1. Pricing Online Getting Prices Right on the Web

2. Pricing Strategy …critical marketing mix variable actually produces revenue shortest term marketing mix variable

3. Pricing Strategy Pricing Objectives survival profit maximization revenue maximization Hybrid model

4. Pricing Strategy Cost Based Pricing cost plus, markup pricing Demand Based Pricing skimming, penetration Competition Based Pricing customary pricing price-leader approach Premium approach

5. Theory: Reference Pricing and Price Anchors Every product has a price range, within which changes have little impact on consumer behavior. For example: Prices for well-known brand-name consumer health and beauty products can be raised as much as 17 % without a change in consumer reaction. NOT SENSITIVE/LOW ELASTICTY Range in which price variations acceptable for certain financial services is less than 1 %. SENSITIVE/HIGH ELASTICTY

6. Consumer Demand – Price Elasticity over time.Conduct periodic price “experiments” to gauge how price sensitivities are changing over time. –Offline? –Online?

7. Exercise Study carefully the pricing strategy of: –Amazon (limit to books) –Netflix Canada –Holt Renfrew –Rogers Wireless –Futureshop Then write the rationale for their pricing strategy in a single short paragraph.

8. Key Questions for Setting Price Do you sell a commoditized product/service or not? Price vs. quality differentiation? Do you have a strong store brand? Service leader? Penetrate or skim? Bundle strategy? Do you have a new or exclusive product?

9. Internet as Advantage?: Price testing can quickly reveal how pricing affects sales at virtually no cost. For example: A merchant could charge every 50th customer a higher or lower price and track the results over time. Merchants can also change prices instantly enabling sellers to benefit from short-term changes in customer demand and market supply. E-tailers may develop the data and technology to enable segmented pricing, which targets shoppers depending upon their buying history.

10. The Big Smackdown: Why is pricing such a challenge in online markets? –Product or category (price sensitivity??) –PLC –# of competitors When should a product/service be free? How do you define value if the product is free?

11. The Big Smackdown: Strategic Consideration: –What is “strategic” about frequent price changes online? –Is it good enough to be second lowest offer? –What are network effects? and indirect network effects? –What can be the economic outcome of strong and positive indirect network effects? What are the implications of such a strategic opportunity? Excursion on Network Product TheoryExcursion

12. Key Differences Online: Fluidity of the Market ease with which online consumers and rival retailers may access comparative information about seller characteristics and prices customers often search at the product level rather than by store or category –Implication? Consumers are more selective in online markets Frequent price changes feasible

13. Commodity Pricing: Study from 2000 Microsoft FrontPage 2000PriceCompared to buy.com CompSource$146.26+19.9% CDW$135.40+11.0% PCStop.com$131.56+7.9% MicroWarehouse$129.95+6.5% Page Computer$129.28+6.0% Dell$127.95+4.9% PC Zone$124.97+2.5% Amazon.com$121.99-- buy.com$121.95-- PC Mall$121.89-- PCWonders.com$118.89-2.5%

14. Still relevant: Brand recognition Firm reputation Store location (placement on the screen)

15. Baye and Gupta “online retail industry is an unpromising one for firms seeking competitive advantage” fluidWhat innovations in pricing strategy are required for a firm to be successful in fluid e-retail markets?

16. 5 Innovations price experimentationUse price experimentation to learn about your Customers’ Price Sensitivity/Price Elasticity stage of PLCQuickly adjust price based on stage of PLC (price sensitivities) number of competitorsQuickly adjust price based on number of competitors UnpredictableStay Unpredictable Temporary AdvantageUse Hit-and-Run Pricing to Gain a Temporary Advantage without Triggering a Price War

17. Conclusion on Pricing Product-specific pricing Dynamic/erratic pricing can be strategic Shortened PLC means higher price sensitivity = requires quicker modulation Free may have value – network effects in two-sided markets! Online pricing often the domain of lower management levels but when doing business online that may be a problem.

18. Conclusion Managerial Challenges: –Best e-businesses set up small functional marketing groups charged with the task of constantly monitoring opportunities to adjust prices based on market changes and customer behavior. –Group members should hold an entrepreneurial view of pricing. –Group should be empowered to set short- to medium-term pricing strategy and implement it.

19. Network Products in Networked Markets The last decade has witnessed a shift from a focus on the value created by a single product to an examination of the value created by networks of products (product ecosystems or NETWORKED PRODUCT). Network products emerge at the intersection of three types of networks: –User network –Complements network –Producer network Key Claims: Any or all of these networks add value or enhance the attractiveness of the associated focal product. any allConsumers allocate resources among competing products based on the perceived value added by any or all of these networks.

20. The Networked Product: Focal Product Producer network Other companies producing the same or similar product or service Complements network Services that permit consumption User network Other consumers

21. Linux as Networked Product: Ex.: Linux Operating System Producer network Other companies producing the same or similar product or service Complements network Application developers Maintenance and Repair Service Companies User network number of other companies that are using Linux (moderated by size, reputation, industry, etc. of these companies)

22. Remember: If you are dealing with a focal product that is a networked product –Consumers allocate resources not only based on the objective and perceived quality of the focal product but based on the perceived value added to the focal product by the networks it has. –Marketing of a networked product therefore is no longer limited to developing a marketing mix and a strategic position for the focal product. Rather, marketing needs to support network strength as well.

23. Examples? Focal Product Producer network Other companies producing the same or similar product or service User network Other consumers Complements network Services that permit consumption iPhone Toyota Prius

24. Your Task Analyze them as Networked Products. Suggest 3 marketing strategies based on your analysis.

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