Photo credit: Matt Callow.
I have been mulling about whether or not I should renew my subscription to the Wall Street Journal. Don’t get me wrong, I think the WSJ is the best newspaper produced today. So, my dilemma has nothing to do with the quality of their product, my dilemma has to do with the cost. Get this: for me to renew daily delivery and online access, the cost is $441 per year. Granted the demographic for WSJ subscribers is affluence, but come-on, I’m not an AIG executive.
Information should be priced using open contracts.
This got me thinking about a creative music label that I’ve recently discovered: Magnatune. (Stick with me; I’ll circle back to the WSJ in a moment). Magnatune’s tagline and business philosophy is, “We are not evil”. All of their music catalog can be played in their entirety (no lame 30 second samples) at 128 Kbps, contains no DRM, 50% of the cost of their music goes directly to the artist, and most importantly they use an open contract or variable pricing model for the music. Users are allowed to pay what they feel is a fair price for the album as long as the payment is within a given price range.
The suggested price of each album in the 700 album catalog for Magnatune is $8. Users can choose to pay as little as $5 or as much as $18. Without peeking below, can you guess the average sale price of an album?
Tobias Regner and Javier A. Barria studied 18 months worth of transactions on the Magnatune website and found that the average payment was $8.20 per album, much more than the $5 minimum payment and higher than the $8 suggested payment. Surprised? Regner and Barria explain:
Information goods are experience goods. Consumers do not know what they are worth to them until they experience them (Shapiro and Varian (1999)). Their exact value to the consumer is quite unknown ex ante. The valuation rather develops until the good has been experienced often enough and the true worth has been established.
When customers have full pre-purchase access to songs they are interested in, they can experience the information good long enough to determine how much it is worth to them and decide whether they really want to buy it.
Regner and Barria’s conclusion is that “social preferences are the likely motivation of the customers that make voluntary payments.”
I suspect that they would make far more money than they do with their fixed subscription model.
And that brings us back to the Wall Street Journal specifically and newspapers in general. It seems that many newspapers around the country have severe financial problems. Rather than rely on either a fixed subscription price, ala the WSJ, or an online advertising model, ala the WashingtonPost.com; they should allow their readers to pay via a variable pricing model for subscriptions.
If the Wall Street Journal offered me a range of prices based on my perceived value of their information, they would undoubtedly receive my renewal. In fact, I suspect that they would make far more money than they do with their fixed subscription model.
The world is changing. Information is valued differently by each consumer. If information providers were flexible in their content pricing they would find that social preferences are the motivation of customers that make voluntary payments. Reciprocity is the source of social preferences in the model of information content valuation.
Neil Bonner works in the information technology field as a manager for applications development at the Transportation Security Administration. His focus is on innovation and collaboration for internal and external audiences. 
neil [at] michelangelo.com
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Update to this post. My subscription expired during the first week of January 2010. However, the WSJ still delivered the newspaper to my home and continued my online access for an additional three months.
Whenever they would call asking me to renew for $441/year, I would tell them that the cost is too high but I would like to negotiate with them for a mutually beneficial agreement. This would always take the caller off of their game and they would quickly return to their tele-script. I told them each time I would renew home delivery and online access for $200/year. They never took me up on my offer yet continued to delivery the newspaper even though I was no longer paying for a subscription.
Finally, last Thursday or Friday they discontinued home delivery and stopped my online access to subscriber-only content (mind you 90 days after I stopped paying). On Saturday, their website offered me a “new subscriber” benefit of 54 weeks of home delivery and online access for $140. I signed up again for another year.
And people wonder why the newspaper business is in such dire financial straights.