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.

Marketing objectives

Pricing Objectives

Examination of determinants - eg costs, demand, competition

Decision on the role that pricing will play in the marketing mix

Development, and evaluation of the effect of, 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

Cost-orientated: You find out what your costs are, and then work out the prices, bearing in
mind what percentage cost-recovery (or profit) you want. This strategy is often used by those
charging internal customers: the customers may have access to the costing data, and it may be
important that the system is perceived to be fair. If staff divide their time between several
services, they may need to keep time sheets, or you may need to take sample timings (eg the time
it takes to generate an invoice or retrieve and photocopy a document). Staff costs for
administration, marketing etc. may also need to be allocated to different services.

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

Harrow, John. (1994) "Warwick statistics end." Library Association record, 96 (5) May, 246.

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.