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 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 Alternatives A Flow Chart Toward Online Auctions Evolving toward Online Auction Physical Auction Enabler Absentee Bidding Allowed Consignment Selling With 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 Price Available 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

20 Magazine 2 Magazine 1 Magazine Consumer Variations for Bundle The Bundle Demand Curve Bundling Works Well When the Bundle is Viewed More Similarly than Individual Items Figure 11.16