elc 310 day 13. agenda questions? marketing plans due october 26

ELC 310

Day 13

Agenda Questions? Marketing Plans due October 26

<<<<CHANGED Due in 7 DAYS!!!! 20% of final grade

Exam 2 will be on OCT 22 Chap 6 – 11 <<<<CHANGED Same Format as before, 15 M/C, 4 Essays Exam will be available on WebCT from 7AM to 7PM

on Friday Password will be e-mailed to you in WebCT

Finish Discussion on Product, Price and Distribution (chap 10)

Overview

Many Products Capitalize on Internet PropertiesCreating Customer Value Online Online Benefits

Attributes Branding Support Services Labeling

E-Marketing Enhanced Product Development Customer Codesign Electronic Input Web Content Development Internet Properties Spur Other Opportunities New-Product Strategies for E-

Marketing

A Taxonomy for Internet Products

New-Product Trends Value Chain Automation Promotion Product Configuration Brokerages Customer Service Distribution Relationship Marketing Outsourcing Information Sharing Centralizing Information

Access Multimedia Assistive Technologies

Three Types of Convergence

Promotion Companies can buy enabling products to help manage four key

promotional activities on the Net:

1. Affiliate Programs: Sites pay their affiliates referral fees to help to drive traffic to

the affiliate sponsor, Low-cost way to acquire customers, Keeping track of the click-throughs and properly crediting the

affiliates is a complex programming task.

Amazon: The logo is splashed over the Web sites of some 600,000

Amazon affiliates , Each click through on the logo + merchandise purchase

generates revenue for the associate. Even if Amazon were to lose money on the sale by paying the

referral fee, it could make it up on repeat business by some of the referred customers.

Promotion

2. Targeted Advertising: Marketers go to great lengths to target ads to appropriate

demographic and psychographic segments. User surfing patterns form an excellent basis by which to

target ads. DoubleClick sells services to target ads based on users’

surfing habits + can follow the user from site to site around the Internet and target ads accordingly.

3. Personalized Promotions: Many sites create custom Web pages for each user, targeting

specific promotions for each user’s individual preferences. Dynamically creating Web pages = a complex programming

task. Firms such as Vignette automate dynamic creation of Web

pages.

Promotion

4. Sales: In the B2B market, enabling software are used to maintain

relationships with its corporate clients. Vignette gives customers instant access to pricing information,

product availability, and order lead-time. Catalog aggregator:

The online manufacturer’s rep takes information from multiple vendor databases and distills it into a single database available for search by the end user.

Enabling companies help automate the aggregation

process.

Product Configuration

Proper component configuration = difficult tasks in high-tech products sale:

Well-trained sales force can properly configure products for end user,

BUT, many end users prefer to configure their own products online:

For convenience, To speed delivery of the product, Self-service = product benefit.

Automatic configuration requires a software program = expert system.

Enabling software guide users through the process of product configuration based on their needs.

Clients = communications, healthcare, and high-tech manufacturing industries, where configurations for equipment and services are often complex.

Brokerages Web auction sites:

Are all the rage in the B2B, B2C, and C2C markets. Difficult to write + long to test and debug the software. Key characteristic = reliability. Airline, food, gas, and water industries use reverse auction

software to drive down prices for products purchased from their suppliers.

Payment/Financing: Barriers to trading in the B2B market = processing credit for

purchases. Enabling software = automates providing, verifying, and

processing credit. Key characteristic = reliability. Software support B2B payments + financing + customer credit

approvals. Paypal, Bidpay (Western Union)

Customer Service Generally, businesses don’t respond very promptly to e-mail inquiries

and complaints. Ideally: messages should receive a personal response with 48 hours. BUT employee costs for e-mail customer service can be prohibitive, + businesses prefer to develop a consistent response to similar problems.

Enabling softwares help route + respond to e-mail customer inquiries: Immediately acknowledges e-mail + promises a response within a

fixed time frame, Can route the message ( scan for keywords) to the appropriate

customer service representative, Can call up previously messages + account information to help

form a context for the inquiry, Can compose a personalized response using artificial intelligence! Customer service representatives accept the generated response

or compose an entirely new response. Companies can double the productivity of their e-mail response teams.

Distribution

Goal = just-in-time (JIT) delivery of products to avoid carrying excessive amounts of inventory.

Main difficulty = coordination. Solution = enabling software that supports value

chain management.

Sun Microsystems: Does not make any of the components that go into its

computers, Coordinates all interactions in its value chain, = the activities of its suppliers and its suppliers’ suppliers to

ensure continued viability of the entire value chain.

Relationship Marketing

Datamining customer information reveal important marketing opportunities.

Enabling software automates the task of profiling customers: Identify customers characteristics, Target e-mail promotions, Provide real-time profiling of consumer behavior

dynamic site configuration in response to that behavior.

Outsourcing

Application service providers (ASPs) perform off-site value chain functions for their client businesses.

