Kai Lung Hui

and Patrick Y.K. Chau

Classifying
Digital Products
The success of the Inter- goods or services that can be digitized (converted
net has created many interest- into a binary format). Examples include conven-
ing challenges for companies tional digital products like software or music, as
ew ork globally to market their well as reports, magazines, or books that are now
f ram in g
A sif y products in the new realm increasingly digitized and sold via the Internet.
o r clas oducts of e-commerce. In particu- Obviously, each of these products entails unique
f l pr r
it a f o lar, increasing numbers of characteristics and their trading terms and condi-
dig en tial sful companies, including tions may vary from one another. For instance,
s s
is es succe publishers, news agents, while statistical packages like SAS or Internet tele-
v i sing er ce banks, and insurance phony services like Zeroplus (www.zeroplus.com)
de m m
e-co egies. agents, among oth- can control the usage periods by incorporating
tr a t
s ers, are now remod- proper time stamps, pay-per-use or pay-per-
eling their product period pricing may not be readily applicable to
concepts in order to create and electronic texts. Currently, popular electronic text
market the digital counterparts of their sellers such as SmartEcon.com (www.smartecon.
traditional goods and services. com), OECD Online Bookshop (electrade.gfi.fr/
The growing popularity of selling digital prod- cgi-bin/OECDBookShop.storefront/) or Barnes
ucts as a major profit-making endeavor has led and Noble (www.barnesandnoble.com/ebook/)
business executives and academic researchers to charge customers a one-time cost for accessing
explore the optimal competitive strategies involved particular electronic content. For these kinds of
in selling these products. A key component in the content-based digital products, it is easy for cus-
process of formulating such strategies is to under- tomers to keep their own copies and therefore dif-
stand the implications behind the product attrib- ficult to prevent future reuses, since information
utes. This requires a good understanding of the in the products can be easily retained once the
nature and characteristics of different digital prod- access right is granted. Pay-per-
ucts. As advocated in a research report [10], differ- period revenue models like leasing
ent digital products tend to exhibit different or licensing, while being increas-
growth rates, which are largely dependent on the ingly applied to digital products like soft-
underlying product characteristics and market ware or services, may not be readily applicable
environments. In spite of that, there has been no to these content-based digital products.1
solid framework for classifying different digital 1
Although a lot of software packages are still being sold through the Internet using
products according to their inherent characteris- the traditional selling approach, licensing is becoming a prominent revenue model
tics. Here, we attempt to fill this void by propos- for relatively large software systems like server software, statistical packages, database
SANDY WONG

development, or CASE tools. On the contrary, almost all content-based digital

ing a framework that classifies digital products products (except extensive information collections like digital libraries or electronic
journals) are being sold individually using the one-time selling approach. That is,
based upon their major types and characteristics. customers need to pay only once for the digital content and then are allowed unlim-
Broadly speaking, digital products refer to any ited access to the information.

