MBAS 830: Dynamic Pricingand Revenue ManagementYouTube- the game changer for onlineadvertising industryevenues for YouTube...
MBAS 830: Dynamic Pricing and Revenue Management                                                                       201...
MBAS 830: Dynamic Pricing and Revenue Management                       2012Executive SummaryInternet has created the ‘new ...
MBAS 830: Dynamic Pricing and Revenue Management                       2012Industry OverviewTelevision has been a major so...
MBAS 830: Dynamic Pricing and Revenue Management                              2012there has been an advent in internet TV ...
MBAS 830: Dynamic Pricing and Revenue Management                        2012segmentation and following two tiered revenue ...
MBAS 830: Dynamic Pricing and Revenue Management                        2012Our analysis gave insight that price sensitive...
MBAS 830: Dynamic Pricing and Revenue Management                        2012       pay by the potential subscribers. We ca...
MBAS 830: Dynamic Pricing and Revenue Management                       2012be integrated with its search analytics and use...
MBAS 830: Dynamic Pricing and Revenue Management                       2012The data available on various Google platforms ...
MBAS 830: Dynamic Pricing and Revenue Management                        2012ConclusionIt is evident from the above analysi...
MBAS 830: Dynamic Pricing and Revenue Management    2012       Exhibit 1Customer Segmentation                             ...
MBAS 830: Dynamic Pricing and Revenue Management    2012                             Exhibit 2                        Stak...
MBAS 830: Dynamic Pricing and Revenue Management                     2012                           Exhibit 3 Loyalty Prog...
MBAS 830: Dynamic Pricing and Revenue Management                       20123) What would your reaction be if you are paid ...
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Google - Youtube strategy - dynamic pricing opportunity

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Google - Youtube strategy - dynamic pricing opportunity

  1. 1. MBAS 830: Dynamic Pricingand Revenue ManagementYouTube- the game changer for onlineadvertising industryevenues for YouTube – online video hosting website.This document represents team effort in preparing aproject report as submission for course – DynamicPricing and Revenue Management. It applies theprinciples of Dynamic Pricing, Revenue Managementand Consumer Behavior modeling in generatingadditional rMuneet Bhatia2/20/2012
  2. 2. MBAS 830: Dynamic Pricing and Revenue Management 2012Table of ContentsExecutive Summary....................................................................................................................................... 2Industry Overview ......................................................................................................................................... 3PRO Application ............................................................................................................................................ 3PRO Opportunity ........................................................................................................................................... 4Customer Segmentation ............................................................................................................................... 5 Data Collection .......................................................................................................................................... 6Dynamic Pricing............................................................................................................................................. 7Consumer Behavior Modeling ...................................................................................................................... 8Stakeholder Analysis ..................................................................................................................................... 9Conclusion ................................................................................................................................................... 10Exhibit 1 ...................................................................................................................................................... 11Exhibit 2 ...................................................................................................................................................... 12Exhibit 3 Loyalty Programs.......................................................................................................................... 13Exhibit 4 Survey (Data Collection) ............................................................................................................... 13 1|Page
  3. 3. MBAS 830: Dynamic Pricing and Revenue Management 2012Executive SummaryInternet has created the ‘new economy’ which has fundamentally changed the rules ofengagement for many industries. One of them is the television and entertainment industry. Priorto advent of the internet, traditional business model consisted of the Production houses creatingcontent, broadcasters securing rights for the content and distributing it to end consumers via thecable TV networks. Key player in this chain was the marketers who bought these prime timesbased on content ratings and hoped to turn marketing budget into sales revenue.In this document, our team intends to propose a unique solution breaking the traditionalbroadcasting model and creating value for each of the stakeholders – Marketers, firms andconsumers. It will be a win-win scenario for all the stakeholders except for the cable TVcompanies which inefficiently bundles the content. We believe to increase the efficiency bycreating a structure for firms such as YouTube that