Pricing Online

Getting Prices Right on the Web

Pricing Strategy

…critical marketing mix variable

actually produces revenue

shortest term marketing mix variable

Pricing Strategy

Pricing Objectives

survival

profit maximization

revenue maximization

Hybrid model

Pricing Strategy

Cost Based Pricingcost plus, markup pricing

Demand Based Pricingskimming, penetration

Competition Based Pricingcustomary pricingprice-leader approachPremium approach

Traditional View: Setting a Pricing Strategy

• What are your store visitors like?

• What is the category you play in?

• What are your competitors doing?

• What does it cost you to purchase (or produce) and market this product or service? – Your price must be above your costs, most of

the time!

Key Questions for Setting Price

• Do you sell a commoditized product/service or not?

• Price vs. quality differentiation?• Do you have a strong store brand? • Service leader? • Penetrate or skim? • Bundle strategy? • Do you have a new or exclusive product?

Consumer Demand – Price Elasticity

• Conduct periodic price “experiments” to gauge how price sensitivities are changing over time.over time.

• Offline:– Newsweek experiment– Split Lists

• Online:– ?

Internet as Advantage?:

• Price testing can quickly reveal how pricing affects sales at virtually no cost.

For example:• A merchant could charge every 50th customer a higher

or lower price and track the results over time.• Merchants can also change prices instantly enabling

sellers to benefit from short-term changes in customer demand and market supply.

• E-tailers may develop the data and technology to enable segmented pricing, which targets shoppers depending upon their buying history.

Theory:

Reference Pricing and Price Anchors

• Every product has a price range, within which changes have little impact on consumer behavior.

For example:• Prices for well-known brand-name consumer

health and beauty products can be raised as much as 17 % without a change in consumer reaction. NOT SENSITIVE/LOW ELASTICTY

• Range in which price variations acceptable for certain financial services is less than 1 %. SENSITIVE/HIGH ELASTICTY

Commodity Pricing: Study from 2000

  Microsoft FrontPage 2000 Price Compared to buy.com

CompSource $146.26 +19.9%

CDW $135.40 +11.0%

PCStop.com $131.56 +7.9%

MicroWarehouse $129.95 +6.5%

Page Computer $129.28 +6.0%

Dell $127.95 +4.9%

PC Zone $124.97 +2.5%

Amazon.com $121.99 --

buy.com $121.95 --

PC Mall $121.89 --

PCWonders.com $118.89 -2.5%

Still relevant:

• Brand recognition

• Firm reputation

• Store location (placement on the screen)

Exercise

• Study carefully the pricing strategy of:– Amazon (limit to books)– Idea Cellular India

• Then write the rationale for their pricing strategy in a single short paragraph.

Key Differences Online: Fluidity of the Market

• ease with which online consumers and rival retailers may access comparative information about seller characteristics and prices

• customers often search at the product level rather than by store or category– Implication?

• Consumers are more selective in online markets• Frequent price changes feasible

Baye and Gupta

• “online retail industry is an unpromising one for firms seeking competitive advantage”

• What innovations in pricing strategy are required for a firm to be successful in fluidfluid e-retail markets?

5 Innovations

• Use price experimentationprice experimentation to learn about your Customers’ Price Sensitivity/Price Elasticity

• Quickly adjust price based on stage of PLC stage of PLC (price sensitivities)

• Quickly adjust price based on number of number of competitorscompetitors

• Stay UnpredictableUnpredictable• Use Hit-and-Run Pricing to Gain a Temporary Temporary

Advantage Advantage without Triggering a Price War

Group Face-off:

• Why is pricing such a challenge in online markets?– Product or category (price sensitivity??)– PLC– # of competitors

• When should a product/service be free?• How do you define value if the product is free?

Group Face-off

• What are network effects?

• In what ways do network effects affect pricing strategy?

• Excursion on Network Product Theory

Baye and Gupta

• Strategic Consideration:– What is “strategic” about frequent price

changes online?– Is it good enough to be second lowest offer?

Conclusion on Pricing

• Product-specific pricing• Dynamic/erratic pricing can be strategic• Shortened PLC means higher price

sensitivity requires quicker modulation• Free may have value – network effects in

two-sided markets!• Online pricing must be the domain of lower

management level but therefore requires innovation in management practices.

Conclusion

• Managerial Challenges:– Best e-businesses set up small functional marketing

groups charged with the task of constantly monitoring opportunities to adjust prices based on market changes and customer behavior.

– Group members should hold an entrepreneurial view of pricing.

– Group should be empowered to set short- to medium-term pricing strategy and implement it.

Network Products in Networked Markets

• The last decade has witnessed a shift from a focus on the value created by a single product to an examination of the value created by networks of products (product ecosystems or NETWORKED PRODUCT).

• Network products emerge at the intersection of three types of networks:– User network– Complements network– Producer network

Key Claims:

• Any or all of these networks add value or enhance the attractiveness of the associated focal product.

• Consumers allocate resources among competing products based on the perceived value added by any any or allall of these networks.

The Networked Product:

Focal Product

Producer networkProducer network Other companies producing the same or similar product or service

Complements networkComplements networkServices that permit consumption

User networkUser network Other consumers

Linux as Networked Product:

Ex.: Linux Operating System

Producer networkProducer network Other companies producing the same or similar product or service

Complements networkComplements network•Application developers•Maintenance and Repair •Service Companies

User networkUser network number of other companies that are using Linux (moderated by size, reputation, industry, etc. of these companies)

Remember:

• If you are dealing with a focal product that is a networked product– Consumers allocate resources not only based on the

objective and perceived quality of the focal product but based on the perceived value added to the focal product by the networks it has.

– Marketing of a networked product therefore is no longer limited to developing a marketing mix and a strategic position for the focal product. Rather, marketing needs to support network strength as well.

Examples?

Focal Product

Producer networkProducer network Other companies producing the same or similar product or service

User networkUser network Other consumers

Complements networkComplements networkServices that permit consumption

iPhoneToyota Prius

Your Task

• Analyze them as Networked Products.

• Suggest 3 marketing strategies based on your analysis.

• Back