Price: The Online Value E-M ARKETING /7E C HAPTER 10

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 10-2 C HAPTER 10 O BJECTIVES  After reading Chapter 10, 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.

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 10-3 T HE P RICE OF AN I P HONE A PP  Mobile apps have different pricing and revenue models.  Freemium is when companies offer a basic product for free and an upgraded version for a fee.  Lite versions are sold at low prices with fewer features.  Full price versions include more features.  In June 2011, 52% of top game app revenue came from freemium games.  So how can companies monetize apps?  When the freemium version of the Instapaper app was removed, sales of the paid app increased.  The company also noticed that few people upgraded from freemium to the paid version.

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 10-4 T HE V IDEO E GG S TORY, CONT.  Online advertising is bought and sold on a CPM (cost per 1,000 views) 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/roll over, which it splits 60/40% with the media site owner. 

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 10-5  Price is the sum of all values (such as money, time, energy and psychic) 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. T HE I NTERNET C HANGES P RICING S TRATEGIES Identify the main fixed and dynamic pricing strategies used for selling online.

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 10-6 B UYER & S ELLER P ERSPECTIVES  The meaning of price depends on viewpoints of the buyer and the seller.  Each party to the exchange brings different needs and objectives that help describe a fair price.  In the end, both parties must agree or no sale take place.  Buyer view  Seller view

B UYER & S ELLER P ERSPECTIVES B UYER V IEW  Buyer’s costs may include money, time, energy, and psychic costs.  Buyers defined Value = Benefits – Costs 1. Real Costs 2. Buyer Control ©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 10-7 Discuss the buyer’s view of pricing online in relation to real costs and buyer control.

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 10-8 B UYER V IEW R EAL C OSTS  The cost of a product purchased online may be higher than offline (due to seemingly hidden elements such as shipping costs and the time and effort needed to search out and compare prices.).  Buying on the Internet can both increase and decrease overall costs.  The Internet is far from perfect, but as bandwidth increases, technology evolves, and firms develop better online strategies, some costs will decline.

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 10-9 B UYER V IEW R EAL C OSTS, C ONT.  Buyers may enjoy online cost savings which come from:  The Internet is convenient: it is open 24 x 7 x 365 (for search, shop, entertainment…)  The Internet is fast: download times may not be acceptable to some, but product delivery can sometimes be next day.  Self-service saves time: track shipments, pay bills, trade securities, check account balances, request product information and receive it immediately…etc. with no need of human interaction.

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL B UYER V IEW R EAL C OSTS, C ONT.  One-stop shopping: comprehensive selection of goods or services at a single location. The Internet offer virtually unlimited goods and services.  Integration save time: Web portals like Yahoo! or AOL allow for ease of use and customization.  Automation saves energy: Simplicity and ease creates happy consumer.  Finally, not everyone wants to save money in online auctions.  Customer needs and their value proposition vary as each individual weighs the desired and perceived benefits against all the costs.  E.g. Amazon

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL  The shift in power from seller to buyer affects pricing strategies.  Buyers set prices and sellers decide whether to accept the prices in a reverse auction.  Online sellers are more willing to negotiate.  Online buyers have access to huge amounts of information  In the B2B market, buyers bid for excess inventory at exchanges.  In the B2G market, government buyers request proposals for materials and labor. B UYER V IEW, C ONT. B UYER C ONTROL

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL B UYER V IEW B UYER C ONTROL, C ONT.  Online buyers have more control through strategies such as reverse auctions, the availability of information and products, and negotiation opportunities:  Reverse auctions allow buyers to enter a price and sellers decide if they are willing to accept that price. has anyone ever been caught in a “bidding war?” e.g. eBay  Buyer power is based on negotiation abilities and the amount of information available to buyers.