have online videos. Incorporated in 2005,YouTube is synonymous with video in internet world and a perfect firm having the capability tobreak the model. The superiority of our model lies in its ability to provide flexible options tocustomers which they can choose to solve their individual problems.The model is simple in concept but sophisticated in implementation and requires high-endadvanced technical expertise in domains such as Data Science and Analytics. In our attempt tobuild the model, we applied the principles of Dynamic Pricing and created the segmentationstructure with different pricing bands. Due to the uniqueness of our model, we proposed twoapproaches for model feasibility – Proxy and Survey. Finally, the core model could be applied toany ‘new economy’ firms willing to explore the ways to efficient pricing and revenuemanagement practices.This model will also be highly useful in the near future when technologyconvergence would become a reality and consumer would demand the same content across thetechnology platforms at their convenience. 2|Page
  4. 4. MBAS 830: Dynamic Pricing and Revenue Management 2012Industry OverviewTelevision has been a major source of entertainment in the last few decades. It has been amajor provider of affordable entertainment such as movies, sitcoms, sports events and otherentertainment programs to people around the world. During similar time period, industry evolvedfrom content providers using the local TV stations to broadcast their content free over theairwaves withthe advent of powerful cable companies that bundled content (channels) tocustomers. For example, in the United States, some cable providers offer more than 1000channels bundling genres that range from arts, movies, sports, music, science and technology,social programming to reality television. However, the adverse effect of bundling was decreasedutility for the people to a considerable level. For example, a person who intends to watch only aparticular sport event may now have to subscribe to 1000 channels for a much greater time thanintended. People effectively lost control overthe choice of programming they wanted to watchover television. The programs and the times when programs are aired on the televisions werecontrolled by the content providers and television channels. Cable industry justified its bundlingapproach to achieve economies of scale and sustain its current business model.Arrival of internet and subsequent technology advancement has gradually changedthe industryrules and also industry dynamics to provide greater freedom to consumers. It also providestremendous opportunity for advertisers which can now increase the effectiveness of theirmarketing. Apart from the traditional content providers, availability and accessibility to cheaptechnology has given anyone with a camera to create their own content and share it withmillions of users worldwide using the World Wide Web. The result is explosion in the contentthat has resulted in consumer behaviorchanges and people are increasingly demanding andviewing content of their choice at their convenience.PRO ApplicationMainstay of entertainment industry is driven by three major revenue streams –Advertising,Subscription and public funding. According OFCOM’s 2009 report studying television industry in10 developed and four BRIC nations, 284 billion dollars in revenue was generated by thetelevision industry. Out of this, 47% revenue was realized by advertising, 44 % by subscriptionand 9% by public funds. North America and in particular USAis currently the biggest driver inadvertising and subscription revenue.With the introduction of broadband internet connections 3|Page
  5. 5. MBAS 830: Dynamic Pricing and Revenue Management 2012there has been an advent in internet TV (IPTV). The subscriber base is expected to increase by83 million in year 2013 alone. The major revenue stream for IPTV is through advertising, bannerads and subscription; the revenues are expected in the tune of 38 billion dollars1.Apart from IPTV, there are other content providers such as Hulu and Netflix, people cansubscribe and pay for content that interests them. The content provided by these providers isusually restricted to movies and sitcoms. Primary revenue channel for these content providers isthrough subscription.Web television characterized by small programs produced by individuals orsmall production companies is gaining prominence. The eco-systems created by onlinewebsites such as YouTube are at the core of the success of web television. Of all the webtelevision sites YouTube is the most prominent one as it has over 3 billion views every day2;more content is uploaded on you tube every 60 days than all the content produced by majortelevision networks produced in past 60 years. Even though YouTube has been very popularwith the viewers it has not translated into major revenue for the parent company Google. Majorrevenue is generated by advertising and banner ads and percentage of revenue thus generatedaccounts for a very small percentage of Google’s revenue.PRO OpportunityThe web television as envisioned by YouTube has been hugely successful. YouTube has beenable to create a critical mass of people who visit the website to upload their videos, share themwith people around the world and users search the website to view videos of their choice at theirconvenience. We believe that YouTube has a great opportunity to utilize this critical mass ofviewers to create new avenues for revenue and manage current revenue streams.We propose that YouTube should move from the currentsingular advertising and banner adsrevenue model to a two tier revenue model that includes advertising and subscription basedrevenue model. This will enable it to segment the customers based on their willingness to payfor the content they are watching. Based on user’s willingness to pay for the content,YouTubecan segregate them into three bandsas described in following customer segmentation.The1 Global TV Market. (n.d.). Retrieved February 19, 2012, from International Television Expert Grouphttp://www.international-television.org/tv_market_data/international_television_market_report_2009.html2 “YouTube users uploading two days of video every minute” -http://www.telegraph.co.uk/technology/google/8536634/YouTube-users-uploading-two-days-of-video-every-minute.htmlhttp://www.telegraph.co.uk/technology/google/8536634/YouTube-users-uploading-two-days-of-video-every-minute.html 4|Page
