Price Decisions

Objectives
Identify the main fixed and dynamic pricing strategies used for selling online. Discuss the buyers view of pricing online in relation to real costs and buyer control. Highlight the sellers view of pricing online in relation to internal and external factors. Outline the arguments for and against the Net as an efficient market.

Overview
Internet Changes Pricing Strategies Buyer and Seller Perspectives Buyer View Seller View Pricing Strategies Fixed Pricing Dynamic Pricing Bartering

The Internet Changes Pricing Strategies

Price is the sum of all valuables that buyers exchange for the benefits of a good or service. Throughout history, prices were negotiated (dynamic). Fixed price policies are a modern idea. The Internet is taking us back to an era of dynamic pricing - varying prices for individual customers. The Internet's properties, especially in the role of information equalizer, allows for price transparency - the idea that both buyers and sellers can view all competitive prices for items sold online.

Overview
Internet Changes Pricing Strategies Buyer and Seller Perspectives Buyer View Seller View Pricing Strategies Fixed Pricing Dynamic Pricing Bartering

Buyer and Seller Perspectives

The meaning of price depends on the viewpoint of the buyer and the seller. Each party to the exchange brings different needs and objectives that help describe a fair price. In the end, both parties must agree or no sale takes place.

Overview
Internet Changes Pricing Strategies Buyer and Seller Perspectives Buyer View Seller View Pricing Strategies Fixed Pricing Dynamic Pricing Bartering

Buyer View
Buyers define value as benefits minus costs. In the last lesson we learnt that the Internet creates many benefits important to consumers and business buyers alike, in the form of Attributes, Branding, Support Services and Labeling . Here we explore the cost side of the formula: money, time, energy, and psychic costs.

The Real Cost

Today's buyer must be quite sophisticated to understand even the simple total monetary cost of a product, given the way they are expressed and the hidden costs. How about the time, energy, and psychic costs that add to a buyer's monetary costs? But buyers often enjoy many online cost savings:

The Net is convenient shop, search, etc 24 Hrs. The Net is fast can buy and get products fast. Self-service saves time. One-stop shopping, Integration, and Automation save time and energy.

Buyer Control
The change in power from seller to buyer affects pricing strategies. Buyers set prices and sellers decide whether to accept the prices in a reverse auction. Online sellers are more willing to negotiate than their offline counterparts, thus giving power to buyers in the exchange. Buyer power online is also based on the huge quantity of information and products available on the Web.

Overview
The Internet Changes Pricing Strategies Buyer and Seller Perspectives Buyer View Seller View Pricing Strategies Fixed Pricing Dynamic Pricing Bartering

Seller View
Sellers view price as the amount of money they receive from buyers, unless they are making a barter exchange Cost the floor. Includes both internal and external factors. Internal factors - Overall pricing objectives, Marketing mix strategy, and the Costs. External factors (affecting online pricing in particular) - Market structure and the Buyer's perspective.

Internal Factors: Pricing Objectives

Pricing objectives may be: profit oriented; market oriented; competition oriented.
Profit-oriented objective could be current profit maximization. Market-oriented objectives could be building a larger market share. Competition-based pricing is pricing according to what competitors charge for similar products.

Internal Factors: Marketing Mix Strategy

Successful companies use an integrated and consistent marketing mix strategy (offline as well as online). The Internet is only one sales channel and must be used in concert with other marketing mix elements. No proven rules or standard practices have emerged at this point - practices vary widely by product and industry.

Internal Factors: Information Technology Affects Costs

Information technology can create both upward and downward pressure on prices as follows: It puts upward pressure on prices on a/c of:
Online customer service: It is a costly necessity Distribution: Each product must be shipped separately to its destination, called "the last mile" problem Affiliate programs: Many Web sites pay a commission on referrals through affiliate programs. Site development and maintenance: Web site development and maintenance is not cheap. Customer acquisition costs (CAC): The cost of acquiring new customers online is quite high.

 Internet puts downward pressure on prices, by saving some costs such as via:
Just-in-time inventory: Allows for just-in-time delivery of parts and reduced inventories. Overhead: Online storefronts can lower their overhead costs. Customer service: Can save by automating some customer service functions. Printing and mailing costs: Good saving Digital product distribution costs: Good saving

Internal Factors: Information Technology Affects Costs

External Factors Affect Online Pricing

2 important market factors affecting prices R: A. Market structure: The seller's leeway to set prices varies with different types of markets.
Pure competition: Many buyers/sellers, uniform commodity, differentiation and marketing communication play no role. Monopolistic competition: Many buyers/ sellers; trading over a range of prices, as sellers can differentiate their offers. Oligopolistic competition: Few sellers who are highly sensitive to each other's pricing. If a company drops its price by 5 percent, buyers will quickly switch to this supplier. Pure monopoly: This market consists of one seller whose prices are usually regulated by the government. Above distinction is extremely important for online sellers. If price transparency eventually results in a completely efficient market, sellers will have no control over online prices.