Example =outsource payroll: manager logs onto the ASP’s Web site + enters the hour totals for each employee + hits submit, and a courier delivers the checks the next day!

Distinction between application service providers and the enablers = location + support

Enablers: business license software + install, configure, and maintain the software on-site,

ASP: the software resides at the ASP’s site + the business accesses the application remotely via a Web browser.

Outsourcing

Advantages of the ASP: Lower startup costs, Lower or no information technology staff costs, Lower switching costs, Particularly attractive for small businesses.

Disadvantages of the ASP: Lack of control over key customer data and business processes.

ASPs: Some can run an entire business = aggregate almost all of the

value chain functions for the client businesses. Other ASPs focus on a single value chain function such as payroll

or customer service.

Information Sharing Today businesses are sharing information with their value chain

partners. Electronic data interchange (EDI) = generic term for the exchange

of data between businesses in digital form.

Benefits: Consistent standards = data do not need to be rekeyed by the

receiving business, Exchange is easier if the businesses agree on a common format

for exchanging data, BUT, this is complicated because most businesses store data in

proprietary formats.

2 solutions: Open buying on the Internet (OBI) = each business translate its

data to a common format for exchange, XML, allows each business to keep its own format while sending

the instructions for translation to the receiving business.

Information Sharing Extensible Markup Language (XML):

Extensible = the language can be extended by the user to accommodate new types of data.

It has strong support = it is built into Internet Explorer, Netscape Navigator, the MS-Office suite, etc. (Mircosoft .NET )

A number of industry standards groups base their content definitions on XML.

To better understand XML: Consider that a cook who is baking a cake needs both an

ingredient list and a recipe to be successful, The ingredient list corresponds to a company’s data, The recipe corresponds to XML formatting instructions, The company receiving the information must have both in

order to decode the communication.

Centralizing Information Access Corporate portals:

Use Web-based technology to create sites specifically for a particular company’s employees.

Are an extension of an earlier concept, the intranet (site for internal consumption for corporate information such as news, policies, and procedures).

A wide variety of corporate information stores—such as sales data, groupware documents, and calendars.

Translate data from all of the information stores into a common interface for presentation to the employee.

Have the potential to save businesses millions of dollars by reducing the time that their employees spend searching for information.

Example: My.yahoo where users can customize the screen display to include categories of information that they find useful.

Centralizing Information Access Extranets = corporate portals that value chain partners are

allowed to access. For example, Sun Microsystems: Sun’s suppliers have nearly

complete access to Sun’s production information and use that access to plan their own production schedules.

Groupware products such as Lotus Domino/Notes: Used to coordinate and share information among work teams. Support threaded discussion groups. Each thread represents a

separate topic. Users add to the thread by responding to one of the topics. In this way the entire dialogue and any posted documents are maintained.

Other applications= e-mail and calendaring.

Most corporate portals either integrate with existing groupware products or imitate their functionality.

Multimedia Real-time multimedia—sound and video—:

Currently of fairly low quality when viewed or heard on a computer over the Net.

Limiting factor = lack of sufficient bandwidth. The quality of transmission is directly proportional to the bandwidth of the communications channel.

Most users still connect to the Internet with modems operating at 56K or slower.

BUT: growing penetration of high-speed access via cable modems, DSL modems, and wireless technologies.

AND, Cisco systems + other networking companies are working on technologies for increased bandwidth at lower prices.

Multimedia technologies are available:

Conferencing software, Webcams, CD-quality audio, Streaming video, Internet telephony VoIP.

Multimedia Conferencing software:

Allows users to hold text, audio, or video conferences over the Internet. Users can simultaneously work on shared whiteboards using Microsoft

NetMeeting.

Webcam: Hardware device that transmits real-time video image over the Web. can be used for Internet conferencing or just be fixed on a target. 2 popular Webcam devices= Logitech QuickCamera & Intel’s PC

Camera.

Streaming audio: Delivery of live or stored audio on demand over the Internet. Users can start hearing the audio very shortly after clicking on the file

without waiting until the entire file is downloaded before playing it. Sites such as Yahoo! Broadcast use its products to rebroadcast radio,

TV, and music over the Internet.

Multimedia MP3:

Standard for CD-quality audio. Began almost as a renegade movement that has now become

mainstream. WinAmp = one of the first players to decode MP3 files.

But how does the user find the files online? Napster = first major service to allow users to share MP3 files

from their computers with the entire Net community. It maintained a database of MP3 availability but did not actually

provide the music. Legal battles with the recording industry finally forced Napster

into bankruptcy. Napster was still hoping to reemerge from bankruptcy thanks to

a partnership with Bertelsmann AG. BUT Napster may have trouble winning back market share from

the hundreds of MP3 search tools and services such as Morpheus.

