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[Pricing Electronic Services] Lecture 1 [Judith Molka-Danielsen] [email protected] http://home.himolde.no/~molka/ Harstad/harstad.htm 5/23/2017 5/23/2017 Dell’s Front Page Online Orders 5/23/2017 Consumer Page 5/23/2017 Small Business Page 5/23/2017 Big Business Page 5/23/2017 Overview • • • • • 5/23/2017 Participants in the market Pricing Forces Model of consumers Model of products Pricing on the Web – effect of market forces on pricing – pricing models Participants Who participates in determining price? • Porter Forces (power of players) New Entrants Suppliers Industry competitors Intensity of Rivalry Substitutes 5/23/2017 Buyers Participants Suppliers Who participates in determining price? 5/23/2017 Supplier Oriented Electronic Marketplace • B2B: Dell, Intel, Cisco, IBM – 90% of their sales to business buyers. • They need different services for business buyers (repeat buyers, order large quantities). • End customer buyers or small businesses must search and compare suppliers and products, searching at e-stores or e-malls to find the best offer. • Buyer owned shopping carts with stored buyer preference and can be integrated with business buyers order system. • Computer reseller Ingram Micro (www.ingram.com) has proprietary auction sites for regular buyers to get surplus discounts. Example of Supplier-Oriented Market Place 5/23/2017 Participants Buyers Who participates in determining price? Buyers Oriented Electronic Marketplace • B2B: Boeing Inc. is a powerful buyer. They purchases thousands of items on the Internet. • These strong buyers prefer to open electronic markets on their own servers or to use electronic intermediary services. • They can invite potential suppliers to bid on announced RFQs (Request for Quotations). • Software agents can be used to participate in automatic bidding processes online. • As an intermediary, Boeing’s PART links airlines with 300 key suppliers of Boeing’s maintenance parts. • General Electric TPN Post has its own auction bidding site to other buyers so they can post their own RFQs. 5/23/2017 Example of Buyer Oriented Marketplace 5/23/2017 Example: GE’s use of an Electronic Intermediary Service. 5/23/2017 Example of Benefits for an Intermediary Electronic Marketplace Service 5/23/2017 Factors for determining/setting price: • Price directly effects the firms revenue. • Businesses try to maximize the firms surplus while consumers try to maximize their consumer surplus. • Businesses would like to set price (need power). • Consumers try to buy a product when prices are low. welfare loss p' S CS price PS p" D quantity demanded 5/23/2017 q q' supply restriction q q price restriction q" Other Factors for setting price: • Businesses (decision makers) can set prices with other goals than profit maximization in mind. They might try to gain larger market share cooperate with competitors focus on improving brand recognition over short term profits set low prices on new products to penetrate the market before competitors use discounts, rebates, and price bundling techniques 5/23/2017 Other Factors for setting price: • Customers (decision makers) can make purchase decisions with other goals than price in mind. Their decisions are based on: product and information availability the cost of searching for the product the power of the buyer (small customers have little power to set prices). 5/23/2017 Pricing Forces: • Customers have tools to help them reduce search costs, give customers more information and give them choice (power) to shop around. search engines (Yahoo!, Excite, Lycos) site services (opinions of experts and peers) chat rooms, bulletin boards intelligent agents (to compare products) • Businesses respond to increased customer power by innovation of products. This can lead to imitations, oversupply, and more customer choice, and also to the cycle of price competition speeding up. 5/23/2017 Model of Customers • Model 1. All customers are not equal. (80-20 Rule, 80% of your revenues comes from 20% of your customers.) Low value customers take longer to repay investments. • Example: Frequent Flyer programs. C group is less loyal, do not use service often, buy on price. B group still price sensitive. A group have high value to the firm, use service often, loyal customers (not shop around on price). A+ customers are highest value to firm and are given special treatment. High customer value 5% 15% 30% Low 5/23/2017 50% A+ A B C Model of Products • Axis: Exchange between participants. At one extreme it is voluntary (trading stocks on the exchange, fair and mutual benefits) and at the other it is forced (at least one party does not want the trade, theft). • A market is efficient if price is the only information needed to make the exchange. Maximum market efficiency (100%) is where the trading maximizes the gains of buyers and sellers (refer: 1st welfare chart). • Between extremes is the range of marketing effectiveness. 5/23/2017 Model of Products • Between extremes is the range of marketing effectiveness. Market forces theft by force theft by fraud seduction-initial resistance products and service commodities Corporate strategy 5/23/2017 trades on a stock exchange Range of marketing effectiveness Range of market effectiveness • Seduction can imply that consumers resist at first, but then may enjoy the product after marketers have enticed them to switch to it. • Products and services can be in large variety, with differentiated characteristics and quality. Products that are easily substituted are commodities. But these also can be differentiated by brand name, packaging, and attached services. • Marketing works best in the Range of marketing effectiveness. Parties are not equal in power. There can be information asymmetries. Marketers make promises to encourage the exchange. 