Information Rules – Carl Shapiro and Hal Varian

Information Rules is a compelling text that focuses on the concept that while we may adopt new strategies in the information economy, fundamental and sound economic principles still apply. The authors, Carl Shapiro and Hal Varian - both distinguished economists, stress that while traditional economics with it emphasis on supply and demand curves and perfectly competitive markets may not help a CEO of an information age company roll out a new product, today’s information markets still adhere to the basic economic theories that can be seen in the history of network industries such as railroad, telephone, and television.

In particular, Information Rules gives us a set of guidelines on the pricing, positioning, and marketing/distribution of goods in the network economy (where total value is related exponentially to the number of nodes of the network). A typical good in the information age is one that has high fixed costs and low to non-existent marginal costs. Information Rules gives us frameworks and examples of the cost characteristics, pricing strategies, and market structures for these types of goods.

A few guidelines illustrated in the book that I feel are the key to understanding the information age are:

Pricing: In order to effectively price a product whose marginal cost is effectively zero, you must understand your industry and how much to invest in producing and selling your product. You need to be aggressive in order to compete in an industry where commoditization erodes your profits and constantly be striving to differentiate your product through feature or personalized pricing for different individuals/groups.

Versioning: Information products can be tailored to fit individuals needs. By versioning your product to fit these needs, you can tap the value of many disparate segments and increase your total revenues. In addition, you can increase your total value by following some basic marketing techniques adapted to the information age such as promotional pricing, quantity discounts, and bundling – all of which help cater to different segments.

Lock In: While many visionaries say that the Internet is a frictionless environment, the concept of lock in and switching costs must be taken into account when bringing an information product to market. You must recognize the switching costs and lock in opportunities (both are predictable) at the time of investment in order to effectively manage the long-term consequences of lock in.

Other guidelines for operating in a network economy are also illustrated in Information Rules such as rights management, standards, and continuous feedback – all of which are important. I strongly urge every aspiring consultant, general manager, marketer, or entrepreneur to read this book to better understand the network economy and how traditional economics and business principles apply.