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL B UYER & S ELLER P ERSPECTIVES S ELLER V IEW  Sellers view price as the amount of money they receive from buyers, unless they are making a better exchange.  All sellers want/need to make a profit.  Between cost and price is profit.  The seller’s perspective includes 1. Internal Factors & 2. External Factors Highlight the seller’s view of pricing online in relation to internal and external factors.

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL S ELLER V IEW : I NTERNAL FACTORS, C ONT. P RICING OBJECTIVES Internal factors include a. Pricing objectives may be: Profit-oriented objective  Pricing is set for current profit maximization  Focus’s on short term success Market-oriented objective  Goal is to build a larger customer base  May lead to lower prices and higher long-run profits  Negotiation & bidding are Market-oriented approaches Competition-based pricing  Pricing according to what competitors are charging, thus pay less attention to the firm’s own costs or to demand

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL S ELLER V IEW : I NTERNAL FACTORS, C ONT. M ARKETING MIX STRATEGY & IT b. Marketing mix strategy Successful companies use an integrated and consistent marketing mix strategy The Internet is only one sales channel Internet should be used in concert with other marketing mix elements c. Information technology Information technologies can be expensive, but should ultimately create tremendous cost efficiencies The Internet Puts Upward Pressure on Prices The Internet Puts Downward Pressure on Prices

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL I NTERNAL FACTORS, C ONT. I NFORMATION TECHNOLOGY Upward Pressure on Prices: Factors in Internet pricing includes:  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 cost of acquiring new customers online is quite high.

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL Downward Pressure on Prices: Firms can save money by using Internet technology for internal processes.  Self-service order processing.  Just-in-time inventory.  Overhead such as Amazon’s physical warehouses.  Customer service.  Printing and mailing.  Digital product distribution. I NTERNAL FACTORS, C ONT. I NFORMATION TECHNOLOGY

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL S ELLER V IEW : E XTERNAL FACTORS M ARKET STRUCTURE AND COMPETITION External factors affecting online pricing include Market structure and Market Efficiency 1. Market structure and competition: The seller’s scope to set prices varies by market type:  Pure competition: Many buyers and sellers trading in a uniform commodity (e.g. corn)  Monopolistic competition: Many buyers and sellers trading over a range of prices. Sellers can differentiate their offers to buyers.

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL S ELLER V IEW : E XTERNAL FACTORS M ARKET STRUCTURE AND COMPETITION  Oligopolistic competition: Few sellers sensitive to each other’s pricing & marketing strategies. If a company drops its prices by 5%, buyers will switch quickly to this supplier.  Pure monopoly: One seller whose prices are usually regulated by government.  If price transparency results in a completely efficient market, sellers will have no control over online prices.

S ELLER V IEW : E XTERNAL FACTORS, C ONT. E FFICIENT M ARKETS 2. Efficient Markets: A market is efficient when customers have equal access to information about products, prices, and distribution. Efficient markets are characterized by:  lower prices,  high price elasticity,  frequent and smaller price changes, and  narrow price dispersion. The web exhibits many characteristics of an efficient market except narrow price dispersion. ©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 10-20

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL E FFICIENT M ARKETS M EAN L OSS OF P RICING C ONTROL

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL  External market factors place downward pressure on Internet prices and contribute to efficiency.  Contributing factors may be:  Shopping agents such as BizRate.  High price elasticity.  Reverse auctions.  Tax-free zones.  Venture capital.  Competition.  Frequent price changes.  Smaller price change increments. I S THE N ET AN E FFICIENT M ARKET ? Outline the arguments for and against the Net as an efficient market.

©2012 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. I S THE N ET AN I NEFFICIENT M ARKET ?

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL I S THE N ET AN I NEFFICIENT M ARKET ? CONT.  Price dispersion may relate to other issues:  Brand strength.  How goods are priced online.  Delivery options.  Time-sensitive shoppers.  Differentiation.  Switching costs.  Second-generation shopping agents.

