E Commerce 8th Chapterv E Commerce E Commerce E Commerce

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Mohammed, Fisher, Jaworski, Paddison

Internet Marketing, 2

nd

Ed

Chapter 8 Lecture Slides

Pricing

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Pricing — Today’s Objectives

To choose a product price which is aligned with the product’s differentiated benefits and targeted customer segments

Chapter 7

Product

Community Customer

Relationships

Pricing

Chapter 10 Chapter 9

Chapter 8

Chapter 6

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Last Updated: 06/24/03 Copyright 2003 by Marketspace LLC

Exhibit 8–2: Key Pricing Strategies

Retail Price Decisions

Retail/Outlet

Pricing

Cost Plus

Brand Pricing

Promotions

English Auctions

Reverse-Price

English Auctions

Dutch Auctions

First-Price

Sealed-Bid Auctions

Reverse

First-Price Sealed-Bid Auctions

Exchanges

Volume Discount

Pricing

Two-Part Pricing

Bundling

Price

Discrimination Over Time

Frenzy Pricing

Three Categories

of Price

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Chapter 8: Pricing

 The Economics of Pricing

 Retail Price Decisions

 Basic and Dynamic Pricing Strategies

 Advanced Pricing Strategies

 Strategic Responses to Competitor Price Cuts

 Pricing Process

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Exhibit 8–6: Hi-Lo vs. EDLP vs. Retail/Outlet

Hi-Lo

Product prices high

most of the time

Occasionally, prices

are set low (generally lower than prices at EDLP retailers)

EDLP

Everyday prices are

set low (generally lower than the high price in Hi-Lo strategy)

Occasionally, EDLP

prices are discounted (generally not lower than the low price in EDLP strategy)

Retail/Outlet

Regular prices at retail

stores (prices rarely discounted at retail stores)

Merchandise

discounted at outlet stores

There are three key brand positioning strategies that retailers can employ regarding price:

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 Retail Price Decisions

 Basic and Dynamic Pricing Strategies

 The Pricing Process

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Supporting Slide 8–E: Promotional Low Cost Pricing

Stores and manufacturers often significantly decrease prices for the following reasons:

Switching Costs

Loss Leaders

 Firms in categories where switching

costs are high try use low price to induce buyers to try their product

 Offering low prices on well-known

brands, staple goods or seasonal items can lead to sales of higher margin goods

Trial

Benefits of Rapid Acceptance

 Lowering the introductory price can

induce consumers to experience the benefits of a new product

 To capitalize on first-mover

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Exhibit 8–7: Promotional Low-Cost Pricing

Promotional Pricing

Trial Loss Leader

Benefits

Well-Known Brands

Staples

Seasonal/Holiday/ Special-Demand

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Exhibit 8–8: Fairness in Pricing

Key Components of Reference Price

Past prices

Close substitute prices

Context or purchase

environment

Environments in Which to Consider

Underpricing (Fairness)

The market clearing

price is much higher than some

well-established reference price

Ongoing pecuniary

relationship between buyer and seller

When Fairness is Important

When there is an

ongoing relationship between buyers and sellers

When the seller has

significant market power over buyers

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Exhibit 8–9: Effects of the Internet on Dynamic Pricing

Effects of the Internet on Dynamic Pricing

Decreased Menu Costs (prices can be easily changed)

Interactivity (easy for buyers and sellers to interact and

negotiate prices)

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 English

 Reverse-Price English  Dutch

 First-Price Sealed-Bid (Priceline Version)

Exchanges Auctions

Dynamic Pricing

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Supporting Slide 8–F: English Auctions

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Supporting Slide 8–G: Reserve-Price English Auctions

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Supporting Slide 8–H: Dutch Auctions

In a Dutch Auction, the seller selects an initial starting price and decreases it until a buyer accepts it

Dutch Auction Drawbacks

 The price is not influenced

upward by the interest of the buyers

 The price must start higher than

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Supporting Slide 8–H: New Economy Dutch Auctions (continued)

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Exhibit 8–11: Priceline Auction Process

Consumer submits nonrefundable 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

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Supporting Slide 8–I: Exchanges

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 Advanced Pricing Strategies

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Exhibit 8–12: Price Discrimination

First Degree— Charge consumers exactly what they are willing to pay for product (e.g., 1–1

price haggling)

Second Degree— Charge consumers exactly what they are willing to pay for first unit of good as well as additional units (e.g.,

volume pricing)

Third Degree— Divide customers into distinct segments, charging

different prices to different segments (e.g., movie-theater

pricing) Price

Discrimination

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Supporting Slide 8–J: Volume Discount vs. Two Part-Pricing

Volume Discount Pricing

Two-Part Pricing

 Decreases the purchase price of an

item as the quantity purchased increases

 Charges a one-time fixed fee and an

associated variable charge for each purchased item

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Last Updated: 06/24/03 Copyright 2003 by Marketspace LLC Consumer’s Demand for

Electronic Music

Value of . . .

