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Internet Marketing
Pricing in an Online
World
Topics
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The power of pricing
Price sensitivity and the Net
Real-time pricing
Bundling
The Power of Pricing
Drucker’s Pricing Sins
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
The Power of Pricing
The High Leverage of Proper Pricing
Proper
pricing must
reflect
changes
brought
about by the
Internet
Figure 11.1 Pricing is Tightly Linked to Profitability
Price Sensitivity & the Net
Price Sensitivity and Online Information
• 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 & the Net
The Unique Value Effect
• 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 handson trial use
• The Internet is effective at doing this
Price Sensitivity & the Net
The Substitute Awareness Effect
• 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
Price Sensitivity & the Net
Total Expenditure Effect
• 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
Price Sensitivity & the Net
Shared Cost Effect
• 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
Price Sensitivity & the Net
Price-Quality Effect
• 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 pricequality effect delays the need for this response
Price Sensitivity & the Net
Inventory Effect
• 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
Real-Time Pricing
Why Simple Pricing Approaches Fail
• 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
Real-Time Pricing Alternatives
• Auctions
• Rental Markets
• Yield Management
Real-Time Pricing Alternatives
Auctions as Real-Time Pricing
• 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
Real-Time Pricing Alternatives
Auctions as Real-Time Pricing
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
Real-Time Pricing Alternatives
A Flow Chart Toward Online Auctions
Figure 11.11
Evolving toward Online
Auction
Physical Auction
Enabler
Consignment Selling
With Online Purchase
Absentee Bidding
Allowed
Fully Online Auctions
English Auctions
•Most common
•Rising prices
Dutch Auctions
•Good for multiple items
•Especially perishable goods
Real-Time Pricing Alternatives
Online Rental Markets
• 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
Real-Time Pricing Alternatives
Yield Management
Yield management is the matching of
price and available capacity
Price
Available
Capacity
Real-Time Pricing Alternatives
Yield Management
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)
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