wk11 pricing distr
TRANSCRIPT
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The influence of the Internet on
Pricing and Distribution
MARK 430
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After this class you will be able to….
Discuss the buyer’s and sellers views of
pricing
Identify the main fixed and dynamic pricingstrategies for selling online
Understand how the Internet has affecteddistribution channels
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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 differentneeds and objectives that help describe a fairprice.
If buyer and seller can’t agree on a fair price,
then there is no sale
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Buyer perspective on price
Buyers define value as benefits minus cost Costs to the buyer
Money – what is the real cost? How is itcalculated; 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 inresearch and locating an item
Psychic costs – frustration, lack of trust of webcommerce, lack of confidence in on-line servicedelivery etc
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Seller perspective on price
Sellers concerned with profitability – but thereis some freedom to set price at a level thatwill 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
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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
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Going from free to paid service
Big issue now is persuading people to pay forsomething they used to get for “free”
Some strategies
Provide basic service at no cost, with upgraded orenhanced service being charged for
Yahoo Mail
Business 2.0 magazine
e-Cards
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Price comparisons by customer
Software agents visit web servers and collect pricing
information, and / or merchants provide a datastream 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
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Pricing strategies
Fixed pricing (similar to offline pricingstrategy)
Price leadership Promotional pricing
Dynamic pricing (Internet-enabled pricing)
Auctions
Segmented pricing (geographic or based oncustomer profile)
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Pricing Strategies: FIXED PRICING
Occurs when sellers set the price, and buyersmust 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
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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 theone that sets the price levels for the market. Others follow theleader with comparative pricing (usually higher).
Walmart is an example of a “low price” price leader that usestechnology to leverage its costs and maintain profitability
An online company such as www.Buy.com consistently offerslower prices. It sells below market value and subsidizes pricecutting with advertising on its web site.
Very hard to maintain price leadership and remain profitable asthe 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?
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Fixed pricing: Promotional pricing
This strategy used to encourage a firstpurchase, encourage repeat business, andclose a sale
Promotions tend to carry an expiry date – creates a sense of urgency
Price promotions can be highly targeted usingemail and on web sites that use clickstreamanalysis (then it becomes dynamic)
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Pricing strategies: DYNAMIC PRICING
Dynamic pricing is fluid pricing Dynamic pricing is one of the most significant
contributions the Internet has made to pricingstrategy.
Decreased “menu” costs on the web - changingprices is easy (no costs of changing price tags,catalogs etc)
Interactivity - buyers and sellers from all aroundthe world can interact and negotiate prices
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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 ituntil 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
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Priceline “Name Your Own Price”
Auction Process
Consumersubmits non-
refundable bid
Pricelinechecks if any ofits participating
airlines arewilling to offerroundtrip flightat bid price or
lower
Checks airline’s
seat availability
Pricelineaccepts orrejects bid
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Pricing Strategies: Dynamic Pricing
Dynamic pricing is also the strategy ofoffering different prices to different customers
Optimizes inventory management
Segments customers by product use or othervariables (eg. frequent or infrequent purchasers)
Web-based technology and database marketinghave 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)
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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 dependingon a number of pre-set variables or decision rules
The Internet gives the ability to recognize aconsumer, 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 introductoryprice – eg. Telus offer to students from Malaspina IPaddress
May use behavioural cue: eg. if you abandon your shoppingcart
Use with care – customers may get upset
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Segmented pricing: geographic segments
A company sets different prices when sellinga product in different geographic areas
Uses IP address of user to guess at theirlocation
Prices can then be related to circumstancesin different countries – local competition,economic conditions etc
Computers, CDs etc. are usually priceddifferently according to geography
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The Internet as a distribution
channel
Distribution determines how the customeractually receives a product or service (alsooften called fulfillment)
A distribution channel is a group ofinterdependent firms that work together totransfer product from producer to consumer
Producers >>Intermediaries>>Consumers
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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 canhave closer ties with customers and suppliers -improved market responsiveness
Customer access and service are now 24/7/52
Increases customer convenience and reduces timespent on shopping
(PERHAPS an opportunity to INCREASE MARGIN due to perceived added value?)
Increase in the power of consumers - we are now SOdemanding
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Some Impacts on Distribution
Evolution from traditional mail order to on-line sellingeg. Land’s End
Traditional firms with large investments in offline retailhave been reluctant to fully engage in onlinecommerce eg. WalMart
Traditional retail firms have experienced “channel
conflict”, cannibalization issues. eg. LeviStrauss
Completely new business models based on digitaldistribution methods
Internet becomes a direct substitute for an offlinedistribution channel eg. online banking
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Disintermediation
Cutting out the “middle person”
Initially it was thought that because of the
move toward self service on the web, wewould move toward a position where thedistribution channel was shorter
This hasn’t happened to the extent predicted
– new kinds of intermediaries on the Internet
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Market Information Monitoring sales trends, inventory levels,
competitive behavior
Promotional Effort Banner ads, sales promotions, traditionaladvertising support, personal selling
Transactional Activities Bargaining on price and terms, order
processing, credit, inventory andassortments
Storage andTransportation
Warehousing, transportation to buyer,sorting and packaging into desired forms
Facilitation Activities Credit card processing, invoicing, shippingconfirmations
Installation and Service Technical support, customer service lines,warranty work, repair, spare parts, etc.
Intermediaries add customer value in various ways
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Logistics functions of the distribution
channel
Include physical distribution activities such astransportation, inventory storage, and productaggregation.
Physical distribution Most products sold online are still distributed
through conventional channels
But any product that can be digitized can bedelivered over the Internet (newspapers,
magazines, music, software, books, TV, moviesetc)
Online distribution costs are significantly lower
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Logistics challenges
The “last mile problem” – cost and logistics ofdelivering small amount of goods to individualcustomers
Solutions: Smart boxes (for a fee!)
Retail aggregator model – items can be shipped toa local convenience store or service station
Specialized e-shop pick-up points
Returns: reverse logistics
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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
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Thank You
Next Week….
How the Internet offers products and Branding…