5/23/2017 Combining the models • Goal of the business should be to move customers up the pyramid in Model 1 and to move products and services into the zone of seduction in Model 2 (where prices are high). • Competitive forces in the market (product competition and increased customer power) will tend to force the customer into lower value groups (they can switch) in Model 1, moves products and services to commodities (technology advances makes it simple and easy to reproduce products, prices go down as with cheap PCs). 5/23/2017 Web Market Forces: that help the customer • Technology enables customer search. Searching costs in time and money can be reduced. Tools are: search engine, directories, comparison sites, intelligent agents • Customers make prices. Usually customers take prices. On-line auctions allow customers to choose their price. Priceline.com allows customers to say the price they want to pay, and comes back if they can find an item that matches the customers bid. Then Priceline.com receives the difference in the customers bid and the item-price for the product or service that they found. 5/23/2017 Web Market Forces: that help the customer 5/23/2017 • Transaction costs are reduced. costs of conducting a transaction in the market. These costs can be included in the firms price of a product or service. Types – Search costs - finding buyers and sellers. Search engines help to reduce search costs. – Information costs - learning about products. Web catalogs, chat rooms, bboards, inform about products. – Bargaining costs - transact, communicate, negotiate the sale. On-line bidding systems can negotiate price, and reduce time needed to reach agreement. – Decision costs - deciding between supplier, product. Comparison sites help. – Policing costs - monitoring the transaction against cheating. On-line banking allows customers to check balance. Electronic receipts. – Enforcement costs -enforcing contractual rights. Legal proceedings and reimbursements. Chat lines can publicize brand reputations. Web Market Forces: That help the business 5/23/2017 • They want to differentiate products and move customers up the pyramid. • Differentiated prices, all the time. Mass customization is possible. Businesses can make products that are customized and cheap, automated and personal. But because they can make the product different for every customer, they can also charge different prices to every customer. (My Yahoo!, Pointcast news) • Use technology to de-menu pricing. It use to take a long time to change a product's shelf price. The price change had to filter down from supplier, distributor, retailer, to salesperson. Changes at each stage had implementation costs. With extranets this can be done with little costs and little time. Web Market Forces: That help the business • Creating customer switching barriers. Sellers can collect very detailed data on customers. They can make their products match the buyer very closely, personally. If the business can bring the customer exactly what they want, the customer will not want to switch on price alone, (because it costs the customer to search and learn about another product). • Customers might be willing to pay more. They may expect to pay less on-line, but they can save in transactions costs (including time) and so they might pay more. 5/23/2017 Web Market Forces: That help the business • Differentiate by staging experiences. Differentiation before was by enhancing quality, adding features, and building brand identification, and on customer service. When products are more alike, they must be made to appear different. The Web allows for many different stage experiences. (personal experiences, esthetic differences, entertainment differences, educational differences, etc.) 5/23/2017 Web Market Forces: That help the business • Total purchase cost. Purchase price of an item is only one part of the total cost. Other costs: searching, shipping, holding. Reducing the other costs will reduce the total cost of the product. T= total costs = P + O P= purchase price O= other costs (include opportunity costs that is time and money that could have been spent on something else). w= Web (web product) s= store (traditional product) Consumers will purchase on the Web when: Tw<Ts Consumers will pay (d)= Pw - Ps where (d)<Os - Ow 5/23/2017 • Firms should reduce customers Os, to raise Pw just below where Tw=Ts. If sellers can reduce Total Costs they can raise their web prices (Pw) over their store prices (Ps). Web Market Forces: That help the business • Establish electronic exchanges. Barter or trade goods when prices are low. • Maximize revenue not price. Airlines perform yield management. They have complex pricing schemes that are hard for customers to compare. Web sites can sell tickets on slow-to-fill flights or ready-to-leave flights. If the flights are not filled that is missed revenue. Customers can also have options (rights but not obligations) to sell tickets at the last minute. 5/23/2017 Web Market Forces: That help the business • Reduce buyer's risk. Customers may be willing to pay a higher price if they can lower their risk in the transaction. Consider a used car dealer. The dealer (is an intermediary) can buy cars at physical auctions or at On-line auto auctions. With on-line auctions, the dealers can have virtual lots of cars. The dealer sells the car to an end customer before they buy it. The dealer avoids risk. 5/23/2017 A Summary of Web Market Forces • Bargaining power of buyers and suppliers differs. • Web empowers traditionally weak buyers to search and collect information used in decision making. • Marketing effectiveness based on different products and services also differ. • Businesses have motivation to differentiate on price. • Web empowers businesses to create diverse pricing models. 5/23/2017