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Part Two: Chapter 12 Pricing 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 Reference price effect: Competitive alternatives and how they are presented online Difficult comparison effect: Not every consumer is motivated to comparison shop or trusts alternate sites

Power of Pricing Reference price effect: Competitive alternatives and how they are presented online Difficult comparison effect: Not every consumer is motivated to comparison shop or trusts alternate sites Switching cost effect: Battle for customers coming and going

Power of Pricing Reference price effect: Competitive alternatives and how they are presented online Difficult comparison effect: Not every consumer is motivated to comparison shop or trusts alternate sites 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 sensitivity SOURCE: 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

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

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 Shared cost effect: Different approaches for cost deciders and cost payers

Pricing and Purchase Importance 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 Borrowing a lesson from financial markets: “The only valid price is the one quoted right now.” Auctions, a primary time-based price strategy, let marketplace determine pricing

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