Chapter 11 Objectives 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.

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The VideoEgg Story The video and rich media advertising

company was founded in 2004 by 3 Yale graduate students.

VideoEgg delivers ads to social networking sites, video sites, and gaming applications.

VideoEgg created AdFrames, which allow video viewers to roll over and watch ad-sponsored content.

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The VideoEgg Story, cont. Online advertising is bought and sold on

a CPM (cost per 1,000 impressions) or pay-per-click model (PPC).

In contrast, VideoEgg charges advertisers based on user engagement (roll over action) with the ad.

VideoEgg’s innovative pricing scheme is $0.75 per roll over, which it splits 60/40% with the site owner.

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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.

The Internet Changes Pricing Strategies

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Buyer & Seller Perspectives: Buyer View 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.

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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. 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.

Buyer Control11-6

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Buyer & Seller Perspectives: Seller View 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.

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Seller View, cont. 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.

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The Internet Puts Upward Pressure on Prices 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.

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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.

The Internet Puts Downward Pressure on Prices

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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 online prices.

External Factors Affect Online Pricing11-11

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Efficient Markets 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.

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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.

Is the Net an Efficient Market?11-

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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.

Is the Net an Inefficient Market?11-

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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

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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.

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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.

Pricing Strategies11-17

Fixed Pricing Fixed pricing (menu pricing) is when

everyone pays the same price. Two common fixed pricing strategies

are: Price leadership. Promotional pricing.

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Dynamic Pricing 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.

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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.

Segmented Pricing11-20

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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.

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Negotiated Pricing and Auctions Through negotiation, the price is set

more than once in a back-and-forth discussion.

Online auctions such as eBay utilize negotiated pricing. In the C2C market, consumers enjoy the

sport and community while others are just looking for a good deal.

B2B auctions are an effective way to unload surplus inventory.

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Renting Software 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.

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