PRICING IN DIGITIAL MARKETING Assist. Prof. Dr. Ozge Ozgen 11-5 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. Source: Judy Strauss and Raymond Frost, (2009), E-Marketing, Pearson Dynamic Pricing Mysimon.com 11-3 4 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. We created Simon to provide smart advice on all the latest products and the best deals from merchants you can trust The goal is for mysimon to be your ultimate destination for online shopping advice. 1
Buyer & Seller Perspectives: Buyer View Buyer Control 11-5 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. CUSTOMERS VIEW OF THE VALUE PROPOSITION MAY DIFFER 11-6 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. Buyer power online is also based on the huge quantity of information and products available on the Web. 7 Auctions English Auction Open auctions in which buyers successively raise their bids until only one buyer remains Open auction all of the bidders know the amount of the highest bid at all times If the final bid reserve price, the item is not sold Reverse-Price English Auction Type of auction in which several sellers offer their items for bidding, and compete for the price which a buyer will accept. Dutch Auctions Auctioneer begins with a high asking price which is lowered until some participant is willing to accept the auctioneer's price, or a predetermined reserve price (the seller's minimum acceptable price) is reached. The winning participant pays the last announced price. 8 Auctions 37% of ebay auctions received bids within the last minute, 12% within the last 10 seconds People believe that if they bid early, item can be perceived as so valuable The winner s curse Some people pay higher price for auctioned products than they would pay an online retailer Entertainment benefit of online auctions 2
Buyer & Seller Perspectives: Seller View The Internet Puts Upward Pressure on Prices 11-9 11-10 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. 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). 11 Affiliate programs 11-11 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. 3
Efficient Markets Efficient Markets Mean Loss of Pricing Control 11-13 11-14 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. Government control Pure monopoly Oligopolistic competition Monopolistic competition Pure competition Efficient market Market control Area of control for e-marketing pricing strategy Is the Net an Efficient Market? Is the Net an Inefficient Market? 11-15 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. 11-16 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. 4
11-17 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. 11-18 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. 5