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The document discusses the theory of two-sided markets, emphasizing the importance of pricing strategies and subsidies to enhance user participation and platform growth. It outlines various pricing strategies such as subsidization, dynamic pricing, and price discrimination, and explains how indirect network effects influence the value derived by each user group. Additionally, it covers the diffusion of innovations theory, detailing the stages of product adoption and factors affecting the rate of diffusion.

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AASHISH MEHRA
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0% found this document useful (0 votes)
6 views

Handout#2_VGS

The document discusses the theory of two-sided markets, emphasizing the importance of pricing strategies and subsidies to enhance user participation and platform growth. It outlines various pricing strategies such as subsidization, dynamic pricing, and price discrimination, and explains how indirect network effects influence the value derived by each user group. Additionally, it covers the diffusion of innovations theory, detailing the stages of product adoption and factors affecting the rate of diffusion.

Uploaded by

AASHISH MEHRA
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 46

U1-T3: Theory of “Two sided markets”: Pricing &

Subsidization
Concept: In two-sided markets, where two distinct groups of users interact on a
platform, pricing strategies and subsidies play a crucial role in driving participation
and platform growth. The key is to understand that the value each side derives
depends on the size and activity of the other, leading to indirect network effects.
Effective pricing often involves subsidizing one side to attract users, who in turn
create value for the other side, ultimately benefiting the platform.
Here's a more detailed explanation:
1. Defining Two-Sided Markets:
• Two-sided markets involve two distinct groups of users who interact on a
platform, like credit card companies connecting consumers and merchants, or
social media platforms connecting users and advertisers.
• The value of the platform to one side is dependent on the size and activity of the
other side, creating a network effect.
• The price structure charged to each side matters, not just the total revenue, as it
influences participation and overall market demand.

1
Prof. (Dr.) Aashish Mehra
U1-T3: Theory of “Two sided markets”: Pricing &
Subsidization
2. Pricing Strategies:
Subsidization:
A common strategy is to subsidize one side (e.g., offering free services to
consumers) to attract them, knowing their participation will increase the value for the
other side (e.g., attracting advertisers).
Dynamic Pricing:
Platforms may adjust prices over time to encourage growth and reach a preferred
equilibrium, potentially using subsidies for early adopters to accelerate participation.
Price Discrimination:
Different prices may be charged to different groups on the same side, or even across
sides, depending on their willingness to pay and the impact of network effects.
Tying:
Offering services bundled together can act as a form of implicit subsidy, potentially
increasing participation and welfare in two-sided markets.

2
Prof. (Dr.) Aashish Mehra
U1-T3: Theory of “Two sided markets”: Pricing &
Subsidization
3. Network Effects and Pricing:
Indirect Network Effects:
Changes in participation on one side of the market directly impact the demand on
the other side, creating a complex pricing landscape.
Pricing Decisions:
Platforms must carefully consider the impact of price changes on both sides of the
market to optimize participation and revenue.
Equilibrium:
Finding the right pricing structure is crucial for achieving a stable and profitable
equilibrium in a two-sided market.

3
Prof. (Dr.) Aashish Mehra
U1-T3: Theory of “Two sided markets”: Pricing &
Subsidization
Examples:
Credit Cards:
Credit card companies often subsidize cardholders by offering free services or low
annual fees to attract a large consumer base, which in turn attracts more merchants.
Social Media:
Social media platforms may subsidize users (e.g., free access to the platform) to
attract a large user base, which then attracts advertisers. For e.g., WhatsApp,
Facebook, Instagram, Twitter (now X), and others Social Media platforms all provide a
FREE ACCESS!! to their users, and in turn ATTRACT!! Advertisers (heavily).
Magazines:
Magazines often charge low or even negative prices for readers (cover price) to attract
a large readership, which then increases the value for advertisers who pay for ad
space.

