Pricing
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Marketing and pricing
• Customers’ rationality is bounded
• Prices are not always determined by
pure market forces
• Marketing has different pricing
strategies
– Skim the cream
– Odd-number pricing
– Penetrate the market
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Searching
• Web supports information and price
searching
– Intelligent agents
• In the physical world, searching is costly
and time-consuming
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Oversupply creates
sophistication
• Customers shop around and learn
• Customers assertively seek value
• Marketers innovate to avoid this
confrontation
• Competitors copy and oversupply
continues
• The Web accelerates this cycle
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Pareto principle
• A few customers create most of the
value
• A Mexican cellular phone company
– 10% of customers account for 90% of sales
• Recoup investment in months
– 80% of customers account for 10%
• Recoup investment in years
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Spectrum of exchange
• Exchanges between actors varies from
– Theft by force to trading floor
– Marketing is effective between these
extremes
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Customer value categories
and exchange spectrum
Market
forces
High
Theft
by force
Theft by stealth
Fraud
Seduction
A+
A
Range of
marketing
effectiveness
Customer's value
to the firm
Products and
services
B
C
Low
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Commodities
Corporate
strategy
Trades on a stock
exchange
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Directions
• Marketing
– Moves customers up the pyramid
– Moves products and services away from
commoditization
• Competition
– Moves customers down the pyramid
– Moves products and services towards
commoditization
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Flattening and narrowing
•
•
•
•
•
•
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Technology facilitates searching
Reducing transaction costs
Customers make prices
Customers control transactions
More one-to-one negotiation
Commoditization
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Technology facilitates
searching
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Type of tool
Functions
Examples
Search engine
Software that searches Web sites by
key word(s).
AltaVista and Hotbot.
Directory
A Web site containing a
Yahoo!
hierarchically structured directory of
Web sites.
Comparison site
A Web site that enables comparisons
of product/service category by
attributes and price.
Shopbot
A program that shops the Web on the Bots used by search engines Lycos
customer’s behalf and locates the
and Excite.
best price for the sought product.
Intelligent agent
A software agent that will seek out
prices and features and negotiate on
price for a purchase.
CompareNet, a Web site that lists
comparative product information
and prices.
Kasbah, a bot being developed by
MIT, can negotiate based on the
price and time constraints provided.
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Reducing transaction costs
Transaction costs
Examples of how the Web can affect
Search costs (finding
buyers, 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, she
would have had to read magazines, talk to knowledgeable individuals, and visit stores. She can now access
firm and product information easily and at no cost, and obtain comparative product information and
access 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 intelligent
agents transact and negotiate on the customer's behalf.
Decision costs
The cost of deciding over Supplier A vs. Supplier B, or Product A vs. Product B. The Web makes
information available on suppliers (on their or comparative Web sites) and products and services. For
example, Travel Web allows customers to compare hotels and destinations on-line.
Policing costs
(monitoring
cheating)
Previously, customers had to wait to receive statements and accounts, and then to check paper
statements for correctness. On-line banking facilitates customers to checking statements real time. Chat
lines 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-Web
world this might require legal assistance. Publicizing the infringement of one’s rights would be difficult
and expensive. Chat lines and bulletin boards offer easy and inexpensive revenge, if not monetary
reimbursement!
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On-line bidding systems can achieve similar result s. For example, GE in 1996 purchased $1 billion ($ 910
million) 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.
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Customers make prices
• Suppliers tend to make prices and
customers take them
– Auctions are an exception
• Web is reversing
– Auctions becoming more popular
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Customers control
transactions
• Major manufacturers are inviting
suppliers to bid on-line
– Caterpillar and GE
• Suppliers forced to compete on price
• Less
– differentiation
– personal selling
– added service
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More one-to-one negotiation
• As negotiation costs decrease, more
negotiation should emerge
• Intelligent agents negotiating on behalf
of buyer and seller
• Prices will be closer to real-market value
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Commoditization
• Commodities are the first to migrate to
electronic markets
• The Web is compelling for perishable
products
• Expect more switching between
established brands
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Migrating up and effective
marketing
•
•
•
•
•
•
•
•
•
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Differentiated pricing all the time
Creating customer switching barriers
De-menuing pricing
Better differentiation
Customers may pay more
Consider total cost
Establish electronic exchanges
Maximize revenue not price
Reduce buyer’s risk
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Differentiated pricing all the
time
• The same product and service can have
different values to different customers
– Airlines
– Drink vendors could charge more on a hot day
• Mass customization enables mass price
differentiation
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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
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De-menuing pricing
• Without automation, changing prices is costly
and time-consuming
– It takes time to filter through the distribution
network
• Networks enable rapid dissemination of price
changes
• Change prices as needed
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Better differentiation
• Differentiate the buying experience as well as
the product or service
• Stage the customer experience
• The Web as theater for a unique personal
experience
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Customers may pay more
• Marketers often assume customers
underestimate the value of a product
– This may not be true
• Try letting customers set the price
– London restaurant
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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
premium
– Convenience
– Opportunity cost
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Establish electronic exchanges
• Bartering may be more effective than selling
when prices are low
• Barter excess supplies
• Mainly business-to-business
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Maximize revenue not price
• Airlines use yield management software to
maximize revenue
• Use Web to sell perishable, last-minute
capacity
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Risk and return trade-off
• Buyers may pay a price premium for
reduced risk
– Manheim Auctions
Risk
Auction
•
On-line
•
Premium
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Return
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Conclusion
• The Web is having a major impact on pricing
strategy
• Technology creates opportunities for both
buyers and sellers
• Smart firms will use the Web to move
customers up the pyramid and the exchange
spectrum
• The Web creates an opportunity for pricing
creativity
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