Jessica Lessin and her team launched The Information this week, “a subscription publication for professionals who need the inside scoop on technology news and trends”.
All the buzz was about the site's pricing model and not the content. At $39 a month of $399 a year, it's much pricier than other technology news sites, most of which are entirely free and ad-supported. When I first heard the price point I thought it was crazy.
But after hearing more about the service and visiting the site, I realized it wasn't that crazy after all. What Lessin and team faced was a classic pricing problem, when you have one set of customers who will pay a lot for your service and many more who won't pay nearly that much.
The ideal scenario in such cases is to try and charge the customers who are willing to pay more a higher price while charging all the other customers exactly the maximum they're willing to pay also. When you can charge every potential customer the reservation price each of them is willing to pay, you've achieved first degree price discrimination, the holy grail of pricing. You've achieved maximum profit.
In reality, that's nearly impossible. The best most businesses can do is some form of segmentation of their customer base into different payment classes. Airlines are one example of a company that do a decent job of segmentation, and they do so by all sorts of methods. They split their seats into First/Business/Economy classes to try to grab money from price insensitive wealthy travelers (some are just plain rich, others pass through the bill on company expense reports). They also charge different prices depending on whether your trip has a Saturday night layover, or how late in the game you purchase your ticket. All these are methods of trying to segment out business travelers to capture more revenue from them.
Another example is with high end software. To take one example, when I was growing up, Adobe Photoshop cost $1000. While it was very useful software, for most people, including myself as just a student, that's a crazy price, far greater than the software itself was worth to me. But for a select set of customers, graphics professionals who used Photoshop every day in their professional life, $1000 was nothing. Those people probably would have paid more than that, actually, since it was critical to their livelihood.
Adobe was faced with a difficult problem: how could they segment out these groups of customers? They never came up with a perfect solution, so they basically picked a price that was geared more towards professionals. Other users were left to try to borrow a copy from work or a friend, or in many cases to pirate a copy to use. Of course many software companies offer educational discounts to try to segment out cash poor students, but even with an educational discount Photoshop was still over $200, even for an upgrade.
Later on Adobe tried to release a much lesser featured version of Photoshop called Photoshop Elements that they sold for a far lower price, at retail it ran anywhere from $30 to $50, but most often it was just thrown in when you purchased a digital camera or printer. As far as I can remember it never really took off.
Which brings us back to The Information. Lessin and her small team could have tried to support itself with ads, but that would mean bringing on ad sales people and spending time trying to drum up enough eyeballs on a daily basis to make the site an attractive advertising destination. It's not as if the tech coverage cupboard is barren.
Alternatively, they could focus on a much smaller audience, but one that could cover all of their expenses with subscription revenue. I'm guessing that, as with Adobe and Photoshop, The Information didn't feel like they had a much larger audience that they charge a much lower fee, say $5 a month, to be worth trying to segment that group out. Regardless, It's not really clear how a news site can easily segment out its user base the way an airline can.
Usually, if you hear a price point and it sounds crazy, it's not for you. Think $5,000 reports from investment banks or Gartner/Forrester. Netjets subscriptions. Courtside seats to Lakers games. That $8,000 bottle of Screaming Eagle on the restaurant wine list. The $1000 omelette at Norma's. Fine art. It's no different with The Information, albeit at a much lower price point. I haven't read any of their articles yet and have no opinion on whether they'll make it or not, but the math, based on the size of their team, doesn't indicate that they'll need an outlandish number of subscriptions to make it a profitable or at the low end a good lifestyle business.
The bright side, for those who do subscribe, is that since The Information's business model is not built around page views and display ad CPMs, readers shouldn't encounter annoying content packaging like slideshows or articles split across a gazillion pages with ad banners on every page.