4
Prof. (Dr.) Aashish Mehra
U1-T3: Theory of “Two sided markets”: Pricing &
Subsidization
Real world examples of two-sided markets
Two-sided market Subsidy side Profit side Examples
PC operating Application PC users Microsoft Windows, Apple
systems developers Macintosh
Online recruitment Job seekers Employers Monster, LinkedIn,
Naukri.com
Social media Consumers Advertisers WhatsApp, Facebook,
platforms Instagram, Twitter (now X),
and manyothers
Web search Searchers Advertisers Google, Yahoo
Video games Players Game developers Sony PlayStation, Microsoft
Xbox, Nintendo Wii
Web browsers Users Web servers Microsoft Internet Explorer,
Mozilla Firefox
Text processing
Credit and differed Readers
Cardholders Writers
Merchants AdobeMasterCard,
Visa, Acrobat, Microsoft
American
debit cards Word
Express
Real estate Home buyers Home sellers
Portals, newspapers Visitors, readers Advertisers
and TV networks and viewers 5
Prof. (Dr.) Aashish Mehra
U1-T4: Rate of Diffusion (Diffusion of Innovations
Theory)
Diffusion of innovations theory is…

The process by which an innovation is communicated


through certain channels over time among members of
a social system (Everett Rogers, 1995).

6
Prof. (Dr.) Aashish Mehra
U1-T4: Rate of Diffusion (Diffusion of Innovations
Theory)
WHAT IS DIFFUSION?

• A social change

• A process by which alteration occurs in the structure and


function of a social system.

7
Prof. (Dr.) Aashish Mehra
U1-T4: Rate of Diffusion (Diffusion of Innovations
Theory)
Four elements/constructs of diffusion
 Innovation
• An idea, object(s), practice(s) that is perceived as new by an individual or other
unit of adoption​
 Communication channels (knowledge)
• Means by which messages get from one individual to another​
 Time (decision process)
• innovation-decision process
• Relative time with which an innovation is adopted by an individual or group
• Innovation rate of adoption/adoption time​
 Social System (structure)
• A set of interrelated units engaged in joint problem solving to accomplish a
common goal (opinion leaders are capable of influencing others)
8
Prof. (Dr.) Aashish Mehra
U1-T4: Rate of Diffusion (Diffusion of Innovations
Theory)
THE INNOVATION DECISION PROCESS:

The innovation-decision process is the process through which


an individual (or other decision making unit) passes from first
1 2
knowledge of an innovation to forming an attitude towards the
3
innovation, to a decision to adopt or reject, to implementation of
4
the new idea, and to the confirmation of this decision.

9
Prof. (Dr.) Aashish Mehra
U1-T4: Rate of Diffusion (Diffusion of Innovations
Theory)

1. KNOWLEDGE:
Knowledge occurs when an individual is exposed to the innovation’s
existence and gains some understanding of how it functions.

2. PERSUASION:
Persuasion occurs when an individual forms a favorable or unfavorable
attitude towards the innovation.
10
Prof. (Dr.) Aashish Mehra
U1-T4: Rate of Diffusion (Diffusion of Innovations
Theory)
3. DECISION:
Decision occurs when an individual engages in activities that lead to a
choice to adopt or reject the innovation.

4. IMPLEMENTATION:
Implementation occurs when an individual puts an innovation into use.

5. CONFIRMATION:
Confirmation occurs when an individual seeks reinforcement of an
innovation decision that has already been made.

11
Prof. (Dr.) Aashish Mehra
U1-T4: Rate of Diffusion (Diffusion of Innovations
Theory)
INNOVATIVENESS:
Innovativeness is the degree to which an individual or other
unit of adoption is relatively earlier in adopting new ideas that
the other members of the system.

12
Prof. (Dr.) Aashish Mehra
U1-T4: Rate of Diffusion (Diffusion of Innovations
Theory)
Factors affecting diffusion/adoption time
• Innovation characteristics
• Individual characteristics
• Social network characteristics
• Others…
- Social environment of diffusion of innovation
- Marketing strategies employed
- Institutional structures (e.g., government)

13
Prof. (Dr.) Aashish Mehra
U1-T4: Rate of Diffusion (Diffusion of Innovations
Theory)
Factors affecting diffusion: Innovation characteristics
Attributes affecting the speed and event of diffusion
 Observability
• The degree to which the results of an innovation are visible to potential
adopters
 Relative Advantage
• The degree to which the innovation is perceived to be superior to current
practice
 Compatibility
• The degree to which the innovation is perceived to be consistent with socio-
cultural values, previous ideas, and/or perceived needs
 Trialability
• The degree to which the innovation can be experienced on a limited basis
 Complexity
• The degree to which an innovation is difficult to understand and use.
Innovations that are perceived as complex can hinder adoption.
14
Prof. (Dr.) Aashish Mehra
U1-T4: Rate of Diffusion (Diffusion of Innovations
Theory)
Factors affecting diffusion: Social network characteristics
• Modernity
• Physical distance
• Opinion leadership

