The Chinese Pricing Strategy in B TO C. Chen Bei Ding Tao (Chinese Academy of Social Sciences)

Transcription

1 The Chinese Pricing Strategy in B TO C Chen Bei Ding Tao (Chinese Academy of Social Sciences) Abstract In traditional business, upon making pricing strategy, such factors as costs, retail channels, advertisements, consumptive psychology need to be taken into consideration. All these factors, however, are under drastic changes due to the intensive competitions in market. Undoubtedly, consumers are having more and more rights in pricing. Because traditional business has some disadvantages, it is very difficult for it to fit in with these changes and draw up the appropriate pricing strategy. BTOC, which is in the background of information technology and Internet, not only can fit in well with these changes, but also can affect those decisive factors, whic h will result in changes in pricing strategy. In this article, the author has analyzed the factors in BTOC, which have great influence on pricing; and taking online information services as example, explained how these influential factors can be used to make pricing strategy in present BTOC. Preface Price plays an essential role in sales. Effective pricing strategy is a must in effective sales. Some scholars even pointed out that successful pricing strategy means half success in sales. The importance of pricing can be seen clearly from this sentence. BTOC is a new business type, the core of it, however, is still business. Statistics shows that at present, most of the Web sites engaged in BTOC have adopted some pricing strategies as discount, free sales etc., so as to attract consumers. So, it could be assumed that price still plays an important role in BTOC. 1. Present Research and Analysis Seeing the importance of price in BTOC, researchers have conducted many researches on pricing strategy in BTOC. The research methods they have adopted are: 1. to introduce traditional pricing theories and strategies to BTOC, 2. to form new theories, which are directly from practice and based on new features of BTOC. These two methods, certainly, can not be completely separated. When introducing traditional theories to BTOC, new features of BTOC should be considerated. While in BTOC practice, traditional theories have also been adopted. As BTOC has new features, large margins must exist between traditional theories and new theories. Followings are some pricing theories and strategies: 1.1 Flexible Pricing This theory clarifies that in transactions, when all the conditions are the same, whether all the consumers will purchase the goods with the same price or with the contrac ted price. 1 The latter causes formation of contracted price. P&G has adopted this pricing strategy. In the condition of more widely spread BTOC, when the enterprises choose the pricing strategy, flexibility is rather

2 important. 2 Along with the progress of information technology, the duration and degree of monopoly, no matter market monopoly, price monopoly, or technology monopoly, will be short and shallow. The enterprises will surely confront with the market which is similar to the market of complete competition. Therefore, more cautions should be given in adopting monopolistic price. This strategy defines the possibility and importance of flexible pricing in BTOC. It, however, does not clearly differentiate market of complete competition and BTOC. BTOC provides an extra transactional locale which is very large, but it could not create more producers or consumers. The market of complete competition is a market on the conditions of: goods of same quality; many suppliers which can not influence the price solely. A market on the conditions that most producing materials are aggregated in large-scale enterprises, only a few enterprises exist, consumers belong to a few Web sites, is quite similar to the market of monopolistic competition. The price, therefore, is less similar to the price in the market of complete competition. 1.2 Traditional Economic Theory The theory is: price-maker is of reason. The managerial personnel usually set the price at which a company gains the biggest profit; consumers, however, try to get more products with less money, reaching the largest surplus. This theory clarifies only one part of pricing but ignores the other part. In reality, the price-maker is only of limited reason, 3 and they, perhaps, don t set the price at which the profit of the company reaches maximum. Moreover, consumers are in a delicate and reasonable position. Their reason is limited by: products and information available, searching costs, impossibility of obtaining the ideal price from big suppliers and etc. The price, therefore, can not be of complete reason. 1.3 Present Online Pricing Strategy Price is rather complicated, it is usually influenced by many factors. Many pricing strategies, therefore, have been formed. The prevalent ones are: discount strategy, free-sale strategy, biding strategy, transparency in pricing strategy, accumulation preference strategy, etc. Discount Strategy: to give discount to consumers. The successful example is Amazon.com. Amazon.com is considered as one of the largest discount dealers in the world, with over 300,000 discount books. Free-sale Strategy: this strategy is usually used in digital products and information services. Since this kind of products can be directly obtained over Internet with few cost for copies, free-sale strategy can be adopted here. As the digital products have the feature of compatibility, the more the user, the more the profit. Free-sale strategy can be a great help for enterprises to rapidly and effectively occupy the market, advertise themselves, gain long-term profit. At present, most of Web sites have adopted this strategy. Microsoft s IE is a good example for free software. Biding Strategy: Web sites dealing with second-hand goods usually adopt this strategy. The form is C2C. Besides, a few enterprises take this strategy on material-purchasing. The suppliers give the bid, and then the enterprises choose the lowest price. Through this way, the enterprises can efficiently reduce the costs and time on purchasing.

