Shirley Hsiao Danielle King-Curzi Gilbert Lee Cecilia Pang. Economics 201a Professor Wolfram

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1 Shirley Hsiao Danielle King-Curzi Gilbert Lee Cecilia Pang Economics 201a Professor Wolfram October 2, 20062...


Shirley Hsiao Danielle King-Curzi Gilbert Lee Cecilia Pang Economics 201a – Professor Wolfram October 2, 2006

Introduction is an eleven year old online dating and relationship company and a leader in the online dating market. The company revolutionized the integration of traditional personal advertisements with the Internet medium. Users can create personal profiles, search profiles, and communicate with potential relationship partners. Based in Dallas, has approximately 250 employees who operate the business and technology functions. The company’s 2005 revenue from service subscriptions was approximately $250 million dollars, reflecting 1.2 million paid subscribers. The service has approximately 15 million registered users. is a wholly-owned subsidiary of InterActiveCorp (IAC), which also owns brands such as Ticketmaster,, and has several revenue streams including advertising sales and content syndication. This paper will focus only on service subscriptions, the major source of income. users fall into two groups: members and subscribers. Members are nonpaying users who can create a profile and search the profiles of users who match their desired attributes. After paying the subscription fee, members can access additional services and features such as the ability to contact other users through an anonymous email and telephone system. Converting members to subscribers is critical for to increase revenue; therefore, it focuses its efforts on increasing subscriptions through aggressive marketing. Qualitative Assessment of Market Demand estimates its potential market to be approximately 35 million people, ages 18 and older. These are individuals who are online and open to pursuing a relationship or using an online dating service. The largest age group represented is between 30 and 49 years old. Fourteen percent of members are 50 years and older, a potential customer base likely to grow given high divorce rates and the large number of baby boomers. 1 operates in a highly competitive and fragmented market. There is a low barrier for competition to enter the market because online dating software is inexpensive and website creation is simple. As an early player in the online dating market, has built a large member base, which is both a marketing tool and competitive advantage. Despite its size,'s demand curve is fairly elastic since it faces strong competition from other online dating services such as Yahoo! Personals,, and Recently, the popularity of free social-networking sites such as (103 million users) and has increased the number of substitutes. As a result,'s demand curve has most likely shifted to the left and potentially become more elastic. A plurality of substitutes further fragments the market. More expensive dating services and independent matchmakers offer a more personalized approach. These services are unlikely to attract price sensitive potential customers. Classified advertisements in print publications target local markets. Traditional dating outlets include meeting people at church, clubs and bars, or through friends and family. While potentially less expensive, these venues may take more time to find a potential match given the smaller candidate pool compared to the millions of online members. Some relationship seekers employ multiple dating methods such as subscribing to several online dating services or employing traditional and online methods. This consumer behavior increases the potential member base for In an effort to adapt to shifting demand, has introduced services to better meet specific consumer needs. Two new campaigns compete with other online dating services that cater to long-term relationship seekers, such as One campaign incorporates exclusive relationship and dating advice, strategies, and action plans in the form of podcasts from the popular television personality, Dr. Phil McGraw. Dr. Phil appears on 2

television commercials promoting the "MindFindBind™ with Dr. Phil" program. The second campaign is a new brand,, which uses a matching system that combines compatibility with chemistry based on the research of Dr. Helen Fisher, a world-renowned anthropologist. Industry reports show that these efforts focus on the search for "love and romance" and target single females between 30 and 54 years of age. The strong desire to find love makes some women in this age bracket relatively inelastic consumers. Qualitative Characterization of Firm’s Cost Structure has relatively high fixed costs compared to its variable costs. Once an online dating infrastructure exists, few additional costs are required to enable the website to accept or increase the user base. This explains how can serve 15 million members with only 250 employees. measures its costs by Cost-Per-Acquisition (CPA) or the cost to convert registered members into paying subscribers. Fixed costs include employee salaries, servers, databases, advertising, and overhead. Overhead includes property or rent, utilities, and office supplies. PRC, another IAC company, operates 32 call centers employing mostly hourly workers who provide customer service and technical support. has a dedicated team within these PRC call centers. Over a short time frame the servers and databases are fixed costs. Once purchased and integrated, changing the architecture of servers requires significant effort. In July 2003, reduced its server costs by moving from 104 to 45 web servers, enabling it to reduce maintenance costs and improve the development cycle efficiency. A Boston-based advertising firm, the Mullen Agency, handles's advertising. Last year, spent $54 million in marketing. Advertising includes television, radio, and fees to online search engines and distribution partners. Though some of the advertising costs can be adjusted or redirected, in general, it is a fixed cost that has been increasing in order to attract new users in a highly competitive 3