First Single: $6.00

Second Single: $5.00

Third Single: $4.00

Fourth Single: $3.00

Fifth Single: $2.00

Sixth Single: $1.00

Seventh Single: $0.50

Production cost of a single: $1.50

 Buy first three singles at $4 per single

 After three singles have been purchased, buy

two additional singles for $2 each

 $4 is “left on the table”

(consumer was willing to pay $20 for five songs)

– Revenue: $16 – Profit: $8.50

 A flat subscription fee of $12.50 can be charged

 In addition to the flat subscription fee, a fee of $1.50

per single can be charged

 Given its demand schedule, the consumer is willing to

pay the subscription fee and purchase five singles at $1.50 per single; recall that the consumer values the five singles at $20

– Total Revenue: $20 – Total Profit: $12.50

 Economically speaking, it is optimal to use a flat fee

subscription model only when the marginal cost of producing the good is equal to zero

Exhibit 8–13: Volume Discounts and Two-Part Pricing

Simple Volume-Discount Pricing Plan

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Supporting Slide 8–K: Implementing a Two-Part Pricing Plan

1. Understand each individual’s demand curve

2. Determine the optimal number of products that should be sold to each customer

The effective implementation of a two-part pricing plan requires several critical steps

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Supporting Slide 8–L: Bundling

Pure Bundling

Mixed Bundling

 Packaging together complementary

products which are only offered as part of a bundle

 Offering items as either component

pieces or as a bundle which discounts each item

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Last Updated: 06/24/03 Copyright 2003 by Marketspace LLC Financial

News

Legal News

Current

News Value Bundle

E-Information’s

Price $3,000 $1,500 $1,250 $5,000

Company A’s

Valuation $3,000 $1,500 $500

Company B’s

Valuation $3,000 $750 $1,250

Company C’s

Valuation $3,250 $1,000 $500

Strategy Net Result

Company A: Purchases value bundle. Implicitly pays $1,500 for legal news, $500 for current news.

Company B: Purchases value bundle. Implicitly pays $750 for legal news, $1,250 for current news.

Company C: Purchases financial news. Pays more ($3,250 vs. $3,000) for financial news relative to Company A and B.

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Exhibit 8–16: Frenzy Pricing

Frenzy Pricing

Demand Uncertainty

Efficient Selling Method Fairness

Marketing

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 Strategic Responses to Competitor Price Cuts

 Pricing and the Four Key Stages of Customer Relationships

 Case Study: EBay

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Supporting Slide 8–M: Competitor Price Cuts

Financial Trouble

 Decreasing prices may be a desperate

attempt to raise cash, or signal to

competitors an interest in being acquired

Becoming an Industry Leader

 Decreasing prices is sometimes a

show of strength to indicate that a firm is doing well enough to withstand the lower prices

Typical motives for

price cutting:

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Last Updated: 06/24/03 Copyright 2003 by Marketspace LLC Responding to Competitor

Price Cuts

Enhance Value Proposition

General Price Cut

Cross Parry

Targeted Price Cut

Fighter Brand

Battle Justify Price

Differential

Exhibit 8–17: Responding to Competitor Price Cuts

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Enhance

Value Proposition Battle

Justify Price Differential

Supporting Slide 8-N: Responding to Competitor Price Cuts (continued)

 Enhancing the basic

product with additional features such as

extended warranties, additional services and the inclusion of

ancillary products, but maintaining the price so that total customer value increases

General Price Cut

 Match the competitors

cut as an aggressive show of strength

Cross-Parry Attack

 Focused efforts toward

competitor’s primary geography or product

Targeted Response

 Communicating the

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 The Pricing Process

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Exhibit 8–18: The Seven Deadly Sins of Pricing

– Leaving money on the table. Don’t discount unless you have to.

– Having a one-size-fits-all mentality. Offer options! Some people will want basic functionality while others will want super-functionality.

– Thinking that every segment is the same. It’s not true! Some segments will value your product more than others. Try to price accordingly.

– Implementing price experiments on the Internet. Customers do not like companies to charge different prices for the same product without proper

justification.

– Underestimating your competitors’ reactions. Many companies have been burned by innocently changing prices only to be met by a full-fledged price war by outraged competitors.

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Exhibit 8–19: The Pricing Pentagon

Estimate

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Exhibit 8–20: Strategic Segmentation: Expanding and Increasing the Density of the Customer Target Sweet Spot

Expanding the Customer Sweet Spot Through Versioning

Increasing Customer Density Through Price Discrimination

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Exhibit 8–21: Estimate Competitor Response

Avoid Setting a Price That Leads to a Price War

Select potential prices

Estimate revised price

the firm could actually charge

 Do industry

research to brief managers before game

 Construct a

scenario-planning exercise

 Use a multiperiod

game for best results

 Use game results to

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Exhibit 8–22: Estimate Competitor Reaction

One-Period Gaming

Medium Price Test Each Potential Price

This process should be conducted for each potential price (high, medium, low). This example focuses on medium price.

Estimate How Each Major Competitor Reacts

Aggressively React

Minimally React

Estimate Final Set of Competitor Prices

Using insight from senior Management, determine how each competitor will react to the price

(aggressively react,

minimally react, or accept).

