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.  Describe several types of online payment systems and their benefits ©2009 Pearson Education, Inc. Publishing as Prentice Hall

The VideoEgg Story  The video and rich media advertising company was founded in 2004 by 3 Yale graduate students.  VideoEgg delivers ads to social networking sites, video sites, and gaming applications.  VideoEgg created AdFrames, which allow video viewers to roll over and watch ad-sponsored content. ©2009 Pearson Education, Inc. Publishing as Prentice Hall 11-2

The VideoEgg Story, cont.  Online advertising is bought and sold on a CPM (cost per 1,000 impressions) or pay-per-click model (PPC).  In contrast, VideoEgg charges advertisers based on user engagement (roll over action) with the ad.  VideoEgg’s innovative pricing scheme is $0.75 per roll over, which it splits 60/40% with the site owner. ©2009 Pearson Education, Inc. Publishing as Prentice Hall 11-3

©2009 Pearson Education, Inc. Publishing as Prentice Hall  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 idea.  The Internet is taking us back to an era of dynamic pricing--varying prices for individual customers.  The internet also allows for price transparency-- both buyers and sellers can view prices online. The Internet Changes Pricing Strategies 11-5

©2009 Pearson Education, Inc. Publishing as Prentice Hall Buyer & Seller Perspectives: Buyer View  The meaning of price depends on the viewpoint of the buyer and the seller.  Buyer’s costs may include money, time, energy, and psychic costs.  But they often enjoy many online cost savings:  The Net is convenient and fast.  Self-service saves time.  One-stop shopping and integration save time.  Automation saves energy. 11-5

©2009 Pearson Education, Inc. Publishing as Prentice Hall  The shift in power from seller to buyer affects pricing strategies.  In the B2B market, buyers bid for excess inventory.  In the B2G market, government buyers request proposals for materials and labor.  Buyers set prices and sellers decide whether to accept the prices in a reverse auction.  Buyer power online is also based on the huge quantity of information and products available on the Web. Buyer Control 11-6

©2009 Pearson Education, Inc. Publishing as Prentice Hall Buyer & Seller Perspectives: Seller View  The seller’s perspective includes internal and external factors.  Internal factors include pricing objectives, marketing mix strategy, and information technology  Pricing objectives may be:  profit oriented.  market oriented.  competition oriented. 11-7

Seller View, cont.  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. ©2009 Pearson Education, Inc. Publishing as Prentice Hall 11-8

©2009 Pearson Education, Inc. Publishing as Prentice Hall 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 for early online retailing was $

©2009 Pearson Education, Inc. Publishing as Prentice Hall  Firms can save money by using internet technology for internal processes.  Self-service order processing.  Just-in-time inventory.  Overhead.  Customer service.  Printing and mailing.  Digital product distribution. The Internet Puts Downward Pressure on Prices 11-11

©2009 Pearson Education, Inc. Publishing as Prentice Hall  Market structure and market efficiency affect pricing strategy.  The seller’s ability to set prices varies by market type:  Pure competition.  Monopolistic competition.  Oligopolistic competition.  Pure monopoly.  If price transparency results in a completely efficient market, sellers will have no control over online prices. External Factors Affect Online Pricing 11-11

©2009 Pearson Education, Inc. Publishing as Prentice Hall Efficient Markets  A market is efficient when customers have equal access to information about products, prices, and distribution.  In an efficient market, one would expect to find:  Lower prices.  High price elasticity.  Frequent price changes.  Smaller price changes.  Narrow price dispersion between highest and lowest price for a product

©2009 Pearson Education, Inc. Publishing as Prentice Hall  External market factors place downward pressure on prices and contribute to efficiency.  Shopping agents such as PriceScan.  High price elasticity.  Reverse auctions.  Tax-free zones.  Venture capital availability.  Competition.  Frequent price changes.  Smaller price change increments. Is the Net an Efficient Market? 11-13

©2009 Pearson Education, Inc. Publishing as Prentice Hall  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 many buyers do not know about or use shopping agents. Is the Net an Inefficient Market? 11-14

Is the Net an Inefficient Market? cont.  Price dispersion may also relate to other issues:  Brand strength.  Online pricing.  Delivery options.  Time-sensitive shoppers.  Differentiation.  Switching costs.  Second-generation shopping agents.  The internet is not an efficient market. ©2009 Pearson Education, Inc. Publishing as Prentice Hall 11-15

Payment Options  Electronic money uses the internet and computers to exchange payments electronically.  Other off-line e-money payment systems include:  Smart chips.  Payment by cell phone.  PayPal has become the industry standard with over 150 million accounts worldwide. ©2009 Pearson Education, Inc. Publishing as Prentice Hall 11-16

©2009 Pearson Education, Inc. Publishing as Prentice Hall  Price setting has become an art as much as a science.  How marketers apply pricing strategy is as important as how much they charge.  Marketers can employ all traditional pricing strategies to the online environment. Pricing Strategies 11-17

Fixed Pricing  Fixed pricing (menu pricing) is when everyone pays the same price.  Two common fixed pricing strategies are: Price leadership. Promotional pricing. ©2009 Pearson Education, Inc. Publishing as Prentice Hall 11-18

©2009 Pearson Education, Inc. Publishing as Prentice Hall 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.  There are 2 types of dynamic pricing:  Segmented pricing.  Negotiation

©2009 Pearson Education, Inc. Publishing as Prentice Hall  Pricing levels are set based on order size, timing, demand, supply, or other factors.  Segmented pricing 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.  The firm must be careful not to upset customers. Segmented Pricing 11-20

©2009 Pearson Education, Inc. Publishing as Prentice Hall  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. Segmented Pricing, cont

©2009 Pearson Education, Inc. Publishing as Prentice Hall Negotiated Pricing and Auctions  Through negotiation, the price is set more than once in a back-and-forth discussion.  Online auctions such as eBay utilize negotiated pricing.  In the C2C market, consumers enjoy the sport and community while others are just looking for a good deal.  B2B auctions are an effective way to unload surplus inventory

Renting Software  Software companies sometimes decide to rent rather than sell software to customers.  Renting software is analogous to leasing cars.  Salesforce.com rents a leading CRM software system. ©2009 Pearson Education, Inc. Publishing as Prentice Hall 11-23