E-Marketing 5/E Judy Strauss and Raymond Frost

1. E-Marketing 5/EJudy Strauss and Raymond Frost Chapter 11: Price: The Online Value

2. 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.

3. 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.

4. 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.

5. The Internet Changes Pricing Strategies • 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 competitive prices online.

6. Pricing Strategies

7. Buyer & Seller Perspectives: Buyer View • The meaning of price depends on the viewpoint of the buyer and the seller. • An agreement to a fair price must be reached or no sales will occur. • Value = Benefits – Cost • Buyer’s costs may include money, time, energy, and psychic costs. • The wide price difference; the inclusion and non-inclusion of tax; supplier rating/reliability; number of reviewers etc.

8. Buyer & Seller Perspectives: Buyer View • But they often enjoy many online cost savings: • The Net is convenient and fast. • Research, shop, get entertained 24/7; on a range of appliances. Ordered items received quickly. • Asynchronous communication anytime anyplace • Self-service saves time. • Look at choices, track order, pay bills, etc without having to wait for company staff/rep. • One-stop shopping and integration save time. • Automobile companies in Malaysia; AutoMall Online USA • Customised info by search engine companies • Automation saves energy. • Tracking previous purchases; sites visited; passwords store.

9. Buyer Control • 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. • Risk – “ the winner’s curse”

10. Buyer & Seller Perspectives: Seller View • Price is the amount of money received from the buyer. • The seller’s perspective includes internal and external factors, identified via SWOT analysis. • Internal factors include pricing objectives, marketing mix strategy, and information technology • External factors include market structure and competition • Pricing objectives may be: • profit oriented – profit maximisation; breakeven. • market oriented – customer buildup • competition oriented.

11. Seller View, cont. • Marketing mix – must be integrated and consistent, whether online or offline. • The Internet is only one sales channel and must be used in concert with other marketing mix elements. • Information technology • Can be expensive but if done well can lead to better operation and efficiency • can place both upward and downward pressure on prices.

12. The Internet Puts Upward Pressure on Prices • Online customer service is an expensive competitive necessity – online assistance, e-mail replies. • Distribution and shipping costs – individual packaging adds to cost. • Affiliate programs add commission costs. • Site development and maintenance – hardware, software, connection costs. • Customer acquisition costs (CAC). • The average CAC for early online retailing was $82.

13. Customer Acquisition Cost • Customer Acqusition Cost Calculator • New customers per month 200 • Website Development Costs $ 10,000 • Estimated life of the website (months) 24 • Monthly Promotion Costs $ 2,000 • Monthly Maintenance Costs $ 250 • Your customer acquisition costs are $13.33 per customer. • Which is: • Website Development Costs / Expected Life of website) + Monthly Promotion Costs + Monthly Maintenance Costs New customers • = ($10,000.00/24) + $2,000.00 + $250.00 / 200 = $13.33

14. The Internet Puts Downward Pressure on Prices • Firms can save money by using internet technology for internal processes. • Self-service order processing. • Just-in-time inventory – sometimes no inventory at all. • Overhead – no rental of selling spaces and associated staffing; if at all in cheaper places • Customer service – customers help themselves. • Printing and mailing – no mailing or distribution needed. • Digital product distribution – true for limited products such as software and music..

15. External Factors Affect Online Pricing • Market structure and market efficiency affect pricing strategy. • The seller’s ability to set prices varies by market type as identified by economists: • 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.

17. 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.

18. Efficient Markets Mean Loss of Pricing Control

19. Is the Net an Efficient Market? • External market factors place downward pressure on prices and contribute to efficiency. • Shopping agents such as PriceScan, Travelocity. • High price elasticity – variability of purchase behavior with changes in price. • Reverse auctions – forces sellers to compete against one another . • Tax-free zones – still have a moratorium on internet taxes. • Venture capital availability – longterm view prevailing thus no pressure for immediate profitability. • Competition – fierce and highly visible; some sacrificing immediate profit for brand equity and market share. • Frequent price changes – many reasons e.g role of shopping agents, need for new customers, incremental volume discounts. • Smaller price change increments – ranking by shopping agents, easy to change prices online, presence of price-sensitive customers.

20. Is the Net an Inefficient Market? • 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. • Dispersion of prices exceed 30% in some cases. • One possible reason - Price dispersion may occur because many buyers do not know about or use shopping agents.

21. Is the Net an Inefficient Market? cont. • Price dispersion may also relate to other issues: • Brand strength – varies from company to company. • Online pricing – fixed, dynamic or auction. • Delivery options – time and place. • Time-sensitive shoppers – reluctant to spend time to seek best deal. • Differentiation – a result of strong branding. • Switching costs – loses familiarity, thus willing to pay a little more. • Second-generation shopping agents- uses ranking. • In summary, the internet is not an efficient market.

22. Payment Options • Electronic money(e-money or digital cash) uses the internet and computers to exchange payments electronically. Touch & Go ? • Other off-line e-money payment systems include: • Smart chips. • Payment by cell phone. • More options in payment methods attracts more customers • Additional costs to customers. • PayPal has become the industry standard with over 84million accounts worldwide.

23. PayPal Account Options • Exhibit 11.6

24. Pricing Strategies • 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.

25. Fixed Pricing • Fixed pricing (menu pricing) is when everyone pays the same price. • Even with quantity discounts • Two common fixed pricing strategies are: • Price leadership – the lowest price. • Company need to be most cost efficient • Normally the largest producer as has the advantage of economy of scale • Promotional pricing. • To encourage first or repeat purchase • Limited time period • Can be highly targeted through e-mails

26. 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 – depending on the season; group travel. • Quick changes can be done on webpages to announce new prices. • There are 2 types of dynamic pricing: • Segmented pricing – set by seller • Price negotiation – usually initiated by the buyer.

27. Segmented Pricing • 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.

28. Segmented Pricing, cont. • 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.

29. Customer Value Segments The target is to move as many customers as possible to the A+ category and keeping the A+ customers as long as possible

30. 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.

31. 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.