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E-Marketing 4/EJudy Strauss, Adel I. El-Ansary, and Raymond Frost

Chapter 11: Price

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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.

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The AOL Story

• AOL’s subscription growth has slowed.• 33 million subscribers in 2001 has declined to 20

million in 2004.• International expansion has not spurred growth.

• AOL wants to build more wallet share by adding interactive entertainment, communication services and information products.

• AOL hopes to increase customer revenue from $19.95/month today to $159/month for a menu of services in the future.

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• They plan to price broadband services at $30/month to build market share.

• AOL believes customers will pay for other services, such as • $20 to add other household computers. • $20 to download music. • $20 to access the Net from cell phones, etc.

• Do you think that AOL’s pricing strategy makes sense in today’s competitive online environment? Why or why not?

The AOL Story, cont.

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• 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 (19th Century)

idea.• Results of mass manufacturing and mass retailing

• The Internet is taking us back to an era of dynamic pricing—varying prices for individual customers.

• The meaning of price depends on the viewpoint of the buyer and the seller.

The Internet Changes Pricing Strategies

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Buyer View

• Buyer’s costs may include time, energy and psychic costs.

• But they often enjoy many online cost savings:• The Net is convenient.• The Net is fast.• Self-service saves time.• One-stop shopping saves time.• Integration saves time.• Automation saves energy.

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• The change in power from seller to buyer affects pricing strategies.

• Buyers set prices and sellers decide whether to accept the prices in a reverse auction.• Request for Proposal• Request for Bids

• Buyer power online is also based on the huge quantity of information and products available on the Web.

Buyer Control

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Seller View

• Pricing objectives may be: • profit oriented. • market oriented. • competition oriented.

• 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.

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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 is $82 for online retailers.

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• 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

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• Market structure and market efficiency affect pricing strategy.

• The seller’s ability to set prices varies by market type:• Pure competition. (many buyers and sellers)

• Commodities <> wood prices

• Monopolistic competition (many buyers & sellers…differentiated offerings)

• Car Sales <> subcompact/compact/sedan/sports/luxury• Truck sales <> work truck/dressed-up truck/sport truck/SUV/luxury

• Oligopolistic competition. (few sellers)• Oil Companies

• Pure monopoly. (one seller)• At one time AT&T, Microsoft??

External Factors Affect Online Pricing

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Efficient Markets

• A market is efficient when customers have equal access to information about products, prices and distribution. (Price transparency)

• 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.

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Efficient Markets Mean Loss of Pricing Control

Pure monopoly

Oligopolistic competition

Monopolistic competition

Pure competition

Government control

Market control

Area of control for e-marketing pricing strategy

Efficient market

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• 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 reduce out of pocket expenditures.• Venture capital availability.• Competition.• Frequent price changes.• Smaller price changes.

Is the Net an Efficient Market?

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• 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 the online

channel is still not completely mature.

• Price dispersion may also relate to other issues:• Brand strength. • Delivery options.• Time-sensitive shoppers.

Is the Net an Inefficient Market?

•Differentiation•Switching Costs•Second-generation

shopping agents

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• 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 (menu pricing) is when everyone pays the same price.

• Two common fixed pricing strategies are:• Price leadership. (Cheapest, Best Value)• Promotional pricing.

Pricing Strategies

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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.• So have Hotels/motels

• There are 2 types of dynamic pricing:• Segmented pricing.• Negotiation.

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

• Pricing according to customer behavior segments 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.

Segmented Pricing

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• 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.

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Customer Value Segments

High Low

A+

A

B

C

Customers Grouped by Value

Customer value to the seller

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Negotiated Pricing

• Through negotiation, the price is set more than once in a back-and-forth discussion.

• Online auctions utilize negotiated pricing.• Consumers enjoy the sport and community.• B2B auctions are an effective way to unload surplus

inventory.

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Bartering

• Goods or services are exchanged for other products rather than cash.

• Users of bartering may enjoy tax benefits.

• Bartering is not a profitable pricing strategy.

• Exchanging or auctioning used items online can hurt sales of new products.