market. The money for advertising is spent in advance of new subscribers joining and therefore advertising is not a direct function of paying subscribers. Several costs are both fixed and variable. Servers, databases, and call centers are a function of the number of members and subscribers, so some component of it is variable. Each of these is also needed to support a single subscription, a reason to include them as a fixed cost. Variable costs include commission to affiliated partners and payment processing services. Since partners with affiliates to provide links or advertisements to recruit potential consumers, commission is paid based on each subscription sold. The commission may be paid once, but the monthly subscription can continue. Credit card processing fees are based on the revenue exchanged and number of transactions. These fees would therefore change with each additional subscriber or new service requested by a subscriber. The marginal costs for a new subscriber include any direct commission and transaction fees because these are the only costs that vary with an incremental change in subscribers. With its low marginal costs, wants to attract as many subscribers as possible. Once a server upgrade is required, there are additional costs associated with producing the service.'s long term decisions on advertising are substantial, but once decided, do not limit the ability to accept more customers as long as the price of the service remains greater than the marginal costs. Finally, IAC has opportunity costs associated with The company could divert funds and resources to other subsidiaries to seek a higher return on its investment. With many subsidiaries, IAC has many internet-based investment opportunities. Qualitative Assessment of Current Pricing Strategy and Use of Advanced Pricing Methods Subscribers can choose from three basic service agreement options. (Table 1) These 4

prices are competitive with other large online dating services.'s monthly subscription fee is higher than Yahoo! Personals, but lower than (Table 1) Table 1: Monthly Subscription Fees standard MindFindBind eHarmony Yahoo! Personals

1-Month $29.99 $38.98 $49.95 $49.95 $24.95

3-Month $16.99 $24.98 $33.32 $33.32 $16.65

6-Month $14.99 $21.98 $26.66 $24.99 $12.49

12-Month $20.83 $20.83 -'s tiered pricing menu reflects a second-degree price discrimination strategy presented in a “goldilocks” manner to entice potential subscribers to pick the mid-level option. This pricing can also be considered a block pricing strategy, where the consumer is charged different prices for a different quantity of service. The multi-month subscription plans allow potential subscribers to buy access in bulk, capturing more of the consumer surplus. The MindFindBind program is a premium version of's basic services. uses second-degree price discrimination to distinguish potential subscribers who are willing to pay more for online dating through the premium service. (Table 1) has also taken the second-degree price discrimination strategy a step further by launching a new brand, offers an advanced matching and introduction process with the goal of establishing long-term relationships. A potential subscriber who is looking for marriage, for example, might be more willing to pay a higher subscription cost if he or she feels the quality of the service will lead to achievement of his or her goals. also employs a block pricing strategy. (Table 1) Both and make use of promotional rebates or coupon strategies. recently created the "Make Love Happen" guarantee. With a six-month service agreement, subscribers receive a guarantee that states: "If you don’t find someone special 5

during your six-month subscription, we will give you an additional six months for free." offers a similar three-month guarantee. Furthermore, members can test the subscriber service through promotional pricing or trial memberships. Finally, when learned 72% of single people have never used an online dating service, they began offering a free "Starter Kit", which includes targeted, interactive audio and visual guides to help new customers get acquainted with Potential for Advanced Pricing Methods By offering the ability to search profiles for free, is missing an opportunity to use an additional second-degree price discrimination strategy to differentiate its serious members from its casual members and gain incremental revenue. Members are able to conduct three types of searches – a quick search, custom search, and keyword search. could charge for custom searches, while still allowing casual users to preview their dating options with a quick or keyword search for free, to take advantage of the varied elasticity between serious and casual users to increase revenue. Serious users tend to have a stronger motivation to find other users of interest and have less patience to sort through hundreds of profiles returned by a quick search. In contrast, casual or cost conscious users would not mind sorting through the additional profiles generated by a broad search. can also apply this strategy by charging for its "Member Spotlight" feature, which increases the member's chance of being seen by other members on partner websites. Serious users will be more willing to pay for such a feature compared to casual users. The difference in demand between serious and casual users will support an a la carte pricing strategy where members pay a nominal price for improved search capabilities or visibility. already applies a la carte pricing strategy to several features. In addition to the monthly subscription fee, subscribers are offered additional routes of communicating with 6

