The influence of the Internet on Pricing and Distribution

1. The influence of the Internet on Pricing and Distribution MARK 430

2. After this class you will be able to…. • Discuss the buyer’s and sellers views of pricing • Identify the main fixed and dynamic pricing strategies for selling online • Understand how the Internet has affected distribution channels

3. Buyers and sellers views of pricing • The meaning of price depends on the viewpoint of the buyer and seller. • Each party to the exchange brings different needs and objectives that help describe a fair price. • If buyer and seller can’t agree on a fair price, then there is no sale

4. Buyer perspective on price • Buyers define value as benefits minus cost • Costs to the buyer • Money – what is the real cost? How is it calculated; what does it include (shipping, taxes, duties, gift wrap) • Time – finding what you want, waiting for it to arrive, slow web sites • Energy – Web = self service, so no-one to help in research and locating an item • Psychic costs – frustration, lack of trust of web commerce, lack of confidence in on-line service delivery etc

5. Seller perspective on price • Sellers concerned with profitability – but there is some freedom to set price at a level that will draw buyers away from competing offers • Profit lies between cost and price • Affected by both internal and external factors • External factors: • Market structure and type of competition • Market efficiency

6. Internal factors affecting price for sellers • Depends on pricing objectives (eg. volume; building market share; high profits; matching competition) • Factors that push prices upwards – • cost of distribution • commissions to affiliates • site development • customer acquisition costs • Factors that depress prices – • Order processing – self service • Just-in-time inventory • Overhead (physical vs. online store) • Customer service costs lower • Printing and mailing costs • Digital product distribution costs

7. Going from free to paid service • Big issue now is persuading people to pay for something they used to get for “free” • Some strategies • Provide basic service at no cost, with upgraded or enhanced service being charged for • Yahoo Mail • Business 2.0 magazine • e-Cards

8. Price comparisons by customer • Software agents visit web servers and collect pricing information, and / or merchants provide a data stream to the site • Many of these sites accept payment for “premium” listings • Bidfind • www.MySimon.com • Froogle – merchants provide a data stream to Google (no paid placement) • Has the effect of decreasing price differences • competitors have easy access to prices • more difficult to maintain position as a price leader in the Internet world

9. Pricing strategies • Fixed pricing (similar to offline pricing strategy) • Price leadership • Promotional pricing • Dynamic pricing (Internet-enabled pricing) • Auctions • Segmented pricing (geographic or based on customer profile)

10. Pricing Strategies: FIXED PRICING • Occurs when sellers set the price, and buyers must take it or leave it • Everyone pays the same • This strategy is very common in retailing • 2 types of fixed price strategy are • Price leadership • Promotional pricing

11. Fixed pricing: Price leadership • A price leader is most often, but not always, the lowest-priced product entry in a particular category. The price leader is the one that sets the price levels for the market. Others follow the leader with comparative pricing (usually higher). • Walmart is an example of a “low price” price leader that uses technology to leverage its costs and maintain profitability • An online company such as www.Buy.com consistently offers lower prices. It sells below market value and subsidizes price cutting with advertising on its web site. • Very hard to maintain price leadership and remain profitable as the lowest price • Can you think of industry examples where the price leaders have higher prices? • How do they succeed? • What does this mean for the internet market? How could you be a higher-priced price leader?

12. Fixed pricing: Promotional pricing • This strategy used to encourage a first purchase, encourage repeat business, and close a sale • Promotions tend to carry an expiry date – creates a sense of urgency • Price promotions can be highly targeted using email and on web sites that use clickstream analysis (then it becomes dynamic)

13. Pricing strategies: DYNAMIC PRICING • Dynamic pricing is fluid pricing • Dynamic pricing is one of the most significant contributions the Internet has made to pricing strategy. • Decreased “menu” costs on the web - changing prices is easy (no costs of changing price tags, catalogs etc) • Interactivity - buyers and sellers from all around the world can interact and negotiate prices