3 Transparency in Pricing Strategy: Web sites provide consumers with all price information (e.g. profit of producer, retailer; delivery costs), and Web sites only claim fixed commissions. A representative is ONSALE (online biding), U.S.A. Accumulation Preference Strategy: is also a good strategy. It can strongly attract the second-round consumption. In some degree, it avoids the direct pricing competition. The representative of it is mileage preference of the airlines. 2. Present Situation in China China s BTOC follows the example of foreign country. In its development, it has taken the pricing strategy in other countries as reference. Presently, domestic BTOC Web sites usually adopt discount strategy, free-sale strategy, biding strategy. But the present pricing strategy has not fully played its role. The reasons include: 1. Lack of knowledge in new features of BTOC. Because BTOC implements the transaction directly between enterprises and consumers, its price can be more flexible. When the products are quite unique, consumers are willing to accept the higher price. The ultimate example is: when a product is only for a certain consumer personally, the price can be rather high because of the incomparability of the product. 2. Incomplete pricing strategy. Many BTOC Web sites only provide the selling locale, and the price is simply an original price minus part of profit. This pricing strategy can only bring the competition not the further profit. The following should be rather clear: price is for sales, the aim of pricing strategy is to promote the development of enterprises. 3. Draw up Effective Pricing Strategy In the background of highly developed market economy and supply surpassing demand, consumers, as a purchaser of goods or services, have direct influence on price. It is even pointed out in 4C Sales Combination, to set the cost which consumers are willing to pay as a basis for pricing. Setting the price in BTOC, therefore, should take not only producers and dealers, but also consumers into consideration. By analyzing the demand and behavior of consumers, factors influencing the demanding price could be found and then reasonable pricing strategy could be drawn up.

4 Traditional theories assume: reason level of a consumer is a decisive factor for his acceptation of a price. The reason level here refers to consumers psychological expectations and related behaviors to pursue the best ratio of quality and price, the best quality or the lowest price. But observing daily consumptive behaviors of consumers, it could be found that consumers are of limited reason. Sometimes, they are rather cautious in order to save money, but sometimes they are willing to pay a terribly high price for the goods of their favorite brand. This limited reason results in uncertainty in setting a price. To conduct a research on these factors which influence reason of consumers is helpful in setting a pricing strategy. 3.1 The Factors Influencing Pricing Strategy Through analysis, the influential factors are as follows: demand and demanding level, information and its searching cost, value as well as impossibility for consumers to require suitable price from large suppliers. These factors are explained in details as follows: Philip Kotler, leading strategic marketer, points out 4, all kinds of needs and wants of mankind are the starting point for marketing. The reason that a consumer pays for a product or a service is that he has such a demand and is willing to pay for it. The stronger the demand, the higher the amount he is willing to pay the money. A fun of Jin Yong (famous Chinese GongFu novel writer)could pay from less to more for novels from love story, Gongfu story to Gongfu story with the author of Jin Yong. According to Demanding level theory, for mankind, there are 5 different demanding levels. Normally, higher level is more difficult to reach, accordingly, consumers have to pay more for it. A pen with brand name of Parker could show the higher status of a person, therefore, it is much more expensive than a normal one. In traditional business environment, though suppliers know that consumers have various demands, they are unable to separate the consumers of different demands. The only choice they have is market specialization, aiming at fulfilling the different demands of consumers. There are, however, more than thous ands varieties in consumers demands, only market specialization can not satisfy all the demands; moreover, blind production still exists, causing the increase in production costs.