COMMUNICATIONS OF THE ACM June 2002/Vol. 45, No. 6 73

 Another example that can illustrate why under- digital product sellers can identify the critical fea-
standing product attributes is important when one tures and dimensions of the products deserving fur-
tries to market a digital product is online services. ther attention and treatment. While the quality of
While data or reports can be easily reproduced and content-based digital products has been recognized
shared among multiple customers, online services, as one important dimension, there are other dimen-
particularly those that offer real-time solutions, may sions (such as product granularity or trialability) that
not be readily or desirably sharable from a cus-
tomer’s point of view. A good example in this case
Interactive
is an online therapy service (see sidebar), where the High Downloadable
companies charge users by the total time of medical Tools and
consultation. “Sharability,” in this case, is not an Utilities
issue from the seller’s point of view since revenue Content-Based
models such as pay-per-period or visit are usually Trialability Digital Products
applied. From the customer’s point of view, how-
ever, he or she may not want to share or intermix
his or her medical records with others. Online
Services
In short, a proper classification framework for Low
digital products can serve several purposes. First, it Low High
characterizes the properties of digital products, Granularity
which can serve as a foundation for specifying prod-
uct and process development platforms [6]. This is
particularly important for digital products since Figure 1. Classifying may be equally, if not more,
even some small and often neglected product fea- digital products based important for their success in
tures may open up new areas for creating new prod- on product category the market.
uct variants. For instance, the interactivity of online and characteristic.
services allows service providers to devise various A Proposed Framework
value schemes such as charging by amount of usage for Classifying Digital Products
or by subscription. Currently, entertainment service We propose a framework for classifying digital prod-
providers like OKBridge (www.okbridge.com) offer ucts based on two dimensions: product category and
customers a yearly renewal membership scheme for product characteristic (Figure 1). There are three
unlimited play, while also providing pay-per-play digital product categories in the framework, namely
tournament services. Since the Internet is capable of tools and utilities, content-based digital products,
handling real-time transactions and micropayments, and online services. Each of these product categories
pay-per-use pricing mechanisms can be easily imple- possesses different product attributes and serves dif-
mented to other online services such as Microsoft ferent purposes for buyers.
WebTV (www.webtv.com), Reuters (www.reuters. Tools and Utilities. These products assist users to
com) or Bloomberg (www.bloomberg.com).2 There accomplish specific goals or tasks. In general, they
are simply unlimited opportunities to achieve verti- are software programs that either help users perform
cal product differentiation in digital product mar- specific functions (for example, F-Secure for virus
kets, but doing so requires a good understanding of scanning and disinfections or Adobe Acrobat for cre-
product characteristics. ating and viewing PDF files) or act as supplemen-
Second, a classification framework that matches tary utilities for achieving other purposes
product characteristics with corresponding product (RealPlayer, which allows users to listen to online
categories can be a useful tool for devising appropri- broadcasts or audio clips, is a good example). In gen-
ate marketing strategies. Some commonly employed eral, commercial software, shareware, or freeware
revenue models, like one-time selling, subscription or that is easily downloadable via the Internet is
periodic licensing, are sometimes not suitable for par- grouped in this category.
ticular types of digital products and marketers may Content-based Digital Products. The value of
need to segregate the details of the products before these products lies in their information content.
devising their marketing strategies. Typical examples include electronic newspapers and
Finally, based on the classification framework, journals (the Wall Street Journal, www.wsj.com; Pro-
Quest Direct, www.proquest.com), research reports
2
or databases (International Data Corporation
Although only the subscription option is currently provided by all those service
providers. (IDC), www.idcresearch.com), and online entertain-

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ment products such as music, magazines, or videos. products, that is, those features that are “born” with
Some others may include public listing databases the product and cannot be easily altered by the sell-
(EDGAR Online, www.sec.gov/edgarhp.htm) or ers. We focus on three intrinsic characteristics: deliv-
industry or countrywide performance reports (The ery mode, granularity, and trialability.
Annual National Accounts published by the OECD Delivery Mode. This refers to the delivery mech-
Online Bookshop) that sometimes are attached with anism of products from sellers to buyers via the
other added-on functions or utilities to assist in the Internet. Generally speaking, digital product sellers
information retrieval or data manipulation process. can deliver products by two means. Either they can
Note that it is the objective of consumers to acquire deliver the full product at one time through Internet
the information, not the add-on functions. downloads or they can deliver the product interac-
Online Services. This includes services that pro- tively on a continual basis. A crucial line of distinc-
vide access to useful resources like server connections tion here is whether or not the digital product is
as well as online utilities that assist users in accom- downloadable. Tools and utilities and content-based
plishing specific tasks. Examples of the former include digital products are often downloadable, as they are
Internet telephony (PC-to-Phone, www.webkall.com; by and large the digital counterparts of their physi-
Zeroplus, www.zeroplus.com) and group support ser- cal goods. When the product is delivered (via down-
vices (Group Systems Online, www.ventana.com); load), the value of the product is transferred to
examples of the latter include the online search ser- customers in a relatively clear-cut fashion. Con-
vices Consultant Search Service (www.searchcon. versely, for digital products such as online services,
com) and Searching4U (www.searching4u.com). interaction between the customers and the service
While these latter products are in some sense related provider (via the Internet) is often needed during
to what we have previously called tools and utilities, the transaction. Therefore, the functions or the val-
there is one subtle difference: customers cannot actu- ues of the products are provided in a piecemeal fash-
ally “purchase” the product. They only pay to use ion and in an interactive mode.
them to locate target information. Granularity. This characteristic captures the
The second dimension of the classification frame- divisibility of digital products. Highly divisible digi-
work relates to the intrinsic characteristics of the tal products present sellers more opportunities for

