lecture 08 digital pricing
Post on 18-Jan-2015
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Digital Pricing
5A3190 DMCMDavid Edmundson-Bird
Digital Pricing
• So what’s the problem?– You have to produce a digital marketing strategy poster– You have to create a market segmentation exercise– You have to describe a typical digital customer voyage– You have to produce a digital customer experience– You have to discuss user experience
Digital Pricing
• So what do you need to learn?– What the economics of digital pricing are– What decisions in digital retail pricing have to be made– How basic and dynamic digital pricing strategies work– How advanced pricing strategies work– How a digital business should respond to price-cutting at a
strategic level– How the digital pricing process works– How digital pricing works at each of the four stages of the
electronic customer relationship
The Effects of the 2 “I”s on Digital Pricing
IndividualisationIndividualisation InteractivityInteractivity
DIGITAL PRICINGDIGITAL PRICINGCustomer redevelops partsof the product to meetpersonal needs and wantsOrganizations provide targeted,individualized, customizedproductsStickiness as customers investtime and effort to personalize
Allows a larger buying and selling communityFacilitates dynamic pricing strategiesAllows prices to be changed easily Allows consumers to easily check pricesEasier to understand and measureconsumers’ reactions to price promotionsEasier to receive customer feedback onprice, understand customers’ willingnessto pay, and implement price-discriminationstrategies
Key Digital Pricing Strategies
RETAIL PRICEDECISIONS
RETAIL PRICEDECISIONS
BASIC PRICINGSTRATEGIES
BASIC PRICINGSTRATEGIES
DYNAMICPRICING
STRATEGIES
DYNAMICPRICING
STRATEGIES
ADVANCEDPRICING
STRATEGIES
ADVANCEDPRICING
STRATEGIES
Cyclical PromotionalPricing (Hi-Lo)Everyday Low PricingRetail/Outlet Pricing
Cost PlusBrand PricingPromotions
English AuctionsReverse-Price EnglishAuctionsDutch AuctionsFirst-PriceSealed-Bid AuctionsReverse First-PriceSealed-Bid AuctionsExchanges
Volume Discount PricingTwo-Part PricingBundling Price DiscriminationOver TimeFrenzy PricingThree Categories of PriceDiscrimination
WHAT ARE THE ECONOMICS OF DIGITAL PRICING?
Information Content Demand Example
Price Quantity Total
Revenue Marginal Revenue
12 0 0
11 1 11
10 2 20
9 3 27
8 4 32
7 5 35
6 6 36
5 7 35
4 8 32
3 9 27
2 10 20
1 11 11
0 12 0
£6
£12
£8
£2
£4
£10
Marginal Cost
2 4 6 8 10 12
PRICE
QUANTITY
Optimal Price(Q=4, P=8)
11
9
7
5
3
1
-1
-3
-5
-7
-9
-11
An adult’s semi-annualdemand for paid for content
Key Variables affecting Curve Slope & Position
Demand curves made of many inputs plotcustomers’ aggregated willingness to buy ateach possible price point
PRICE
QUANTITY
Price Price
Substitutes
Complementaries
Income
Market Size
Taste
Substitutes
Complementaries
Income
Market Size
Taste
Demand Curve Inputs• Price
– Price decreases, demand increases from market• Substitutes
– Close substitutes negatively affect chargeable price• Complementaries
– Their price affects digital product’s demand as much as its own price• Income
– Demand linked to consumer income• Market Size
– Growth in market positively affects demand• Taste
– Customer preference positively drives demand
Demand Curve Slopes & Degrees of Flexibility
• The slope of the demand curve determines an organisation’s flexibility in setting a price
No Pricing Flexibility Complete Pricing Flexibility
Quantity
Price
Quantity
(a) (b)
Industry Demand Curves
• Certain industries are more inclined toward one extreme type of demand curve than the other
• Luxury– Goods that buyers will purchase regardless of price
because there are no acceptable substitutes
• Commodity– Goods that are homogenous and have available substitutes
Using Demand Curves to Set Price
• Optimal pricing strategy is to choose the point on the demand curve where marginal cost is equal to marginal revenue
• Marginal Cost– Cost associated with producing one additional
product/service• Marginal Revenue
– Positive/negative amount created when price is changed by one increment
WHAT DECISIONS HAVE TO BE MADE IN DIGITAL RETAIL PRICING?