14. Dynamic pricing: Auctions • Variety of auction types • “English” auction - such as e-Bay where the price starts low and is then driven up • “Dutch” auction - the auctioneer announces a high price for the product, then gradually reduces it until a buyer will accept it • e-Bay has a variant of this, where a seller has multiples of the same product to sell • First-Price sealed bid auction (purchaser does not know the amount of the other bids) • Priceline is an example of this type of auction

15. Priceline “Name Your Own Price” Auction Process Consumer submits non-refundable bid Priceline checks if any of its participating airlines are willing to offer roundtrip flight at bid price or lower Checks airline’s seat availability Priceline accepts or rejects bid

16. Pricing Strategies: Dynamic Pricing • Dynamic pricing is also the strategy of offering different prices to different customers • Optimizes inventory management • Segments customers by product use or other variables (eg. frequent or infrequent purchasers) • Web-based technology and database marketing have made this strategy much easier to implement • What advantages does this provide a marketer when trying to manage product levels and market segment positioning?(Discuss)

17. Dynamic pricing: Segmented pricing • Where the company sells goods or services at two or more prices,based on segment differentiation • automatically generates a different price depending on a number of pre-set variables or decision rules • The Internet gives the ability to recognize a consumer, then customize prices, segmenting sometimes to a segment of one • eg. anyone who has previously purchased 10 items gets a discount • May use your IP address to offer a product at an introductory price – eg. Telus offer to students from Malaspina IP address • May use behavioural cue: eg. if you abandon your shopping cart • Use with care – customers may get upset

18. Segmented pricing: geographic segments • A company sets different prices when selling a product in different geographic areas • Uses IP address of user to guess at their location • Prices can then be related to circumstances in different countries – local competition, economic conditions etc • Computers, CDs etc. are usually priced differently according to geography

19. The Internet as a distribution channel • Distribution determines how the customer actually receives a product or service (also often called fulfillment) • A distribution channel is a group of interdependent firms that work together to transfer product from producer to consumer Producers >>Intermediaries>>Consumers

20. The effect of the Internet on servicing customers across multiple distribution channels • Adds another communication channel between buyers and sellers • Facilitates real-time communication so firms can have closer ties with customers and suppliers - improved market responsiveness • Customer access and service are now 24/7/52 • Increases customer convenience and reduces time spent on shopping(PERHAPS an opportunity to INCREASE MARGIN due to perceived added value?) • Increase in the power of consumers - we are now SO demanding

21. Some Impacts on Distribution • Evolution from traditional mail order to on-line selling eg. Land’s End • Traditional firms with large investments in offline retail have been reluctant to fully engage in online commerce eg. WalMart • Traditional retail firms have experienced “channel conflict”, cannibalization issues. eg. LeviStrauss • Completely new business models based on digital distribution methods • Internet becomes a direct substitute for an offline distribution channel eg. online banking

22. Disintermediation • Cutting out the “middle person” • Initially it was thought that because of the move toward self service on the web, we would move toward a position where the distribution channel was shorter • This hasn’t happened to the extent predicted – new kinds of intermediaries on the Internet

23. Intermediaries add customer value in various ways

24. Logistics functions of the distribution channel • Include physical distribution activities such as transportation, inventory storage, and product aggregation. • Physical distribution • Most products sold online are still distributed through conventional channels • But any product that can be digitized can be delivered over the Internet (newspapers, magazines, music, software, books, TV, movies etc) • Online distribution costs are significantly lower

25. Logistics challenges • The “last mile problem” – cost and logistics of delivering small amount of goods to individual customers • Solutions: • Smart boxes (for a fee!) • Retail aggregator model – items can be shipped to a local convenience store or service station • Specialized e-shop pick-up points • Returns: reverse logistics

26. Some industries that are undergoing rapid change due to Internet forces • Recorded Music industry • Video/DVD rental industry • Newspaper and magazine publishing • Banking • Textbook publishing • Forces for change: • Digitizable product • Self service • Direct to consumer shift

27. Thank You • Next Week…. How the Internet offers products and Branding…