Online Therapy Services

T ypical online therapy services (such as Reality

Therapy, www.realitytherapy.com; The Therapy
Office, www.therapyoffice.com; The CyberAnalysis
and email exchange (see the accompanying figure).
Consultation is primarily charged based on the
amount of time connected, and the service rates
Clinic, www.cyberanalysis.com; Internet Therapist, typically range from one U.S. dollar to several U.S.
www.internettherapist.com) allow patients to com- dollars per minute. Some of these online clinics also
municate with the therapists via the Internet. Four offer volume discounts, where if patients purchase a
different communication channels are commonly longer time slot (or more email messages), they get
offered: telephone conversation, Internet cheaper rates. Since all service channels allow ubiq-
video/audioconferencing, Internet text chatting, uitous connections from all over the world, the ser-
vice is truly global and treatment requests from
Internet Text Chat Email Inquiries patients in most other countries are well
accepted.
To ensure the service fits with customers’
The Internet
expectations and to allow customers to get a
Therapist sense of the online therapy sessions, some of
Video/Audioconferencing these online clinics also feature free trials, where
customers can talk to the therapist for a limited
Patients from all
Telephone over the world time period or they can send questions/queries
Networks and receive answers for an online inquiry without
paying anything. However, just like free tryouts
Telephone Conversation with shareware, such tryout options are generally
limited to one use, and usually last for approxi-
Online therapy services. mately 15 minutes. c

COMMUNICATIONS OF THE ACM June 2002/Vol. 45, No. 6 75

vertical differentiation, which is an important com- their own schedules. Since transactions are relatively
petitive element for sellers to distinguish themselves clear-cut, there are only limited options in terms of
from competitors. For instance, in the category of pricing the products. Repurchases tend to be sparse
content-based products, research companies selling and usually appear when the tools and utilities are
industry reports may offer to sell 10 years of data, 20 upgraded to a newer version. The revenue stream
years of data, or the complete series on selected sub- that the sellers can collect tends to be discrete and
sets of industries. Similarly, some e-book sellers such the overall revenue also tends to be limited.
as SmartEcon.com offer chapter-by-chapter sale of One way to get around this constraint is to apply
their electronic texts. This can cater to the needs of restrictions on the usage period. Currently, a num-
different customer segments and hence bring in ber of well-known software packages such as Group
additional revenue.3 Systems Online (www.ventana.com) are sold under
The same case also applies to products in the regular subscription schemes where buyers need to
other two categories because, at least from a techno- renew their licenses after a certain amount of time.
logical point of view, the products can be versioned This can effectively secure a long and constant
by bundling or limiting certain features and func- stream of revenue to sellers, since customers have to
tionalities provided to the customers. From a busi- pay regularly if they wish to continue to use the
ness perspective, however, some sellers of digital products. Also, such schemes can induce buyers to
products may not prefer having their products too upgrade their products when new versions appear,
granular especially when the products have only a since the incremental cost of upgrading is compara-
few main features/functionalities and are targeting a tively lower than that of purchasing a whole new
specific market niche. package. The upgraded version can be easily down-
Trialability. Not every digital product is desirably loaded via the Internet.
trialable by customers and/or sellers. While some Tools and utilities generally have low granularity
digital products may allow customers to preview a
subset of the full product or use the product for a
Category/ Tools and Content-based Online
limited trial period, others may not. One cannot try Characteristic Utilities Digital Products Services
out the e-books sold by the SmartEcon.com or the
Delivery mode By download By download Interactive
OECD Online Bookshop. Similarly, the research
reports marketed by IDC are largely nontrialable. Granularity Low• High• Medium•
For these latter cases it is sometimes difficult to Trialability High• Low• Medium•
judge the product quality, as customers do not have • In relative sense

