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Internet Marketing & e-Commerce Ward Hanson Kirthi Kalyanam Requests for permission to copy any part of the material should be addressed to: PERMISSIONS DEPARTMENT THOMSON BUSINESS and ECONOMICS 5109 Natorp Boulevard Mason, OH 45040 Phone: (800) 423-0563 © Copyright 2006, Thomson South-Western, a division of the Thomson Corporation 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 © Copyright 2006, Thomson South-Western, a division of the Thomson Corporation 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 © Copyright 2006, Thomson South-Western, a division of the Thomson Corporation 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? © Copyright 2006, Thomson South-Western, a division of the Thomson Corporation 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 © 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 © 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 © 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 © Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Power of Pricing Information about product alternatives influences price sensitivity SOURCE: PRNewsFoto/Nokia, PRNewsFoto/Handspring Inc, Market Wire Global Locate © 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 © 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 © Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Pricing and Purchase Importance Consumers who spend major portion of budget on pharmaceuticals are more likely to look for savings online © 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.” © 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 © 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 – Internet resolves problem of assembling enough bidders and enough information – Lessons from EBay © Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Time-based Pricing © 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 © 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 © Copyright 2006, Thomson South-Western, a division of the Thomson Corporation 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 © Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Personalized Pricing • Emerging approaches – Coupons and loyalty discounts – Price pegged to credit scores – Personal-level pricing contracts – Personalized bundling © Copyright 2006, Thomson South-Western, a division of the Thomson Corporation 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 © Copyright 2006, Thomson South-Western, a division of the Thomson Corporation 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 © Copyright 2006, Thomson South-Western, a division of the Thomson Corporation 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 © Copyright 2006, Thomson South-Western, a division of the Thomson Corporation 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 © Copyright 2006, Thomson South-Western, a division of the Thomson Corporation