  6. 6. MBAS 830: Dynamic Pricing and Revenue Management 2012segmentation and following two tiered revenue model would benefit YouTube in the followingways. It will realize higher revenue from advertising – Currently one ad is aired before the beginning of a video that someone wants to play. The ads are not added before every video that someone has requested and the ads that are being aired are chosen at random. By making ads appear before every request,YouTube has the potential to increase its revenue given that it hasby more than 3 billion video requests every day. People do not have control over the ads they want to watch, YouTube can enhance the user experience by giving them the power to select the categories for which they are willing to see advertisements. Also selected ad viewing also allows the advertisers targeted campaigns. YouTube subscription – YouTube is omnipresent and can be accessed from television, PC, laptop, tablet or a smartphone. There is a compelling argument for every business to have its presence on social media and being a first mover in video listing, YouTube had huge brand recognition in this space. Currently majority of the content on YouTube has been created by individuals or small independent production companies. YouTube has been trying to give access to people to premium content such as movies and sitcoms on a pay per view basis. Instead of a pay per view basis, YouTube has the potential to bundle all the premium content and offer it at a bundled price to subscribers.YouTube can use a combination of advertising and subscription revenue model to segmentpeople based on their willingness to pay and their willingness to watch advertisement before thestart of the requested programming. This methodology will increase its revenue and enableYouTube to charge the advertisers and its customers for the value that they see in the contentavailable on YouTube.Customer SegmentationBased on our preliminary research, we are proposing YouTube to introduce three options-Silver, Gold and Platinum segments. The features and pricing of these three options would bedesigned in such a way that customers would self-select themselves in to one of thesesegments. In addition to these three segments, we also propose to introduce an ALa Carte forall the customers to be able to watch any preferred or premium content over the internet. Therationale for proposing three options is as follows. 5|Page
  7. 7. MBAS 830: Dynamic Pricing and Revenue Management 2012Our analysis gave insight that price sensitive customers (such as students) who watch thevideos online regularly would continue to watch it for free though they wouldn’t mind watchingadvertisements during or before the video. However, another set of viewers would place greatervalue to ad-free or uninterrupted nature of video watching. This customer segment would like topay a premium to remove the advertisements that come along with content. Finally, there wouldbe section of customers choosing the middle-path between the ad-free and ad-loaded world –that would not like to watch any unrelated ads but are fine to watch a few selected and ‘relevant’ads. Based on this information, we suggest YouTube to take advantage of the variablewillingness to pay of the viewers and extract maximum revenue from the associated model. Thebasic features of the three segments and the relationship of a-la-carte have been explained inExhibit 1 – Suggested Customer Segmentation.Customers with Silver subscription would be consistent with current version of YouTube - abilityto watch user generated videos for free, but they would have to watch advertisements duringand before the video as identified by Google. But users would earn and accumulatenon-expiryG-Dollars (Virtual Currency managed by Google payment gatewaysuch as – Google Wallet). G-Dollarscould be redeemed by purchasers in buying any merchandise using Google Wallet fromtheir partnered retail, buying new subscription and many more opportunities. Customers withGold subscription would be able to select the categories of ads they would like to watch andwould have access to free and some premium content earning G-Dollars to watch those ads.They would have to pay a subscription fee for this flexibility though. Finally, customers withPlatinum subscription would have access to all free and premium content and would not have towatch any ads. They would pay a higher subscription fee for these features and able to earn G-Dollars on renewal of their monthly subscription.Data CollectionTo price the monthly subscriptions for the Gold and Platinum subscribers, we would need toascertain the willingness to pay (WTP) data for these customers. We propose two approachesfor this data collection. 1. We would use the current cable TV monthly subscriptions and other online subscriptions available e.g. hulu.com as proxy to come up with a baseline. This baseline and current subscription levels for different channels would provide us a fair idea of the willingness to 6|Page
