© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Internet Marketing & e-Commerce Ward Hanson Kirthi Kalyanam Requests for permission to copy any part of the material should be addressed to: PERMISSIONS DEPARTMENT THOMSON BUSINESS and ECONOMICS 5109 Natorp Boulevard Mason, OH Phone: (800)

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Part Two: Chapter 12 Pricing in an Online World “It is only an auctioneer who can equally and impartially 公平 地 admire all schools 學派 or art.” Oscar Wilde, The Critic as Artist

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation 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

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation 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

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation 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?

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation ☆ The Standard Pricing Answer Based on costs 成本法, customer demand, competition 市場法 Using research data, pricing intuition, and experience Even not to set price (auction 拍賣法 )

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation ☆ Power of Pricing The Internet tends to increase price sensitivity, but prices online are not automatically lower or less dispersed 分散 Value uncertainty contributes in predictable ways to price sensitivity Purchase importance contributes in predictable ways to price sensitivity

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Value Uncertainty Price Sensitivity Factors Reference price effect: Competitive alternatives and how they are presented online

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Value Uncertainty Price Sensitivity Factors 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

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Value Uncertainty Price Sensitivity Factors 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

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Value Uncertainty Price Sensitivity Factors 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

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Price sensitivity factor: value uncertainty Power of Pricing Information about product alternatives influences price sensitivity SOURCE: PRNewsFoto/Nokia, PRNewsFoto/Handspring Inc, Market Wire Global Locate

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Purchase Importance Price Sensitivity Factors Total expenditure effect: Consumers are most price sensitive to items that consume largest part of their budget

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Purchase Importance Price Sensitivity Factors 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

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Purchase Importance Price Sensitivity Factors 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

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Purchase Importance Price Sensitivity Factors Consumers who spend major portion of budget on pharmaceuticals are more likely to look for savings online

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation ☆ Advanced Pricing Online 1.Time-based pricing –Auction –Yield Management –Renting rather than selling –Running a limited time sale 2.Personalized pricing (page 419 bottom) 3.Bundle pricing –Bundling to reduce costs –Bundling to expand market –Bundling to improve performance –s

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Time-based Pricing Borrowing a lesson from financial markets: “The only valid price is the one quoted right now.”

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation 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

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation 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

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Time-based Pricing

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation 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

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation 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

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation 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 不道德 –Difficult to identify high-value buyers –Consumer resale risks

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Personalized Pricing Emerging approaches –Coupons and loyalty discounts –Price pegged 釘住 to credit scores –Personal-level pricing contracts –Personalized bundling

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Bundle Pricing Bundling to reduce costs –Production efficiency bundling promotes combined products when production or shipping has steep set-up costs 高設置費用 Margin spread bundling combines items with high contribution margins 高利潤

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation 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

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation Aggregation Bundle Pricing (Explain: 下面各圖 Price per song 去除 per song, ; 右圖 20 songs price 分別是 20, 15,10, 5,0 pennies) 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

© Copyright 2006, Thomson South-Western, a division of the Thomson Corporation 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