Pricing and the Internet

1. Pricing and the Internet Richard T. Watson The University of Georgia rwatson@mis.terry.uga.edu

2. The importance of pricing • Price -> revenue • Pricing is a critical managerial decision • Economic theory assumes buyers and sellers are rational • Profit maximization • Demand and supply analysis • Perfect competition

3. Real world • Bounded rationality • Satisficing • Goals other than profit maximization • Brand and image perceptions • Customers are emotional

4. Internet impact • Dispersed buyers and sellers interact electronically • Search costs are reduced • Markets are more efficient • A threat to marketers • Customers will increasingly make prices

5. Competitive rationality theory • An abundance of choice makes customers more sophisticated • More searching and comparison • Value seeking behavior • Marketers try to be smarter still • Cycle is accelerated • Oversupply increases

6. Pareto principle • A small number of customers account for most of the profits • Mexican cellular phone company • 10% of customers create 90% of sales • Recoup investment in months • 80% of customers create 10% of sales • Recoup investment in years

7. Spectrum of exchange • The range of transactions between actors • From theft by force to trading on an exchange • Marketing is effective somewhere between these two extremes

8. Customer value and pricing

9. Directions • Marketing • Moves customers up the pyramid • Moves products and services away from commoditization • Competition • Moves customers down the pyramid • Moves products and services towards commoditization

10. Technology facilitates customer search bottomdollar.com Customers make rather than take prices priceline.com Customers control transactions GE and Caterpillar Flattening forces

11. A return to one-to-one negotiation onsale.com Commodization and efficient markets MIS research market Flattening forces

12. Technology facilitates searching

13. Reducing transaction costs

14. Travelbids Regular Listing: L006946 Quoted Price:$1718 Bidding Deadline:08/09/99 12:46 PM Description: Air Qantas for 1, Atlanta to Melbourne, Aust. 10/13-25 Bid #B009090 Disc Bid Amt:$340 19.8% Bid Time:08/09/99 12:43 PM (MST) A Bid #B009088 Disc Bid Amt:$335 19.5% Bid Time:08/09/99 12:42 PM (MST) Bid #B009087 Disc Bid Amt:$330 19.2% Bid Time:08/09/99 12:40 PM (MST) Bid #B009086 Disc Bid Amt:$320 18.6% Bid Time:08/09/99 12:39 PM (MST) Bid #B009085 Disc Bid Amt:$310 18.0% Bid Time:08/09/99 12:39 PM (MST) Bid #B009083 Disc Bid Amt:$300 17.5% Bid Time:08/09/99 12:38 PM (MST) Bid #B009082 Disc Bid Amt:$275 16.0% Bid Time:08/09/99 12:37 PM (MST) Bid #B009081 Disc Bid Amt:$245 14.3% Bid Time:08/09/99 12:35 PM (MST) Bid #B009080 Disc Bid Amt:$240 14.0% Bid Time:08/09/99 12:35 PM (MST) Bid #B009079 Disc Bid Amt:$215 12.5% Bid Time:08/09/99 12:34 PM (MST) Bid #B009078 Disc Bid Amt:$210 12.2% Bid Time:08/09/99 12:33 PM (MST) Bid #B009077 Disc Bid Amt:$205 11.9% Bid Time:08/09/99 12:31 PM (MST) Bid #B009076 Disc Bid Amt:$200 11.6% Bid Time:08/09/99 12:30 PM (MST) Bid #B009075 Disc Bid Amt:$175 10.2% Bid Time:08/09/99 12:28 PM (MST) Bid #B009074 Disc Bid Amt:$170 9.9% Bid Time:08/09/99 12:24 PM (MST) Bid #B009073 Disc Bid Amt:$150 8.7% Bid Time:08/09/99 12:24 PM (MST) Bid #B009072 Disc Bid Amt:$145 8.4% Bid Time:08/09/99 12:20 PM (MST) Bid #B009071 Disc Bid Amt:$140 8.1% Bid Time:08/09/99 12:18 PM (MST) Bid #B009070 Disc Bid Amt:$135 7.9% Bid Time:08/09/99 12:12 PM (MST) Bid #B009067 Disc Bid Amt:$130 7.6% Bid Time:08/09/99 09:26 AM (MST) Bid #B009047 Disc Bid Amt:$125 7.3% Bid Time:08/08/99 01:58 AM (MST) Bid #B009041 Disc Bid Amt:$120 7.0% Bid Time:08/07/99 03:11 PM (MST) Bid #B009034 Disc Bid Amt:$115 6.7% Bid Time:08/06/99 05:25 PM (MST) Bid #B009027 Disc Bid Amt:$110 6.4% Bid Time:08/06/99 02:43 PM (MST) Bid #B009021 Disc Bid Amt:$105 6.1% Bid Time:08/06/99 12:52 PM (MST)

15. Migrating up and effective marketing • Differentiated pricing all the time • Creating customer switching barriers • De-menuing pricing • Better differentiation • Customers may pay more • Consider total cost • Establish electronic exchanges • Maximize revenue not price • Reduce buyer’s risk

16. Differentiated pricing all the time • The same product and service can have different values to different customers • Airlines • Drink vendors could charge more on a hot day • Mass customization enables mass price differentiation

17. Creating customer switching barriers • Collect details on customers to raise switching costs • Knowing preferences is necessary for better service • The Web site should learn about the customer’s preferences

18. De-menuing pricing • Without automation, changing prices is costly and time-consuming • It takes time to filter through the distribution network • Networks enable rapid dissemination of price changes • Change prices as needed

19. Better differentiation • Differentiate the buying experience as well as the product or service • Stage the customer experience • The Web as theater for a unique personal experience

20. Customers may pay more • Marketers often assume customers underestimate the value of a product • This may not be true • Try letting customers set the price • London restaurant

21. Consider total cost • Purchase price is one element of total acquisition cost • If Web-based purchasing reduces the total acquisition cost customers may pay a price premium • Convenience • Opportunity cost

22. Establish electronic exchanges • Bartering may be more effective than selling when prices are low • Barter excess supplies • Mainly business-to-business

23. Maximize revenue not price • Airlines use yield management software to maximize revenue • Use Web to sell perishable, last-minute capacity

24. Risk Auction • On-line • Premium Return Risk and return trade-off • Buyers may pay a price premium for reduced risk • Manheim Auctions

25. Pricing mechanisms

26. Pricing factors

27. Pricing directions

28. How does the firm interact with each class of customer? Personalized Web sites for A customers and the opportunity to make prices Weekly standard emails for the C customers Blend communication technology, pricing mechanisms, and customer value concepts to manage revenue precisely Marketing will become more like trading Integrated Internet pricing strategy

29. Efficiency is not enough Fast response is essential Online bids must be answered within minutes Accurate, dynamic cost analysis Create trading teams Change the mindset Fixed to variable pricing Single to multiple interactions Survival tactics

30. Learn what customers want Customer databases Data mining and OLAP One-to-one marketing Information is the heart of customer service Boost the information content of products and services Survival tactics

31. The Internet is having a fundamental impact on pricing strategy At worst, it will flatten the customer base At best, it will increase the ability to differentiate Customers will move along the exchange spectrum more rapidly Flee to electronic commodity markets or seduced to mutually valuable long-term relationships? Creative pricing strategies are critical Conclusion