Multimedia

Streaming video: Requires more bandwidth than streaming audio. More heavily constrained by the lack of bandwidth online. BUT observers see a bright future for live video and video

on demand. broadcast industry and the video rental business could be

threatened by its development. SonicBlue's ReplayTV, a competitor to Sony's TiVo, allows

users to record broadcast video and then share it over broadband Internet connections with other SonicBlue users.

Internet telephony: Transmits phone calls relies on the Web eliminating long-

distance charges.

Multimedia

Voice over Internet Protocol (VoIP): Major constraint = bandwidth. Voice quality is quite good, but it is not reliable. Requires less bandwidth than streaming video, Internet

telephony is an attractive business proposition. Net2Phone offers products that can complete long-

distance calls off the Net. Represents a threat to long-distance phone companies

(for international calls).

Assistive Technologies Designed to help people with disabilities operate their

computers.

Potential customers = Millions of people are for these products—not just disabled people.

Assistive technologies do allow persons with certain disabilities to productively enter the workforce:

Voice-activated computers: Computer can be completely controlled by voice commands. In call centers, the caller interacts with the computer by

speaking commands. http://shop.voicerecognition.com/

Large-type screen displays. Help people with poor vision see and navigate on their computer screens.

Assistive Technologies Type-to-speech or Braille:

Allows blind people to interact with a computer. Reads Internet pages aloud. Technologies are also being built into automobiles such as GM’s

OnStar system = drivers can listen to e-mail messages and stock quotes while driving.

Important implications for Web page design = designers avoid graphics since the technology can only read text.

Speech-to-text telephony. The telecommunications device for the deaf (TDD) converts speech to text, allowing deaf people to hold telephone conversations or conference online.

Eye gaze-to-type: People who are completely paralyzed can control a computer using

eye gaze-to-type technologies. The user controls her computer by staring at control buttons on the

screen.

http://www.aapd-dc.org/

Overview

Many Products Capitalize on Internet PropertiesCreating Customer Value Online Online Benefits

Attributes Branding Support Services Labeling

E-Marketing Enhanced Product Development Customer Codesign Electronic Input Web Content Development Internet Properties Spur Other Opportunities New-Product Strategies for E-

Marketing

A Taxonomy for Internet Products

New-Product Trends Value Chain Automation Promotion Product Configuration Brokerages Customer Service Distribution Relationship Marketing Outsourcing Information Sharing Centralizing Information

Access Multimedia Assistive Technologies Three Types of

Convergence

Three Types of Convergence

The marketing opportunities in media convergence are tremendous.

3 types of convergence are attracting attention today:

1. voice, video, and data on corporate networks,

2. wireless devices and the Web, 3. the Web with broadcast media.

Voice, Video, and Data on Corporate Networks

Will allow corporations to have: 1 single switch for voice, video, and data

communications rather than 3 separate systems.

Cisco is leading the charge in this market: Supporting both the infrastructure and end user

appliances such as IP telephones.

Wireless Devices and the Web Wireless devices:

Cell phones and personal digital assistants (PDAs), With Web access + sometimes a global positioning function (GPS), Race to see whether cell phones or PDAs will become the preferred

platform for wireless Internet access, Many people think these devices are likely to merge = a single

device would serve as a combination cell phone, PDA, and Web browser.

Limitations:The screen size of PDAs & cell phones: Tiny cell phone screen can be used to check e-mail and retrieve

weather, news, and stock quotes. BUT Web content is designed for color on much larger displays. Web sites are starting to create content for the Wireless Access

Protocol (WAP) so that it displays correctly on these tiny screens. Interesting application running on a PDA is Auctioneer, used to

track eBay auctions.

Wireless Devices and the WebBandwidth: Wireless networks are much slower than land line networks. BUT the market is growing rapidly. One technology to watch = WiFi networks built on the Ethernet

802.11b standard + 3G wireless cell phone networks.

Outside of the US, the current & potential market for wireless Web access is greater (a higher penetration rate for mobile phone communications).

Why? Telephone companies in other countries usually charge by the minute for local

calls. Many users conclude that if they are going to be charged by the minute anyway, they might as well have the additional benefit of wireless access.

Consumers in many countries have to wait years for a telephone line to be installed—at a high price.

In Japan, DoCoMo’s i-mode service has attracted millions of users who check weather forecasts, sports scores, maps, stock trading, banking, etc.

Wireless Devices and the Web Wireless mobility of the future will have 6 components :

1. Content provider. The firm creating wireless versions of current Web content. This might include sites such as travelocity.com and B2B services such as sales force automation.

2. Portal software. These firms—such as Yahoo!, AOL, and Microsoft—will provide a higher level of personalization, maintaining user preferences for a wide variety of content.

3. Data aggregation agent. Companies such as Yodlee, Acxiom, and Microsoft keep track of a user’s login and password information for quick mobile access to banks, stock brokerage accounts, and so forth—a boon to business travelers.

