Pricing Electronic Services

jmd 2007

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E: Definitions

electronic commerce (EC)The process of buying, selling, or exchanging products, services, or information via computer networks

e-businessA broader definition of EC that includes not just the buying and selling of goods and services, but also servicing customers, collaborating with business partners, and conducting electronic transactions within an organization

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E: Concepts

• EC and EB is defined through these perspectives– Communications– Commercial (trading)– Business process– Service– Learning– Collaborative– Community

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Defining the Product or Service

• Pure Versus Partial EC– EC takes several forms depending on the

degree of digitization (the transformation from physical to digital)

(1) the product (service) sold, (what it is at the end)(2) the process, (how it is made) (3) the delivery agent (or intermediary) (how it is

delivered)

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Exhibit 1.1 The Dimensions of Electronic Commerce

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Active in 3-D: delivery, process, product

• EC organizationsbrick-and-mortar organizationsOld-economy organizations (corporations) that perform most of their business off-line, selling physical products by means of physical agentsvirtual (pure-play) organizationsOrganizations that conduct their business activities solely onlineclick-and-mortar (click-and-brick) organizationsOrganizations that conduct some e-commerce activities, but do their primary business in the physical world

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Active in 3-D: delivery, process, product

• Where EC is conductedelectronic market (e-marketplace)An online marketplace where buyers and sellers meet to exchange goods, services, money, or informationinterorganizational information systems (IOSs)Communications system that allows routine transaction processing and information flow between two or more organizationsintraorganizational information systemsCommunication systems that enable e-commerce activities to go on within individual organizations

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Major Business Pressures

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Value Propositions look to Add value (new/improve). = Responses to Business

Pressures• Organizational response strategies

– Strategic systems– Agile systems– Continuous improvement efforts and business

process restructuring– Customer relationship management– Business alliances– Electronic markets

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Responses.. are the generators of new products and services.

– Reductions in Cycle Time and Time-to-Marketcycle time reductionShortening the time it takes for a business to complete a productive activity from its beginning to end

– Empowerment of EmployeesEC allows the decentralization of decision making and authority via empowerment and distributed systems, but simultaneously supports a centralized control

– Supply Chain ImprovementsEC can help reduce supply chain delays, reduce inventories, and eliminate other inefficiencies

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Responses (target segments)

– Mass Customization: Make-to-Order in Large Quantitiesmass customizationProduction of large quantities of customized items

– Intrabusiness: From Sales Force Automation to Inventory Controlknowledge Management (KM)The process of creating or capturing knowledge, storing and protecting it, updating and maintaining it, and using it

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Part of the Business Model is the Revenue Model. How do we earn?

• Revenue Modelsrevenue modelDescription of how the company or an EC project will earn revenue

• Major revenue models– Sales– Transaction fees– Subscription fees– Advertising fees– Affiliate fees– Other revenue sources

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Common Revenue Models

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How should we price e-products and e-services?

• Based on benefits to sellers (individual or business)?

• Based on benefits to customers (individual or business)?

• Based on benefits to society?• Based on costs?• Based on market (Porter) forces? • Other factors?

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Benefits of EC

• Global Reach• Cost Reduction• Supply Chain

Improvements• Extended Hours• Customization• New Business Models• Vendors’

Specialization• Rapid Time-to-Market

• Lower Communication Costs

• Efficient Procurement• Improved Customer

Relations• Up-to-Date Company

Material• No City Business

Permits and Fees• Other Benefits

Benefits to Organizations

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Benefits of EC

• Ubiquity• More Products and

Services• Customized Products

and Services• Cheaper Products and

Services

• Instant Delivery• Information

Availability• Participation in

Auctions• Electronic

Communities• No Sales Tax

Benefits to Consumers

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Benefits of EC

• Benefits to Society– Telecommuting– Higher Standard of Living– Homeland Security– Hope for the Poor– Availability of Public Services

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Price Comparisons

• Study by Brynjolfsson and Smith (2000)– Prices online < conventional store– Menu cost online < conventional store– Price dispersion online > conventional store

• Examples:– Amazon.com vs. Bestbuy– travelocity.com, priceline.com vs. Hertz

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Online Prices Should Be Lower

• Advantages of regular shopping– Affective processing (images, sounds, smells)

vs. cognitive faculties (price and feature comparison).

