E-MARKETING 5/EJUDY STRAUSS AND RAYMOND FROST

Chapter 11: Price: The Online Value

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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. Describe several types of online payment systems and

their benefits.

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The VideoEgg Story

The video and rich media advertising company was founded in 2004 by 3 Yale graduate students.

VideoEgg delivers ads to social networking sites, video sites, and gaming applications.

VideoEgg created AdFrames, which allow video viewers to roll over and watch ad-sponsored content.

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The VideoEgg Story, cont.

Online advertising is bought and sold on a CPM (cost per 1,000 impressions) 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 per roll over, which it splits 60/40% with the site owner.

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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 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 competitive prices online.

The Internet Changes Pricing Strategies

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Pricing Strategies

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Buyer & Seller Perspectives: Buyer View The meaning of price depends on the

viewpoint of the buyer and the seller. An agreement to a fair price must be

reached or no sales will occur. Value = Benefits – Cost Buyer’s costs may include money, time,

energy, and psychic costs. The wide price difference; the inclusion and non-

inclusion of tax; supplier rating/reliability; number of reviewers etc.

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Buyer & Seller Perspectives: Buyer View

But they often enjoy many online cost savings: The Net is convenient and fast.

Research, shop, get entertained 24/7; on a range of appliances. Ordered items received quickly.

Asynchronous communication anytime anyplace Self-service saves time.

Look at choices, track order, pay bills, etc without having to wait for company staff/rep.

One-stop shopping and integration save time. Automobile companies in Malaysia; AutoMall Online USA Customised info by search engine companies

Automation saves energy. Tracking previous purchases; sites visited; passwords store.

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The shift in power from seller to buyer affects pricing strategies. In the B2B market, buyers bid for excess inventory. In the B2G market, government buyers request

proposals for materials and labor. Buyers set prices and sellers decide whether

to accept the prices in a reverse auction. Buyer power online is also based on the huge

quantity of information and products available on the Web.

Risk – “ the winner’s curse”

Buyer Control11-9

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Buyer & Seller Perspectives: Seller View Price is the amount of money received from the buyer. The seller’s perspective includes internal and external

factors, identified via SWOT analysis. Internal factors include pricing objectives, marketing mix

strategy, and information technology External factors include market structure and

competition Pricing objectives may be:

profit oriented – profit maximisation; breakeven. market oriented – customer buildup competition oriented.

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Seller View, cont.

Marketing mix – must be integrated and consistent, whether online or offline.

The Internet is only one sales channel and must be used in concert with other marketing mix elements.

Information technology Can be expensive but if done well can lead to better

operation and efficiency can place both upward and downward pressure on

prices.©2009 Pearson Education, Inc. Publishing as Prentice Hall

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The Internet Puts Upward Pressure on Prices

Online customer service is an expensive competitive necessity – online assistance, e-mail replies.

Distribution and shipping costs – individual packaging adds to cost.

Affiliate programs add commission costs. Site development and maintenance –

hardware, software, connection costs. Customer acquisition costs (CAC).

The average CAC for early online retailing was $82.

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Customer Acquisition Cost

Customer Acqusition Cost Calculator New customers per month 200 Website Development Costs $ 10,000 Estimated life of the website (months) 24 Monthly Promotion Costs $ 2,000 Monthly Maintenance Costs $ 250

Your customer acquisition costs are $13.33 per customer. Which is: Website Development Costs / Expected Life of website) + Monthly

Promotion Costs + Monthly Maintenance Costs New customers = ($10,000.00/24) + $2,000.00 + $250.00 / 200 = $13.33

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Firms can save money by using internet technology for internal processes. Self-service order processing. Just-in-time inventory – sometimes no inventory at all. Overhead – no rental of selling spaces and

associated staffing; if at all in cheaper places Customer service – customers help themselves. Printing and mailing – no mailing or distribution

needed. Digital product distribution – true for limited products

such as software and music..

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 as identified by economists: Pure competition. Monopolistic competition. Oligopolistic competition. Pure monopoly.

If price transparency results in a completely efficient market, sellers will have no control over online prices.

External Factors Affect Online Pricing11-15

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Efficient Markets

A market is efficient when customers have equal access to information about products, prices, and distribution.

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, Travelocity. High price elasticity – variability of purchase behavior with changes in

price. Reverse auctions – forces sellers to compete against one another . Tax-free zones – still have a moratorium on internet taxes. Venture capital availability – longterm view prevailing thus no pressure

for immediate profitability. Competition – fierce and highly visible; some sacrificing immediate profit

for brand equity and market share. Frequent price changes – many reasons e.g role of shopping agents,

need for new customers, incremental volume discounts. Smaller price change increments – ranking by shopping agents, easy to

change prices online, presence of price-sensitive customers.

Is the Net an Efficient Market?11-19

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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. Dispersion of prices exceed 30% in some cases. One possible reason - Price dispersion may occur

because many buyers do not know about or use shopping agents.

Is the Net an Inefficient Market?11-20

Is the Net an Inefficient Market? cont. Price dispersion may also relate to other issues:

Brand strength – varies from company to company. Online pricing – fixed, dynamic or auction. Delivery options – time and place. Time-sensitive shoppers – reluctant to spend time

to seek best deal. Differentiation – a result of strong branding. Switching costs – loses familiarity, thus willing to

pay a little more. Second-generation shopping agents- uses ranking.

In summary, the internet is not an efficient market. ©

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Payment Options

Electronic money(e-money or digital cash) uses the internet and computers to exchange payments electronically. Touch & Go ?

Other off-line e-money payment systems include: Smart chips. Payment by cell phone.

More options in payment methods attracts more customers

Additional costs to customers. PayPal has become the industry standard with over 84

million accounts worldwide.©2009 Pearson Education, Inc. Publishing as Prentice Hall

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PayPal Account Options

Exhibit 11.6

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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.

Pricing Strategies11-24

Fixed Pricing

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

Even with quantity discounts Two common fixed pricing strategies are:

Price leadership – the lowest price. Company need to be most cost efficient Normally the largest producer as has the advantage of

economy of scale Promotional pricing.

To encourage first or repeat purchase Limited time period Can be highly targeted through e-mails

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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 – depending on the season; group travel.

Quick changes can be done on webpages to announce new prices.

There are 2 types of dynamic pricing: Segmented pricing – set by seller Price negotiation – usually initiated by the buyer.

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

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.

Segmented Pricing11-27

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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.11-28

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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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The target is to move as many customersas possible to the A+ category and keeping the A+customers as long as possible

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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, consumers enjoy the sport

and community while others are just looking for a good deal.

B2B auctions are an effective way to unload surplus inventory.

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Renting Software

Software companies sometimes decide to rent rather than sell software to customers.

Renting software is analogous to leasing cars. Salesforce.com rents a leading CRM software

system.

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