Sci Art 1

Internet Marketing, 2nd Ed
Mohammed, Fisher, Jaworski, Paddison
Chapter 8 Lecture Slides
Pricing
Exhibits and Tables
Copyright © 2003 by Marketspace LLC

Pricing — Today’s Objectives
To choose a product price which is aligned with the product’s differentiated benefits
and targeted customer segments
Chapter 8
Chapter 7 Pricing Chapter 9
Product
Communication
Chapter 10
Chapter 6
Customer Community
Relationships
Chapter 12 Chapter 11
Branding Distribution
Copyright  2003 by Marketspace LLC

Last Updated: 06/24/03
Exhibit 8–2: Key Pricing Strategies
Retail Price Basic Pricing Dynamic Pricing Advanced Pricing

Decisions Strategies Strategies Strategies
Cyclical CostPlus English Auctions Volume Discount

Promotional Brand Pricing Reverse-Price Pricing
Pricing (Hi-Lo) Promotions English Auctions Two-Part Pricing
Everyday Low Dutch Auctions Bundling
First-Price Price
Pricing
Retail/Outlet Sealed-Bid Discrimination
Pricing Auctions Over Time
Reverse First- Frenzy Pricing
Price Sealed-Bid Three Categories
Auctions of Price
Exchanges Discrimination

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
 Pricing and the Four Key Stages of Customer Relationships
 Case Study: EBay
 Conclusion

Exhibit 8–6: Hi-Lo vs. EDLP vs. Retail/Outlet
There are three key brand positioning strategies that retailers can employ regarding price:
cyclical promotional pricing (Hi-Lo), everyday low pricing (*EDLP), and retail/outlet pricing
Hi-Lo EDLP Retail/Outlet
Product prices high Everyday prices are Regular prices at retail

most of the time set low (generally lower stores (prices rarely
than the high price in discounted at retail
Occasionally, prices Hi-Lo strategy) stores)
are set low (generally
lower than prices at Occasionally, EDLP Merchandise
EDLP retailers) prices are discounted discounted at outlet

(generally not lower stores
than the low price in
EDLP strategy)

Chapter 8:
Pricing
 The Pricing Process
 Conclusion

Supporting Slide 8–E: Promotional Low Cost Pricing
Stores and manufacturers often significantly decrease prices for the following
reasons:
 Lowering the introductory price can

Trial induce consumers to experience the
benefits of a new product
 To capitalize on first-mover
Benefits of Rapid Acceptance advantage, firms set a low price and
usurp the competition
 Firms in categories where switching

Switching Costs costs are high try use low price to
induce buyers to try their product
 Offering low prices on well-known

Loss Leaders brands, staple goods or seasonal
items can lead to sales of higher
margin goods
Exhibit 8–7: Promotional Low-Cost Pricing
Well-Known
Brands
Trial Loss Leader Staples
Seasonal/Holiday/
Special-Demand
Items
Promotional
Pricing
Benefits
of Rapid Switching Costs
Acceptance

Exhibit 8–8: Fairness in Pricing
Whether a selected price reconciles with a consumer’s internally generated
reference price determines whether or not it is considered “fair”
Environments in Which
Key Components of When Fairness is
to Consider
Reference Price Important
Underpricing (Fairness)
Past prices The market clearing When there is an

price is much higher ongoing relationship
Close substitute prices than some well- between buyers and
established reference sellers
Context or purchase
price
environment When the seller has
Ongoing pecuniary significant market
relationship between power over buyers
buyer and seller

Exhibit 8–9: Effects of the Internet on Dynamic Pricing
The Internet has made it feasible for companies to frequently and proactively
adjust their pricing
Effects of the Internet on Dynamic Pricing
Interactivity
Decreased Menu Costs (easy for buyers and
(prices can be easily changed) sellers to interact and
negotiate prices)

Exhibit 8–10: Dynamic Pricing
Auctions
 English
 Reverse-Price English
 Dutch
 First-Price Sealed-Bid (Priceline Version)
Dynamic
Pricing
Exchanges

Supporting Slide 8–F: English Auctions
In an English Auction, buyers successively raise their bids until only one buyer
remains and all bids are visible

Supporting Slide 8–G: Reserve-Price English Auctions
In a Reserve-Price English Auction, firms submit a request for proposal or quotation
(RFP or RFQ) and the winning bid is the supplier who can provide the goods at the
lowest cost

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
the market clearing price in
order to claim the available
profit

Supporting Slide 8–H: New Economy Dutch Auctions (continued)
In a New Economy Dutch Auction, the seller specifies the minimum priced for
multiple items and buyers bid up from that price; The highest bidders purchase
the item at the price bid by the lowest winning bidder

