E-MARKETING, 6TH EDITION

JUDY STRAUSS AND RAYMOND FROST

Chapter 10 - Price - The Online Value

What Is Price?
Product

Amount of money charged for a product or service

Price

Promotion

Place (Distribution)

The VideoEgg Story

The video and rich media advertising company was founded in 2004 by 3 Yale graduate students. VideoEgg delivers ads to social networking sites, video sites, and gaming applications. VideoEgg created AdFrames, which allow video viewers to roll over and watch ad-sponsored content. Online advertising is bought and sold on a CPM (cost per 1,000 impressions) or pay-per-click model (PPC). In contrast, VideoEgg charges advertisers based on user engagement (roll over action) with the ad. VideoEggs innovative pricing scheme is $0.75 per roll over, which it splits 60/40% with the site owner.

The Internet Changes Pricing Strategies

Price is the sum of all values that buyers exchange for the benefits of a good or service. Throughout history, prices were negotiated; 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 also allows for price transparency-both buyers and sellers can view prices online.

Buyer & Seller Perspectives: Buyer View

The meaning of price depends on the viewpoint of the buyer and the seller. Buyers costs may include money, time, energy, and psychic costs. But they often enjoy many online cost savings:
The Net is convenient and fast. Self-service saves time. One-stop shopping and integration save time. Automation saves energy.

Buyer Control

The shift in power from seller to buyer affects pricing strategies.

In the B2B market, buyers bid for excess inventory. In the B2G market, government buyers request proposals for materials and labor.

Buyers set prices and sellers decide whether to accept the prices in a reverse auction. Buyer power online is also based on the huge quantity of information and products available on the Web. Beware of the winners curse

Buyer & Seller Perspectives: Seller View

The sellers perspective includes internal and external factors. Internal factors include pricing objectives, marketing mix strategy, and information technology Pricing objectives may be: profit oriented; market oriented; competition oriented The Internet is only one sales channel and must be used in concert with other marketing mix elements. Information technology can place both upward and downward pressure on prices.

The Internet Puts Downward Pressure on Prices

Firms can save money by using internet technology for internal processes.
Self-service order processing. Just-in-time inventory. Overhead. Customer service. Printing and mailing. Digital product distribution.

The Internet Puts Upward Pressure on Prices

Online customer service is an expensive competitive necessity. Distribution and shipping costs. Affiliate programs add commission costs. Site development and maintenance. Customer acquisition costs (CAC).

The average CAC for early online retailing was $82.

External Factors Affect Online Pricing

Market structure and market efficiency affect pricing strategy. The sellers ability to set prices varies by market type:

Pure competition. Monopolistic competition. Oligopolistic competition. Pure monopoly.

If price transparency results in a completely efficient market, sellers will have no control over online prices.

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 price changes. Smaller price changes. Narrow price dispersion between highest and lowest price for a product.

Efficient Markets Mean Loss of Pricing Control

Gove rnme nt control

Pure monopoly Oligopolistic competition Monopolistic competition Pure competition Effic ient market Marke t control Are a of control for e -marketing pricing strategy

Is the Net an Efficient Market?

External market factors place downward pressure on prices and contribute to efficiency.
Shopping agents such as PriceScan. High price elasticity. Reverse auctions. Tax-free zones. Venture capital. Competition. Frequent price changes. Smaller price change increments.

Is the Net an Inefficient Market?

The internet does not act like an efficient market regarding narrow price dispersion.
In

two studies, greater price spread was found for online purchases than for offline purchases. Price dispersion may occur because many buyers do not know about or use shopping agents.

Is the Net an Inefficient Market?

Price dispersion may also relate to other issues:

Brand strength. Online pricing. Delivery options. Time-sensitive shoppers. Differentiation. Switching costs. Second-generation shopping agents.

The internet is not an efficient market.

Payment Options

Electronic money uses the internet and computers to exchange payments electronically. Other off-line e-money payment systems include:
Smart chips. Payment by cell phone.

PayPal has become the industry standard with over 84 million accounts worldwide.

PayPal Account Options (Exhibit 11.6)

Pricing Strategies

Price setting has become an art as much as a science. How marketers apply pricing strategy is as important as how much they charge. Marketers can employ all traditional pricing strategies to the online environment.

Fixed Pricing
Fixed pricing (menu pricing) is when everyone pays the same price. Two common fixed pricing strategies are:

Price

leadership. Promotional pricing.

Dynamic Pricing
Dynamic pricing is the strategy of offering different prices to different customers. Firms use dynamic pricing strategy to optimize inventory management and to segment customers. Airlines have long used dynamic pricing to price air travel. There are 2 types of dynamic pricing:

Segmented pricing. Negotiation.

Segmented Pricing

Pricing levels are set based on order size, timing, demand, supply, or other factors. Segmented pricing is becoming more common as firms collect more behavioral information. Segmented pricing can be effective when:
The market is segmentable. Pricing reflects value perceptions of the segment. Segments exhibit different demand behavior.

The firm must be careful not to upset customers.

Segmented Pricing, cont.

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

Negotiated Pricing and Auctions

Through negotiation, the price is set more than once in a back-and-forth discussion. Online auctions such as eBay utilize negotiated pricing.

In

the C2C market, consumers enjoy the sport and community while others are just looking for a good deal. B2B auctions are an effective way to unload surplus inventory.

Renting Software
Software companies sometimes decide to rent rather than sell software to customers. Renting software is analogous to leasing cars. Salesforce.com rents a leading CRM software system.

Prepare Radiohead: Music at Your Own Price case for tomorrow class.