Optimal Pricing and Advertising Policies for Web Services

The accumulated evidence indicates that pure revenue models, such as free-access models (where the revenue is solely dependent on advertisements) or pure subscription fee based models (where the revenue is solely based on subscription fees, and advertisements are not shown to customers), are not sufficient to support the survival of online information sellers. Hence, hybrid models based on a combination of subscription fees and advertising revenues have replaced the pure revenue models on many web sites including the popular online content provider sites such as Wall Street Journal and Classmates Inc. In response to increasing interest in hybrid models, we study the problem of dynamic pricing of web content on a site where revenue is generated from subscription fee as well as advertisements. Using the optimal control theory, we obtain a dynamic pricing strategy of subscription and the optimal level of advertisements shown to the subscribers. Since the decision in any one time period affects the decisions of all subsequent time periods, the proposed dynamic model provides a globally optimal solution. Our model shows that the subscription fee is reduced initially to attract more customers, and is subsequently increased once a large customer base is obtained. Even when the fee increases in later periods, the number of subscribers increases due to the value associated with the quality of the content. We present several analytical and numerical results which provide some important managerial implications