By Kirk Kardashian, February 2012
Published Feb 06, 2012
Millions of people read online newspapers every morning looking for answers to all sorts of questions. Who won the football game? What happened at the city hall meeting? Is it going to rain? Increasingly, however, readers themselves are being asked one important question: How much are you willing to pay to peruse the news?
As newspapers have discovered the stark reality that advertising revenues alone don’t cover the costs of producing the news online, they’ve slowly started stashing their stories behind pay walls. The London Times and Sunday Times did it in 2010, The New York Times created a 20-article per month threshold in 2011, and the Chicago Sun-Times followed suit earlier this year, just to name a few.
But setting the price for online news is no simple task, says Praveen Kopalle, a professor of marketing at Tuck and an expert on pricing strategy. That’s because newspapers exist in a two-sided market: they get income from both readers and advertisers. Furthermore, the two sides are irrevocably intertwined, with the demand from the readers affecting the demand from advertisers, and vice versa.
In other words, newspapers are a classic example of a network externality: a situation where a product’s utility depends not only on its use by the consumer, but on how many other people are also consuming the same product. “If I’m the only one with a phone,” Kopalle says as an analogy, “who am I going to call?”
To get a feel for the tricky dynamics of the newspaper economy, consider these axioms:
Kopalle makes sense of these interrelated truths by organizing readers and advertisers according to the benefits they get from the transaction. The most common and most interesting scenarios occur when (a) the benefit to advertisers is high (because of more readers) but the benefit to readers from ads is low; or (b) the benefits to both readers and advertisers are high.
The first scenario is akin to what The New York Times and other newspapers must deal with—advertisers like having millions of eyeballs see their ads, but people don’t read newspapers for the ads. So these newspapers takes great care in finding an article threshold and price that both brings in enough revenue and doesn’t reduce readers. They also try to find just the right number and type of ads: enough to pay the bills, but not so many as to be obnoxious or annoying.
The second scenario is in play with magazines like Vogue and GQ. People read these magazines, in part “so the ads can tell them what kind of lifestyle they should be living,” Kopalle says. These readers also happen to be affluent. It’s a win on both sides: the advertisers can engage with a rich, targeted clientele, and the readers actually enjoy flipping through 20 pages of advertisements before getting to the table of contents.
What’s made the business model for online news even more difficult is that many papers, The New York Times included, gave their content away for free for many years, and many still do. “That sets the reference price in readers’ heads to zero,” Kopalle says, “so when you put up a pay wall, anything you charge becomes more than the reference price.” Basic economics dictates that when price goes up, demand goes down, and that’s especially the case “when you have conditioned people to a price of zero,” asserts Kopalle.
The question then becomes: How do newspapers with new pay walls stem the decrease in readers? For Kopalle, the answer partly lies in educating the consumer. “You must stress to people the value of the product,” he says, “and that the reference price should not be zero.”
Equally important is bringing the interests of advertisers and readers into a closer balance. That can happen, Kopalle says, when the advertisements are more targeted to the readers. Thanks to social media and data analytics, targeting readers with the content and ads they might like is much easier. But Kopalle stresses that it must be more seamless than pop-up ads or a picture of the shoes you browsed at Zappo’s last week. “It has to be more creative and integrated,” he says. “Something like a narrative.”
Perhaps it will give a new meaning to “news you can use.”