4. Infrastructure. These firms provide wireless Internet access, parallel to non-mobile ISPs.

5. Transaction providers. American Express, Visa, and others will serve online retailers by processing payments.

6. Mobile devices. Cell phones + PDAs, or some convergence of the two platforms, allowing the user to send and receive data.

Broadcast Media and the Internet

iTV (interactive TV): Convergence is between broadcast media (television and radio) and

the Internet. Result = single appliance to receive broadcast content over the

Internet. Major obstacle = lack of bandwidth to support full-motion video. Cable modems, DSL modems, and fixed wireless access to the

home may provide more bandwidth.

MSN TV: Users simply browse the Web on a TV screen. Not very successful because of the low resolution of TV screens +

consumers are not used to reading on a TV screen.

ABC’s Enhanced TV: Users need to log onto ABC’s Web site while they are watching TV. Users can get more information about the current broadcast, play

games with other users, and participate in polls and chats.

Broadcast Media and the Internet

When the bandwidth does become available, it is unlikely that the Web will be used only to serve TV and audio on demand.

A taste of the future = BrilliantDigital produces multipath movies in which viewers take a more active role.

Future products depend on the telecommunications industry: Since mid 2000: The industry started to collapse. $2 trillion lost in valuation + numerous high profile bankruptcies. Markets were flooded with products and services driving prices

down below profitable levels.

The products that survive in the long-term will be those that best deliver customer value.

Infrastructure * Verizon * Sprint

Transaction Provider * AmEx * Visa

Content Provider Portal Software Data Aggegration Agent

Mobile Device * Palm * Nokia * HP

Six Components of Mobile CommunicationsSource: Information from Peppers and Rogers Group (2001)

E-Marketing, 3rd edition Judy Strauss, Adel I. El-Ansary, and Raymond Frost

Chapter 11: Price

© Prentice Hall 2003

Overview

The 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 amount of money charged for a product or service, The sum of all the values (such as money, time, energy, and psychic

cost) that buyers exchange for the benefits of having or using a good or service,

Set by negotiation between buyers and sellers.

Fixed price policies: One price for all buyers, A relatively modern idea = end of the nineteenth century, Arose with the development of large-scale retailing and mass

production.

Now, one hundred years later: The Internet is taking us back to an era of dynamic pricing:

= Varying prices for individual customers

The Internet Changes Pricing Strategies

In the past, the Internet was used for: Marketing communication benefits, Distribution channel benefits.

BUT it has a huge potential to change pricing strategy.

The Internet properties allow for price transparency = the idea that both buyers and sellers can view all competitive prices for items sold online.

This feature would tend to commoditize products sold online, making the Internet an efficient market.

Overview




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 there is no sale.

Buyer View For the buyers: values = benefits – costs

The Real Costs

Today’s buyer must be quite sophisticated to understand even the simple dollar cost of a product.

The seller’s price may or may not include shipping, tax, and other seemingly hidden elements (costs revealed online at the last screen of a shopping experience).

Promotion of a new pricing scheme for a long distance telephone company:

Complex deals, Some carriers advertise “$0.07 a minute, period.”

1.$23.90 per month standard plan providing access to AOL and the Internet, without hourly fees.*

2.$19.95 per month ($239.40 1 year prepaid subscription) providing access to AOL and the Internet, without hourly fees, for members who pay in advance for 1 year.*

3.$14.95 per month "bring-your-own-access " plan providing unlimited access to thousands of unique AOL features*, including access to the Internet, for individuals who already have an Internet connection or access through the work or school environment.

4.$4.95 per month light usage plan providing 3 hours of AOL, including the Internet, with additional time priced at just $2.50 per hour*.

5.$9.95 per month limited usage plan providing 5 hours of AOL, including the Internet, with additional time priced at just $2.95 per hour*.

* Pricing plans do not include premium services, which carry additional charges.

AOL ISP Fee Schedule in July 2002 Source: See www.aol.com

These are fairly clear yet complex, and the burden is on the consumer to understand his or her needs and translate those into the best price.

The Real Costs

How about the time, energy, and psychic costs that add to a buyer’s monetary costs?

Sometimes: The Net is slow, Information is hard to find, Other technological problems,

Users can spend more time and energy & become frustrated (psychic cost).

The Real Costs Shopping agents will find the lowest prices online, but

the search adds to the time cost. A search for the lowest airfare at Orbitz.com or

Travelocity.com can be minimal compared to the dollar savings,

BUT the same may not be true for a book price search.

It depends on: The time it takes to search & the savings as a percentage of the

item cost, How much familiarity and experience the buyer has with the search

engine.

As bandwidth increases, technology evolves, and firms develop better online strategies, some of these costs will decline.

Buyer Control The change in power from seller to buyer affects pricing.

Reverse auction: Buyers set prices for new products and sellers decide whether or

not to accept these prices. Example = Priceline.com.

In the B2B market: buyers bid for excess inventory at exchanges + for products at firms such as Caterpillar.

