E-Marketing 4/E
Judy Strauss, Adel I. El-Ansary, and Raymond Frost
Chapter 11: Price
©2006 Prentice Hall
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Chapter 11 Objectives
• After reading Chapter 11 you will be able to:
• Identify the main fixed and dynamic pricing
strategies used for selling online.
• Discuss the buyer’s view of pricing online in relation
to real costs and buyer control.
• Highlight the seller’s view of pricing online in
relation to internal and external factors.
• Outline the arguments for and against the Net as an
efficient market.
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The AOL Story
• AOL’s subscription growth has slowed.
• 33 million subscribers in 2001 has declined to 20
million in 2004.
• International expansion has not spurred growth.
• AOL wants to build more wallet share by adding
interactive entertainment, communication
services and information products.
• AOL hopes to increase customer revenue from
$19.95/month today to $159/month for a menu
of services in the future.
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The AOL Story, cont.
• They plan to price broadband services at
$30/month to build market share.
• AOL believes customers will pay for other
services, such as
• $20 to add other household computers.
• $20 to download music.
• $20 to access the Net from cell phones, etc.
• Do you think that AOL’s pricing strategy makes
sense in today’s competitive online
environment? Why or why not?
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The Internet Changes Pricing Strategies
• Price is the sum of all values that buyers
exchange for the benefits of a good or service.
• Throughout history, prices were negotiated.
• Fixed price policies are a modern (19th Century)
idea.
• Results of mass manufacturing and mass retailing
• The Internet is taking us back to an era of
dynamic pricing—varying prices for individual
customers.
• The meaning of price depends on the viewpoint
of the buyer and the seller.
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Buyer View
• Buyer’s costs may include time, energy and
psychic costs.
• But they often enjoy many online cost savings:
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The Net is convenient.
The Net is fast.
Self-service saves time.
One-stop shopping saves time.
Integration saves time.
Automation saves energy.
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Buyer Control
• The change in power from seller to buyer
affects pricing strategies.
• Buyers set prices and sellers decide whether to
accept the prices in a reverse auction.
• Request for Proposal
• Request for Bids
• Buyer power online is also based on the huge
quantity of information and products available
on the Web.
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Seller View
• Pricing objectives may be:
• profit oriented.
• market oriented.
• competition oriented.
• The Internet is only one sales channel and must
be used in concert with other marketing mix
elements.
• Information technology can place both upward
and downward pressure on prices.
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The Internet Puts Upward Pressure
on Prices
• Online customer service is an expensive
competitive necessity.
• Distribution and shipping costs.
• Affiliate programs add commission costs.
• Site development and maintenance.
• Customer acquisition costs (CAC).
• The average CAC is $82 for online retailers.
©2006 Prentice Hall
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The Internet Puts Downward
Pressure on Prices
• Firms can save money by using Internet
technology for internal processes.
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Self-service order processing.
Just-in-time inventory.
Overhead.
Customer service.
Printing and mailing.
Digital product distribution.
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External Factors Affect Online
Pricing
• Market structure and market efficiency affect pricing
strategy.
• The seller’s ability to set prices varies by market type:
• Pure competition. (many buyers and sellers)
• Commodities <> wood prices
• Monopolistic competition (many buyers &
sellers…differentiated offerings)
• Car Sales <> subcompact/compact/sedan/sports/luxury
• Truck sales <> work truck/dressed-up truck/sport truck/SUV/luxury
• Oligopolistic competition. (few sellers)
• Oil Companies
• Pure monopoly. (one seller)
• At one time AT&T, Microsoft??
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Efficient Markets
• A market is efficient when customers have
equal access to information about products,
prices and distribution. (Price transparency)
• In an efficient market, one would expect to find:
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Lower prices.
High price elasticity.
Frequent price changes.
Smaller price changes.
Narrow price dispersion between highest and
lowest price for a product.
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Efficient Markets Mean Loss of
Pricing Control
Gove rnme nt control
Pure monopoly
Oligopolistic competition
Monopolistic competition
Pure competition
Effic ient market
Marke t control
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Are a of control for
e -marketing pricing strategy
Is the Net an Efficient Market?
• External market factors place downward
pressure on prices and contribute to efficiency.
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Shopping agents such as PriceScan.
High price elasticity.
Reverse auctions.
Tax-free zones reduce out of pocket expenditures.
Venture capital availability.
Competition.
Frequent price changes.
Smaller price changes.
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Is the Net an Inefficient Market?
• The Internet does not act like an efficient
market regarding narrow price dispersion.
• In two studies, greater price spread was found for
online purchases than for offline purchases.
• Price dispersion may occur, because the online
channel is still not completely mature.
• Price dispersion may also relate to other issues:
• Brand strength.
•Differentiation
• Delivery options.
•Switching Costs
• Time-sensitive shoppers. •Second-generation
shopping agents
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Pricing Strategies
• How marketers apply pricing strategy is as
important as how much they charge.
• Marketers can employ all traditional pricing
strategies to the online environment.
• Fixed pricing (menu pricing) is when everyone
pays the same price.
• Two common fixed pricing strategies are:
• Price leadership. (Cheapest, Best Value)
• Promotional pricing.
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Dynamic Pricing
• Dynamic pricing is the strategy of offering
different prices to different customers.
• Firms use dynamic pricing strategy to optimize
inventory management and to segment
customers.
• Airlines have long used dynamic pricing to price
air travel.
• So have Hotels/motels
• There are 2 types of dynamic pricing:
• Segmented pricing.
• Negotiation.
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Segmented Pricing
• Pricing levels are set based on order size,
timing, demand, supply or other factors.
• Pricing according to customer behavior
segments is becoming more common as firms
collect more behavioral information.
• Segmented pricing can be effective when:
• The market is segmentable.
• Pricing reflects value perceptions of the segment.
• Segments exhibit different demand behavior.
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Segmented Pricing, cont.
• Geographic segment pricing
• Pricing differs by geographic area.
• May vary by country.
• May reflect higher costs of transportation, tariffs,
margins, etc.
• Value segment pricing
• Recognition that not all customers provide equal
value to the firm.
• Pareto principle: 80% of a firm’s business comes
from the top 20% of customers.
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Customer Value Segments
High
A+
Customer value to
the seller
A
B
C
Low
Customers Grouped by Value
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Negotiated Pricing
• Through negotiation, the price is set more than
once in a back-and-forth discussion.
• Online auctions utilize negotiated pricing.
• Consumers enjoy the sport and community.
• B2B auctions are an effective way to unload surplus
inventory.
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Bartering
• Goods or services are exchanged for other
products rather than cash.
• Users of bartering may enjoy tax benefits.
• Bartering is not a profitable pricing strategy.
• Exchanging or auctioning used items online can
hurt sales of new products.
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