Why comparing prices does not make sense

Yesterday we were discussing the characteristics of the information economy in our class. I was using and referring to the book by Shapiro and Varian (1999) titled “Information Rules”. It is a great book, a true classic and in many ways very valid today despite the fact that it was written over ten years ago. It explains many of the characteristics of the information economy very clearly.

I wanted to make sure that at least in some way I was able to explain some of the ideas and concepts of the book. To do this I made a populist test by asking a question before I started the lecture and by repeating the same question at the end of the lecture. I told students that comparing prices makes no sense in the information economy. Then I asked how many compare prices? Everybody does. At the end of the lecture I repeated my hypothesis and once again asked the same question: how many compare prices? Once again everybody continued with comparing prices. It seemed that no change had taken place. Had my lesson gone to waste? Or was I barking up the wrong tree?

The point Shapiro&Varian make in their book is that the fixed cost of producing information goods are both large and sunk. The fact that the cost is also sunk means that it is very difficult - practically impossible - to retrieve the cost one has invested in making an information product. For example if you have invested hundreds of hours in writing a book and the book does not sell, there is no way you can retrieve the cost of your investment i.e. get paid.

Shapiro&Varian point out that the variable cost of information production also has an unusual structure: the cost of producing an additional copy typically does not increase even if a great number of copies are made.

From these characteristics of information goods Shapiro&Varian conclude 1)“Information markets will not, and cannot look like text book perfect markets in which there are many suppliers offering similar products, each lacking the ability to influence prices”, 2) low variable cost offers great marketing possibilities and 3)they instruct companies to avoid commoditization.

My populist conclusion from all of this was: “comparing prices does not make sense”

One should and this I was trying to explain to the students be very aware that at best pricing can be very personalised. Even shops and supermarkets could have different prices in the morning and different pricess in the evening. At best they could have a price specifically tailored to you i.e. when you walk in the shopkeeper decides instantaneously whether to give you low medium or high prices. Of course in a physical environment this does not really work.

In the virtual environment personalised pricing is very possible and often the norm and by versioning products and services one can make the product look different and hence avoid price comparison and commoditization and from the perspective of the consumer this leads to the statement that there is not necessarily much sense in price comparison.

What should the consumer do? Well in my view he should be very aware that prices can fluctuate in the information economy. He or she should also have a general understanding of prices and price levels. In particular he or she should focus on what the value of the product or service is to him or herself and to express the value also in money. Then all the consumer needs to do is wait until somebody has a promotional price which is acceptable to the consumer and once this happens: grab the deal!

Why free education creates a market of non consumption?

In Finland we are proud of our free education system. However we should also be concerned. About 93-95% of the generation continue to a professional or university degree (for free) after they have finnished their obligatory education at the age of c 15. However we should also be concerned because only 86,8% get a degree. In other words we have a drop out rate of 6 to 8%. This is high and a should be a major concern.

One should note that, the fact that education in Finland is free, does not make Finland any better compared with others.When comparing Finland with other OECD countries, Finlands performance of 86,8% with a professional or University degree is only average (Helsingin Sanomat 12.9). Could it be that a free education system is also a barrier?

The consultancy company Innosight describes how you can create a business model that unlocks an unserved market. It is natural to think that developing countries can be underserved, but one should also consider if developed countries like Finland could be underserved because they have structures, barriers and cultural habbits, that prevent new ideas and new forms of business emerging. In particular in the context of education, one should ask can free education be a barrier?

Closer inspection would show that education in Finland is not totally free. For example high school students - in practice their parents - have to buy their school books (some stimates say this is about 1000 euro, when bought new). Nevertheless we have a culture of free. We are not used to paying for and investing into education. The high school students have this mental mindset when they enter University and I would hypothesise that the Finnish University student buys less books than his foreign counterpart. I would love somebody testing this or coming back with empirical evidence.

This culture of free is also affecting how students invest in IT technology, which is central to modern learning. Today each student buys his or her computer, but mainly because they need it for personal entertainment and social networking not beacuse they need it for school.

