Transparent Pricing

Min Ding

Pennsylvania State University

The Power of Pricing

POIM Figure 11.1 Pricing is Tightly Linked to Profitability

Proper pricing must

reflect changes brought about by

the Internet

The High Leverage of Proper Pricing

Pricing Policy

1. Select the pricing objective

2. Understand demand (for a given price)

3. Selecting a pricing method

4. Selecting the final price

Pricing Objectives Survival Maximum Current Profit Maximum Current Revenue Maximum Sales Growth Maximum Market Skimming Product-Quality Leadership

Most e-commerce firms’ pricing objective is _________, and the rationale is __________.

Determine the demand

9 factors affecting price sensitivity (Nagle, 1995)1. Unique value effect

2. Substitute awareness effect

3. Difficult-comparison effect

4. Total expenditure effect

5. End-benefit effect

6. Shared-cost effect

7. Sunk-investment effect

8. Price-quality effect

9. Inventory effect

The Unique Value Effect

The most important determinant of price sensitivity

Unique features and benefits lower price sensitivity and raise willingness to pay

To prove uniqueness Provide hard facts, solid testimonials, and

hands-on trial useThe Internet is effective at doing this

The Substitute Awareness Effect

Connects price sensitivity with the presence and awareness of alternatives Price elasticity depends on whether there are

alternatives available in the marketplaceThe Net enables instantaneous side-by-

side price comparisons of available alternatives Increasing information may lead to less

willingness to payThis may be the Net’s biggest impact

Difficult-comparison effect

Buyers are less price sensitive when it’s hard to compare substitutes

Internet will have huge impact on this.

Total Expenditure Effect

Consumers are more price sensitive when shopping for items that comprise a larger percentage of their budget

They naturally pay more attention to shopping for the best price Examples include cars & healthcare

Internet’s impact?

End-benefit effect

Customers are less price sensitive the smaller the expenditure is to the total cost of the end product

Internet’s impact ? (minimum)

Shared Cost Effect

Price sensitivity decreases if the person choosing the product isn’t the person paying for the product Example: Business travelers are less price sensitive

because their employers are footing the bill

Companies have to decide whether they’re targeting their sites at the decider or the payer

If the target is the payer, emphasize cost effectiveness

Internet’s impact?

Sunk investment effect

Buyers are less price sensitive when the product is used in conjunction with assets already bought

Internet’s impact?

Price-Quality Effect Well-known brands with a high quality

reputation can charge higher prices because price sensitivity is lessened Example – Charles Schwab vs. Ameritrade

Unknown online low-price outlets need to build confidence and trust if they want customers to respond to low price One solution is to partner with trusted and well-

known firms While well-known firms may eventually have to

lower their prices to match the competition, the price-quality effect delays the need for this response

Inventory Effect

Price elasticity is much higher on items that are nonperishable and can be stored easily Example: A discount on books may prompt

purchase even though the consumer may not read the book for several months

It’s harder to stimulate demand by lowering the prices of perishable items There has to be a closer match between

time of purchase and consumption

Selecting a Pricing Method Markup Pricing Target Return Pricing Perceived value pricing Value Pricing Going Rate Pricing Sealed-Bid Pricing

and Real time pricing (internet)

Real-Time Pricing

Setting prices is difficult if Companies don’t know their demand curves Different customers pay different prices for the product or

service Customers buy multiple products that are linked to each other

Under rapidly changing conditions It’s impossible for companies to calculate demand curves

accurately, so they can’t figure out price elasticity Instead of setting prices themselves, many companies

are using real-time pricing The power of the Internet to provide real-time information to

the marketplace makes real-time pricing possible

Why Simple Pricing Approaches Fail

Real-Time Pricing Alternatives

AuctionsRental MarketsYield Management

Real-Time Pricing Alternatives

Auctions work well on the Internet In-depth information is available to bidders Confused bidders can call or e-mail for more info Participants can join in from anywhere on the planet

Online auction sites improve the power and efficiency of auctions The Internet makes it easier to gather buyers and sellers

together in the same place at the same time The Internet enables sellers to provide in-depth

information, so buyers can evaluate the item being sold The Internet expands the number of bidders, which raises

the price paid and the profitability of the auction

Auctions as Real-Time Pricing

Real-Time Pricing Alternatives

Online Auction Types English Auction

An auctioneer calls out bids until no one is willing to top the last bid

The high bidder gets the item Examples: FirstAuction.com, Onsale.com and E-bay.com

Dutch Auction The price starts high and falls at regular time intervals The first customer willing to bid gets as many of the items as

he/she wants at that price Remaining items continue to have their prices cut

Auctions as Real-Time Pricing

Real-Time Pricing Alternatives

The rental market serves customers’ immediate needs

More efficient because the buyer pays a fee for each use rather than paying a large lump sum for unlimited use Example – software rentals

Barriers to further online adoption include credibility and the lack of willingness of sellers to use micro-transactions

Online Rental Markets

Real-Time Pricing Alternatives

Yield management is the matching of price and available

capacity

PriceAvailable Capacity

Yield Management

Real-Time Pricing Alternatives

Requirements for successful yield mgt: Fixed and perishable capacity – the good must lose 100%

of its value at a specific point in time. In addition, the industry should face high fixed costs so the cost of an additional customer is relatively low

Customer base with identifiable segments – give price sensitive customers a break without causing a loss of customers willing to pay full price

Demand uncertainty + information technology – tracking is necessary to ensure proper yield management (made easier by using company web sites)

Yield Management

One Powerful Online Pricing Strategy -- Bundling

Bundling works particularly well online Bundling is the combination of products into

larger packages A single fee gives users access to entire product

offering Example: AOL

SummaryUnderstand the factors that might affect

price elasticity and which ones will be significantly influenced by internet;

Understand real-pricing;Know bundling.