costs). In organisations which are worried about cashflow, there may be a preference for incurring variable costs (less risk of paying for something you do not use).

Direct costs are those which can be associated directly with the service (eg a journal or piece of equipment bought specifically for use in one service) and overheads are costs which benefit a range of services (eg the cost of heating and lighting university buildings). A salaried employee employed on a specific service might be seen as a fixed, direct cost. An online search carried out for the same service would be a variable direct cost.

A number of fee-based services have found that they need to keep more detailed records than their organisation's MIS is able to provide. If you work in the sort of organisation where objectives may be changed without warning, then it is useful to have costing data to hand which will enable you to work out quickly, for example, the effect of having to include accommodation costs for the first time, or split costs differently between internal clients.

Pricing strategies

Competitor-orientated: You look at what your competitors are charging, and react accordingly. You might decide to charge the same, to undercut, or to present your service as better in some way, so that you can charge more. If you are charging internally, competitors might consist of external information brokers, or other parts of the company. It is a good idea to find out about competitor prices, even if you are adopting other strategies, although you need to bear in mind that their circumstances (and costs) may be very different from yours.

Demand-orientated: You look at "what the market will bear": the perceived value of the service. This means you could charge more for a service which is seen as being value-added or elite (eg extra-fast delivery; delivery by electronic mail; formatting information into a report). You need to find out what your users perceive as being value-added. This is generally the preferred approach for those who take marketing seriously. However, costs and cost-recovery objectives are obviously still relevant.

In relation to perceived-value pricing, it is also worth saying that if market surveys show that potential clients perceive the value of an information service as being low (too low to even cover your costs), then you will need to change the service so that it is perceived as valuable, choose a new target market, or stop offering the service, unless you have sponsors with generous pockets. Educating people about the value of information is a slow and expensive operation.

Part of your strategy will be determined by how you see your service positioned in the marketplace. Is it a 'cheap and cheerful' service (where the expectation will be of low prices and moderate quality), or do you want to be seen as a premium service (in which case, to set your prices too low might be counterproductive - I know of one public-sector business information service which encountered potential clients who doubted the quality of the service because of the low price).

Even if you have not thought of this aspect, you will find that your clients will have developed (consciously or subconsciously) an idea of where you are positioned in relation to your competitors. Perceptions of what is 'premium' may vary over time, and it is important to keep up with these changes: for example, people used to view fax delivery as a special service and accept high per-page charges, whereas now it is viewed as a normal part of business communication.

You will want to gear your pricing strategy towards your key target market, and use the strategy encourage repeat-buying. Discounts, and subscription or membership schemes, are sometimes used to foster customer loyalty and create the impression that a special, tailored service is being offered.

Common mistakes with pricing

These include:

• Not being varied enough. Commercial operators adapt pricing strategy to different market segments and also provide different 'packages' (with product variations, and promoted and priced in different ways). Readers of this journal who run their own businesses will know that price negotiation is part of business life. Those running a service from within a public-sector organisation may unfortunately find that their managers view differential pricing as suspicious (or illegal).

• Being set unrealistically: for example, too low to cover costs.

• Not being the result of a marketing decision. This can happen when someone further up in your organisation takes a policy decision on pricing (often without thinking-through the implications).

• Not providing tangible packages. Intangibility is a problem common to services - clients cannot view the product in advance to confirm its appropriateness and value. Some information brokers approach this problem by creating packages which can at least be understood by the potential client, even if they cannot be previewed. Examples are: providing a certain number of news stories for a fixed fee; having a fixed charge for a company profile. Document supply is in fact the most obvious example.

• Being too cost-orientated.

• Being incomprehensible to the client. This can easily happen if you try and reflect costs too exactly. Online search charges are difficult enough for information professionals to understand. Clients will generally respond better to a pricing structure that charges more if more information is supplied. Some brokers do this informally, but it can be a better idea to fit this in as a formal part of your pricing strategy. It may mean that (for example) you make relatively little profit on searches which did not find much information, and considerably more on searches which were 'successful'.

  There are some types of search in which the client will be happiest if little or no information is found (for example patent searches), and if you have significant numbers of this type of search you obviously would not want to adopt a find-less/charge-less approach.

To say that guesswork is never an element of pricing would be unrealistic. However, it should be used with caution. The fact that there have been numerous examples of information brokers struggling for survival (and in some cases going under) because they are not sufficiently profitable, indicates that their pricing strategy (but almost certainly not only their pricing strategy) was flawed. John Harrow commented after the demise of the Warwick Business Information Service (a well-known service and one of the first to be established in the UK)

"If Warwick was as busy as some of its ex-staff suggest but was still running at a loss, then clearly its pricing policy was askew. The fact that its rate card was broadly competitive might indicate that margins across the industry are very pinched" (Harrow, 1994)

The services which are surviving today are the ones which have tackled pricing as part of their overall marketing strategy and are managing their strategy in response to their market.

References

Bibliography

There are books which are about pricing, and the more recent ones are likely to include sections on service pricing. Similarly, books which focus on services marketing will include pricing aspects. Examples are:

• Gabor, Andre. (1988) Pricing. Gower. (Chapter 9)
• Kotler, Philip. (1994) Marketing management. 8th edition. Prentice-Hall. (Chapters 18 - services - and 19 - pricing).
• Palmer, Adrian. (1994) Principles of services marketing. McGraw-Hill,. (Chapter 11).

Other relevant sources include:

• Akeroyd, John. (1991) "Costing and pricing information: the bottom line." Aslib proceedings, 43 (2/3), 87-92.

• BUBL, the Bulletin Board for Libraries, has a section which contains results of library surveys carried out via the Internet. These include some surveys to do with pricing, eg a survey of photocopy charges..

• Charging: 5 years on. (1994) Hitchin: Effective Technologies Ltd.

• Clague, L. (1991) "Charging for information services: is there a best way for internal and external cost recoveries? I" New Zealand libraries, 46 (9), 12-14. (Part II, by Sallie Hill, is in the same issue, pages 14-16.)

• Danilenko, G. (1994) "Activity-based costing for services: the corporate information centre." Special libraries , 85 (1), 24-29.

• European Information Researchers Network (1993)EIRENE membership directory European Information Researchers Network. Entries in the directory include pricing structure (though not all brokers give this information).

• Kinnell, Margaret and MacDougall, Jennifer. (1994) Meeting the marketing challenge: strategies for public libraries and leisure services. Taylor Graham. Report of a survey carried out on UK public libraries: chapter 8 deals with costing and charging.

• Smith, Cathy (ed) (1988) Towards a pricing policy for charging: proceedings of a seminar held in London on 22nd September 1988 Hitchin: Effective Technologies Ltd.

• Webber, Sheila. (1993)"Charging for library and information services in medical libraries: a review of the literature and a survey of current practice." Health libraries review. 10 : 202-223. The whole of this issue of the journal is devoted to costing/ charging.

• Yates-Mercer, P and Pearson, D. (1992) "Charging policies and practice in corporate information units in the UK. 1: to charge or not to charge?" Journal of information science, 18 (1), 11-25.

• Yates-Mercer, P and Pearson, D. (1992) "Charging policies and practice in corporate information units in the UK. 2: how to charge." Journal of information science , 18 (2), 127-137.