Final Output

(medium price, set of competitor prices in reaction to medium price) Using insight from senior

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Exhibit 8–23: Test Final Market Equilibrium

Final Price and Volume Points Yield Estimated Demand Curve

P

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Exhibit 8–24: Pricing Strategy Framework

Hi-Lo Pricing Retail/Outlet

Pricing

No Pricing Flexibility

 Price at market

Corporate Mandate

 Target return pricing

 Target profit return

High Initial Demand

 Fairness pricing

 Bundling

 Frenzy pricing

Correlated Demand

 Bundling

 Volume discount pricing

 Two-part pricing

Dynamic Pricing

 English auction

 Reverse English auction

Price as Marketing Strategy

 Prestige

 Sign of quality

 Promotional

Everyday Low Pricing

Select Pricing Strategy

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 Pricing and the Four Key Stages of Customer Relationships

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Four Key Stages of Customer Relationships

 Click-through

promotions

 Web-referral

promotions

 Specially negotiated

promotions (e.g., hotels)

 Bricks-and-clicks

promotions

 Web price discounts

 Targeted Promotions  Future price

promotions

 Justify prices  Loyalty programs

 Tiered loyalty

programs

 Wide variety of

pricing plans

 Become affiliates  Profit-enhancing

programs

 Volume-discount

promotions

 Targeted promotions

 Discontinue pricing

promotions

 Reconfigure loyalty

programs

 Decrease profit

programs

Exhibit 8–25: Pricing Levers and the Four Key Stages of Customer Relationships

Awareness Exploration/

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 Case Study: EBay

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Exhibit 8–26: EBay Real Estate Insertion Fees

List ing Ty pe / Dura t ion I nse rt ion Fe e

3-, 5-, 7-, or 10-day Listing $50 30-day Listing $75

30-day Listing $100 90-day Listing $200

Ad Form a t

Real Estate Timeshare & Land

Auct ion Form a t

List ing Ty pe / Dura t ion I nse rt ion Fe e

3-, 5-, 7-, or 10-day Listing $100 30-day Listing $150

30-day Listing $150 90-day Listing $300

Re side nt ia l, Com m e rcia l, & Ot he r

Auct ion Form a t

Ad Format

List ing Ty pe / Dura t ion I nse rt ion Fe e All Ot he r Re a l Est a t e Ca t e gorie s

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Exhibit 8–27: EBay Insertion Fee Scale for Regular, Reserve Price, and Dutch Auction Listings

Reserve price auctions carry an additional fee, fully refunded if the item sells:

Minim um Bid, Ope ning V a lue or Re se rv e Price

I nse rt ion Fe e

$0.01 - $9.99 $0.30 $10.00 - $24.99 $0.55 $25.00 - $49.99 $1.10 $50.00 - 199.99 $2.20 $200.00 and up $3.30

Re se rv e Price

Re se rv e Price Auct ion Fe e

$0.01 - $24.99 $0.50 $25.00 - $199.99 $1.00 $200 and up $2.00

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Exhibit 8–28: EBay Listing Option Fees

Seller Feat ure D escript ion I nsert ion Fee Homepage Featured Item appears in a special

featured section and will most likely be rotated for display on the eBay homepage

$99.95

Featured Plus! Item appears in the featured-item section and in bidders' search results

$19.95

Highlight Item listing is highlighted with lavender-colored band

$5.00

Bold Item listing is displayed in bold $2.00

Gallery Item listing includes a small picture in the Gallery (eBay's minituature picture showcase)

$0.25

Gallery Featured Item listed in the Gallery will also be featured at the top of the Gallery in a larger size

$19.95

List in Two Categories Item listing appears in two categories, increasing visibility

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Exhibit 8–29: EBay Final Value Fee Schedule

Final Value

Final Value Fee

$0–$25 5.25% of the final value

$25–$1,000 5.25% of the initial $25 ($1.25) plus 2.75% of the amount above $25

Over $1,000

5.25% of the initial $25 ($1.25) plus 2.75% of the initial $25–$1,000 ($24.38) plus 1.5% of the amount above $1,000

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Exhibit 8–30: EBay Payments Fee Schedule

Merchant Account Standard Account

Transaction of $15 or less 35¢ 35¢

Transaction over $15 35¢ + 1.75% 35¢ + 2.5%

0.50% 0.50%

$2,000 $500

Transaction of $15 or less 35¢ 35¢

Transaction over $15 35¢ + 0.75% 35¢ + 1.5%

0.50% 0.50%

$200 $200

Payment Type

Account Type

Credit Card

Transaction Fee

Auto Deposit Fee (For transactions over $15) Per Transaction Limit

Electronic Check

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Pricing — Conclusion

 Firms have a wide variety of potential pricing strategies and price points to

consider when deciding how to best implement profit-maximizing strategies.

 Firms can use a framework called the Pricing Pentagon to determine prices:

1. Challenge pricing mindset

2. Develop pricing segmentation

3. Establish product value

4. Estimate competitor reaction

5. Test final market equilibrium

 There are a variety of pricing levers for firms to employ in their pricing