5 In BTOC, consumers can choose the products personally, and can even participate in designing the products. Through the methods of electronic products exhibition hall and consumers survey, suppliers can have very specified knowledge of needs and preferences of all consumers. Thus, they can easily get to know the intended price of each consumer, whether the consumer is ready to pay more for his special demands, and then suppliers can set the price accordingly Information and Related Searching Costs Information is another factor influencing consumers reason. A product can have two quite different prices in two shops, thus, consumers get different information concerning one product. It is said that comparing three shops for a product, that means, collecting various information for a final decision. These various information could be divided into three kinds: the consumers knowledge of products, advertisements made by suppliers, and the opinions of other consumers. The products knowledge consumers have depend on complexity of products, professional specifications of products, popularity of products and educational background of consumers. Generally speaking, when a consumer has better understanding of a product, it will be easier for him to have correct views towards product s price. Advertisement made by suppliers and opinions of other consumers also influence the price. Undoubtedly, the more products knowledge the consumers have, the lower the products price will be. Related searching costs also have great influence on products price. Information searching takes not only money, but also time. When a person has limited time, he pays a lot for reducing the searching costs. In BTOC, information is really abundant. However, a consumer may not always find the information he needs. For instance, upon buying a computer, a consumer knows exactly how much CPU costs, and how much a monitor costs. While he orders cosmetics, he does not know exactly how much the different ingredients cost. That is to say, as this consumer has insufficient knowledge of cosmetics, he, perhaps, has to pay more for it. The influence of information on pricing strategy is noticeable. Each trade or enterprise should analyze the influence according to their own situation. It is impossible for an enterprise to know the products knowledge each consumer has, but it can know the knowledge each consumer group has, and set a reasonable price accordingly. Obviously, while setting a price, computer traders pay

6 more attention on costs, cosmetics traders, however, can set a much higher price compared with the costs Value The value a product or a service can bring to a consumer is also an important factor. Philip Kotler 4 points out: choosing among products which can fulfill certain demand of a consumer, the key point is the value which the product can bring to a consumer. The higher the value which a product can bring to a consumer, the more the amount a consumer is willing to pay. In BTOC, the value a product or a service can bring to a consumer could be measured through: 1. collecting the information of consumers. Enterprises can collect a great deal of information by observing registration information of a consumer and his visits on the Web. 2. observing consumption history of consumers. If a consumption have repeated many times and cost a large amount of money, it indicates that this product is of great value to the consumer. In ordinary business, these factors also have influence on consumers decision. But because of costs, duration of collecting and transmitting information, amount of work, enterprise itself, it is very difficult for suppliers to take all these influencing factors into consideration upon setting a price. Besides, the sales model is one supplier to many consumers, it also causes difficulty in setting various prices with various consumers. In BTOC, with the development of IT, and the new features of Internet, all the above-mentioned problems could be solved. Through Internet, suppliers can rapidly and easily collect the consumers information, such as: income, education background, hobbies, consumption, etc. Moreover, Internet provides consumers and suppliers with one-to-one trading site. Both of them can negotiate at a lower cost. A price, therefore, is rather flexible, it even can differ from person to person. At this moment, these factors become the decisive factors on products price. Using these factors flexibly, enterprises can set an advantageous pricing strategy. 3.2 Using Influencing Factors to Set a Price The author has explained influencing factors and their roles in three different aspects, next step is from theory to practice. The core of setting a pricing strategy is to fit in with profit expectation of enterprises through the proper use of above mentioned factors. Following is an analyses of setting

