The importance of pricing
Price -> revenuePricing is a critical managerial
decisionEconomic theory assumes buyers
and sellers are rationalProfit maximizationDemand and supply analysisPerfect competition
Real world
Bounded rationalitySatisficingGoals other than profit
maximizationBrand and image perceptionsCustomers are emotional
Internet impact
Dispersed buyers and sellers interact electronically
Search costs are reducedMarkets are more efficientA threat to marketersCustomers will increasingly make
prices
Competitive rationality theory
An abundance of choice makes customers more sophisticated
More searching and comparisonValue seeking behaviorMarketers try to be smarter stillCycle is acceleratedOversupply increases
Pareto principle
A small number of customers account for most of the profitsMexican cellular phone company
10% of customers create 90% of salesRecoup investment in months
80% of customers create 10% of salesRecoup investment in years
Spectrum of exchange
The range of transactions between actors
From theft by force to trading on an exchange
Marketing is effective somewhere between these two extremes
Customer value and pricing
High
Customer’svalue
to the firm
Low
Marketforces
A+
A
B
CCorporatestrategy
Theft byforce
Theft by stealthFraud
Products
and service
Seduction
Commodities
Trades on a stockexchange
Range ofmarketing
effectiveness
Directions
MarketingMoves customers up the pyramidMoves products and services away
from commoditizationCompetition
Moves customers down the pyramidMoves products and services towards
commoditization
Flattening forces
Technology facilitates customer searchbottomdollar.com
Customers make rather than take pricespriceline.com
Customers control transactionsGE and Caterpillar
Flattening forces
A return to one-to-one negotiationonsale.com
Commodization and efficient marketsMIS research market
Technology facilitates searching
Reducing transaction costsTransaction costs Examples of how the Web can affect
Search costs (findingbuyers, sellers)
A collector of tin soldiers wishes to identify sources. He can use search engines and comparison sites,using the search term “tin soldier.”
Information costs(learning)
A prospective customer wishes to learn more about digital cameras and what is available. Previously, shewould have had to read magazines, talk to knowledgeable individuals, and visit stores. She can now accessfirm and product information easily and at no cost, and obtain comparative product information andaccess suppliers on the Web.
Bargaining costs(transacting,communicating,negotiating)
The time normally taken by a customer to negotiate can now be used for other purposes as intelligentagents transact and negotiate on the customer's behalf.
On-line bidding systems can achieve similar results. For example, GE in 1996 purchased $1 billion ($910million) from 1400 suppliers over the Internet and there is evidence of a substantial increase since.Significantly, the bidding process for the firm has been cut from 21 days to 10.
Decision costs The cost of deciding over Supplier A vs. Supplier B, or Product A vs. Product B. The Web makesinformation available on suppliers (on their or comparative Web sites) and products and services. Forexample, Travel Web allows customers to compare hotels and destinations on-line.
Policing costs(monitoringcheating)
Previously, customers had to wait to receive statements and accounts, and then to check paperstatements for correctness. On-line banking facilitates customers to checking statements real time. Chatlines frequently alert participants to good and bad buys, and potential product and supplier problems(e.g., the flaw in Intel's Pentium chip was communicated extensively over the Internet).
Enforcement costs(remedying)
When a problem exists with a supplier, how does the customer enforce contractual rights? In the non-Webworld this might require legal assistance. Publicizing the infringement of one’s rights would be difficultand expensive. Chat lines and bulletin boards offer easy and inexpensive revenge, if not monetaryreimbursement!
