Part Two: Chapter 12 Pricing in an Online World

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Internet Marketing & e-CommerceWard HansonKirthi Kalyanam

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Part Two: Chapter 12Pricing 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


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


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.


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?


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


Power of Pricing

• Reference price effect: Competitive alternatives and how they are presented online


Power of Pricing


• Difficult comparison effect: Not every consumer is motivated to comparison shop or trusts alternate sites


Power of Pricing



• Switching cost effect: Battle for customers coming and going


Power of Pricing



• Switching cost effect: Battle for customers coming and going

• Price-quality effect: Advantage goes to well-established brands


Power of Pricing

Information about product alternatives influences price sensitivitySOURCE: PRNewsFoto/Nokia, PRNewsFoto/Handspring Inc, Market Wire Global Locate


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




• 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



Consumers who spend major portion of budget on pharmaceuticals are more likely to look for savings online


Time-based Pricing

• Borrowing a lesson from financial markets: “The only valid price is the one quoted right now.”


Time-based Pricing


• Auctions, a primary time-based price strategy, let marketplace determine pricing


Time-based Pricing


• Auctions, a primary time-based price strategy, let marketplace determine pricing– Internet resolves problem of assembling

enough bidders and enough information– Lessons from EBay


Time-based Pricing


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


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


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


Personalized Pricing

• Emerging approaches – Coupons and loyalty discounts– Price pegged to credit scores– Personal-level pricing contracts– Personalized bundling


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


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


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


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

Part Two: Chapter 12 Pricing in an Online World

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