Transparent Pricing Min Ding Pennsylvania State University

The Power of Pricing POIM Figure 11.1 Pricing is Tightly Linked to Profitability Proper pricing must reflect changes brought about by the Internet The High Leverage of Proper Pricing

Pricing Policy 1. Select the pricing objective 2. Understand demand (for a given price) 3. Selecting a pricing method 4. 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. Unique value effect 2. Substitute awareness effect 3. Difficult-comparison effect 4. Total expenditure effect 5. End-benefit effect 6. Shared-cost effect 7. Sunk-investment effect 8. Price-quality effect 9. 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-by- side 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  Example – Charles Schwab vs. Ameritrade  Unknown online low-price outlets need to build confidence and trust if they want customers to respond to low price  One solution is to partner with trusted and well- known 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  Setting prices is difficult if  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  Under rapidly changing conditions  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  The power of the Internet to provide real-time information to the marketplace makes real-time pricing possible Why Simple Pricing Approaches Fail

Real-Time Pricing Alternatives  Auctions  Rental Markets  Yield Management

Real-Time Pricing Alternatives  Auctions work well on the Internet  In-depth information is available to bidders  Confused bidders can call or 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 Auctions as Real-Time Pricing

Real-Time Pricing Alternatives 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 Auctions as Real-Time Pricing

Real-Time Pricing Alternatives  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 Online Rental Markets

Real-Time Pricing Alternatives Yield management is the matching of price and available capacity Price Available Capacity Yield Management

Real-Time Pricing Alternatives 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) Yield Management

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.