– Transaction costs should be lower online

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Cost Transparency

• Cost transparency: buyers see through product costs and evaluate prices– Retailers: wholesale price– manufacturers: manufacturing cost

• Traditional price opaque– Fair price = actual cost + reasonable premium– Customer infer cost

• Cause: Information Abundance– Price comparison website, searching engine

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Direct Impacts

• Direct Impacts– Low profits (AT&T vs. Sprint)– Services and products as commodities

(Ameritrade, E-Trade vs. Merrill Lynch)– Customer loyalty (P&G)– Reputation damage by price unfairness

(Barnes&Nobel around 1999.)

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1: Information

• More information about prices, features and quality on Internet.– Price-comparison is easy (Pricescan.com,

shopbots)– More information about quality, features

and reliability (Epinions.com)– Proprietary information is available

(travelocity.com, new car shopping)

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2: Brand Premium

• Internet technology lowered the risk that buyers paid for inferior brands before– National brand vs. inferior brand– Risk premium for brand– Easily accessible information about other

brands– (Still can be fooled. Ebay has received

complaints because false branded products are being sold there.)

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3: Buyer-Seller Match

• Internet makes buyers reach sellers more efficiently and vice versa.– B2B context of industrial procurement.– Online directory linking companies from

various industries.• Alibaba.com• sesami.com

– Buyers and sellers find each other more easily

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4: Price Floor Revealed

• Buyer-led pricing and reverse auctions allow buyers to see price floor more easily– Buyer-led pricing

• priceline.com

– Buyers’ motivation to bid lower next time– Reverse auctions

• Dutch auctions• eBay

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5: Building Customer Base

• Rethinking about pricing: importance of gaining customer

• Examples– Buy.com– Free cell phones

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Exceptions

• Online prices may be higher– Anonymity online– Buyers want to remain anonymous

• Study of 46 prescription e-tailers online– Viagra and Propecia– 10% higher online

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Managing Online Pricing

• Reexamining price structure and policy• Bundling (Gateway PC)• Quality/functionality improvement

(Amazon.com)• Innovation: Gain Cost Advantage (Dell)• Versioning (Information Goods)

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Information Goods

• Information Goods– Properties: Information-based– Big fixed cost– Small or negligible variable cost

• Average cost calculation

– Examples• Movie, record, book, etc.• James Bryant and ProCD: Phone book CD

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Versioning of Info. Goods

• Versioning: many variation of essentially the same goods– Theoretical basis: price discrimination– Charge as many people as possible the price

as high as possible– Reason: Information goods make versioning

easy

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Versioning (cont’d)

• Examples– Convenience (AOL membership)– Comprehensiveness (New York Times)– Manipulation (Lexis-Nexis)– Speed (Mathematica)

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Logic Behind Versioning

• Free version– Awareness (PC game)– Follow-up sale (McAfee)– Network (Adobe)– Advertisement (Playboy)– Competitive advantage (IE)– User base and service (RedHat)

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Price Sensitivity Online

• High Price Sensitivity for Internet Shoppers– Buy.com

• Availability of Quality Information Reduces Price Sensitivity

• Separate Online Price and B&M Price– Barnes and Noble

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How to Fight a Price War

• Non-Price Tactics– Reveal your cost advantage

• Price matching

– Focus on quality • Ritz-Carlton of Malaysia

– Alert customers to price-cut risks• European medical equipment manufacturer

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Fighting a Price War

• Price Tactics– Change consumer’s choice

• McDonald’s Value Meal vs. Taco Bell

– Modify only certain prices• Sun Country Airlines vs. Northwestern

– Introducing a “fighting brand” • (Thinkpad)