Cyclical Promo (HiLo) vs. Every Day Low Pricing vs. Retail/Outlet
• HiLo– High prices most of the time– Occasional low prices (Often lower than EDLP)
• EDLP– ED prices set low (lower than HiLo high price)– Occasionally prices are discounted
• R/O– Regular rarely discounted prices in main retail– Discounts at “outlets”
HOW DO BASIC AND DYNAMIC DIGITAL PRICING STRATEGIES WORK?
Basic Digital Pricing Strategies• Cost-Plus
– Add a fixed mark-up to the total cost of item• Target Profit Growth
– Fixed profit target: better margins through price increase or higher volumes through price decrease
• Target Return Price– Fixed return on capital achieved through price change
• Brand Pricing– Build a brand to charge a premium price
• Promotional Price– Regular discounting
Promotional Low Price Costing• Organisations often discount:• Trial
– Induce customers to experience benefits of new product/service• Rapid Acceptance
– Set low price as first mover advantage to stuff competition• Switching Costs
– Where switching is expensive, low lost induces customers• Loss Leaders
– Low prices in famous names/staples/seasonals leads to sales in higher margin product/service
Fairness in Pricing
• Matching the customer’s internally generated reference price with selected price
• Key components of reference price– Past prices, substitutes, context
• When to under-price– Market clearing price is higher than reference price,
financial relationship between buyer & seller• Where fairness counts
– Ongoing relationship between buyer & seller, where seller has significant power
Digital Dynamic Pricing
• Digital Economy allows for frequent & proactive price adjustment
• Prices can be easily changed• Buyers and sellers can interact and negotiate
prices
Digital Dynamic Pricing
• Auctions– English– Reverse-Price English (C2B invitation to tender)– Dutch (price drops until bought)
• Price cannot be influenced upwards, price starts higher than market value to claim profit
– First-Price Sealed Bid
• Exchanges– Commodity owners meet to exchange goods– Host receives commission
HOW DO ADVANCED PRICING STRATEGIES WORK?
Price DiscriminationCharging different prices based on willingness to pay
PRICE
DISCRIMINATION
First Degree — Charge consumers exactlywhat they are willing to pay for product –haggling)
Second Degree — Charge consumersexactly what they are willing to pay forfirst unit of good as well as additionalunits – e.g. volume pricing
Third Degree — Divide customers intodistinct segments, charging different pricesto different segments
Volume Discount vs. Two-Part Pricing
• Strategies used to charge consumers what they are willing to pay for each additional item purchased
• Volume Discount– Decreases the purchase price of an item as the quantity
purchased increases• Often associated with minimum purchases in fixed period
• Two-Part– Charges a one-time fixed fee and an associated variable
charge for each purchased item• Often associated with subscription fee models and zero-cost of
production
Two-Part Pricing Implementation
• Need to understand each individual customer’s price curve
• Need to determine optimal number of products to sell to each customer
• Need to calculate how much customer is willing to pay for product and set fixed & variable prices to encourage them to purchase optimal number
Bundling
• Packaging several items together under one price
• Pure Bundling– Packaging together complementaries which are
only offered as part of a bundle• Mixed Bundling
– Offering items as either component pieces or as a bundle which discounts each item
HOW SHOULD A DIGITAL BUSINESS RESPOND TO PRICE-CUTTING AT A STRATEGIC LEVEL?
What Motivates Price Cutting?
• A tactic used to gain market share• Motives
– Trouble• Desperate attempt to raise cash, or signal to
competitors an interest in being acquired– Industry Leader
• Show of strength to indicate organisation is doing well enough to withstand the lower prices
– Displeasure• To punish a competitor for a change in its strategy
Responding to Price Cuts
ENHANCE VALUEPROPOSITION
ENHANCE VALUEPROPOSITION
BATTLEBATTLE
JUSTIFY PRICEDIFFERENTIAL
JUSTIFY PRICEDIFFERENTIAL
GENERALPRICE CUT
GENERALPRICE CUT
TARGETEDPRICE CUT
TARGETEDPRICE CUT
CROSSPARRY
CROSSPARRY
FIGHTERBRAND
FIGHTERBRAND
Enhancing the basic product with additionalfeatures such as extended warranties, additionalservices and the inclusion of ancillary products,but maintaining the price so that total customervalue increases
Communicating the differential benefits offeredby the organisation that justify a higher pricethan the competition
Match the competitorscut as an aggressiveshow of strength
Focused efforts towardcompetitor’s primarygeography or product
Discounts offered onlyto vulnerable customers
New products developedto appeal to vulnerablecustomers
HOW DOES THE DIGITAL PRICING PROCESS WORK?
