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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.

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chapter 11 objectives
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.
the videoegg story
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.
the videoegg story cont
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.
the internet changes pricing strategies
The Internet Changes Pricing Strategies
  • 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 prices online.
buyer seller perspectives buyer view
Buyer & Seller Perspectives: Buyer View
  • The meaning of price depends on the viewpoint of the buyer and the seller.
  • Buyer’s costs may include money, time, energy, and psychic costs.
  • But they often enjoy many online cost savings:
    • The Net is convenient and fast.
    • Self-service saves time.
    • One-stop shopping and integration save time.
    • Automation saves energy.
buyer control
Buyer Control
  • 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.
buyer seller perspectives seller view
Buyer & Seller Perspectives: Seller View
  • The seller’s perspective includes internal and external factors.
  • Internal factors include pricing objectives, marketing mix strategy, and information technology
  • Pricing objectives may be:
    • profit oriented.
    • market oriented.
    • competition oriented.
seller view cont
Seller View, cont.
  • 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.
the internet puts upward pressure on prices
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 for early online retailing was $82.
the internet puts downward pressure on prices
The Internet Puts Downward Pressure on Prices
  • 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.
external factors affect online pricing
External Factors Affect Online Pricing
  • Market structure and market efficiency affect pricing strategy.
  • The seller’s ability to set prices varies by market type:
    • 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.
efficient markets
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.
is the net an efficient market
Is the Net an Efficient Market?
  • 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.
    • Venture capital availability.
    • Competition.
    • Frequent price changes.
    • Smaller price change increments.
is the net an inefficient market
Is the Net an Inefficient Market?
  • 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.
is the net an inefficient market cont
Is the Net an Inefficient Market? cont.
  • Price dispersion may also relate to other issues:
    • Brand strength.
    • Online pricing.
    • Delivery options.
    • Time-sensitive shoppers.
    • Differentiation.
    • Switching costs.
    • Second-generation shopping agents.
  • The internet is not an efficient market.
payment options
Payment Options
  • Electronic money uses the internet and computers to exchange payments electronically.
  • Other off-line e-money payment systems include:
    • Smart chips.
    • Payment by cell phone.
  • PayPal has become the industry standard with over 150 million accounts worldwide.
pricing strategies
Pricing Strategies
  • 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.
fixed pricing
Fixed Pricing
  • Fixed pricing (menu pricing) is when everyone pays the same price.
  • Two common fixed pricing strategies are:
      • Price leadership.
      • Promotional pricing.
dynamic pricing
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.
  • There are 2 types of dynamic pricing:
    • Segmented pricing.
    • Negotiation.
segmented pricing
Segmented Pricing
  • 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 pricing cont
Segmented Pricing, cont.
  • 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.
negotiated pricing and auctions
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.
renting software
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.