Exhibit 8–11: Priceline Auction Process
Priceline has created a new economy variant of the first price sealed-bid auction
which allows individual buyers to compete against an unknown reserve price
Priceline checks if
any of its
Consumer submits participating airlines Checks airline’s seat Priceline accepts or
nonrefundable bid are willing to offer availability rejects bid
roundtrip flight at bid
price or lower

Supporting Slide 8–I: Exchanges
Exchanges are forums where buyers and sellers can meet to exchange goods
with a percentage of the transaction going to the host

Chapter 8:
Pricing
 Conclusion

Exhibit 8–12: Price Discrimination
Price discrimination is the practice of charging different prices to buyers based on
their willingness to pay
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
Price
willing to pay for first unit of good
Discrimination 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)

Supporting Slide 8–J: Volume Discount vs. Two Part-Pricing
Two types of strategies are used to charge consumers what they are willing to
pay for each additional item purchased
 Decreases the purchase price of an

Volume Discount Pricing item as the quantity purchased
increases
 Charges a one-time fixed fee and an

Two-Part Pricing associated variable charge for each
purchased item

Exhibit 8–13: Volume Discounts and Two-Part Pricing
Simple Volume-Discount
Pricing Plan
 Buy first three singles at $4 per single
 After three singles have been purchased, buy
Consumer’s Demand for two additional singles for $2 each
Electronic Music  $4 is “left on the table”
(consumer was willing to pay $20 for five songs)
Value of . . .
– Revenue: $16
First Single: $6.00
– Profit: $8.50
Second Single: $5.00
Third Single: $4.00 Two Part Pricing
Fourth Single: $3.00
Fifth Single: $2.00  A flat subscription fee of $12.50 can be charged
Sixth Single: $1.00  In addition to the flat subscription fee, a fee of $1.50
Seventh Single: $0.50 per single can be charged
 Given its demand schedule, the consumer is willing to
Production cost of a single: $1.50 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
Supporting Slide 8–K: Implementing a Two-Part Pricing Plan
The effective implementation of a two-part pricing plan requires several critical

steps
1. Understand each individual’s demand curve
2. Determine the optimal number of products that should be sold to

each customer
3. Calculate how much the consumer is willing to pay for each product
and set the fixed and variable prices to encourage them to purchase
the optimal number

Supporting Slide 8–L: Bundling
Bundling is the strategy of packaging several products together under one total
price
 Packaging together complementary

Pure Bundling products which are only offered as
part of a bundle
 Offering items as either component

Mixed Bundling pieces or as a bundle which discounts
each item

Exhibit 8–14: Yahoo’s E-Mail Bundle Pricing

Exhibit 8–15: E-Information’s Mixed Bundling Strategy
Financial Legal Current

Value Bundle
News News News
E-Information’s
$3,000 $1,500 $1,250 $5,000
Price
Company A’s
$3,000 $1,500 $500
Valuation
Company B’s
$3,000 $750 $1,250
Valuation
Company C’s
$3,250 $1,000 $500
Valuation
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.

Exhibit 8–16: Frenzy Pricing
Frenzy pricing, a strategy which results in significant excess demand due to low
prices, occurs for a variety of reasons
Demand
Fairness Uncertainty
Frenzy
Pricing Efficient
Marketing Selling
Method
Signal
of
Quality

Chapter 8:
Pricing
 Conclusion

Supporting Slide 8–M: Competitor Price Cuts
Price cutting, a tactic used to gain market share, is typically motivated by one of
three objectives
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

Typical motives for
 Decreasing prices is sometimes a
price cutting: show of strength to indicate that a firm
is doing well enough to withstand the
lower prices
Signaling Displeasure Over a

Competitor’s Strategy
 A firm can use a price cut to punish a
competitor for a change in its strategy

Exhibit 8–17: Responding to Competitor Price Cuts
When faced with a competitive price cut, firms have three alternative responses
Responding to Competitor
Price Cuts
Enhance Justify Price

Battle
Value Proposition Differential
General Price Cross Targeted Fighter

Cut Parry Price Cut Brand

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

Battle
Value Proposition Differential
 Enhancing the basic General Price Cut  Communicating the

product with additional
 Match the competitors differential benefits
features such as offered by the firm that
cut as an aggressive
extended warranties, justify a higher price
show of strength
additional services and than the competition
the inclusion of Cross-Parry Attack
ancillary products, but
 Focused efforts toward
maintaining the price
competitor’s primary
so that total customer
geography or product
value increases
Targeted Response
 Discounts offered only
to vulnerable customers
Fighter Brand
 New products
developed to appeal to
vulnerable customers
Chapter 8:
Pricing
 Conclusion

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.
– Discounting because everyone else is doing it. Brand
strength or adding extra features (e.g., free upgrades)
may temper the need to discount price.
– Misjudging the value of goodwill. Sure, goodwill is
important in maintaining relationships, but think about
whether you are giving up too much in terms of price.
Customers may remain loyal even if you don’t offer
them the 10 percent discount.