In the B2G market : Government buyers put out a request for proposal for materials &

labor needed, Businesses bid for the work, The government buyer selects the lowest price = having control

over the exchange.

Buyer Control

Buyer power online is based largely on the huge quantity of information & product availability on the Web.

Online buyers are becoming more sophisticated.

Sellers are more willing to negotiate = giving power to buyers in the exchange.

Sellers realize that information technology can help them better manage inventories & automate frequent price changes.

Buyer View Buyers often enjoy many online cost savings:

The Net is convenient: It is open 24/7 = users can research, shop, consume

entertainment anytime. E-mail allows asynchronous communication among users at any

location and prevents “telephone tag” with sellers.

The Net is fast: Users can order a product and receive it the following day.

Self-service saves time: Customers can track shipments, pay bills, trade securities, check

account balances, and handle many other activities without waiting for sales reps.

Users can request product information at Web sites and receive it immediately.

Buyer View One-stop shopping saves time:

Increase customer convenience, AutoMall Online = partner with a number of firms to provide

automobile price comparisons, research about various models and manufacturers, financing and insurance information, and service options.

Integration saves time: Web portals ( Yahoo! and AOL) = allow users to quickly find many

things they want online. Some sites allow users to create individualized Web pages with

news, stock quotes, weather, and other customized information.

Automation saves energy: Customers value simplicity and ease BUT the Net makes some

activities more complex, technology can help. Customer computers can keep track of passwords for Web sites and

to track previous purchases at Web sites save time and energy.

Buyer View

Not everyone wants to save money in online transactions.

Customer needs and their view of the value proposition vary,

= Each individual weighs the desired and perceived benefits against all the costs.

Example of the value equation tradeoffs = online auctions:

Called “the winner’s curse,” = Some people actually pay a higher price for auctioned products than they would pay an online retailer,

In the B2B market: car dealers pay significantly more for used automobiles online than they do offline.

Buyer View

Some people prefer to order books from Amazon.com with overnight delivery, knowing that:

Amazon prices are often higher than other online booksellers, The book is in stock at a local bookstore, Overnight delivery costs quite a bit more.

So, why? The Amazon brand name is trustworthy, These customers have had excellent previous experiences with

Amazon, They are familiar with the site and can quickly find what they need, Those benefits and time/energy-saving features overcome the higher

expense.

Seller View Price = the amount of money they receive from buyers. Pricing floor = seller costs for producing the good or service,

Under, no profit is made, Above, marketers set a price to draw buyers from competing

offers, Price - Cost = Profit

Factors affecting pricing levels: Internal factors = the firm’s strengths and weaknesses from:

Its SWOT analysis, Its overall pricing objectives, Its marketing mix strategy, The costs involved in producing and marketing the product.

External factors = the market structure & the buyer’s perspective.

Internal Factors: Pricing Objectives

1. Profit-oriented objective (most common strategy) :1. Focuses on current profit maximization rather than long-term

performance,2. First estimate what demand and costs will be at different prices,3. Then choose the price that will produce the maximum current profit,

cash flow, ROI.

2. Market-oriented objective: 1. Building a larger customer base = lower costs & higher long-run profit,

Low prices generally build market share. AOL broadband Internet connection services is low to increase market share.

2. Product-quality leadership = high price to cover higher performance quality and high cost of R&D.

3. Negotiation and bidding.

3. Competition-based pricing objective:1. Price according to what competitors charge for similar products, paying

less attention to the company's own costs or to demand. When one airline drops prices, its competitors usually follow suit. The Internet gives firms quicker access to competitive price changes.

Internal Factors: Marketing Mix Strategy

Successful companies use an integrated and consistent marketing mix strategy.

Volvo = upscale brand image: Sells high priced automobiles through dealerships, Marketing communication = a Web site + offline, More than 80% of its customers shop online, Highly educated men + live in urban areas = configure a new

Volvo on the Web site, price it, + talk to dealers via e-mail ( Dealers close 10-15% of these leads).

Volvo uses the Internet to generate sales leads, knowing that its customers are not likely to buy a high priced item directly from the Internet.

The Internet is one sales channel + must be used in concert with other marketing mix elements.

No proven rules or standard practices on how to price the same product for sale in both online and offline channels.

Internal Factors: Information Technology Affects Costs

The Internet Puts Upward Pressure on Prices:Reason of the dot-coms failure = expensive customer relationship management + other software that did not generate new revenue to cover the sites’ costs.

Factors that put upward pressure on Internet pricing:1. Distribution:

“The last mile” problem = each product must be shipped separately to its destination.

Retailers pass shipping costs on to their customers & reveal it at the conclusion of the order.

Some vendors inflate the shipping cost to recoup some of the discount offered.

2. Affiliate programs: Affiliate sponsors reward the referring Web sites 7- 15% commission

on each reference that leads to a sale. This commission inflates the price of the item or lowers company

profits.


