The influence of the Internet on Pricing and Distribution

MARK 430

After this class you will be able to.

Discuss the buyers 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 cant 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 higherpriced 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

Priceline checks if any of its participating airlines are willing to offer roundtrip flight at bid price or lower

Consumer submits nonrefundable bid

Checks airlines seat availability

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. Lands 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 hasnt happened to the extent predicted new kinds of intermediaries on the Internet

Intermediaries add customer value in various ways

Market Information Promotional Effort Transactional Activities Storage and Transportation
Monitoring sales trends, inventory levels, competitive behavior Banner ads, sales promotions, traditional advertising support, personal selling Bargaining on price and terms, order processing, credit, inventory and assortments Warehousing, transportation to buyer, sorting and packaging into desired forms

Facilitation Activities

Credit card processing, invoicing, shipping confirmations

warranty work, repair, spare parts, etc.

Installation and Service Technical support, customer service lines,

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