Chapter 11 Objectives 11 2 After reading Chapter

Chapter 11 Objectives 11 -2 After reading Chapter 11, you will be able to: Identify the main fixed and dynamic pricing strategies used for selling online. Discuss the buyer’s view of pricing online in relation to real costs and buyer control. Highlight the seller’s view of pricing online in relation to internal and external factors. Outline the arguments for and against the Net as an efficient market. Describe several types of online payment systems and their benefits. © 2009 Pearson Education, Inc. Publishing as Prentice Hall

The Video. Egg Story 11 -2 The video and rich media advertising company was founded in 2004 by 3 Yale graduate students. Video. Egg delivers ads to social networking sites, video sites, and gaming applications. Video. Egg created Ad. Frames, which allow video viewers to roll over and watch adsponsored content. © 2009 Pearson Education, Inc. Publishing as Prentice Hall

The Video. Egg Story, cont. 11 -3 Online advertising is bought and sold on a CPM (cost per 1, 000 impressions) or pay-perclick model (PPC). In contrast, Video. Egg charges advertisers based on user engagement (roll over action) with the ad. Video. Egg’s innovative pricing scheme is $0. 75 per roll over, which it splits 60/40% with the site owner. © 2009 Pearson Education, Inc. Publishing as Prentice Hall

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. © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Buyer & Seller Perspectives: Buyer View 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. © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Buyer Control 11 -6 The shift in power from seller to buyer affects pricing strategies. In the B 2 B market, buyers bid for excess inventory. In the B 2 G market, government buyers request proposals for materials and labor. Buyers set prices and sellers decide whether to accept the prices in a reverse auction. Buyer power online is also based on the huge quantity of information and products available on the Web. © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Buyer & Seller Perspectives: Seller View 11 -7 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. © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Seller View, cont. 11 -8 The Internet is only one sales channel and must be used in concert with other marketing mix elements. Information technology can place both upward and downward pressure on prices. © 2009 Pearson Education, Inc. Publishing as Prentice Hall

The Internet Puts Upward Pressure on Prices 11 -9 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). The average CAC for early online retailing was $82. © 2009 Pearson Education, Inc. Publishing as Prentice Hall

The Internet Puts Downward Pressure on Prices 11 -11 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. © 2009 Pearson Education, Inc. Publishing as Prentice Hall

External Factors Affect Online Pricing 11 -11 Market structure and market efficiency affect pricing strategy. The seller’s ability to set prices varies by market type: Pure competition. Monopolistic competition. Oligopolistic competition. Pure monopoly. If price transparency results in a completely efficient market, sellers will have no control over © 2009 Pearson Education, Inc. online prices. Publishing as Prentice Hall

Efficient Markets 11 -12 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. © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Is the Net an Efficient Market? 11 -13 External market factors place downward pressure on prices and contribute to efficiency. Shopping agents such as Price. Scan. High price elasticity. Reverse auctions. Tax-free zones. Venture capital availability. Competition. Frequent price changes. Smaller price change increments. © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Is the Net an Inefficient Market? 11 -14 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. © 2009 Pearson Education, Inc. Publishing as Prentice Hall

11 -15 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. © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Payment Options 11 -16 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. Pay. Pal has become the industry standard with over 150 million accounts worldwide. © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Pricing Strategies 11 -17 Price setting has become an art as much as a science. How marketers apply pricing strategy is as important as how much they charge. Marketers can employ all traditional pricing strategies to the online environment. © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Fixed Pricing 11 -18 Fixed pricing (menu pricing) is when everyone pays the same price. Two common fixed pricing strategies are: Price leadership. Promotional pricing. © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Dynamic Pricing 11 -19 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 Negotiation. pricing. © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Segmented Pricing 11 -20 Pricing levels are set based on order size, timing, demand, supply, or other factors. Segmented pricing is becoming more common as firms collect more behavioral information. Segmented pricing can be effective when: The market is segmentable. Pricing reflects value perceptions of the segment. Segments exhibit different demand behavior. The firm must be careful not to upset customers. © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Segmented Pricing, cont. 11 -21 Geographic segment pricing Pricing differs by geographic area. May vary by country. May reflect higher costs of transportation, tariffs, margins, etc. Value segment pricing Recognition that not all customers provide equal value to the firm. Pareto principle: 80% of a firm’s business comes from the top 20% of customers. © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Negotiated Pricing and Auctions 11 -22 Through negotiation, the price is set more than once in a back-and-forth discussion. Online auctions such as e. Bay utilize negotiated pricing. In the C 2 C market, consumers enjoy the sport and community while others are just looking for a good deal. B 2 B auctions are an effective way to unload surplus inventory. © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Renting Software 11 -23 Software companies sometimes decide to rent rather than sell software to customers. Renting software is analogous to leasing cars. Salesforce. com rents a leading CRM software system. © 2009 Pearson Education, Inc. Publishing as Prentice Hall