3. Site development and maintenance: Web site development and maintenance is not cheap. Development of a “conservative” site = $10,000 - $100,000,

an “aggressive” site = $1 million or more. Maintenance = expensive, with hardware, software, and

monthly Internet connection costs.

4. Customer acquisition costs (CAC). The cost of acquiring new customers online is quite high, The average CAC for online retailers is $82. How many orders must a firm receive to recoup that cost, and

at what price? BUT customers are not nearly as brand loyal online as offline.


The Internet Puts Downward Pressure on Prices:

1. Order processing—self-service: Customers fill out their own order forms = no order entry

personnel & paper processing. Average retail banking transaction costs $0.15 - $0.20 online

versus $1.50 offline. 2. Just-in-time inventory:

Electronic data interchange (EDI) drives down costs by coordinating value-chain activities & allows for just-in-time (JIT) delivery of parts and reduced inventories.

Some online retailers and offline retailers do not even hold inventory but buy in response to customer orders.

3. Overhead: Online storefronts lower overhead costs = no rent for retail

space & staff . Warehouses can be located in areas with low rents, low wages,

low taxes, and quick access to shipping hubs.


4. Customer service: $15 - $20 in an offline call center versus $3 - $5 when

customers help themselves on the Internet.

5. Printing and mailing: No mail distribution & printing costs for their product catalogs. Once the catalog is placed online, access carries little or no

incremental costs. The same holds true for e-mail promotions.

6. Digital product distribution costs: Distribution costs for digital products are extremely low in the

Internet channel.

External Factors Affecting Online Pricing: Market Structure

Economists recognize 4 types of markets:

Pure competition: Many buyers and sellers trading in a uniform commodity ( corn ). Product differentiation, and marketing communication play little or no

role.

Monopolistic competition: Many buyers and sellers trade over a range of prices. Sellers can differentiate their offers to buyers.

Oligopolistic competition: A few sellers sensitive to each other’s pricing and marketing strategies. If a company drops its price, buyers will quickly switch to this supplier.

Pure monopoly: This market consists of one seller whose prices are usually regulated by

the government.

Pure monopoly

Oligopolistic competition

Monopolistic competition

Pure competition

Government control

Market control

Area of control for e-marketing pricing strategy

Efficient market

Efficient Markets Mean Loss of Pricing Control

The market structure distinction is extremely important for online sellers because if price transparency eventually results in a completely efficient market, sellers will have no control over online prices—the result will be pure competition. One example of a nearly-efficient market is the stock market.

External Factors Affecting Online Pricing: Efficient Markets

Efficient markets: Experience perfect price competition. Customers have equal access to information about

products, prices, and distribution. Lower prices, high price elasticity, frequent price

changes, smaller price changes, and narrow price dispersion.

Commodity markets came close to being efficient until the government intervened with controls.

The Internet is close to an efficient markets but the behavior of consumers on the Internet does not bear out all of the economists’ predictions.

External Factors Affecting Online Pricing: Efficient Markets

Is The Net an Efficient Market?

The Net present all symptoms of efficient markets, Access to information through corporate Web sites, shopping

agents, and distribution channels. Products sold exhibit lower prices, high price elasticity, frequent

price changes, and smaller price changes.

BUT do these factors actually make the Net an efficient market? Lower costs can result in lower prices for consumers, Technology enables buyers to evaluate and demand appealing

prices. Research shows that online prices for books and CDs are indeed

lower by 9% to 16%. Does that mean that all prices online are lower? No but many

factors place a downward pressure on Internet prices, contributing to efficiency.

Efficient Markets Shopping agents (www.pricescan.com):

Facilitate consumer searches for low prices by displaying the results in a comparative format.

High price elasticity: Price elasticity refers to the variability of purchase behavior with

changes in price. Leisure travel is very elastic: When the airlines engage in fare wars,

consumers snap up ticket inventories creating huge demand. For books and CDs, the online market is more elastic than the

offline market.

Reverse auctions: Allow buyers to name their price and have sellers try to match that

price. This pits sellers against one another and usually drives prices down.

Efficient Markets

Tax-free zones: Most online retailing takes place across state lines,

Buyers pay no sales taxes on purchases, Reduce total out-of-pocket expenditures by 5-8% per transaction.

Venture capital: Venture capital/angel investors finance many Internet

companies, They take a long-term view & are willing to sustain short-term

losses (<5 years) = time to establish brand equity + grab market share,

No profit-maximization pricing objective = can offer lower price,

BUT changes are coming ( the dot-com crash +the 5-year time frames are over for many early Net firms).

Shopping Agent Site Millions of Visitors

Dealtime.com 7.4

Bizrate.com comparison shopping 5.7

Mysimon.com 2.7

Pricegrabber.com* 2.2

All other search sites combined 0.2

Users of One or More Comparison Shopping Sites 18.2

Monthly Users of the Internet 119.5

* Represents an aggregation of commonly owned/branded domain names.

