Wk11 Pricing Distr

8/3/2019 Wk11 Pricing Distr

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The influence of the Internet on

Pricing and Distribution

MARK 430



After this class you will be able to….

Discuss the buyer’s and sellers views of

pricing

Identify the main fixed and dynamic pricingstrategies for selling online

Understand how the Internet has affecteddistribution channels



Buyers and sellers views of

pricing The meaning of price depends on the

viewpoint of the buyer and seller.

Each party to the exchange brings differentneeds and objectives that help describe a fairprice.

If buyer and seller can’t agree on a fair price,

then there is no sale



Buyer perspective on price

Buyers define value as benefits minus cost Costs to the buyer

Money – what is the real cost? How is itcalculated; what does it include (shipping, taxes,

duties, gift wrap) Time – finding what you want, waiting for it to

arrive, slow web sites

Energy – Web = self service, so no-one to help inresearch and locating an item

Psychic costs – frustration, lack of trust of webcommerce, lack of confidence in on-line servicedelivery etc



Seller perspective on price

Sellers concerned with profitability – but thereis some freedom to set price at a level thatwill draw buyers away from competing offers

Profit lies between cost and price

Affected by both internal and external factors

External factors:

Market structure and type of competition

Market efficiency



Internal factors affecting price for sellers

Depends on pricing objectives (eg. volume; building

market share; high profits; matching competition) Factors that push prices upwards –

cost of distribution

commissions to affiliates

site development

customer acquisition costs

Factors that depress prices – Order processing – self service

Just-in-time inventory

Overhead (physical vs. online store)

Customer service costs lower

Printing and mailing costs

Digital product distribution costs



Going from free to paid service

Big issue now is persuading people to pay forsomething they used to get for “free”

Some strategies

Provide basic service at no cost, with upgraded orenhanced service being charged for

Yahoo Mail

Business 2.0 magazine

e-Cards

http://mail.yahoo.com/?.intl=us

http://www.business2.com/

http://www.business2.com/

http://mail.yahoo.com/?.intl=us



Price comparisons by customer

Software agents visit web servers and collect pricing

information, and / or merchants provide a datastream to the site

Many of these sites accept payment for “premium”listings

Bidfind www.MySimon.com

Froogle – merchants provide a data stream to Google

(no paid placement)

Has the effect of decreasing price differences competitors have easy access to prices

more difficult to maintain position as a price leader in the

Internet world

http://www.bidfind.com/index.html

http://www.mysimon.com/

http://froogle.google.com/froogle

http://froogle.google.com/froogle

http://www.mysimon.com/

http://www.bidfind.com/index.html



Pricing strategies

Fixed pricing (similar to offline pricingstrategy)

Price leadership Promotional pricing

Dynamic pricing (Internet-enabled pricing)

Auctions

Segmented pricing (geographic or based oncustomer profile)



Pricing Strategies: FIXED PRICING

Occurs when sellers set the price, and buyersmust take it or leave it

Everyone pays the same

This strategy is very common in retailing

2 types of fixed price strategy are

Price leadership

Promotional pricing



Fixed pricing: Price leadership

A price leader is most often, but not always, the lowest-priced

product entry in a particular category. The price leader is theone that sets the price levels for the market. Others follow theleader with comparative pricing (usually higher).

Walmart is an example of a “low price” price leader that usestechnology to leverage its costs and maintain profitability

An online company such as www.Buy.com consistently offerslower prices. It sells below market value and subsidizes pricecutting with advertising on its web site.

Very hard to maintain price leadership and remain profitable asthe lowest price Can you think of industry examples where the price leaders have higher

prices? How do they succeed? What does this mean for the internet market? How could you be a higher-

priced price leader?

http://www.buy.com/

http://www.buy.com/



Fixed pricing: Promotional pricing

This strategy used to encourage a firstpurchase, encourage repeat business, andclose a sale

Promotions tend to carry an expiry date – creates a sense of urgency

Price promotions can be highly targeted usingemail and on web sites that use clickstreamanalysis (then it becomes dynamic)



Pricing strategies: DYNAMIC PRICING

Dynamic pricing is fluid pricing Dynamic pricing is one of the most significant

contributions the Internet has made to pricingstrategy.