accurate information on the product features. Since

Figure 2. Classifying
consumers cannot gain sufficient experience of the but high trialability. Due to digital products
full products, sellers may need to resort to other the download time constraint, based on product
means like advertisements or third-party evaluations many tools and utilities sold category and
to create appropriate means by which to judge the on the Internet are smaller characteristic.
product quality. than others sold via tradi-
tional means—in the form of CDs, for example—in
E-Commerce Strategies for Digital terms of the size (measured in MB). This makes this
Products in Different Categories type of digital product typically have low granular-
Figure 2 summarizes the overall classification frame- ity, not because they cannot be improved techni-
work by assigning the three product groups into the cally, but because it may not be desirable to do so.
intrinsic characteristic space. Depending upon the This is especially the case when the tool or utility is
product category and the underlying product char- designed for some limited or specific functions and
acteristics, some e-commerce strategies may be more the market competition is intense with strong
appropriate for certain digital products than others. demand for versatile features of the tool. A good
Tools and Utilities. Because tools and utilities example is anti-virus software, where Norton Anti-
are essentially software programs that can be down- Virus, McAfee Virus-Scan and F-Secure can all be
loaded via the Internet, the value of the products is purchased and downloaded online and they contain
completely transferred to the customers who can extensive lists of virus information. It would be
then examine and try out the products according to unattractive to customers if these software products
3
can only handle particular subsets of viruses.
Such chapter-by-chapter selling model, however, may not be readily applicable to book
categories like novels or fiction. Currently, electronic novels, for example, those written
Relatively low granularity implies limited differ-
by Steven King, are only available in a single version in major online bookstores. entiation capability. Therefore, unless the demand is

76 June 2002/Vol. 45, No. 6 COMMUNICATIONS OF THE ACM

highly inflexible, sellers of tools and utilities in gen- Since the products are informational in nature, even
eral could capture only a small portion of consumer one single access to the information may be sufficient
surplus from customers. An alternative for the sellers for customers to replicate the whole product for self-
is to try to broadly segment their markets into use. It is difficult for sellers to forbid a customer from
smaller niche groups and sell different product ver- further referring to or reproducing the information
sions, each with not too much granularity. An excel- contained within the products.
lent example is Eudora 4.3 (www.eudora.com), To secure the profits of sellers in this kind of mar-
which offers three different versions: a light mode ket, a possible technique is digital watermarking
with limited functionality; a sponsor-supported since it establishes a formal mechanism for identify-
mode that is complete but with onscreen advertise- ing illegal product copies. Customers, when illegally
ments; and a paid mode that is complete and con- replicating and/or reselling the product, may need to
tains no advertisements but requires payments from bear the legal responsibility once they are found
customers. In this case, the seller has truly exploited reproducing the product, which is the major goal of
an irrelevant dimension (the onscreen advertise- digital watermarking. Such a protection scheme is
ments) in differentiating its software. As emphasized becoming increasingly popular on digital content
by Choi et al. [1], it is always beneficial to sell mul- over the Internet. For instance, Index Stock Imagery
tiple product versions since differentiation generally (www.indexstock.com) embeds Digimarc’s water-
increases total welfare and sellers’ profits. mark into its almost 500,000 still images, while
Tools and utilities are usually highly trialable, a BARCO (www.barco.com) also adds the watermark
strategy popularly used in the shareware market into its personalized document-printing systems.
because this kind of free trial, in general, is not detri- Compared to tools and utilities, content-based
mental and will not severely disrupt sellers’ profits. digital products are more granular but less trialable. It
Through limited-period free evaluations, users are is easy to divide information into pieces and then sell
allowed to test the product (probably with limited different combinations of the pieces. For instance,
functionalities) within a specified period. After the daily stock quotes can be offered in different
trial-usage period, the evaluation copies expire and schemes. A basic version may provide information on
cannot be further activated unless users pay to pur- only 50 of the most fluctuating or frequently traded
chase the full product. The growth of this free-trial stocks, while a complete version may offer informa-
practice is highly facilitated by the ubiquity and the tion on every stock being traded in a particular mar-
high bandwidth of the Internet, and the digital nature ket. A good example is InterQuote (interquote.com),
of software products. For instance, in popular share- an agent that offers online financial quotes. Cur-
ware sites like TUCOWS (www.tucows.com) and rently, InterQuote offers two different quote pack-
CNET Download.com (download.cnet.com), it is ages: a supreme version that offers real-time quotes
easy to download trial copies of thousands of software on 300 different stocks, futures, and options, while
packages. Many sellers might refrain from offering a there is another express version that only offers real-
trial option if they had to actually ship the evaluation time quotes on 100 stocks and futures. The price
copies (for example, on CDs or diskettes) to cus- charged for the express version is substantially lower
tomers due to the highly escalated cost but with no than that for the supreme package.
guaranteed sales. With the Internet, however, cus- The high granularity of content-based digital
tomers can download the trial copies without costing products implies sellers marketing these products are
sellers anything. Therefore, the Internet facilitates try- much more flexible in packaging, marketing, and
outs of tools and utilities and offers sellers an efficient pricing their products. High degrees of vertical dif-
channel for demonstrating their product qualities. ferentiation can be achieved by appropriately divid-
Also, sellers can now reach customers directly in a ing the information. This has two important
more effective way via the Internet. implications. First, compared to the tools and utili-
Content-based Digital Products. Like tools and ties market, the content-based digital product mar-
utilities, customers can get content-based digital ket is less likely to be perfectly competitive, since
products by downloading them via the Internet. sellers can easily differentiate themselves from peer
Because of this downloadable nature, the pricing and competitors. Instead, monopolistically competitive
marketing issues faced by the sellers are essentially the markets, where each seller can retain certain market
same as those selling tools and utilities. Sellers can power in setting prices, are more likely to occur [1].
exert little control on the post-purchase usage behav- Second, because of the high differentiability, sellers
ior of customers and resale and redistribution of the have a much better chance of capturing more con-
product among customers are difficult to prevent. sumer surplus. The prerequisite for this, however, is