Retail Shopping Comparison in July 2002 Source: Data from com Score Media Metrics

MySimon Shopping Agent Search Results Source: www.mysimon.com

Example of a VCR search at mySimon.com. Since the results are listed in order with the lowest price first, outlets that are not price competitive risk being left off of the first screen and might as well be invisible.

Efficient Markets Competition:

Fierce and very visible.

Frequent price changes (than the offline market) : Online suppliers want to attract price-sensitive

consumers, Vendors alter their pricing to place higher on the

results provided by shopping agents, A computerized environment firms can offer volume

discounts in smaller increments, Experimentation is easy online, firms see how

demand changes + adjust & change prices as competition and other factors emerge.

Efficient Markets Lower costs:

Result in either higher profits or lower prices.

Smaller price change increments: Smallest offline price change = $0.35 / online =

$0.01, Price-sensitive consumers may respond to even a

small price advantage, Shopping agents rank their results by price (even

small advantage earn a higher ranking), It is difficult to change prices offline = retailers

wait until the need for a price change is even greater.

Is The Net an Inefficient Market? The Web does not act like an efficient market with respect to narrow

price dispersion: Prices tend to equalize in commodities markets, Online retailer branding and other benefits justify price differences in the

minds of customers.

Greater spread was found between high/low prices online versus high/low prices offline for the same items:33% for books and 25% for CDs,

The online channel is still not completely mature = many buyers do not know about or use shopping agents.

Related to the way goods are priced online as well as delivery options, time-sensitive shoppers, branding, differentiation, switching costs, and second-generation shopping agents.

How goods are priced online: Offline = fixed prices, Online = goods are available for a fixed, a dynamically updated, or an

auction price, PLUS, shipping & special services make it difficult to compare products.

Is The Net an Inefficient Market? Delivery options:

The same product delivered under differing conditions (time and place) have different value to the consumer.

A product delivered to the door may have considerably more value for some consumers than one that is bought at the store = Online grocery shopping.

Time-sensitive shoppers: Time-sensitive shoppers may not wish to invest the time and energy

required to track down the best price (complexity of the sites).

Branding: The top Web sites get most of the traffic, Consumers show a preference for brand when using shopping

agents even if that brand does not offer the lowest price, The best-branded Web sites spend millions of dollars to attract

customers: Amazon spends 24% of revenues on promotion, but it can charge 7-12% more than bargain online retailers.

Is The Net an Inefficient Market?

Differentiation: Strong branding = perceived/real product

differentiation + different pricing strategy.

Switching costs: Customers face switching costs when they

choose a different online retailer. Some customers are not willing to incur those

costs and stick with a familiar online retailer. Why? The customer loses access to a familiar

interface. In the B2B market: it is more effective to build

relationships with a limited number of suppliers rather than offer all items out for bid.

Is The Net an Inefficient Market?

Second-generation shopping agents: Guide the consumer through the process of

quantifying benefits + evaluating the value equation.

For benefits ranked high, customers may be willing to pay more.

BizRate allows consumers to evaluate merchants based on ratings compiled from previous customers.

Is the Internet an efficient market? Not yet, BUT it has all the features to move toward efficiency in the future.

Overview




Pricing Strategies Price setting is full of contradictions:

Short term: If the price is too low profits will suffer/ if it is too high sales decline.

In the long run: an initial low price that builds market share can create economies of scale to lower costs + increase profits

Information technology has complicated pricing: Sellers can easily change prices according to each buyer’s previous

behavior. BUT it is a steep learning curve. Pricing objectives produce very different results = a low price will

build market share at the expense of maximizing profit. Buyer value perceptions vary between rational and emotional, and

not everyone reacts the same way. Firms using multichannel delivery systems must consider the varying

costs of each channel and buyers’ differing value perceptions about purchasing on the Internet versus the brick and mortar store.

Pricing is a tricky business, guided by data, experience, and experimentation.

Fixed Pricing Fixed pricing (also called menu pricing):

Sellers set the price and buyers take it or leave it = same price for everyone.

This is the model most brick-and-mortar retailers use.

Two common fixed pricing strategies used online:

1. Price leadership:

A price leader = lowest-priced product entry + set the pace for other retailers.

To implement this strategy, costs must be minimum. Largest producer = price leader because of economies of scale. The second-lowest-priced item also gain sales, especially if it

offers advantages over the price leader.

Fixed Pricing Two common fixed pricing strategies used online (Con’T) :

2. Promotional pricing:

Used to encourage a first purchase, encourage repeat business, and close a sale.

Carry an expiration date to create a sense of urgency. Promotional pricing on the Internet can be highly

targeted through e-mail messages and research shows high customer satisfaction with Internet purchases.

Dynamic Pricing The strategy of offering different prices to different customers.