B. Efficient Markets
A market is efficient when customers have equal access to information about products, prices, and distribution. In an efficient market one would expect to find lower prices, high price elasticity, frequent & smaller price changes, and narrow price dispersion - the observed spread between the highest and lowest price for a given product. Is the Net an efficient market? Does Internet contribute to market efficiency? Shopping agents facilitate consumer searches for low prices by displaying the results in a comparative format. High price elasticity For leisure travel, books and CDs, the online market is more elastic than the offline market, so we would expect Internet users to be sensitive to price changes. Reverse auctions. Reverse auctions allow buyers to name their price and have sellers try to match that price. This format pits sellers against one another and usually drives prices down. Venture capital. Many let them take a long-term view and are willing to sustain short-term losses, letting companies grow by establishing brand equity and grabbing market share. Competition. The competition online is fierce and highly visible. Furthermore, competitors are willing to set lower prices to gain brand equity and market share rather than short term profits.

 Even though the Web exhibits many characteristics of an efficient market, it does not act like an efficient market with respect to narrow price dispersion (Good example of Retail video industry, Books etc.) due to the following:

Is the Net an Inefficient Market?

Is the Internet an efficient market? No, not now. But, it has all the features to move toward efficiency, and then e-marketers will lose control over pricing strategies.

Brand still a sought-after benefit in spite of web site proliferation. How goods are priced online. Use fixed, dynamically updated, auction price, with/w/o shipping etc confusing the shoppers. Delivery options. Same product delivered under differing conditions (time and place) may have different value. Time-sensitive shoppers may not wish to invest the time and energy required to track down the best price. Differentiation. Strong branding also leads to perceived or real product differentiation, enabling pricing their products differently. Switching costs. Some customers are not willing to switch online retailer and incur those costs. Second-generation shopping agents. Guide the consumer through quantifying benefits and evaluating the value equation.

Overview
The Internet Changes Pricing Strategies Buyer and Seller Perspectives Buyer View Seller View Pricing Strategies Fixed Pricing Dynamic Pricing Bartering

Pricing Strategies
Price setting is full of contradictions. If the price is too low profits will suffer, yet if it is too high sales may decline. Another contradiction is that information technology complicates pricing in some ways while making it easier in other ways. Sellers can easily change prices at a moment's notice or vary them according to each individual buyer's previous behavior. In general, marketers can employ all traditional pricing strategies to the online environment. We focus on three types of pricing strategies particularly important to online sellers: Fixed pricing, Dynamic pricing, and Barter.

Overview
The Internet Changes Pricing Strategies Buyer and Seller Perspectives Buyer View Seller View Pricing Strategies Fixed Pricing Dynamic Pricing Bartering

Fixed Pricing
Also called menu pricing occurs when sellers set the price and buyers must take it or leave it. Two common online fixed pricing strategies are price leadership and promotional pricing.

A price leader is the lowest-priced product entry in a particular category. To implement this strategy, shave costs to a minimum thro Internet marketing cost efficiencies described earlier. On the Net, Buy.com is a price leader in many different categories, selling many items below market value and recouping losses through advertising revenue from the Web site. Promotional pricing online are used to encourage a first purchase, repeat business, and close a sale. Most promotions carry an expiration date that helps create a sense of urgency. Promotional pricing on the Internet can be highly targeted through e-mail messages.

Overview
The Internet Changes Pricing Strategies Buyer and Seller Perspectives Buyer View Seller View Pricing Strategies Fixed Pricing Dynamic Pricing Bartering

Dynamic Pricing
Dynamic pricing is offering different prices to different customers. It is used to optimize inventory management and segment customers.
Airlines, Hotels, Personal transport industry have long used dynamic pricing to price travel and stay.

Can be initiated by the seller or the buyer. Two types of dynamic pricing include:
Segmented pricing - Co sells a good or service at two or more prices, based on segment differentiation rather than cost alone Mthly pass. Negotiation - Co negotiates prices with individual customers, who comprise segments of one.

Segmented Pricing
Uses Internet properties for mass customization, automatically devising pricing based on order size and timing, demand and supply levels, and other preset decision factors. Segmented pricing can be effective when: The market is segmentable. Pricing reflects value perceptions of the segment. Segments exhibit different demand behavior.

Segmented Pricing, cont.

Two variables that are particularly important to online pricing strategies are geographic segmentation and value segmentation. Geographic segment pricing
Pricing differs by geographic area. May vary by country. May reflect higher costs of transportation, tariffs, margins, etc.

Value segment pricing

Recognition that not all customers provide equal value to the firm. Pareto principle: 80% of a firms business comes from the top 20% of customers.

Customer Value Segments

High

A+ A B
Customer value to the seller

C
Customers Grouped by Value

Low

Negotiated Pricing
Through negotiation, the price is set more than once in a back-and-forth discussion. Online auctions utilize negotiated pricing. Consumers enjoy the sport and community. B2B auctions are an effective way to unload surplus inventory.

Overview
The Internet Changes Pricing Strategies Buyer and Seller Perspectives Buyer View Seller View Pricing Strategies Fixed Pricing Dynamic Pricing Bartering

Bartering
Goods or services are exchanged for other products rather than cash. Users of bartering may enjoy tax benefits. Bartering is not a profitable pricing strategy. Exchanging or auctioning used items online can hurt sales of new products.