Students, however, do not invest in professional software, although as we all know  two thirds of IT costs are in software and not in the hardware. This is clearly a market of non consumption, as Clayton Christensen, the Harvard professor, would call it. Interestingly Universities are facing budget cuts, because of a low performing economy and they too would hesitate in investing more in IT.

The question is how do we build a market in which we teach students to invest in software and at the same time test out different software or etools as I would call them. I have some ideas. And hopefully I will get back to you with them, some time later on.

I started the blog entry by being concerned with the 6 to 8% drop out rate. I understand the figure is high, but it is not  my biggest concern. My biggest concern is the fact that in Finland we are not learning the e-tools that are needed to run a modern business.

Why universities do not have web shops?

Some time ago I was wondering why the large Finnish retail shops like the S-group, Kesko and Stockmann do not have a web presence, why they do not have a web shop.  Now, a few years later, all have established some sort of web presence (e.g. http://www.kesko.fi/fi/Kaupat-ja-palvelut/K-ryhman-kaupat/verkkokaupat/  and http://www.s-kanava.fi/web/vk/en/asiakasomistajalle). The latest is the S-group and you can see their web shop advertisements when visiting the local Prisma supermarket.  

The reason for the rush into establishing a web shop and a web presence is simple: customers are on-line and ready to buy. Not having a web presence means a sure risk of losing market share.

The retail shops were late in establishing their web shops because their business logic was built around the local community and on the logic of securing the best physical presence, in practice an intersection of major roads, to build a physical store. The retail shops had focused on physical intersections and forgotten the virtual intersections. Now they are learning how to conduct an online business and they are learning that underlying business principles and structures will be questioned by the customer. The customer drives their business.

In a sense universities are similar to retail shops. Universities are built around the local community to serve the knowledge needs of the local population. Education in Finland is free. It is not the customer – the student – who brings in the money. It is the government who pays for the tuition. In this sense Universities are different to retail shops. However Universities should pay attention and note that students are online and that they are also learning online. The Finnish retail stores were late going online. The Finnish universities will be slower. Hopefully they will not be too late in creating an online presence.

Internet i.e. online business is different to physical business. Internet based business models have four interesting characteristics: search engines are key, tools are given to the user to enable interaction, one should focus on building a community and the business model is scalable.

An online university could be compared to the hotels.com application. It is easy to find a hotel room anywhere in the world. It should be as easy to search for an online course starting within a single university and then build to leverage interuniversity relationships. One should give the students tools to openly comment and recommend the course to other students. Why not, while at it, also give the alumni and industry members interactive Internet based tools to comment and suggest content and areas of future development for the course.  In Finland tax payers are paying for the tuition. Following the principles of open data, tax payer financed content should be available to all – and not just the students in class. Like in many Internet business models, the lectures could be open to all in the online community and personal (possibly also online) feedback plus discussion, course grading’s, certificates etc. to those who have paid for the course or are enrolled as students.

It is interesting that the Internet was born in university related research environments, but the universities are among the last to notice the Internet´s potential in changing their business model and their governance structures.

 

 

What tools do students need and how much do they cost?

In Finland school is free, except for the books, which the student at high school level has to pay for. A yearly debate is, whether or not also these books should be free or not. Helsingin Sanomat (http://www.hs.fi/digilehti/#15082012/kotimaa/ ) calculated how much a student has to pay all together during three years at high school, if he was to invest into new – not used – books. The total sum is 1972 Euro´s.

In today´s information society almost every family has a personal pc and I would assume – not knowing the statistics – that a majority of high school students have a personal laptop. This is an investment which they should also have for school purposes. A sum of 500 Euro´s should be added onto the 1972 Euro´s invested into books.

Thinking on a bit further, do the books need to be printed versions? Could they not be e-books or even integrated into the e-learning platforms of schools.

It is also surprising that there was no discussion on the e-tools (e.g. software programmes) students need to buy and how much they need to spend. Every computer most probably has a Microsoft office package, which has a price tag. But how many schools and students are using Google applications?