  8. 8. MBAS 830: Dynamic Pricing and Revenue Management 2012 pay by the potential subscribers. We can get this data from third party consumer research firms e.g. Nielson and others. 2. We plan to run an online survey on various Google platforms (Google+, Gmail, and YouTube, Google Maps etc.) to access the needs of the customers, their satisfaction levels with the current services and their willingness to pay if a desired service is introduced to them. Given that Google and YouTube have a vast reach to the customers, this survey results should provide us a fair assessment of the pricing potential. A sample survey is attached in the Exhibit 4- Survey.Dynamic PricingWe also propose to introduce a common‘A La Carte’ option for all three categories. With thisoptionall customers would be able to pick any video that they would like to watch on any givenday. For premium customers, this ‘A La Carte’ would be perfect for event based videossuch asNFL Match, a latest movie, popular music show or any live event.For Silver and Gold members, they will have access to any premium content that Platinummembers have by default and/or any live event streaming via‘A La Carte’option. Price of thispremium content would be calculated using the dynamic pricing techniques and would dependon the popularity of the content. For example, live music show from Bryan Adams or live soccerworld cup match. The G-Dollars accumulated in the account of these silver and gold memberscould be redeemed against the purchase of other premium content.If the silver and gold members are fine to watch ads even during the high profile events or whilewatching the premium content, they would be given the option of doing so. In such scenario, thecontent would be priced dynamically for these silver and gold members taking in to account thepopularity of the event and ability to command higher ads prices during these popular events.Henceforth, YouTube could enable customers of all three segments access to all the contentand they would pay for any content depending on only their willingness to pay to satisfy theirutility. Following this approach, YouTube would overcome the crucial hurdle of the traditionalbroadcasting industry.Google currently possesses one of the most advanced search engines. It also has massive userdata containingtheir search patterns. Google could leverage this ‘behavioral’ data trail that could 7|Page
  9. 9. MBAS 830: Dynamic Pricing and Revenue Management 2012be integrated with its search analytics and use it to dynamically optimize theadvertising ratescharged to its advertising partners. Combining analytics with data trail will increase the adsrelevancy that would also improve the effectiveness the marketing/advertising for its partners.Products that are more popular under different categories would be priced depending on thepopularity or demand of those products and categories.Consumer Behavior ModelingThe proposed business model would also derive higher returns for YouTube/Google’sadvertisers for multiple reasons. First, only those viewers are watching ads who really want towatch those ads. Google will in turn develop enhanced analytics capabilities to understand thebrowsing habits of the consumers and achieve that by integrating all the online platformsprovided to the consumers e.g. Gmail, YouTube, Google+, Images, Maps, Calendar and Books.This can be easily achieved by providing a single-sign-on feature asking the users to log inthrough a single interface every time they decide to use any of the Google’s services orproducts. Google can then track each and every user activities and map it accordingly to buildthe customized preferences.By doing this, Google would be able to track the buying patterns of the silver and goldsubscribers – majority of its user base. Through the introduction of loyalty card (Exhibit 3)wepropose that consumers would redeem their credits on the point of sales (POS) of the retailersor other business partners. By analyzing this data, Google would be able to fine-tune the adsbeing shown to the silver subscribers instead of showing them any random ads. This wouldfurther enhance the utility of the advertisers as they would be able to realize the direct benefitsof the advertising spend.The data thus collected would be extremely valuable for Google to analyze the patterns for allthe three segments. Since it has access to the browsing history of the consumers- searchpatterns (Google), videos (YouTube and Google Videos) and maps being explored (GoogleMaps), travel plans being made (Google Travel), vacations being planned (Google Calendar),Google is in perfect position to tie these disparate data points and create value most valuable toits advertisers. For Platinum subscribers, the advertisers would use the flyers to reach out to thepotential customers for various relevant offers. 8|Page
  10. 10. MBAS 830: Dynamic Pricing and Revenue Management 2012The data available on various Google platforms could also be used to price various localevents,for example by analyzing the Google calendar data, Google would know the availabilityof the subscribers in a particular area and accordingly would price the live streaming of theevent on YouTube for the subscribers in that area. Another example would be to utilize theGoogle Maps and Google Groups data to find the strength of particular subject matter –‘Dynamic Pricing’. This data would be incredibly valuable to organizers hosting a convention onDynamic Pricing subject in a local area.Stakeholder Analysis(Exhibit 2)The stakeholders in the mentioned business model are – Google, Advertisers and consumers.Advertisers would be chiefly benefited from the gold subscribers as those customers would bewatching relevant ads of products and services they are interested in buying in the short to mid-term. Advertisers would be able to extract maximum value out of their advertising expend andconvert these advertising dollars in to actual purchases dollars. Advertisers would also bebenefitted from the silver subscribers in many ways. They would be inclined to pursue Google’shelp to understand the buying habits and patterns of the consumers and introduce targetedadvertising campaigns. Google revenues are directly tied to the ads revenue garnered frommarketing firms. The new enhanced model would help Google price the advertisements at theoptimal level to maximize their revenues from the advertisers instead of current fixed revenuemodel (e.g. pay per 20 sec slot etc.). This business model would also allow the advertisingbudget to divert from TV channels (mass communication) to the online community (targetedcommunication) and YouTube would be the largest beneficiary for this diversion effect.Finally the end users or consumers would be benefited in healthy ways. This business modelwill allow viewers to watch ads only if they are willing to and also specific ads that they arewilling to watch. This could be explained by a simple example. Consider a student, priceconscious but willing to watch the videos. His motivation lies in the freedom to watch the contentat minimum price. He would prefer to enroll himself into Silver membership instead of rigid cableTV structure enjoying the videos along with ads. Soon after, he graduates and his affordabilitychanges the scope of videos and ads-tolerance that shifts him to Gold Membership. He wants tomaximize his utility in every aspect (such as increasing the relevance factor of its ads). Withtime affordability increases to a point where our student turned professional finds any adsannoying and shifts to Platinum membership. The lifecycle clearly shows the end user as abenefactor of the business model benefiting at every stage. 9|Page
  11. 11. MBAS 830: Dynamic Pricing and Revenue Management 2012ConclusionIt is evident from the above analysis that Google has an immense opportunity to generatebillions of dollars in advertising revenues through YouTube ecosystem. Google also has anopportunity to extract maximum utility out of its existing infrastructure by integrating its variousplatforms and building a strong analytics capability on top of it. Google’s strategic position getsstronger with its acquisition of the hardware platform (Motorola mobile phone). With the industryfast motiving towards technology convergence, Google can take a leadership position byintegrating its future plans of Google TV with its existing software platforms and Motorola mobilephones. Google would be able to provide both regular and premium content to its viewersworldwide across the platforms- mobiles, tablets, TV, personal computers etc.This business model also allows Google to negotiate exclusive partnerships with contentproducers and have exclusive rights to show that content over the internet through carefullycrafted contracts. For e.g. Google can sign up directly with sports clubs, music companies,movie production houses etc. to have rights for the regular and premium content, whether livestreaming or recording. This would enforce the advertisers to move further from TV to onlineand mobile advertising and this would further empower Google.This example of YouTube utilizing its mass reach to the end consumer clearly shows howappropriate application of dynamic pricing, customer segmentation, customer analytics andbehavior modeling can change the way the online and advertising industry operates. Thisapproach is highly scalable and could be easily implemented for other related industries andcompanies. For e.g. any e-commerce company or social networking or online media companycan use this approach to customize their advertising strategy to significantly enhance theirrevenues and profits. 10 | P a g e
  12. 12. MBAS 830: Dynamic Pricing and Revenue Management 2012 Exhibit 1Customer Segmentation 11 | P a g e
  13. 13. MBAS 830: Dynamic Pricing and Revenue Management 2012 Exhibit 2 Stakeholder Benefits Advertisers Targeted Advertisement Customized Advertisement Knowledge of customer buying patterns Revenue Management & Dynamic PricingConsumers GoogleRewards Additional SourcesPricing - of Revenuewillingness topay Customer LoyaltySelective Ads Ability to build and sell customerOption to self statisticsselect 12 | P a g e
  14. 14. MBAS 830: Dynamic Pricing and Revenue Management 2012 Exhibit 3 Loyalty Programs Exhibit 4Survey (Data Collection)1) Are you happy with the current scenario where you have to watch ads randomly before or during the videos? a. Yes b. No2) Would you be more satisfied if you could control the kind of ads that are shown? a. Yes b. No 13 | P a g e
  15. 15. MBAS 830: Dynamic Pricing and Revenue Management 20123) What would your reaction be if you are paid for having been watched the ad? a. It depends on the amount paid b. Any amount paid is fine as long as I am paid c. I don’t care about the payment but I don’t want to watch the ad d. I would like to watch only specific ads4) If you want to watch only specific ads of your choice, would you be fine if you are paid lower than the ones who want to watch all the ads a. Yes b. No5) What would your reaction be if you are not paid in cash but your Google wallet is loaded with the Google dollars which you can use anywhere? a. I am perfectly fine with this arrangement b. I would prefer cash only c. I am fine with anything as long as I am rewarded for watching the ad6) Are you willing to pay to watch premium content on you tube? a. Yes b. No7) Are you willing to watch advertisement of your choice along with the premium content? a. Yes b. No8) What are you willing to pay monthly to watch premium content with advertisements of choice? a. $20.00 b. $15.00 c. $10.00 d. $59) What are you willing to pay monthly to watch premium content without advertisements? a) $50.00 b) $40.00 c) $30.00 d) $20.00 14 | P a g e

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