ch11 pricing in online world
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pricing in online worldTRANSCRIPT
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
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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