Transparent Pricing
Min Ding
Pennsylvania State University
The Power of Pricing
The High Leverage of Proper Pricing
Proper
pricing must
reflect
changes
brought
about by the
Internet
POIM Figure 11.1 Pricing is Tightly Linked to Profitability
Pricing Policy
1.
2.
3.
4.
Select the pricing objective
Understand demand (for a given price)
Selecting a pricing method
Selecting the final price
Pricing Objectives

Survival
 Maximum Current Profit
 Maximum Current Revenue
 Maximum Sales Growth
 Maximum Market Skimming
 Product-Quality Leadership
Most e-commerce firms’ pricing objective is
_________, and the rationale is __________.
Determine the demand
9 factors affecting price sensitivity (Nagle, 1995)
1.
2.
3.
4.
5.
6.
7.
8.
9.
Unique value effect
Substitute awareness effect
Difficult-comparison effect
Total expenditure effect
End-benefit effect
Shared-cost effect
Sunk-investment effect
Price-quality effect
Inventory effect
The Unique Value Effect
 The
most important determinant of price
sensitivity
 Unique features and benefits lower price
sensitivity and raise willingness to pay
 To prove uniqueness
 Provide
hard facts, solid testimonials, and
hands-on trial use
 The
Internet is effective at doing this
The Substitute Awareness Effect
 Connects
price sensitivity with the
presence and awareness of alternatives
 Price
elasticity depends on whether there are
alternatives available in the marketplace
 The
Net enables instantaneous side-byside price comparisons of available
alternatives
 Increasing
information may lead to less
willingness to pay
 This
may be the Net’s biggest impact
Difficult-comparison effect
 Buyers
are less price sensitive when it’s
hard to compare substitutes
 Internet will have huge impact on this.
Total Expenditure Effect



Consumers are more price sensitive when
shopping for items that comprise a larger
percentage of their budget
They naturally pay more attention to shopping for
the best price
 Examples include cars & healthcare
Internet’s impact?
End-benefit effect
 Customers
are less price sensitive the
smaller the expenditure is to the total
cost of the end product
 Internet’s impact ? (minimum)
Shared Cost Effect

Price sensitivity decreases if the person
choosing the product isn’t the person paying
for the product

Example: Business travelers are less price sensitive
because their employers are footing the bill
Companies have to decide whether they’re
targeting their sites at the decider or the payer
 If the target is the payer, emphasize cost
effectiveness
 Internet’s impact?

Sunk investment effect
 Buyers
are less price sensitive when the
product is used in conjunction with
assets already bought
 Internet’s impact?
Price-Quality Effect

Well-known brands with a high quality
reputation can charge higher prices because
price sensitivity is lessened


Unknown online low-price outlets need to
build confidence and trust if they want
customers to respond to low price


Example – Charles Schwab vs. Ameritrade
One solution is to partner with trusted and wellknown firms
While well-known firms may eventually have
to lower their prices to match the competition,
the price-quality effect delays the need for this
response
Inventory Effect
 Price
elasticity is much higher on items
that are nonperishable and can be
stored easily
 Example:
A discount on books may prompt
purchase even though the consumer may
not read the book for several months
 It’s
harder to stimulate demand by
lowering the prices of perishable items
 There
has to be a closer match between
time of purchase and consumption
Selecting a Pricing Method

Markup Pricing
 Target Return Pricing
 Perceived value pricing
 Value Pricing
 Going Rate Pricing
 Sealed-Bid Pricing
and
 Real time pricing (internet)
Real-Time Pricing
Why Simple Pricing Approaches Fail

Setting prices is difficult if




Under rapidly changing conditions


Companies don’t know their demand curves
Different customers pay different prices for the product or
service
Customers buy multiple products that are linked to each
other
It’s impossible for companies to calculate demand curves
accurately, so they can’t figure out price elasticity
Instead of setting prices themselves, many
companies are using real-time pricing
Real-Time Pricing Alternatives
 Auctions
 Rental
Markets
 Yield Management
Real-Time Pricing Alternatives
Auctions as Real-Time Pricing

Auctions work well on the Internet

In-depth information is available to bidders
Confused bidders can call or e-mail for more info

Participants can join in from anywhere on the planet


Online auction sites improve the power and
efficiency of auctions



The Internet makes it easier to gather buyers and sellers
together in the same place at the same time
The Internet enables sellers to provide in-depth
information, so buyers can evaluate the item being sold
The Internet expands the number of bidders, which
raises the price paid and the profitability of the auction
Real-Time Pricing Alternatives
Auctions as Real-Time Pricing
Online Auction Types
 English Auction
 An auctioneer calls out bids until no one is willing to top the last
bid
 The high bidder gets the item
 Examples: FirstAuction.com, Onsale.com and E-bay.com
 Dutch Auction
 The price starts high and falls at regular time intervals
 The first customer willing to bid gets as many of the items as
he/she wants at that price
 Remaining items continue to have their prices cut
Real-Time Pricing Alternatives
Online Rental Markets

The rental market serves customers’ immediate
needs

More efficient because the buyer pays a fee for
each use rather than paying a large lump sum
for unlimited use


Example – software rentals
Barriers to further online adoption include
credibility and the lack of willingness of sellers
to use micro-transactions
Real-Time Pricing Alternatives
Yield Management
Yield management is the matching of
price and available capacity
Price
Available
Capacity
Real-Time Pricing Alternatives
Yield Management
Requirements for successful yield mgt:



Fixed and perishable capacity – the good must lose 100%
of its value at a specific point in time. In addition, the
industry should face high fixed costs so the cost of an
additional customer is relatively low
Customer base with identifiable segments – give price
sensitive customers a break without causing a loss of
customers willing to pay full price
Demand uncertainty + information technology – tracking
is necessary to ensure proper yield management (made
easier by using company web sites)
One Powerful Online Pricing Strategy
-- Bundling

Bundling works particularly well online
 Bundling is the combination of products into
larger packages

A single fee gives users access to entire product
offering

Example: AOL
Summary
 Understand
the factors that might affect
price elasticity and which ones will be
significantly influenced by internet;
 Understand real-pricing;
 Know bundling.