COMMUNICATIONS OF THE ACM June 2002/Vol. 45, No. 6 77

that sellers can solicit the real preferences of cus- instances. Different schemes such as lump-sum pay-
tomers. Therefore, collecting customers’ preferences ments, periodical subscriptions, or usage-based pric-
and value distributions is vital for sellers of content- ing are all viable for this kind of product. This
based digital products to achieve favorable profits in flexibility in pricing mechanisms is very valuable to
this market. both sellers and customers. For sellers, they can pre-
Because of the informational nature of the prod- serve higher network efficiency and prevent ineffi-
ucts, content-based information products are gener- cient use of valuable bandwidth, which has
ally less trialable than tools and utilities owing to important profit implications when the service is
two subtle differences. While tools and utilities can congested. For customers, variable pricing or multi-
have a choice of offering a trial version of the full part tariffs improve the chance of getting the service
product limited by time (30 days is a common lim- for those who value the service higher than others.
itation) and a version with limited Therefore economic efficiency can also be improved,
functionalities/features, it is diffi- and such pricing flexibility has pos-
cult, if not impossible, for some itive implications toward overall
content-based digital products to Selling a social welfare [4, 5].
choose the former. For example, if Second, resale or redistribution of
customers are allowed to access the digital product products is not a big problem for
entire copy of a new book on sale
via the Internet (such as the two vol-
I
over the nternet online services since it is always dif-
ficult, if not impossible, for cus-
umes of OECD National Accounts), can be very tomers to “retain” or “replicate” the
they can download the complete different from whole service. Finally, sharing of ser-
book and retain their own copies. vices is not always feasible (since the
This kind of free trial can be very selling one in service providers often explicitly for-
detrimental and severely disrupt the a traditional bid concurrent access) or desirable
sellers’ profits. A second problem in (as the charge may be by the amount
trying out a content-based digital market. of usage). Compared to tools and
product is that no matter what a utilities and content-based digital
customer gets, it is still just a sam- products, online services are moder-
ple, which in theory cannot ade- ately granular and trialable. They are
quately convey a sense of quality, which is often the granular as sellers can easily divide their services into
case when trying out a software program. It is typi- different components. An online casino (USA
cal for online booksellers to offer publishers’ reviews, Casino, www.usacasino.com) allows users to select
tables of contents, or sometimes an introductory single player or multiplayer game modes, while it
passage of their e-books. However, it is often diffi- also offers wide varieties of different games like
cult for customers to judge the overall suitability or Poker, Roulette, and so forth. Similarly, in some
usefulness of the book based on such limited sam- online search services like Searching4U, various
ples. To address these problems, sellers may have to search options like statewide, nationwide, or death
rely on advertisements, building up reputation index searches are available. It is possible for sellers to
through word of mouth or trusted third parties (for differentiate their services by restricting certain ser-
example, most online bookstores offer customers’ vice attributes.
reviews). Also, they may rely on intermediaries to Yet, the degree of granularity of online services is
convey quality messages. These intermediaries can not as high as that of content-based products, the
act as a centralized marketplace or additional sources main reason being the costs involved in restricting
for quality information [1]. Since content-based the nature of the service. While the cost of dividing
digital products may encompass many different ver- information can be quite low, more effort is needed
sions and direct marketing between sellers and buy- in restricting the offering of the online services.
ers may not always be feasible, the role of Additional programming or controlling mechanisms
intermediaries can be crucial. are required most of the time.
Online Services. One essential feature of online Online services are also trialable. For instance, in
services is their interactivity. Customers typically Reality Therapy (realitytherapy.com), customers can
need to submit interactive requests and receive inter- try the online consultation for 15 minutes without
active responses. Such interactivity has a number of paying. If they desire to continue using the service
implications for online service providers. First, the after that evaluation period, they need to pay the full
value of the goods tends to be delivered in multiple consultation fee. Similarly, certificate authorities like

