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 pricing strategies for selling online
Understand how the Internet has affected distribution 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 different needs and objectives that help describe a fair price.
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 it calculated; 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 in research and locating an item
Psychic costs – frustration, lack of trust of web commerce, lack of confidence in on-line service delivery etc
Seller perspective on price
Sellers concerned with profitability – but there is some freedom to set price at a level that will 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 for something they used to get for “free”
Some strategies Provide basic service at no cost, with upgraded or
enhanced service being charged for Yahoo Mail Business 2.0 magazine e-Cards
Price comparisons by customer Software agents visit web servers and collect pricing
information, and / or merchants provide a data stream 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
Pricing strategies
Fixed pricing (similar to offline pricing strategy) Price leadership Promotional pricing
Dynamic pricing (Internet-enabled pricing) Auctions Segmented pricing (geographic or based on
customer profile)
Pricing Strategies: FIXED PRICING
Occurs when sellers set the price, and buyers must 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 the one that sets the price levels for the market. Others follow the leader with comparative pricing (usually higher).
Walmart is an example of a “low price” price leader that uses technology to leverage its costs and maintain profitability
An online company such as www.Buy.com consistently offers lower prices. It sells below market value and subsidizes price cutting with advertising on its web site.
Very hard to maintain price leadership and remain profitable as the 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?
Fixed pricing: Promotional pricing
This strategy used to encourage a first purchase, encourage repeat business, and close a sale
Promotions tend to carry an expiry date – creates a sense of urgency
Price promotions can be highly targeted using email and on web sites that use clickstream analysis (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 pricing strategy.
Decreased “menu” costs on the web - changing prices is easy (no costs of changing price tags, catalogs etc)
Interactivity - buyers and sellers from all around the 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 it until 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
Consumer submits non-refundable bidConsumer submits non-refundable bid
Priceline checks if any of its
participating airlines are willing to offer roundtrip flight at bid price
or lower
Priceline checks if any of its
participating airlines are willing to offer roundtrip flight at bid price
or lower
Checks airline’s seat availability
Checks airline’s seat availability
Priceline accepts or rejects bid
Priceline accepts or rejects bid
Pricing Strategies: Dynamic Pricing
Dynamic pricing is also the strategy of offering different prices to different customers Optimizes inventory management Segments customers by product use or other
variables (eg. frequent or infrequent purchasers) Web-based technology and database marketing
have 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 depending
on a number of pre-set variables or decision rules The Internet gives the ability to recognize a
consumer, 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 introductory
price – eg. Telus offer to students from Malaspina IP address
May use behavioural cue: eg. if you abandon your shopping cart
Use with care – customers may get upset
Segmented pricing: geographic segments
A company sets different prices when selling a product in different geographic areas
Uses IP address of user to guess at their location
Prices can then be related to circumstances in different countries – local competition, economic conditions etc
Computers, CDs etc. are usually priced differently according to geography
The Internet as a distribution channel
Distribution determines how the customer actually receives a product or service (also often called fulfillment)
A distribution channel is a group of interdependent firms that work together to transfer 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 can
have closer ties with customers and suppliers - improved market responsiveness
Customer access and service are now 24/7/52 Increases customer convenience and reduces time
spent on shopping(PERHAPS an opportunity to INCREASE MARGIN due to perceived added value?)
Increase in the power of consumers - we are now SO demanding
Some Impacts on Distribution
Evolution from traditional mail order to on-line selling eg. Land’s End
Traditional firms with large investments in offline retail have been reluctant to fully engage in online commerce eg. WalMart
Traditional retail firms have experienced “channel conflict”, cannibalization issues. eg. LeviStrauss
Completely new business models based on digital distribution methods
Internet becomes a direct substitute for an offline distribution 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, we would move toward a position where the distribution 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, traditional advertising support, personal selling
Transactional Activities Bargaining on price and terms, order processing, credit, inventory and assortments
Storage and Transportation
Warehousing, transportation to buyer, sorting and packaging into desired forms
Facilitation Activities Credit card processing, invoicing, shipping confirmations
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 as transportation, inventory storage, and product aggregation.
Physical distribution Most products sold online are still distributed
through conventional channels But any product that can be digitized can be
delivered over the Internet (newspapers, magazines, music, software, books, TV, movies etc)
Online distribution costs are significantly lower
Logistics challenges The “last mile problem” – cost and logistics of
delivering small amount of goods to individual customers
Solutions: Smart boxes (for a fee!) Retail aggregator model – items can be shipped to
a 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…