To optimize inventory management, To segment customers by product use or other variables. Airlines have long used dynamic pricing software to price air travel.

Web-based technology + database marketing make this pricing strategy much more practical for companies to apply to segments of any size.

Online music retailer CDNow offers lower prices on selected products to loyal customers,

These customers receive an e-mail message directing them to a special Web page to view and buy these featured products.

With the right technology, segments as small as one can be targeted with different prices

Prices can be changed daily or even hourly, Depending on changes in demand, supply, competition, costs, or other

factors.

Dynamic Pricing

XML and other technologies make dynamic Web page serving possible.

Allows database information to be consolidated in a recipe for a Web page.

Marketers can update product databases instantly and continuously as new product features are developed and as they decide on price adjustments.

Internet users receive up-to-date price information on demand from product databases (information change with the time and user).

Dynamic Pricing

Dynamic pricing can be initiated by the seller or the buyer.

2 types of dynamic pricing:

1. Segmented pricing = the company sells a good/service at two or more prices, based on segment differentiation rather than cost alone. Segmented pricing is usually set by the seller.

2. Negotiation = the company negotiates prices with individual customers. Segmented pricing involves a one-time price = may be different for different customers + may change many times before buyers and sellers agree. Negotiation is more often initiated by the buyer.

Segmented Pricing Uses the Internet properties for mass customization, automatically

devising pricing based on order size and timing, demand and supply levels, and other preset decision factors.

The firm uses decision rules to set pricing levels for segments of customers according to customer behavior.

Is easier online at the individual level because sophisticated software permits firms to set rules and make price changes.

Using cookie files, online sellers recognize individuals and experiment with offers and prices to motivate transactions: Presents customized recommendations to each customer.

Online firms can build loyalty programs, like frequent flyer programs, to offer special prices to individuals who return and purchase often.

Segmented Pricing

Effective when the market is segmentable, The different prices reflect real differences in each segment's

perceptions of the product's value + show different degrees of demand.

Appropriate when the costs of segmentation + segmented pricing do not exceed the extra revenue obtained from the price difference.

The firm’s segmented pricing must meet legal and regulatory guidelines.

The firm must take care not to upset customers who learn they are getting different prices than their neighbors.

E-marketers employing segmentation must use customer accepted reasons = discounts to new/loyal customers.

Geographic Segment Pricing

A company sets different prices when selling a product in different geographic areas.

Seller knows where the user resides because server logs register the user’s IP address + the top level domain name typically indicates country of residence.

Geographic pricing can help a company better relate its pricing to country-by-country or regional factors = competitive pressure, local costs, economic conditions, legal or regulatory guidelines, and distribution opportunities.

The manufacturer faces price escalation and must price to reflect the higher costs of transportation, tariffs, and importer margins, among other costs involved in selling in different locations.

Given the Internet’s worldwide reach, marketers also may display a special Web page to those coming in from markets it does not serve = This helps to build goodwill for the firm’s brand.

Value Segment Pricing The seller recognizes that not all customers provide equal value to

the firm.

Pareto Principle states that 80% of a firm’s business usually comes from the top 20% of customers.

A+ customers: A small group that contribute disproportionately to the firm’s

revenues and profits. The most loyal customers who may become brand advocates to

their friends and acquaintances = The frequent flyers. They are also brand-loyal frequent customers who provide

significant value to the seller. When A+ or A customers appear at the Web site, they will be

recognized and receive special attention. They may not be price sensitive = they perceive that the brand/firm

offers greater benefits + has earned their loyalty.

Value Segment Pricing B customers are price sensitive + use the product category

more than do C customers.

C customers: large group + may be price shoppers or infrequent users of the product category, not accounting for much of the seller’s revenue.

The seller’s goal is to keep A customers brand loyal and to move all groups up to a higher level of value.

Pricing strategies can help. Giving high-value customers the first shot at discounts will

reinforce their loyalty.

B and C customers: might enjoy e-mail blasts with fixed prices so they can be informed of the firm’s price +The seller can use this technique to build a database for moving customers up in value.

High Low

A+

A

B

C

Customers Grouped by Value

Customer value to the seller

Customer Value Segments From Low (C) to High (A+)Source: Adapted from (Pitt et al. 2001)

Negotiated Pricing Through negotiation the price is set more than once in a back

and forth discussion.

Haggling over price is common in many countries; but U.S. consumers have shied away from such bargaining.

The spectacular growth of online auctions is changing this.

Many consumers enjoy the sport and community of an auction while others are just looking for a good deal.

Auctions in the B2B market are a very effective way to unload surplus inventory at a price set by the market.

Bartering

Goods or services are exchanged for other products rather than cash.

Users may enjoy tax benefits, but otherwise this is not a particularly profitable pricing strategy.

Consumers exchanging/auctioning used items

online can hurt sales of new products.

elc 310 day 13. agenda questions? marketing plans due october 26

Documents

agenda questions

marketing plans