Exhibit 8–19: The Pricing Pentagon
The Pricing Pentagon is a framework designed to help managers price products
Develop Pricing
Segmentation
Determine
Retail
Strategy
Challenge Establish
Pricing Product
Mindset PRICING Value
Set Pricing
PROCESS
Goals
Test Final Estimate

Market Competitor
Equilibrium Reaction

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

Sweet Spot Through Versioning Through Price Discrimination
Expanded Target
Market
Expanded Expanded
Target Original
Target Price
Market Target Market
Market Discrimination
Increases
Density
Expanded Target
Market

Exhibit 8–21: Estimate Competitor Response
Avoid Setting a Price That Leads to a Price War
Select potential
prices
 Pick at least three

potential prices
 Must be prices that Game out
the firm could competitors’
actually charge reactions
 Do industry
research to brief
managers before
Estimate revised
game
price
 Construct a
scenario-planning
exercise  Use game results to
 Use a multiperiod estimate both the
game for best firm’s final price as
results well as competitors’
price points

Exhibit 8–22: Estimate Competitor Reaction
One-Period Gaming
Estimate How Each Estimate Final Set of

Test Each Potential Price
Major Competitor Reacts Competitor Prices
This process should be Using insight from senior Using insight from senior
conducted for each potential Management, determine Management, hypothesize the
price (high, medium, low). how each competitor will new price point for each
This example focuses on react to the price competitor (in reaction to
medium price. (aggressively react, medium price).
minimally react, or accept).
Aggressively React
Final Output
Minimally React (medium price, set of competitor
Medium Price
prices in reaction to medium price)
Accept

Exhibit 8–23: Test Final Market Equilibrium
Final Price and Volume Points Yield Estimated Demand Curve
Price-High
P
R
I Price-Medium
C
E
Price-Low
Q Q Q
QUANTITY
H M L
I E O
D
Note: Quantity Derived from Estimated Market Shares

Exhibit 8–24: Pricing Strategy Framework
Everyday Low Retail/Outlet

Hi-Lo Pricing or or
Pricing Pricing
Select Pricing Strategy
No Pricing Price as
Corporate Mandate High Initial Demand Correlated Demand Dynamic Pricing
Flexibility Marketing Strategy
 Price at market  Target return pricing  Fairness pricing  Bundling  English auction  Prestige
 Target profit return  Bundling  Volume discount pricing  Reverse English  Sign of quality
 Frenzy pricing  Two-part pricing auction  Promotional
 Price discrimination  Dutch auction (regular
over time and eBay type)
 First-price sealed-bid
auction (regular and
Priceline type)
 Reverse first-price
sealed-bid auction
 Group buying
 Electronic exchange

Chapter 8:
Pricing
 Conclusion

Exhibit 8–25: Pricing Levers and the Four Key Stages of Customer
Relationships
Four Key Stages of Customer Relationships
Exploration/
Awareness Commitment Dissolution
Expansion
 Click-through  Targeted Promotions  Tiered loyalty  Discontinue pricing

promotions  Future price programs promotions
 Web-referral promotions  Wide variety of  Reconfigure loyalty
promotions  Justify prices pricing plans programs
 Specially negotiated  Loyalty programs  Become affiliates  Decrease profit
promotions (e.g.,  Profit-enhancing programs
hotels) programs
 Bricks-and-clicks  Volume-discount
promotions promotions
 Web price discounts  Targeted promotions
 Bundle  Future price
 Frenzy pricing promotions
 Prestige  Fairness
 Price as a sign of  Two-part pricing
quality  EDLP
 Hi-Lo
 Dynamic pricing

EDLP Last Updated: 06/24/03
Chapter 8:
Pricing
 Conclusion

Exhibit 8–26: EBay Real Estate Insertion Fees
Real Estate Timeshare & Land

List ing Ty pe / Dura t ion I nse rt ion Fe e
Auct ion Form a t
3-, 5-, 7-, or 10-day Listing $50
30-day Listing $75
Ad Form a t
30-day Listing $100
90-day Listing $200
Re side nt ia l, Com m e rcia l, & Ot he r

Auct ion Form a t
3-, 5-, 7-, or 10-day Listing $100
30-day Listing $150
Ad Format
30-day Listing $150
90-day Listing $300
All Ot he r Re a l Est a t e Ca t e gorie s

Auct ion Form a t
3-, 5-, 7-, or 10-day Listing $100
30-day Listing $150
Ad Format
30-day Listing $150
90-day Listing $300

Source: http://pages.ebay.com/help/sellerguide/selling-fees.html
Exhibit 8–27: EBay Insertion Fee Scale for Regular, Reserve Price, and
Dutch Auction Listings
Minim um Bid, Ope ning I nse rt ion Fe e