Other Factors affecting diffusion
- Social environment of diffusion of innovation
- Marketing strategies employed
- Institutional structures (e.g., government)

15
Prof. (Dr.) Aashish Mehra
U1-T4: Rate of Diffusion (Diffusion of Innovations
Theory)
Diffusion Process

Learn about innovation

Adopt innovation or perform new behavior

Interact with others in a social network and either


encourage them to adopt new behavior or
confirm your own decision to adopt the behavior

16
Prof. (Dr.) Aashish Mehra
U1-T4: Rate of Diffusion (Diffusion of Innovations
Theory)
Diffusion Process: Learning About the Innovation

• Symbolic modeling is most common source of influence


• Innovations that are difficult to understand take longer to
be adopted
• May learn about new innovation through:
• Television
• Newspaper
• Interpersonal contacts

17
Prof. (Dr.) Aashish Mehra
TYPES OF INNOVATIONS

Continuous Repositioning

Brand extension

Dynamically Line extension


Continuous

New to company

Discontinuous New to world

18
TYPES OF INNOVATIONS

19
INNOVATION DIFFUSION

Percent
Adopt

Time
20
INNOVATION DIFFUSION

ADOPTER CATEGORIES:

Early Late

Majority Majority

Early Laggards
Adopters

Innovators

13.5% 34% 34% 16%


2.5%

-2s.d. -1 s.d. mean +1 sd.

21
ADOPTER CATEGORIES

22
ADOPTER CATEGORIES

23
ADOPTER CATEGORIES

24
Sales Growth Model

25
Rate of Diffusion

Rate of adoption is the


relative speed with which
an innovation is adopted
by the members of a
social system.
• It forms an s-shaped
curve.
• Most innovations have
an s-shaped curve but
it varies from
innovation to
innovation.
• Some ideas diffuse
quickly while others
diffuse slowly.

26
Rate of Diffusion

• Rate of adoption is measured by the length of time to adopt a innovation.


• There are also differences in the rate of adoption for the same
innovation in different social systems.
• Innovations that have a greater compatibility, advantage have a more
rapid rate of adoption.

27
WHAT INFLUENCES RATE OF DIFFUSION

Influence Fast Slow


Initial beliefs Uniform Heterogeneous
Compatibility Very Not very much
Amount of risk Little A lot
Level of Low High
involvement
Satisfies needs A lot A little
Trialability Easy to try Difficult to try
Marketing A lot A little
expenditures

28
PREDICTING SALES: TRIAL/REPEAT MODEL

AWARENESS TRIAL REPEAT

Evaluate reactions Test Test


to ad’g/promos market market

Market size = (% aware x %try x % repeat)

x potential number of buyers

29
NEW PRODUCT MODEL

AWARENESS TRIAL REPEAT

Problem recognition

Product quality evaluation

Price evaluation
Social influences

30
CONSUMER SEGMENTS: EXPENDITURES

SEGMENT CONSUMPTION DEMOGRAPHICS


PATTERN
Functionalists HH essentials Blue collar; dual
(12.7%) earners
Nurturers (4.8%) Childrearing;pets; Young; high educ;
care for elderly white collar
Aspirers (8.1%) Status products High income/
educ; white collar
DINKS
Experientials Entertainment; Singles; white
(23.8%) appearance collar

31
CONSUMER SEGMENTS: EXPENDITURES

SEGMENT CONSUMPTION DEMOGRAPHICS


PATTERN
Succeeders Spend most Middle age;
(5.2%) overall: education highest educ and
income
Moral Majority Donate to causes Empty nest;
(5.5%) traditional h-w
roles
Golden Years Remodel home; High income; 2nd
(3.2%) comfort oldest
Sustainers Basic survival Oldest; lowest ed
(22.5%) needs and SES
Survivors (14.2%) Housing Lowest income
and educ; many
on welfare
32
U1-T5: The Adoption of New Products
Consumers go through five stages in the process of adopting a new product

The adoption process typically involves five key


stages: awareness, interest, evaluation, trial, and
adoption/rejection. These stages describe how
individuals or organizations become familiar with,
consider, and eventually decide to use a new product,
service, or idea.