What to do and not to do• Don’t discount unless you have to.• Offer options! Some people will want basic functionality while others will
want super-functionality. • Some segments will value your product more than others. Try to price
accordingly.• Customers do not like companies to charge different prices in different
channels for the same product without proper justification.• Many organisations have been burned by changing prices only to be met
by a full-fledged price war by outraged competitors.• Brand strength or adding extra features (e.g., free upgrades) may temper
the need to discount price.• Goodwill is important in maintaining relationships, but think about
whether you are giving up too much in terms of price. Customers may remain loyal even if you don’t offer them the 10 percent discount
The Digital Pricing Pentagon
DETERMINESELLING
STRATEGY
DETERMINESELLING
STRATEGY
SET PRICINGGOALS
SET PRICINGGOALS
DIGITALPRICING
PROCESS
Develop PricingSegmentation
EstablishProductValue
ChallengePricingMindset
EstimateCompetitorReaction
Test FinalMarket
Equilibrium
Strategic Segmentation: Expanding & Increasing
Expanding the customer“sweet-spot” through
versioning
Increasing customer densitythrough pricediscrimination
ORIGINALTARGETMARKET
ExpandedTarget Market
Pricediscriminationincreasesdensity
Estimate Competitor Response
• Avoid setting a price that leads to a price war• Set potential prices
– Use scenario planning– Must be real prices you could charge
• Guess what competitor reaction would be to each one– Will they aggressively react, minimally react or accept?
• Estimate your final price and hypothesize competitors’ final price points
Test Final Market Equilibrium• Final price and volume
points give your estimated demand curve
PRICE
QUANTITY
Hi
Medium
Low
Hi Medium Low
Derived fromestimated marketshares
Digital Pricing Strategy FrameworkRETAIL PRICE
DECISION
HiLo EDLP R/O
Select Digital Pricing Strategy
No PricingFlexibility
No PricingFlexibility
CorporateMandate
CorporateMandate
High InitialDemand
High InitialDemand
CorrelatedDemand
CorrelatedDemand
DynamicPricing
DynamicPricing
Price asMarketingStrategy
Price asMarketingStrategy
Price at market
Price at market
Target return pricingTarget profit return
Target return pricingTarget profit return
Fairness pricingBundlingFrenzyPrice discrimination over time
Fairness pricingBundlingFrenzyPrice discrimination over time
BundlingVolume DiscountTwo-Part
BundlingVolume DiscountTwo-Part
English, Reverse & DutchFirst-price sealed-bidReverse first-price sealed-bidGroup buyingElectronic exchange
English, Reverse & DutchFirst-price sealed-bidReverse first-price sealed-bidGroup buyingElectronic exchange
PrestigeSign of QualityPromotional
PrestigeSign of QualityPromotional
HOW DOES DIGITAL PRICING WORK AT EACH OF THE FOUR STAGES OF THE ELECTRONIC CUSTOMER RELATIONSHIP?
Digital Pricing Levers & 4 Stages of ERM
Acquisition Conversion Retention Dissolution
Click-through promotionsDigital Presence-referralpromotionsSpecially negotiatedpromotions (e.g., hotels)B&C promotionsDigital-only price discountsBundleFrenzy pricingPrestigePrice as a sign of qualityHi-LoDynamic pricing EDLP
Targeted PromotionsFuture price promotionsJustify pricesLoyalty programs
Tiered loyalty programsWide variety ofpricing plansBecome affiliatesProfit-enhancing programsVolume-discount promotionsTargeted promotionsFuture price promotionsFairnessTwo-part pricingEDLP
Discontinue pricing promotionsReconfigure loyalty programsDecrease profit programs
What We’ve Covered Today– We’ve looked at what the economics of digital pricing are– We’ve seen what decisions in digital retail pricing have to be made– We’ve looked at how basic and dynamic digital pricing strategies work– We’ve looked at how advanced pricing strategies work– We’ve explored how a digital business should respond to price-cutting
at a strategic level– We’ve investigated how the digital pricing process works– We’ve seen how digital pricing works at each of the four stages of the
electronic customer relationship
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