Price: The Online Value Instructor: Hanniya Abid Assistant Professor COMSATS Institute of Informatio Technology Lecture 13 E-Marketing

Objectives  After this lecture, you will be able to:  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.

“All too often strategists overlook one of their best weapons: improved pricing strategies.” (Robert Doctors) “Price goes by many names” (Philip Kotler)

Efficient Markets Mean Loss of Pricing Control

Efficient Markets A market is efficient when customers have equal access to information about products, prices, and distribution. In an efficient market, one would find: Lower prices. High price elasticity. Frequent price changes. Smaller price changes. Narrow price dispersion.

Is the Net an Efficient Market? External market factors place downward pressure on Internet prices and contribute to efficiency. Shopping agents such as BizRate. High price elasticity. Reverse auctions. Tax-free zones. Venture capital. Competition. Frequent price changes. Smaller price change increments.

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 many buyers do not know about or use shopping agents.

Is the Net an Inefficient Market? cont. Price dispersion may relate to other issues: Brand strength. Online pricing. Delivery options. Time-sensitive shoppers. Differentiation. Switching costs. Second-generation shopping agents. In summary, the Internet is not an efficient market.

Payment Options Electronic money uses the Internet and computers to exchange payments electronically. Off-line e-money payment systems include: Smart chips. Payment by cell phone. For one-time payments, PayPal has become the industry standard with over 84 million accounts worldwide.

PayPal Account Options

Pricing Strategies 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.

Fixed Pricing Fixed pricing (menu pricing) occurs when sellers set the price and buyers must take it or leave it. Everyone pays the same price. Two common fixed pricing strategies are: Price leadership. Promotional pricing.

Dynamic Pricing Dynamic pricing is the strategy of offering different prices to different customers. Airlines have long used dynamic pricing to price air travel. There are 2 types of dynamic pricing: Segmented pricing. Price negotiation.

Segmented Pricing Pricing levels are set based on order size and timing, demand and supply levels, or other factors. 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.

Geographic Segment Pricing Geographic segment pricing Pricing differs by geographic area. May vary by country. May reflect higher costs of transportation, tariffs, margins, etc.

Value Segment Pricing The seller recognizes 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.

Customer Value Segments

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, trust between buyers and sellers is an important issue. Ebay uses a feedback system to assist buyers. B2B auctions are an effective way to unload surplus inventory.

Video on Pricing Diversity / Price Discrimination

New Pricing Approaches Pricing and price models are being turned upside down by the Internet. In 2007, UK pop band, Radio Head, recently launched their CD online with a ‘pay whatever you want ’ price tag. Reports suggested that many downloaded the album for free.

New Pricing Approaches Have you noticed how price models are changing online? Imagine being paid one day and the next day having to pay for delivering the same service? AOL used to pay ABC News for content. Now ABC pays AOL to place its content on AOL pages. It ’s also happened in advertising. Audiences used to pay for the media, now the media pay audiences to watch their ads.

New Pricing Approaches In this section you will see why you need to review your prices and your pricing models regularly as transparent and dynamic pricing impact all markets. Name-your-price services such as Priceline ( ), transparent pricing and global sourcing (particularly by giant procurement mergers like Ford and Chrysler) are forcing marketers to radically rethink their pricing strategies. Companies who can offer digital products such as written content, music or videos now have more flexibility to offer a range of purchase options at different price points including:

New Pricing Approaches ● Subscription. This is a traditional publisher revenue model, but subscription can potentially be offered for different periods at different price points, e.g. 3 months, 12 months or 2 years. ● Pay Per View. A fee for a single download or viewing session at a higher relative price than the subscription service. Music service Napster offers vouchers for download in a similar way to a mobile company ‘ Pay As You Go ’ model. ● Bundling. Different channels or content can be grouped at a reduced price compared to pay per view.

New Pricing Approaches Ad supported content. There is no direct price set here, instead, the publishers main revenue source is through adverts on the site. (Either CPM display advertising on site using banners ads and skyscrapers or CPC which stands for ‘Cost Per Click ’ more typical of Search ad networks such as Google Adsense ( ) which accounts for around a third of Google ’s revenue.)