78 June 2002/Vol. 45, No. 6 COMMUNICATIONS OF THE ACM

Verisign (www.verisign.com) issue free digital IDs to tion (see [3, 7, 8, 11]). Furthermore, the service ori-
individuals that are valid only for two months, so entation of many digital products requires several
that customers can try the essential service features more “P”s in the formulation of e-commerce strate-
during the trial period and then decide if they would gies. One such “P” is the process, which involves
like to continue to use the service provided. how the digital product or service is delivered to or
Such tryout options are possible because online consumed by the customer. Since the customer
services are continuous. Even if customers are might reside on the other side of the globe from the
allowed to try the services, they still need to pay if seller, appropriate “process” must be developed to
they want to access the same service in subsequent ensure proper consumption of the digital
periods. Replication is not a big issue here, nor are product/service. Another “P” that may be important
illegal acquisitions or redistributions. Just like tools in the Internet world is “professionalism,” which
and utilities, such tryout options can allow sellers to refers to the “look” of the product or service. In tra-
convey an effective sense of quality, which is impor- ditional service marketing, professionalism. In the
tant for marketing on the Internet. Also, since Inter- Internet world, this professionalism moves into what
net transmission is almost costless, a tryout option is kind of Internet technologies, security technologies
generally feasible for online service providers. in particular, a Web site uses. A customer may
Nonetheless, there are some online services that choose to transact with a particular Web site because
are discrete in the sense their services are offered it looks professional, which may reflect a form of
once in awhile to particular customers. This typi- trust.
cally happens on online search services, where Many believe the emergence of electronic com-
repeated requests from customers are sometimes rare merce has dramatically affected and will continue to
and infrequent. Therefore although online services affect national and international trade, business
are in general trialable, the degree of trialability is operations, and society in general [2]. Selling digital
smaller than software tools and utilities, which are products in this new marketplace presents a number
almost fully trialable by customers. of challenges. How much we can capitalize on the
power of the Internet depends upon how we develop
Conclusion and utilize this new global marketplace. c
A key element of the Internet is information, which
is also described as the “gasoline” in an information References
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example described here illustrates how software sell-
ers can combine different dimensions in achieving Kai Lung Hui ([email protected]) is an assistant professor in
horizontal product differentiation. We believe there the Department of Information Systems, School of Computing at the
is ample space for further exploitation of other novel National University of Singapore in Singapore.
ideas in the Internet realm, but that requires good Patrick Y.K. Chau ([email protected]) is an associate
knowledge and insight into the underlying product. professor
Hong Kong.
in the School of Business at the University of Hong Kong in

Devising an appropriate e-commerce strategy for

a digital product requires understanding of not just
the product itself but also other important market-
ing mix elements including price, place, and promo- © 2002 ACM 0002-0782/02/0600 $5.00

COMMUNICATIONS OF THE ACM June 2002/Vol. 45, No. 6 79