Travelbids
Regular Listing: L006946 Quoted Price:$1718 Bidding Deadline:08/09/99 12:46 PMDescription: Air Qantas for 1, Atlanta to Melbourne, Aust. 10/13-25 Bid #B009090 Disc Bid Amt:$340 19.8% Bid Time:08/09/99 12:43 PM (MST) A Bid #B009088 Disc Bid Amt:$335 19.5% Bid Time:08/09/99 12:42 PM (MST) Bid #B009087 Disc Bid Amt:$330 19.2% Bid Time:08/09/99 12:40 PM (MST) Bid #B009086 Disc Bid Amt:$320 18.6% Bid Time:08/09/99 12:39 PM (MST) Bid #B009085 Disc Bid Amt:$310 18.0% Bid Time:08/09/99 12:39 PM (MST) Bid #B009083 Disc Bid Amt:$300 17.5% Bid Time:08/09/99 12:38 PM (MST) Bid #B009082 Disc Bid Amt:$275 16.0% Bid Time:08/09/99 12:37 PM (MST) Bid #B009081 Disc Bid Amt:$245 14.3% Bid Time:08/09/99 12:35 PM (MST) Bid #B009080 Disc Bid Amt:$240 14.0% Bid Time:08/09/99 12:35 PM (MST) Bid #B009079 Disc Bid Amt:$215 12.5% Bid Time:08/09/99 12:34 PM (MST) Bid #B009078 Disc Bid Amt:$210 12.2% Bid Time:08/09/99 12:33 PM (MST) Bid #B009077 Disc Bid Amt:$205 11.9% Bid Time:08/09/99 12:31 PM (MST) Bid #B009076 Disc Bid Amt:$200 11.6% Bid Time:08/09/99 12:30 PM (MST) Bid #B009075 Disc Bid Amt:$175 10.2% Bid Time:08/09/99 12:28 PM (MST) Bid #B009074 Disc Bid Amt:$170 9.9% Bid Time:08/09/99 12:24 PM (MST) Bid #B009073 Disc Bid Amt:$150 8.7% Bid Time:08/09/99 12:24 PM (MST) Bid #B009072 Disc Bid Amt:$145 8.4% Bid Time:08/09/99 12:20 PM (MST) Bid #B009071 Disc Bid Amt:$140 8.1% Bid Time:08/09/99 12:18 PM (MST) Bid #B009070 Disc Bid Amt:$135 7.9% Bid Time:08/09/99 12:12 PM (MST) Bid #B009067 Disc Bid Amt:$130 7.6% Bid Time:08/09/99 09:26 AM (MST) Bid #B009047 Disc Bid Amt:$125 7.3% Bid Time:08/08/99 01:58 AM (MST) Bid #B009041 Disc Bid Amt:$120 7.0% Bid Time:08/07/99 03:11 PM (MST) Bid #B009034 Disc Bid Amt:$115 6.7% Bid Time:08/06/99 05:25 PM (MST) Bid #B009027 Disc Bid Amt:$110 6.4% Bid Time:08/06/99 02:43 PM (MST) Bid #B009021 Disc Bid Amt:$105 6.1% Bid Time:08/06/99 12:52 PM (MST)
Migrating up and effective marketing
Differentiated pricing all the timeCreating customer switching barriersDe-menuing pricingBetter differentiationCustomers may pay moreConsider total costEstablish electronic exchangesMaximize revenue not priceReduce buyer’s risk
Differentiated pricing all the time
The same product and service can have different values to different customersAirlinesDrink vendors could charge more on a hot
day
Mass customization enables mass price differentiation
Creating customer switching barriers
Collect details on customers to raise switching costs
Knowing preferences is necessary for better service
The Web site should learn about the customer’s preferences
De-menuing pricing
Without automation, changing prices is costly and time-consumingIt takes time to filter through the distribution
network
Networks enable rapid dissemination of price changes
Change prices as needed
Better differentiation
Differentiate the buying experience as well as the product or service
Stage the customer experienceThe Web as theater for a unique personal
experience
Customers may pay more
Marketers often assume customers underestimate the value of a productThis may not be true
Try letting customers set the priceLondon restaurant
Consider total cost
Purchase price is one element of total acquisition cost
If Web-based purchasing reduces the total acquisition cost customers may pay a price premiumConvenienceOpportunity cost
Establish electronic exchanges
Bartering may be more effective than selling when prices are low
Barter excess suppliesMainly business-to-business
Maximize revenue not price
Airlines use yield management software to maximize revenue
Use Web to sell perishable, last-minute capacity
Return
Risk
•On-line
•Auction
Premium
Risk and return trade-off
Buyers may pay a price premium for reduced riskManheim Auctions
Pricing mechanisms
Negotiation
Auction
Reverseauction/Dutch
auctionSeller makes
Buyer makes
Seller and buyermake
Tender/yieldmanagement
Bid/yieldmanagementSeller makes
Buyer makes
Singletransaction
Multipletransactions
Tender/Calloption
Retail/Put optionSeller makes
Buyer makes
Fixed
Variable
Price
Pricing factors
Pricing directions
Weakbuyer
Weakseller
Strongbuyer
Strongseller
Retailingcommodity market
Dutch auction
Auction
Reverseauction
Negotiation
Integrated Internet pricing strategy
How does the firm interact with each class of customer?Personalized Web sites for A customers and
the opportunity to make pricesWeekly standard emails for the C customers
Blend communication technology, pricing mechanisms, and customer value concepts to manage revenue precisely
Marketing will become more like trading
Survival tactics
Efficiency is not enoughFast response is essential
Online bids must be answered within minutes
Accurate, dynamic cost analysisCreate trading teamsChange the mindset
Fixed to variable pricing Single to multiple interactions
Survival tactics
Learn what customers wantCustomer databasesData mining and OLAP
One-to-one marketingInformation is the heart of customer
serviceBoost the information content of
products and services
Conclusion
The Internet is having a fundamental impact on pricing strategyAt worst, it will flatten the customer baseAt best, it will increase the ability to differentiate
Customers will move along the exchange spectrum more rapidlyFlee to electronic commodity markets or seduced
to mutually valuable long-term relationships?
Creative pricing strategies are critical