The Dynamics of Pricing Strategies in E-Commerce: Understanding Market Models and Consumer Behavior

1. e-business strategies and models Eduardo J C Beira Department of informaton systems University of Minho

2. What is your best price? • What is finding the best price? • To search across the web for the lowest posted price? • NO! • In (e-)commerce price usually emerges from some kind of dickering • Fixed posted prices are exceptions • B2C markets, specially

3. Fundamentals • Selling the same product to customers at different prices is fundamental to profitable business • Principle: concealing your best selling secret: • key to the sucess of the dealer´s strategy of different prices for different customers is keeping the best price secret • Sellers try to keep the prices of actual deals secret and they try to keeep secret any information that would help buyers figure out the seller’s rock-bottom price, determined by cost

4. E-deals • A broad principle is that e-commerce does not change the fundamentals of deals • The forces that make the players conceal their best prices are no different as the internet improves communication • A core of the successful e-commerce enterprise (outside books, CDs and groceries) will be a way to make deals happen despite the desire to conceal their best prices.

5. Variety of e-markets • eBay model • One of a kind product, several buyers, automated auction • OffRoad model • Multiple units of the same product, many buyers bidding (pure B2B) • FreeMarkets model • Buyers specifies the component; reverse auction between suppliers • Dickering in the supply chain • Nasdaq model • Standard product, many buyers and sellers, automated continuous exchange • Priceline model • Customer makes an offer (may accept restrictions). Seller accepts or not • Products that trade in a markets where usually some buyers pay much more than others • Grainger model • Products in high volume, fixed asking price • No discount (Amazon) or special pre-negotiated discount (Grainger) • MRO (maintenance, repair, operations) products

6. A bot can´t tell you what price you will pay after you dicker, nor can it predict the price you would pay in an auction. • Despite bots, prices in e-markets, like books, have not fallen to a uniformly low level

7. Zero-profit principle: • New sellers will enter a market until the prospective profit (in excess of the normal return to capital) is zero • Unless a pioneer in an e-market has a powerful patent or builds up a real head start (like eBay) its profit will erode as others enter the market • Because trading on e-markets is so much cheaper than in traditional markets, the opening up of e-markets has expanded opportunities for dealers • eBay traders • e-markets generate information, and information is property.

8. The essence of the digital deal • Conceal your best price • Build your e-market within a robust e-commerce infrastructure • Trading partners, payments, deliveries • Choose an e-market business model suited for your business • Make an intelligent choice about transparency • Recognize the role of the secondary markets and dealers • Recognize that competition will limit your profits

9. Old vs new • Traditional companies have built-in advantages over pure e-commerce firms • Substantial customer base • Brand recognition • Knowledge capital • Physical plants and outlets • Solid supplier relationships • Market power • Processes, policies & people in place • Advantages in look & feel products • Disadvantages in commodities

10. The dot com retail continuum • On the web all goods are not equal

11. e-opportunity • e-operations • e-marketing • e-services

12. Seven misconceptions • First mover • First mover status is a precarious perch on which to rest strategy • Reach • Customer solutions • Internet sectors • Best of breed partner • Born global • Technology is the strategy

13. B2B • Proprietary electronic marketplaces (e-markets) • e-exchanges • A particular important question about B2B is how much trading will occur in neutral, independent owened e-markets, and how much in e-markets operated by existing players • A large part of the story of the crash was the finding that neutrals were making little headway ahainst the captive e-markets set up by big companies or consortiums • Captive e-markets • Tremendous natural liquidity • Perception of non neutral operation

14. B2B • Network externalities • Kelly law: nn • Dynamic pricing models • Shifting power from sellers to buyers • Virtual exchange concept • Bring buyers and sellers together on line

15. B2B (IIIa) • Multiple buyers • Multiple sellers • Many to many model • Post-trade information • Liquidity

16. B2B (IIIb) • Towards EDI compliant + XML capable • New infomediaries • Lower comissions • 10% to 1% • Community of buyers and sellers • In a structured and organized fashion • Critical vertical knowledge • Membership: open vs closed • Ownership issues • Uthentication isssues • Settlement / clearing

17. B2B trading models • Fixed price • Low price items; small quantity transactions • One to one negotiation • Auction markets • Seller driven • Liquidation sales • Buyer driven • Reverse auction • Electronic autoexecution systems • Constinuous two way auctions (Nasdaq) • Standard products • High liquidity

18. B2Bbusiness models • Agregators • One stop shopping, multisupplier catalogues • Trading hubs • Vertical markets communities • Post & browse markets • Buleeetin board with expressions of interest • Auction markets • Multiple buyers ans dellers in competitive bidding • Fully automated exchanges • Centralized markets for standardized (commodities like) products • Automatic matching of orders • Efficient price-setting on line mechanisms • Prequalificaton required

19. Channel conflits • From B2B • To B2B2C? • And the traditional brokers of the market?

20. B2B exchanges7 secrets • Stay focused: specialize in a vertical market • Plan to win: the need to dominate • Maintain commercial neutrality • Ensure transparency and integrity • Add value by building a virtual community • Make the right partnership • Operate as a virtual corportaion

21. B2B profile • Overview • History • Vertical market opportunity • Membership model • Traiding model • Market entry stategy • Achieving dominance • Building a community • Services added to the trading mechanism • Revenue model • Confidentiality and neutrality

22. R. Hall, “Digital dealing”, WW Norton & Co., 2001 • A. Sculley e W. Woods, “B2B exchanges”, HaperBusiness, 2001 • E. Brynjolfsson e G. Urban, “Strategies for e-business sucess”, MITSloan Management Review, Jopssey-Bass, 2001 • S. Chen, “Strategic management of e-business”, J Wiley & Sons, 2001 • M. Porter, “Strategy and the internet”, Harvard Business Review, Março 2001 • “Older, wisier, webbier”, The economist, 28 Junho 2001