33
Prof. (Dr.) Aashish Mehra
U1-T5: The Adoption of New Products

Five stages in the process of adopting a new product

34
Prof. (Dr.) Aashish Mehra
Stages in the Adoption Process
Let’s look at each of these stages in the consumer adoption process (often referred
to as the “hierarchy of effects model”) in some detail.
Stage 1: Product Awareness. The first stage in the consumer adoption process is
simply creating awareness that the product is available, so the company develops a
successful marketing strategy to make customers cognizant of the new product. This
strategy might include creating a strong presence for the product in social media, for
example. The goal here is to reach as many customers as possible at a relatively low
cost. Let’s assume for a minute that you’re watching a football game on Saturday
afternoon, and you see a television commercial for a mouthwash that whitens your
teeth while you rinse. You’re now aware of the product, thanks to that commercial!
Stage 2: Product Interest. In this stage, consumers are aware of the product, and it
has piqued their interest. The company should guide consumers by providing easily
accessible information on the product, such as a website, blog posts, tutorials, or
instructional videos. Let’s go back to our mouthwash example. You’re intrigued with the
concept that a mouthwash can whiten your teeth, so you call your brother who’s a
dentist to ask if he’s familiar with the product and what he has to say about it. That’s
product interest.

35
Prof. (Dr.) Aashish Mehra
Stages in the Adoption Process
Stage 3: Product Evaluation. Before they buy it, consumers will typically examine,
compare, and evaluate the product. They haven’t purchased it yet, and they often look
to social media channels, such as online reviews and recommendations, to see how
other consumers feel about the product or service. Think about it: How many times
have you viewed customer reviews on Amazon prior to purchasing a product? In our
example of the mouthwash, you might do an Internet search to read reviews of the
product before you actually purchase it. That’s product evaluation.
Stage 4: Product Trial. This is the stage in the consumer adoption process where the
consumer actually tries the product out. It might be a free sample in a retail store or a
“100 percent money-back guarantee” trial purchase of an online product. This is also
the stage in which marketers are hoping that the product will deliver on consumer
expectations.
Stage 5: Product Adoption. When consumers enter this phase, they’re ready to buy,
whether it’s online or in a retail store. As a marketer, hopefully you’ve made the
acquisition and payment process as seamless as possible so that your customers can
easily obtain your product.

36
Prof. (Dr.) Aashish Mehra
U1-T6: Forecasting Demand (for new
products)

37
Prof. (Dr.) Aashish Mehra
U1-T6: Forecasting Demand (for new products)
(Contd…)
Preparing the budget A new product forecasting process needs its budget sorted
out as it helps reduce risk during a good's life cycle. It benefits efficient financial
decision-making that drives cash flow, allocation of resources, profit margins,
expansion opportunities, inventory accounting, operational costs & overall
expenses.
Better Inventory Control The critical aspect that new product demand forecasting
models drive is it lets your business know which product your customer base is
looking out for and when they are looking to acquire it. Thus, helping your inventory
operations complete the order fulfilment targets by having better inventory &
warehousing control. This also saves your partners & stakeholders the shortage of
supplies during sudden customer demands during peak season, while upping the
credentials of your brand value.
Tapping into Market Potential Dynamic Pricing is a well-known concept in today’s
ecommerce driven business. To create a sudden splurge in demands, companies
employ flash sales with reduced prices to attract higher conversion rates. This is a
strategical business action which is a byproduct of smart demand forecasting
process. A company’s understanding of market opportunities based on demand
forecasting gives them foresight to house inventory beforehand and cash-in with a
38
Prof. (Dr.) Aashish Mehra
U1-T6: Forecasting Demand (for new products)
(Contd…)
promotional sale at a later stage to edge out its competition. Not only does it
improve an organization’s digital footprint but also keeps you trending considering
your marketing plan has made you the sole player providing the most sought-after
product in the market.
Better Profit Margins Every business thrives on good profits at the end of each
quarter. With demand forecasting providing you with accurate marketing insight
which later translates into intelligent sales decision bringing in attractive numbers –
a business model more often than not will end up returning profit on its investments.
Any industry which proactively invests in demand planning based on relevant sales
data, market trends & the current economic situation will have a thriving commerce
statement.

