Decreasing returns . Traditional models had decreasing returns Works for bulk processing manufacturing industries Coffee plantation Equilibrium was predictable and orderly Therefore winning meant operational excellence, differentiation, and reasonable margins. No one could dominate.
Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.
Production is repetitive
Products remain same
Keep products flowing, improve quality, lower costs
Need control and planning
Optimization is possible
Internet – Casino
Winner takes all
Quest for next cash cow
Mission oriented not production oriented
Give free rein
Reinvent, restructure, reposition, reorganize
Adapt – games changing constantlyA comparison
Hyper-Competition on Price
Loss Leader Pricing
to build Installed Base
Consumer Price Sensitivity on the Net
(1) Product Quality
- e.g. Lexus versus Corolla
(2) Service level
- e.g. Merrill Lynch vs. E*Trade
(3) Purchase conditions (Cash vs. Credit)
- e.g. gasoline, automobile financing, etc.
(4) Location and Transportation
- e.g. hypermarche’s in France, warehouse stores.
(5) Brand Image
- e.g. McAfee versus Command.com
Big difference between what people say and what they do.
Most visit only 1 site prior to purchase
Internet has the feature that has high fixed costs and low or zero marginal costs
A and B develop software spending $500 million a year in marketing, R&D, and promotion.
Variable cost is $5 to sell each copy.
Price = $200
Firm A has 80% market share and firm B has 20% share
Market size is 10 million units in 1999.
Profit for Firm A = 200*8M - (500M+8M*5) = 1060M
Profit for Firm B = 200*2M - (500M+2M*5) = -110M
Market share is key!
Margins and growth rates are also important in determining the profits.
There are a number of lock-in factors:
Costs to implement price changes
- Confusion to customers
Most efficient mechanism from a welfare point of view
Internet overcomes some of the problems associated with the above pricing strategies.
Small operators – liquidators, small retail shops, entrepreneurs
4 million items listed
Top 20 sellers 72000 listings
Top 38000 – 2.7 million items listed
15.8 million registered users
commissions 1.25 – 5% of the value of the item sold
Power seller Bronze $ 2,000 per month
Must have received 100 comments from customers and 98 % positive.
Ebay has 20-25K power sellers
Power sellers get full time customer service support and permission to display an official power seller logo.
10% of sellers sold 80% of sales
Sellers made a 40% margin
Amazon spent 25% sales on marketing
Bargaining / Menu pricing
Bargaining / Menu pricing
MobShop, Yahoo auctions
Altra Energy, CheMatch
Degree of Customization
Auction Management Services
E.g., eBay, Ubid
E.g., Basement.com, Outletzoo.com
This works if:
e.g. Non differentiated products
Awareness of local restaurants
e.g. Technical products
Different pack sizes
Business expense or personal ?
- Segment consumers by their price-consciousness;
- keep the sales within the company;
- allow consumers to trade-up.