I S THE N ET AN E FFICIENT M ARKET ? C ONT.  The Internet is not an efficient market. However it has all the features to move toward efficiency.  Because the Internet could become a more efficient market in the future, marketers that want to maintain control over pricing should differentiate their products on bases other than price, create unique product bundles of benefits, and consider the role of customer perceptions of value when determining pricing levels. ©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 10-25

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL P AYMENT O PTIONS  Electronic money, also called e-money or digital cash, is a system that uses the Internet and computers to exchange payments electronically.  Off-line e-money payment systems include:  Smart chips. MZOOP Created in South Korea Inserted into a cell phone  Payment by cell phone.  For one-time payments, PayPal has become the industry standard with over 84 million accounts worldwide.

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL  Price setting has become an art as much as a science. If prices are too high, sales may decline, if prices are too low profits will suffer.  Pricing is the easiest part of the marketing mix, but because it has the biggest impact on the bottom line can be the most difficult decision for marketers to make.  Buyer value perceptions vary between rational and emotional, and consumers react differently. P RICING S TRATEGIES

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL  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,  Dynamic pricing,  Barter P RICING S TRATEGIES, C ONT.

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL P RICING S TRATEGIES F IXED P RICING  Fixed pricing (also called menu pricing) occurs when sellers set the price and buyers must take it or leave it. Commonly used by many brick-and- mortar firms.  Everyone pays the same price.  Two common fixed pricing strategies are:  Price leadership.  Promotional pricing.

P RICING S TRATEGIES F IXED P RICING, C ONT.  Price leadership  Lowest priced product in a particular category  Offline, Wal-Mart is a price leader  Most often, the largest producer becomes the price leader due to economies of scale  Promotional pricing  Encourages a first purchase  Encourages repeat business  Assists in closing a sale ©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 10-30

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL P RICING S TRATEGIES D YNAMIC P RICING  Dynamic pricing is the strategy of offering different prices to different customers.  Unlike fixed pricing, dynamic pricing can be initiated by the customer.  Airlines have long used dynamic pricing to price air travel.  There are two types of dynamic pricing:  Segmented pricing. a. Geographic Segment Pricing b. Value Segment Pricing  Price negotiation.

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL Segmented Pricing  Pricing levels are set based on order size and timing, demand and supply levels, or other factors.  Thus the firm set pricing levels for segments of customers and uses decision-making software to determine who gets what price.  Firms use decision rules to determine who pays what price.  Segments may be many or one  Pricing according to customer behavior segments is more common  Firm’s use cookie files to experiment with customer specific offers and prices to motivate transactions P RICING S TRATEGIES : D YNAMIC P RICING, C ONT.

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL  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. P RICING S TRATEGIES : D YNAMIC P RICING S EGMENTED P RICING, C ONT.

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL a. Geographic segment pricing  Pricing differs by geographic area.  Can be tracked by registration information or IP addresses  May vary by country.  May reflect higher costs of transportation, tariffs, margins, etc. P RICING S TRATEGIES : D YNAMIC P RICING S EGMENTED P RICING, C ONT.

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL P RICING S TRATEGIES : D YNAMIC P RICING S EGMENTED P RICING, C ONT. b. 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. This 20% tend to be the most loyal and most likely to advocate other business, so they deserve recognition and special attention.

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL C USTOMER V ALUE S EGMENTS

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL P RICING S TRATEGIES : D YNAMIC P RICING S EGMENTED P RICING, C ONT. c. Negotiated Pricing and Auctions  Through negotiation, the price is set more than once in a back-and-forth discussion.  The Net is changing the art of negotiation, evident in the popularity and growth of online auctions.  A major difference form the all other pricing strategies  Negotiating is common in other countries  Becoming more acceptable due to online auctions  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.

R ENTING S OFTWARE  Many organizations that require the use of software for a specific or short- term project prefer to rent the software instead of purchasing the software (CRM) ©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL Describe several types of online payment systems and their benefits.

10-39 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2012 Pearson Education, Inc. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall