Essay “for Digitized Enterprises, Costs Are Generally of Decreasing Relevance in Determining Product Prices”

Management Accounting, Strategy and Organizational Control Essay question

Comment the statement

The new economy is a digital economy where vast amounts of information can be squeezed, compressed and transmitted at the speed of light. When information becomes digitized and communicated through digital networks, a new world of possibilities unfolds. A staggering number of customers can be reached through the internet, new digital products appear and companies are facing a fierce competition on the web. One of the consequences of a digital economy is a complete shift in pricing: prices are no more the result of a simple addition of costs and a profit margin. We will discuss the assumption that for digitized enterprises, costs are generally of decreasing relevance in determining product prices.

First, digitized enterprises have been racing to become the biggest player on the internet. Big players gather all the profits since they attract huge numbers of customers on their websites. A famous name is a guarantee of trust, quality and customer service, which are key in a virtual environment. Therefore, a new strategy has emerged: the pursuit of market share through “introductory” pricing. The idea is to cut prices in order to attract a high number of customers, increase customer switching costs and promote network effects leading to strong competitive advantage. Those introductory prices can be lower than costs. Some companies have even been giving products for free to reinforce their positioning. We can give the example of the recruitment website Monster.com whose services are completely free for job seekers. To increase the number of transactions, you need to have both good sellers and good buyers. Besides, with the introduction of new means of revenue such as online-advertising, a “free” website can be profitable. Facebook and Twitter exemplify the new business models that have been made possible thanks to the internet. Those websites are very profitable even...