V a lue or Re se rv e Price
$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
Reserve price auctions carry an additional fee, fully refunded if the item sells:
Re se rv e Price Auct ion

Re se rv e Price Fe e
$0.01 - $24.99 $0.50
$25.00 - $199.99 $1.00
$200 and up $2.00

Exhibit 8–28: EBay Listing Option Fees
Seller Feat ure D escript ion I nsert ion Fee

Homepage Featured Item appears in a special $99.95
featured section and will most
likely be rotated for display on
the eBay homepage
Featured Plus! Item appears in the featured- $19.95
item section and in bidders'
search results
Highlight Item listing is highlighted with $5.00
lavender-colored band
Bold Item listing is displayed in bold $2.00
Gallery Item listing includes a small $0.25

picture in the Gallery (eBay's
minituature picture showcase)
Gallery Featured Item listed in the Gallery will $19.95
also be featured at the top of
the Gallery in a larger size
List in Two Categories Item listing appears in two Double the

categories, increasing visibility insertion and
optional feature
fees (excluding
home page
featured)
Ten-Day Auction Duration Item listed for the longest $0.10
duration available
Buy It Now Item available for sale instantly $0.05
to the first buyer meeting a
specified price
Exhibit 8–29: EBay Final Value Fee Schedule
Final Value Final Value Fee
$0–$25 5.25% of the final value
5.25% of the initial $25 ($1.25) plus 2.75% of the

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

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

Exhibit 8–30: EBay Payments Fee Schedule
Account Type
Payment Type Merchant Account Standard Account
Credit Card
Transaction of $15 or less 35¢ 35¢
Transaction Fee Transaction over $15 35¢ + 1.75% 35¢ + 2.5%
Auto Deposit Fee (For transactions over $15) 0.50% 0.50%
Per Transaction Limit $2,000 $500
Electronic Check
Transaction of $15 or less 35¢ 35¢
Transaction Fee Transaction over $15 35¢ + 0.75% 35¢ + 1.5%
Auto Deposit Fee (For transactions over $15) 0.50% 0.50%
Per Transaction Limit $200 $200

Source: http://pages.ebay.com/help/sellerguide/bp-fees.html
Chapter 8:
Pricing
 Conclusion

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
strategies. Each stage of the customer relationship has a set of appropriate
pricing levers that should be used.


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Internet Marketing, 2nd Ed

Mohammed, Fisher, Jaworski, Paddison

Chapter 8 Lecture Slides

Exhibits and Tables

Copyright © 2003 by Marketspace LLC

Chapter 7 Pricing Chapter 9

Copyright  2003 by Marketspace LLC

Retail Price Basic Pricing Dynamic Pricing Advanced Pricing

Cyclical CostPlus English Auctions Volume Discount

Copyright  2003 by Marketspace LLC

 The Economics of Pricing

 Retail Price Decisions

 Basic and Dynamic Pricing Strategies

 Advanced Pricing Strategies

 Strategic Responses to Competitor Price Cuts

 Pricing and the Four Key Stages of Customer Relationships

 Case Study: EBay

Copyright  2003 by Marketspace LLC

Hi-Lo EDLP Retail/Outlet

Product prices high Everyday prices are Regular prices at retail

EDLP retailers) prices are discounted discounted at outlet

Copyright  2003 by Marketspace LLC

 The Economics of Pricing

 Retail Price Decisions

 Basic and Dynamic Pricing Strategies

 Advanced Pricing Strategies

 Strategic Responses to Competitor Price Cuts

 The Pricing Process

 Pricing and the Four Key Stages of Customer Relationships

 Case Study: EBay

Copyright  2003 by Marketspace LLC

 Lowering the introductory price can

 Firms in categories where switching

 Offering low prices on well-known

Trial Loss Leader Staples

Copyright  2003 by Marketspace LLC

Past prices The market clearing When there is an

Copyright  2003 by Marketspace LLC

Effects of the Internet on Dynamic Pricing

Copyright  2003 by Marketspace LLC

Copyright  2003 by Marketspace LLC

Copyright  2003 by Marketspace LLC

Copyright  2003 by Marketspace LLC

Dutch Auction Drawbacks

 The price is not influenced

Copyright  2003 by Marketspace LLC

Copyright  2003 by Marketspace LLC

Copyright  2003 by Marketspace LLC

Copyright  2003 by Marketspace LLC

 The Economics of Pricing

 Retail Price Decisions

 Basic and Dynamic Pricing Strategies

 Advanced Pricing Strategies

 Strategic Responses to Competitor Price Cuts

 The Pricing Process

 Pricing and the Four Key Stages of Customer Relationships

 Case Study: EBay

Copyright  2003 by Marketspace LLC

Second Degree — Charge

Third Degree — Divide customers

Copyright  2003 by Marketspace LLC

 Decreases the purchase price of an

 Charges a one-time fixed fee and an