other prospective dates, through video, voice mail, and text messaging. For example, "MatchMobile", at $4.99/month, allows a subscriber to search for dates on their mobile phones, view profiles, and chat using's anonymous text messaging service. Other examples include "Online Speed Matching" services, also offered to non-subscribers but at a higher fee, and single event fees for advice on dating or writing profiles. This pricing strategy allows to keep the price of entry-level subscriptions low for cost sensitive consumers. Allowing people to sign up as members with limited service entices potential consumers, who are skeptical or curious. Once members join as a basic subscriber, hopes to increase revenue by offering premium or supplemental services and capture a portion of the consumer surplus that would otherwise exist with a flat monthly price. An a la carte structure may be confusing and difficult to communicate clearly to members, so can consider bundling the a la carte items and offering it as a new premium line of service. Alternatively, can initiate a member "token" purchase system where "tokens" are deducted on a per contact basis. This may attract users who are willing to pay a per contact fee for minimal use of the service. Also, although advertising supplements revenue from subscribers, some subscribers may be willing to pay to limit advertisements. can utilize third-degree price discrimination strategies by creating niche groups in its member base by social, religious, or ethnic qualities or preferences. Niche online personals services, such as JDate, BlackSinglesConnection, and LDSMingle, are very successful as a result of targeting specific groups. The site could charge for advanced searches to identify certain customs or traditions. Additionally, can modify its profiling and questionnaires to include characteristics which are of greater importance to these niches. The company may even want to further understand price-sensitivity and utilize that information to derive demand curves for each group and set prices accordingly. 7

Summary/Conclusion is one of many online dating services in a highly competitive market, which has led to an elastic consumer demand. While a large portion of's fixed costs are dedicated to marketing to consumers, the company could take more advantage of its 15 million members. Effective pricing strategies would help to convert more members to subscribers and to minimize consumer surplus. Though currently employs several second degree price discrimination strategies, such as “goldilocks” pricing and bundling, future strategies might attract cost sensitive consumers while drawing more revenue from serious subscribers. Lower monthly subscription pricing and fees for advanced searches, improved subscriber visibility, or fee-based contacts address a wide range of consumer elasticity. should utilize a test market for several of these strategies to determine which are most effective to maximize profit. Too many pricing options would be too complicated given the broad market. "Twenty years from now, the idea that someone looking for love without looking for it online will be silly, akin to skipping the card catalog to instead wander the stacks because 'the right books' are found only by accident."1 As the world moves increasingly online and online dating becomes a cultural norm in a society with less free time,'s audience of those willing to pay for the search for human compatibility and companionship will most likely expand. By using advanced pricing techniques such as al a carte pricing, will capture consumer surplus and maximize its profits. The long-term outlook in this industry is strong, for as long as human nature exists, the search for love will continue.


Bibliography 1. Griscom, Rufus, “Why are Online Personals So Hot?”, Wired Magazine, Issue 10.11 (Nov 2002) Entwistle, Liz ([email protected]) and Maida Goodman ([email protected]), phone and email interviews and “ Fact Sheet,” (Sept 27 & 29, 2006) Francisco, Bambi, "Social Networks vs. Dating Sites," Market Watch (Aug 31, 2006) %2D901C%2D098EE74B03DD%7D&siteid= Goodstein, Ellen, "The Cost of Finding Love," (Feb 12, 2004) Johnson, Kimberly S., “Fla. Firm will Bring 500 New Jobs: PRC of Fort Lauderdale says it will open a call center in Englewood in mid-October." (Aug 31, 2006) Kapsinow, Steven, “Case Study:” Rye, Court L. IAC/InterActiveCorp, 2005, Stanley, T.L., “Online-Dating Sites Get Stood Up by Consumers: Singles Flock to Myspace, Leaving and Others Looking for Love.” (Apr 17, 2006) “History of” IAC 10K SEC filings (Mar 13, 2006) " Launches New Starter Kit to Help People Discover What Millions Already Know: Online Dating Works More People Know Someone Who Had Success on than any Other Dating Site1" (May 10, 2006) " Launches MindFindBind™ with Dr. Phil" (Jan 12, 2006) MediaKit, 9

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