Internet Marketing

Pricing in an Online World

Topics

• The power of pricing• Price sensitivity and the Net• Real-time pricing• Bundling

The Power of Pricing

1. The Worship of Premium Pricing – companies try too hard to hold onto high profit margins with small sales

2. Skim Pricing of New Products – companies serve the most desirable segment first and forget to adapt to the main stream

3. Cost-Driven Pricing – Cost is internal to the firm, but value is the only thing the customer cares about

Drucker’s Pricing Sins

The Power of Pricing

Figure 11.1 Pricing is Tightly Linked to Profitability

Proper pricing must

reflect changes brought about by

the Internet

The High Leverage of Proper Pricing

Price Sensitivity & the Net

• Common perception is that the Net will always raise consumer price sensitivity– This will be true for many companies

• But, some companies will be able to get higher prices

• So, we need to understand why the Internet brings about changes in price sensitivity

Price Sensitivity and Online Information

Price Sensitivity & the Net

• The most important determinant of price sensitivity

• Unique features and benefits lower price sensitivity and raise willingness to pay

• To prove uniqueness – Provide hard facts, solid testimonials, and

hands-on trial use

• The Internet is effective at doing this

The Unique Value Effect

Price Sensitivity & the Net

• Connects price sensitivity with the presence and awareness of alternatives– Price elasticity depends on whether there are

alternatives available in the marketplace

• The Net enables instantaneous side-by-side price comparisons of available alternatives– Increasing information may lead to less

willingness to pay

• This may be the Net’s biggest impact

The Substitute Awareness Effect

Price Sensitivity & the Net

• Consumers are more price sensitive when shopping for items that comprise a larger percentage of their budget

• They naturally pay more attention to shopping for the best price– Examples include cars & healthcare

Total Expenditure Effect

Price Sensitivity & the Net

• Price sensitivity decreases if the person choosing the product isn’t the person paying for the product– Example: Business travelers are less price sensitive

because their employers are footing the bill

• Companies have to decide whether they’re targeting their sites at the decider or the payer

• If the target is the payer, emphasize cost effectiveness

Shared Cost Effect

Price Sensitivity & the Net

• Well-known brands with a high quality reputation can charge higher prices because price sensitivity is lessened– Example – Charles Schwab vs. Ameritrade

• Unknown online low-price outlets need to build confidence and trust if they want customers to respond to low price– One solution is to partner with trusted and well-known

firms

• While well-known firms may eventually have to lower their prices to match the competition, the price-quality effect delays the need for this response

Price-Quality Effect

Price Sensitivity & the Net

• Price elasticity is much higher on items that are nonperishable and can be stored easily– Example: A discount on books may prompt

purchase even though the consumer may not read the book for several months

• It’s harder to stimulate demand by lowering the prices of perishable items– There has to be a closer match between

time of purchase and consumption

Inventory Effect

Real-Time Pricing

• Setting prices is difficult if– Companies don’t know their demand curves– Different customers pay different prices for the product

or service– Customers buy multiple products that are linked to each

other

• Under rapidly changing conditions– It’s impossible for companies to calculate demand curves

accurately, so they can’t figure out price elasticity

• Instead of setting prices themselves, many companies are using real-time pricing– The power of the Internet to provide real-time

information to the marketplace makes real-time pricing possible

Why Simple Pricing Approaches Fail

Real-Time Pricing Alternatives

• Auctions• Rental Markets• Yield Management

Real-Time Pricing Alternatives

• Auctions work well on the Internet– In-depth information is available to bidders– Confused bidders can call or e-mail for more info– Participants can join in from anywhere on the planet

• Online auction sites improve the power and efficiency of auctions – The Internet makes it easier to gather buyers and sellers

together in the same place at the same time– The Internet enables sellers to provide in-depth

information, so buyers can evaluate the item being sold– The Internet expands the number of bidders, which

raises the price paid and the profitability of the auction

Auctions as Real-Time Pricing

Real-Time Pricing Alternatives

Online Auction Types• English Auction

– An auctioneer calls out bids until no one is willing to top the last bid

– The high bidder gets the item– Examples: FirstAuction.com, Onsale.com and E-

bay.com

• Dutch Auction– The price starts high and falls at regular time

intervals– The first customer willing to bid gets as many of

the items as he/she wants at that price– Remaining items continue to have their prices cut

Auctions as Real-Time Pricing

Real-Time Pricing AlternativesA Flow Chart Toward Online

AuctionsEvolving toward OnlineAuction

Physical AuctionEnabler

Absentee BiddingAllowed

Consignment SellingWith Online Purchase

English Auctions•Most common•Rising prices

Dutch Auctions•Good for multiple items•Especially perishable goods

Fully Online Auctions

Figure 11.11

Real-Time Pricing Alternatives

• The rental market serves customers’ immediate needs

• More efficient because the buyer pays a fee for each use rather than paying a large lump sum for unlimited use – Example – software rentals

• Barriers to further online adoption include credibility and the lack of willingness of sellers to use micro-transactions

Online Rental Markets

Real-Time Pricing Alternatives

Yield management is the matching of price and available

capacity

PriceAvailable Capacity

Yield Management

Real-Time Pricing Alternatives

Requirements for successful yield mgt:– Fixed and perishable capacity – the good must

lose 100% of its value at a specific point in time. In addition, the industry should face high fixed costs so the cost of an additional customer is relatively low

– Customer base with identifiable segments – give price sensitive customers a break without causing a loss of customers willing to pay full price

– Demand uncertainty + information technology – tracking is necessary to ensure proper yield management (made easier by using company web sites)

Yield Management

Bundling• Bundling works particularly well online• Bundling is the combination of

products into larger packages– A single fee gives users access to entire

product offering• Example: AOL

Bundling

Bundling Guidelines• Margin Spread Bundling

– Bundle items that have a high contribution margin ratio

– Creates incentive for increasing volume

• Aggregation Bundling– Target the bundle toward the average

customer– Increases customer demand for the

bundled good

20 M

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2 M

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1 M

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Consumer Variationsfor Bundle

The BundleDemand Curve

Bundling Works Well When the Bundle is

Viewed More Similarly than

Individual Items

Figure 11.16