Download Ch-12

Internet Marketing & e-Commerce
Ward Hanson
Kirthi Kalyanam
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Part Two: Chapter 12
Pricing in an Online World
“It is only an auctioneer who can equally and impartially
admire all schools or art.”
Oscar Wilde, The Critic as Artist
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Power of Pricing
• The most active and dynamic of
marketing’s fundamental tools
• The most digital of marketing actions
• Pricing = information
• Informational aspect means that all
pricing actions are affected by the Net
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Power of Pricing
The close link of pricing to profitability
SOURCE: Marn and Rosiello, (1992), “Managing price, gaining profit,” The McKinsey Quarterly, No. 4, pp. 18-37.
© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation
Power of Pricing
• For Internet marketers, evaluating price
sensitivity online
– How does the presence of the Internet
change price sensitivity of products?
– How can online content influence price
sensitivity of customers?
– What new pricing tools work better online
than through traditional methods?
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Power of Pricing
• The Internet tends to increase price
sensitivity, but prices online are not
automatically lower or less dispersed
• Value uncertainty contributes in
predictable ways to price sensitivity
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Power of Pricing
• Reference price effect: Competitive
alternatives and how they are presented
online
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Power of Pricing
• Reference price effect: Competitive
alternatives and how they are presented
online
• Difficult comparison effect: Not every
consumer is motivated to comparison shop
or trusts alternate sites
© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation
Power of Pricing
• Reference price effect: Competitive
alternatives and how they are presented
online
• Difficult comparison effect: Not every
consumer is motivated to comparison shop
or trusts alternate sites
• Switching cost effect: Battle for customers
coming and going
© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation
Power of Pricing
• Reference price effect: Competitive
alternatives and how they are presented
online
• Difficult comparison effect: Not every
consumer is motivated to comparison shop
or trusts alternate sites
• Switching cost effect: Battle for customers
coming and going
• Price-quality effect: Advantage goes to wellestablished brands
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Power of Pricing
Information about product alternatives influences price sensitivity
SOURCE: PRNewsFoto/Nokia, PRNewsFoto/Handspring Inc, Market Wire Global Locate
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Pricing and Purchase Importance
• Total expenditure effect: Consumers
are most price sensitive to items that
consume largest part of their budget
© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation
Pricing and Purchase Importance
• Total expenditure effect: Consumers
are most price sensitive to items that
consume largest part of their budget
• End benefit effect: Supply chain inputs
are more sensitive for companies with
price-sensitive customers
© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation
Pricing and Purchase Importance
• Total expenditure effect: Consumers
are most price sensitive to items that
consume largest part of their budget
• End benefit effect: Supply chain inputs
are more sensitive for companies with
price-sensitive customers
• Shared cost effect: Different
approaches for cost deciders and cost
payers
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Pricing and Purchase Importance
Consumers who spend major portion of budget on
pharmaceuticals are more likely to look for savings online
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Time-based Pricing
• Borrowing a lesson from financial
markets: “The only valid price is the
one quoted right now.”
© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation
Time-based Pricing
• Borrowing a lesson from financial
markets: “The only valid price is the
one quoted right now.”
• Auctions, a primary time-based price
strategy, let marketplace determine
pricing
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Time-based Pricing
• Borrowing a lesson from financial
markets: “The only valid price is the
one quoted right now.”
• Auctions, a primary time-based price
strategy, let marketplace determine
pricing
– Internet resolves problem of assembling
enough bidders and enough information
– Lessons from EBay
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Time-based Pricing
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Time-based Pricing
• Yield management, used regularly in
travel industry, links price to availability
– Importance of fixed, perishable capacity
– Low incremental cost vs. average cost
– Cost-sensitive vs. most loyal customers
– Analyzing and predicting demand
uncertainty
© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation
Time-based Pricing
• Yield management, used regularly in
travel industry, links price to availability
– Importance of fixed, perishable capacity
– Low incremental cost vs. average cost
– Cost-sensitive vs. most loyal customers
– Analyzing and predicting demand
uncertainty
• Other approaches: rentals, trials and
sales
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Personalized Pricing
• Price differences based on willingness
to pay, servicing costs or other
individual-level distinctions
• Higher profits, but potential obstacles
– Could be illegal or unethical
– Difficult to identify high-value buyers
– Consumer resale risks
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Personalized Pricing
• Emerging approaches
– Coupons and loyalty discounts
– Price pegged to credit scores
– Personal-level pricing contracts
– Personalized bundling
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Bundle Pricing
• Bundling to reduce costs
– Production efficiency bundling promotes
combined products when production or
shipping has steep set-up costs
– Margin spread bundling combines items
with high contribution margins
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Bundle Pricing
• Bundling to expand markets
– Aggregation bundling stimulates volume,
offers higher priced individual items to
unusual customer segments
– Trade-up bundling encourages customers
to increase purchases in price-sensitive
markets
– Loyalty bundling used to cement loyalty,
discourage switching
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Bundle Pricing
• Bundling to improve performance
– Joint performance bundling recognizes
that certain components perform better
together than separately
– Product definition bundling helps
consumers understand full range of
product and service benefits
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Bundle Pricing
Most effective when bundle viewed more similarly than single items
SOURCE: Bakos and Brynjolfsson, (1998), “Bundling Information Goods: Pricing, Profits and Efficiency,” Working paper, MIT
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