39
Prof. (Dr.) Aashish Mehra
U1-T6: Forecasting Demand (for new products)
(Contd…)

40
Prof. (Dr.) Aashish Mehra
U1-T6: Forecasting Demand (for new products)
(Contd…)
1. Substitute Approach This method runs on the assumption that the introduction
of a new product in place of an existing one will give the organization some
workable marketing insights. It generally is inclusive of opinion analysis/survey
which helps the production vertical with some constructive feedback.
2. Evolutionary Approach This course of action assumes that the new product will
be a default improvement over the one it is replacing. This demand forecasting
technique allows the new product to follow the same life cycle as the existing
products. Hence, the sales figures of the existing products acts as default
baseline targets for the newly launched product.
3. Buyers or Consumers view This action plan accounts for an organization’s loyal
user base as its early bird consumers for the new product and relies on their first-
impression view. A company runs predictive analysis on these first reviews to set
demand forecasts for a fully-fledged market launch.
4. Expert’s View The approach accounts for the expert’s view of the marketing field
who are well-equipped with the ever-changing trends of a retailing filled with
capable competitors. An expert’s opinion is treated as a gospel helping an
organization find its footing for a new product launch.

41
Prof. (Dr.) Aashish Mehra
U1-T6: Forecasting Demand (for new products)
(Contd…)
5. Trial Run As the name suggests, this method applies a trial run for the new product
in certain selected retail areas for a specified period. Its response sets the base for
forecasting the sales of the latest development.

Why Is Forecasting New Products Difficult?


For an organization to start with its demand forecasting for new products, there are
quite a few catches to begin with.
• Lack of Data Insights Any business initiating a novel project requires historical data
to chart its course. The unavailability of relevant data is in short supply for a new
product launch. This statement holds more accuracy if the latest product is utterly
independent, right from its ideation to development. However, companies can get
workable information if the offering is a slight improvement of an existing product.
• Small Timeframe for Forecasts With stiff competition in retail, companies are
always in duel mode to edge out their competitors. This often pushes organizations
to design a new launch without accurate information leading to demand forecasting
full of errors. Such pursuits of excellence in shorter duration are generally lacking in
fruitful results.

42
Prof. (Dr.) Aashish Mehra
U1-T6: Forecasting Demand (for new products)
(Contd…)
• Organization’s Internal Policies Every company’s final decision leading to a
new offering in the market is driven by optimism that it will take the consumer’s
interest by storm. This may be misleading as demand forecasting for such
scenarios depends more on hope than actual data-centric decision-making.
• Unknown Uncertainties Predicting consumer & market response is a tough ask.
There can be times when a product fails to register its mark even with advanced
data analytics foresight. These uncertainties cannot be planned for and are only
known once the product launches.
• Overlooking Red Flags A classic case when a conglomerate chooses to
overlook the red flags from historical data projections and still ventures ahead with
a product launch. Usually, a final management decision takes precedence over
the potential warning signs a demand forecasting for new products showcases.

43
Prof. (Dr.) Aashish Mehra
U1-T6: Forecasting Demand (for new products)
(Contd…)
The Challenges of Product Forecasting Throughout
the Life Cycle

44
Prof. (Dr.) Aashish Mehra
U1-T6: Forecasting Demand (for new products)
(Contd…)
Why Is New Product Forecasting Important?
New product forecasting is more critical than ever but also much more
complex due to factors such as intermittent demand, shortened product life
cycles, and increasing market volatility.
In many industries new products are a considerable part of revenue, and
getting the forecast wrong results in overstocks or empty shelves and lost
sales.
Traditional forecasting techniques rely on aggregated sales estimates,
substitution mechanisms, and ratio mechanisms.
These dated approaches are problematic because they rely heavily on a few
people with inside knowledge, they are manual and time-consuming, and they
don’t scale.

45
Prof. (Dr.) Aashish Mehra
U1-T6: Forecasting Demand (for new products)
(Contd…)

Case Study 3

Application of Proper Forecasting Technique in Juice Production: A Case Study

46
Prof. (Dr.) Aashish Mehra

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