Decreased “menu” costs on the web - changingprices is easy (no costs of changing price tags,catalogs etc)

Interactivity - buyers and sellers from all aroundthe world can interact and negotiate prices



Dynamic pricing: Auctions

Variety of auction types “English” auction - such as e-Bay where the price

starts low and is then driven up

“Dutch” auction - the auctioneer announces a high

price for the product, then gradually reduces ituntil a buyer will accept it e-Bay has a variant of this, where a seller has multiples of the

same product to sell

First-Price sealed bid auction (purchaser does not

know the amount of the other bids) Priceline is an example of this type of auction



Priceline “Name Your Own Price”

Auction Process

Consumersubmits non-

refundable bid

Pricelinechecks if any ofits participating

airlines arewilling to offerroundtrip flightat bid price or

lower

Checks airline’s

seat availability

Pricelineaccepts orrejects bid

http://www.priceline.com/

http://www.priceline.com/



Pricing Strategies: Dynamic Pricing

Dynamic pricing is also the strategy ofoffering different prices to different customers

Optimizes inventory management

Segments customers by product use or othervariables (eg. frequent or infrequent purchasers)

Web-based technology and database marketinghave made this strategy much easier to implement

What advantages does this provide a marketer when trying to

manage product levels and market segment positioning? (Discuss)



Dynamic pricing: Segmented pricing Where the company sells goods or services at two or

more prices,based on segment differentiation

automatically generates a different price dependingon a number of pre-set variables or decision rules

The Internet gives the ability to recognize aconsumer, then customize prices, segmenting

sometimes to a segment of one eg. anyone who has previously purchased 10 items gets a

discount

May use your IP address to offer a product at an introductoryprice – eg. Telus offer to students from Malaspina IPaddress

May use behavioural cue: eg. if you abandon your shoppingcart

Use with care – customers may get upset



Segmented pricing: geographic segments

A company sets different prices when sellinga product in different geographic areas

Uses IP address of user to guess at theirlocation

Prices can then be related to circumstancesin different countries – local competition,economic conditions etc

Computers, CDs etc. are usually priceddifferently according to geography



The Internet as a distribution

channel

Distribution determines how the customeractually receives a product or service (alsooften called fulfillment)

A distribution channel is a group ofinterdependent firms that work together totransfer product from producer to consumer

Producers >>Intermediaries>>Consumers



The effect of the Internet on servicing

customers across multiple distribution

channels Adds another communication channel between

buyers and sellers

Facilitates real-time communication so firms canhave closer ties with customers and suppliers -improved market responsiveness

Customer access and service are now 24/7/52

Increases customer convenience and reduces timespent on shopping

(PERHAPS an opportunity to INCREASE MARGIN due to perceived added value?)

Increase in the power of consumers - we are now SOdemanding



Some Impacts on Distribution

Evolution from traditional mail order to on-line sellingeg. Land’s End

Traditional firms with large investments in offline retailhave been reluctant to fully engage in onlinecommerce eg. WalMart

Traditional retail firms have experienced “channel

conflict”, cannibalization issues. eg. LeviStrauss

Completely new business models based on digitaldistribution methods

Internet becomes a direct substitute for an offlinedistribution channel eg. online banking



Disintermediation

Cutting out the “middle person”

Initially it was thought that because of the

move toward self service on the web, wewould move toward a position where thedistribution channel was shorter

This hasn’t happened to the extent predicted

– new kinds of intermediaries on the Internet



Market Information Monitoring sales trends, inventory levels,

competitive behavior

Promotional Effort Banner ads, sales promotions, traditionaladvertising support, personal selling

Transactional Activities Bargaining on price and terms, order

processing, credit, inventory andassortments

Storage andTransportation

Warehousing, transportation to buyer,sorting and packaging into desired forms

Facilitation Activities Credit card processing, invoicing, shippingconfirmations

Installation and Service Technical support, customer service lines,warranty work, repair, spare parts, etc.

Intermediaries add customer value in various ways



Logistics functions of the distribution

channel

Include physical distribution activities such astransportation, inventory storage, and productaggregation.

Physical distribution Most products sold online are still distributed

through conventional channels

But any product that can be digitized can bedelivered over the Internet (newspapers,

magazines, music, software, books, TV, moviesetc)

Online distribution costs are significantly lower



Logistics challenges

The “last mile problem” – cost and logistics ofdelivering small amount of goods to individualcustomers

Solutions: Smart boxes (for a fee!)

Retail aggregator model – items can be shipped toa local convenience store or service station

Specialized e-shop pick-up points

Returns: reverse logistics



Some industries that are undergoing

rapid change due to Internet forces Recorded Music industry

Video/DVD rental industry

Newspaper and magazine publishing

Banking

Textbook publishing

Forces for change: Digitizable product

Self service

Direct to consumer shift



Thank You

Next Week….

How the Internet offers products and Branding…

Documents

Wk11 Pricing Distr