7 a price for on-line information services. Through this example, the author explains the process of setting a price. Online information service is a service that Web sites provide all kinds of information to consumers. The features of it are: it belongs to digital product and almost no cost for copying. Because a consumer can require very personal services, the price, therefore, is more flexible. It can be a good example to explain how to use the influencing factors to set a price. The personal information of a consumer (such as income, consumptive habits) can be collected by investigating his registration information, sending him a questionnaire and investigating with cookies Demand and Demanding Level Many consumers often get on to the Internet for information. The information they need could be divided into two parts: normal information and specially concerned information. For instance, a person has subscribed business news from China.com, that means: compared with other information, the business news just fit in with his demand. Furthermore, among all the business news he has received, he focused on only one or two pieces of news. Thus, the different demanding degrees for different information are obvious. In many cases, he flowed some of the information with special attention, sometimes, he was even willing to pay for the all round information of one issue. The information providers, therefore, can through above-mentioned methods, obtain abundant information of consumers. They can collect and classify all the demands, so as to separate the special demands and normal demands, and then charge differently in accordance with the demanding degrees. Because the role of information in meeting different demanding levels is not so noticeable, the demanding level, here, has little influence on pricing-setting. Demanding level could be ignored here Information and its Searching Costs. Upon using the information provided by Web sites, consumers don t know the exact cost of collecting such information, i.e., they don t have a clear idea how much he should pay for such information. In this case, Web sites could easily increase the charges for information. From the searching cost s point of view, though the cost of Internet is rather low, the volume of information

8 founded is rather large and to pick out the required information is also of large cost, it is still difficult for a consumer to find the useful information. From this point of view, the special information supplier should, undoubtedly, charge more for their services Value The value of consumption is of two kinds: 1. Consumers can learn or obtain knowledge; 2. Consumers can obtain enjoyment. The value of Internet usually lies on the former one, i.e., consumers can get something useful. The useful information is just like tool books. These tool books are warmly welcomed, because they can tell people what to do and how to do. The useful information can bring people even higher value, therefore, they, should have higher prices. Since Web sites pay little attention to intellectual property, plagiarizing is rampant, and netizens are used to having free information, the information on Internet usually have to be provided freely. However, this does not mean that Web sites can not charge. The Web sites can provide rather personally designed service and special service, creating transitional cost of consumers, take advantage of above-mentioned influencing factors and charge for special services. Web sites can also charge more for advertisements on top-visited information, this could serve as compensational pricing strategy. The author has explained how to use the influencing factors to set a price with an example of Internet information services above. Because of the various market situations and various operational goals of enterprises, enterprises, therefore, should set a suitable pricing strategy in accordance with its own situation and influencing factors. 4. Conclusion To sum up, in BTOC, to set an effective pricing strategy is a goal but difficult to reach. With Internet and development of information technology, it becomes easier for enterprises to find and analyze the sensitive factors of each consumer towards price. Enterprises can set a price in accordance with acceptable cost of consumers so as to secure the enterprises profit. Only through maintain ing the uniqueness of the products, can enterprises avoid noxious pricing competitions and promote healthy development. An effective pricing strategy also needs the cooperation of

9 other strategies. Having had full consideration of all these factors connecting with price, the enterprises can set the suitable pricing strategy. References: 1.Market Analysis:Assessing Your Business Opportunities Copyright:1993 by Robert E. Stevens,Philip K. Sherwood, and J. Paul 2. Marketing Planning Guide by Stevens, Robert E., David Loudon, and William E. Warren. Haworth Press, Binghamton, NY 1997 Paperback, Prentice Hall, Robert E Stevens, Marketing Strategy, translated by Wang Qi and etc., Machinery Industry Publishing House Yang Jianmin, Conceptions Renovation of Marketing in BTOC, Practice of Foreign Economics and Trade, Lu Ta ihong, Yang Xiaoyan, Textbook for Internet Marketing, Guangdong Economics Publishing House, Philip Kolter, Marketing Management, translated by Mei Ruhe and etc., Shanghai People s Publishing House, 1996