New Pricing Approaches Other options include affiliate revenue from sales on third party sites or offering access to subscriber lists. The UK ’s most popular newspaper site, the Guardian ( ), trialled an ad free subscription service, but like many online publishers has reverted to ad-supported content.

New Pricing Approaches For all of these it is necessary to have a sound digital rights management (DRM) solution in place to minimize copying. A growth in competition is caused partly by global suppliers and partly by globalized customers searching via the web, which puts further pressure on prices. Many online companies enjoy lower margins with more efficient web- enabled databases and processes. They also cut out the middleman and his margin. So they revel in the ultra- competitive nature of online global markets.

New Pricing Approaches And there ’s more... barter, countertrade, strategic alliances, technology transfer, licences, leasing as well as auctions, and reverse auctions where sellers compete to supply a buyer, counter auctions... are all putting downward pressure on prices.

New Pricing Approaches On the other hand, web sites can track customer segments and their sensitivity to prices against their activity on the site, or past purchase habits recorded in host databases or stored in cookies held on the user ’ s computer (with their permission), For example, if a customer ’s history shows two visits to a particular product page, then an automatic online coupon might nudge the unsure customer to buy. In theory, marketers with well-managed databases can tailor prices to discrete segments at optimum prices.

Pricing Under Pressure Pricing is under pressure through the continual trend towards commoditization. Something new is commoditized almost every day. Once buyers can (a) specify exactly what they want, and (b) identify suppliers, they can run reverse auctions. Qualified bidders undercut each other – for both business and consumer products. Colvin (2000) reported that through MedicineOnline.com elective procedures such as laser eye corrections or plastic surgery required by a particular customer are fought over by rival practices.

New Pricing Approaches Price transparency is another factor. As prices are published on the web, buyer comparison of prices is more rapid than ever before. Storing prices digitally in databases potentially enables shopping bots and robot shoppers to find the best price. Price comparison sites have been around for many years now, in different sectors. So, such comparison sites create customer empowerment which leads to further downward pressure on prices. This is what happens when customers want to take control of the relationship rather than the other way around.

New Pricing Approaches And it ’s not going to get any easier to sustain old prices. A prototype next generation e-commerce server from the University of Washington uses gaming strategies to decide when to bargain even harder during the negotiation of complex contracts. Prices are complex.

New Pricing Approaches Options for the price package include: ● Basic price ● Discounts ● Add-ons and extra products and services ● Guarantees and warranties ● Refund policies ● Order cancellation terms ● Revoke action buttons.

New Pricing Approaches Ironically, the money-rich and time-poor customers in B2C markets may be much slower than buyers in B2B markets where transaction values are often higher, so savings are more significant. B2B marketplaces, known as exchanges or hubs, and auctions will grow in significance. Much routine and repetitive buying will be carried out in these B2B exchanges. Major corporations are already buying through online exchanges and auctions.

New Pricing Approaches Marketers (and buyers) will need new skills – defining the strengths and weaknesses of various exchanges and auctions. Experienced business people know the impact of buying efficiencies. Martin Butler estimates that a 5% saving in procurement equals the same contribution as a 30% increase in sales for many manufacturing companies ( Butler, 2001 ).

Price Monitoring Pricing is an important variable. Not knowing that your competitors have increased their prices can cost you loss. Equally not knowing your competitors have cut their prices can push a brand outside of a price sensitive market.

The Internet is changing pricing for ever. Prices are under pressure. Pricing structures and options are becoming more complex. It is crucial to get the pricing right in the short, medium and long term. Review new price structures in your markets driven by customers looking for lower prices available through a range of online tools including reverse auctions, customer unions, commoditization, cybermediaries, intermediaries, infomediaries and shopping bots.

Summary How pricing works in online world? From the buyer’s perspective From the seller’s perspective Market efficiency vs inefficieny Fixed and dynamic pricing

Something for you to look into… Many companies use a new-product development process called scenario planning. For example Microsoft executives wonder what it would be like if you could search your computer for phone numbers, addresses, and both file names and document content all at once with one search word. Think of five scenarios that will make your life easier while using internet.