Price: The

Online Value
The Internet Changes Pricing
Strategies
– price is the amount of money charged for a
product or service. More broadly, price is the sum
of all the values (such as money, time, energy, and
psychic cost) that buyers exchange for the
benefits of having or using a good or service.
The Internet Changes Pricing
Strategies
– Fixed price policies—setting one price for all buyers—is a
relatively modern idea that arose with the development of large-
scale retailing and mass production at the end of the nineteenth
century. Now, 100 years later, the internet is taking us back to an
era of dynamic pricing—varying prices for individuals.
– The internet’s properties, especially in the role of information
equalizer, allow for price transparency—the idea that both buyers
and sellers can view competitive prices for items sold online.
Buyer and Seller Perspectives

– The meaning of price depends on the viewpoint of the buyer and the seller.
Each party to the exchange brings different needs and objectives that help
describe a fair price. In the end, both parties must agree or no sale takes place.
Buyer and Seller Perspectives

– Buyer View
From the buyer’s perspective, the cost of a product purchased online may be higher than that offline
(due to seemingly hidden elements such as shipping costs and the time and effort needed to search out
and compare prices).
Yet buyers may also enjoy online cost savings due to the internet’s:
 convenience
 Speed
 self-service capability
 one-stop shopping,
 Integration
 and automation.
Buyer and Seller Perspectives

Seller View
Sellers view price as the amount of money they receive from buyers, unless they
are making a barter exchange.
Seller costs for producing the good or service represent the pricing floor, under
which no profit is made. Above that floor, marketers have the freedom to set a
price that will draw buyers from competing offers. Between cost and price is profit.
The seller’s perspective on pricing includes both internal and external factors.
Buyer and Seller Perspectives

Seller View
Internal factors are the firm’s strengths and weaknesses from
its SWOT analysis, its overall pricing objectives, its marketing
mix strategy, and the costs involved in producing and
marketing the product. External factors that affect online
pricing in particular include the market structure,
competition, and the buyer’ perspective, as discussed earlier.
Buyer and Seller Perspectives

Seller View
Two Important External Factors Affecting Online
Pricing:
– Market structure
– market efficiency.
 Buyer and Seller Perspectives

– Market Structure
The seller’s leeway to set prices varies with different types of markets.
Economists recognize four types of markets, each presenting a different
pricing challenge:
1. Pure competition.
2. 2. Monopolistic competition
3. 3. Oligopolistic competition
4. 4. Pure monopoly
Buyer and Seller Perspectives

– 1. Pure competition. This market consists of many buyers

and sellers trading in a uniform commodity such as corn.
Product differentiation and marketing communication
play little or no role, so sellers in these markets do not
spend much time on marketing strategy. Many online
products could be seen as pure competition, such as
MP3 music downloads; however, the retailers offering
the products can differentiate based on customer
service.
 Buyer and Seller Perspectives

– 2. Monopolistic competition. This market consists of many buyers and sellers who
trade over a range of prices rather than a single market price. A range of prices
occurs because sellers can differentiate their offers to buyers. Online university
courses are one product delivered over the internet that falls in this category.
– 3. Oligopolistic competition. This market consists of a few sellers who are highly
sensitive to each other’s pricing and marketing strategies. If a company drops its
price by 5 percent, buyers will quickly switch over to this supplier. Online travel
agents, such as Expedia and Travelocity, fall into this category.
Buyer and Seller Perspectives

– 4. Pure monopoly. This market consists of one seller

whose prices are usually regulated by the government. If
you are in a smaller town, your internet service provider
could fall into this category.
Buyer and Seller Perspectives

Market Efficiency
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, and narrow price dispersion— the observed
spread between the highest and lowest price for a given
product.
 Buyer and Seller Perspectives

Is the Internet an Efficient Market?

Many people believe that the internet is an efficient
market because of access to information through
corporate Web sites, shopping agents, and
distribution channels. For instance, a search for a
flight to Bangkok at Kayak.com or Travelocity.com
will display a complete array of airlines and prices.
 Buyer and Seller Perspectives

The following external market factors place a downward pressure on internet

prices, contributing to efficiency:
 Shopping agents. Shopping agents, also called comparison shopping agents,
facilitate consumer searches for low prices by displaying the results in a
comparative format.
 Flash sales. Flash sales are limited-time offers for site members to purchase a
product at a deep discount.
 High price elasticity. Price elasticity refers to the variability of purchase behavior
with changes in price.
 Buyer and Seller Perspectives

 Reverse auctions. Reverse auctions allow buyers to name their price and have sellers
try to match that price.
 Tax-free zones. Most online retailing takes place across state lines, so buyers often pay
no sales taxes on purchases, reducing total out-of-pocket expenditures by as much as 5
percent to 8 percent per transaction.
 Competition. The competition online is fierce and highly visible. Furthermore, some
competitors are willing to set prices that return little or no short-term profits to gain
brand equity and market share.
 Payment Options

– Electronic money, also called e-money or digital cash, is a system that uses the
internet and computers to exchange payments electronically. It can be used in offline
or online transactions, using the internet to transfer money between buyer and
seller accounts.
– Payment by smart chip. MZOOP, created by Harex InfoTech in South Korea, is a chip
inserted in a cell phone that can be pointed at a vending machine or other point of
purchase reader for purchasing items. The transaction is charged to the owner’s
debit or credit bank card
 Payment Options

– Mobile wallets. Japan and Finland already allow offline payments via
cell phone at vending machines and elsewhere. Google recently
introduced a mobile wallet application that stores all credit cards in
the mobile phone. Owners simply swipe the phone at participating
retailers and can remotely disable the function from the Web if the
phone is lost.
 Pricing Strategies

– Fixed pricing (also called menu pricing) occurs when sellers set the price and buyers
must take it or leave it. With fixed pricing, everyone pays the same price.
Three common fixed pricing strategies used online are price leadership, promotional
pricing, and freemium pricing:
Price leadership. A price leader is the lowest-priced product entry in a particular category.
Both online and offline, Walmart is a price leader, setting the pace for other retailers.
Promotional pricing. Many online retailers have turned to promotional pricing to
encourage a first purchase, encourage repeat business, and close a sale. Most promotions
carry an expiration date that helps create a sense of urgency.
Pricing Strategies

– Freemium pricing. Many companies offer free versions

of products, as mentioned in the Instapaper opening
story. Skype is one of the first to successfully use a
freemium pricing model.
 Pricing Strategies

– Dynamic pricing is the strategy of offering different prices to different

customers.
Two types of dynamic pricing are:
segmented pricing, where the company sells a good or service at two or
more prices, based on segment differentiation rather than cost alone
price negotiation, where the company negotiates prices with individual
customers
 Pricing Strategies

– Renting Software
Companies developing software sometimes decide to rent rather than sell it
to customers. Buyers want to purchase software they use on a regular basis,
such as Microsoft Office, but if organizations want to use software for a
short-term project or don’t want to go to the expense of installing and
maintaining it on their servers, renting makes sense.
 Pricing Strategies

Price Placement on Web Pages

Many physical world retailers have found that if they first offer customers a
higher-priced product overall sales will be higher than if they first offer a
lower-priced product. For example, if similar tables sell at prices from $400
to $4,000 (with several priced in the middle), it is best to offer the $4,000
version first. The customer will often look at lower-cost versions, but fewer
offered the $400 table will look at much higher-cost versions.