Urgency as a pricing strategy

10 Feb

In my very recently-past life as a finance journalist, I wrote about topics like high frequency trading and so-called latency arbitrage.

Both of these terms refer, broadly speaking, to the arms race consuming investment banks and hedge funds over who can “react” to a news event (i.e. buy or sell shares in a company that’s just released its earnings, say) the fastest.

In finance, fractions of a second can mean the difference between making money, not making as much money, or indeed losing money.

Time is money, etc.

Which is why the likes of Goldman Sachs and Citibank have been willing to cough up large sums for annual subscriptions to Bloomberg and to ThomsonReuters, both of which specialise in being both fast and accurate.

And it is why both of these organisations are investing in so-called “machine readable news“, the better to serve their increasingly demanding algorithmic clients.

This is all happening alongside the rise of machines writing the news (leading to the inevitable question, “will software replace journalists“?)

The two trends are mutually reinforcing: as more banks and hedge funds use computers and software to both inform their trading decisions and execute transactions, wire services and other news organisations are obliged to speed up the pace at which they get data to their customers in the financial world.

This inequality of access to sensitive (read: potentially profitable) information strikes many as unfair at best, and possibly illegal at worst.

But the likes of Bloomberg and ThomsonReuters and startups like Selerity have built reputations and businesses on perpetuating, or at least facilitating, the information divide.

There’s a lesson in microeconomics here, and one that startups thinking about their monetisation strategy would do well to remember: price discrimination works.

As The Startup Daily put it, urgency creates pricing options:

Some customers place a high value on gaining early access to a product, while others will only buy at a lower price, and are willing to wait to do so. Media companies often use release windows to maximize profits across this urgency spectrum.

[A common example of a pricing-as-timing strategy is “skimming”, which is the practice of charging a comparatively high price at launch – when the early adopters are out in force.]

One to think about.

See also:
Fixed to Flexible: Four Simple Lessons AboutCost, Price, Margin and The OptionsAvailable to The 21st Century Business – Todd Sattersten (PDF)

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