How the InternetHow the Internet
Affects PricingAffects Pricing
Effects of the 2Effects of the 2IIss
on Pricingon Pricing
• Makes it easier to reach a much wider audience
• Easier and cheaper to implement dynamic
• Easier and cheaper to adjust pricing based on
• Cheaper for consumers to investigate pricing.
• Easier to measure customer sensitivity to
• Easier to receive customer feedback on pricing.
Interactivity Affects PricingInteractivity Affects Pricing
• Consumers make it easier for companies to
convey information on the pricing they are
willing to pay for specific products.
• Customers can register their preferences with
• Customers can more easily participate in
dynamic pricing processes.
• The Internet (different websites) makes it much
easier to cater to different segments, so firms
can set specific pricing by segment.
Will the InternetWill the Internet
commoditize pricing?commoditize pricing?
• Firms react to competitor actions such as
changes in pricing.
• Companies change their offerings, enhance
existing products, launch new products, and
constantly updates their product portfolios.
• 3 Strategies for pricing:
– Hi-LoHi-Lo: Prices set high most of the time, then deep
discounts set occasionally.
– Every Day Low PriceEvery Day Low Price: Everyday prices set low
(lower than the High in the Hi-Low approach)
– Retail/OutletRetail/Outlet: Regular pricing set at retail stores
hardly ever discounted. Merchandise is discounted at
the outlet stores.
Dynamic PricingDynamic Pricing
• 2011 final ONE day sales of $1.37 billion was
33% more than 2010’s total $1.03 billion.
• $198.26 average sale was 2.6% more than last
• IBM found that about 10.8% of consumers used
mobile devices to visit a shopping site while
6.6% made an actual purchase. This increased
from 6.9% and 2.3% in 2010.
Cyber MondayCyber Monday
• Cost PlusCost Plus: Add a fixed mark up to the cost of
making the product.
• For service-based firms, you apply the mark up
to the employees’ hourly based fee.
• Easy to compute but it has a lot of drawbacks.
• Not always easy to compute all the costs.
• Fixed costs may be applied to expected sales
whose forecasts are off.
• Doesn’t take into consideration the relationship
between price and quantity in the demand
Cost Plus Pricing StrategyCost Plus Pricing Strategy
• For mature products/services, you set
your pricing to meet/exceed growth
• Three elements to adjust include:
– Reducing costs;
– Growing sales, and/or
– Changing prices.
• In mature markets, costs are relatively
fixed so you can experiment with
different pricing strategies.
Target Profit Pricing StrategyTarget Profit Pricing Strategy
• Setting a high price for a perceived high
value brand leads customers to positive
feelings of self-worth associated with the
value and image of owning the brand.
• Through brand-building the firm hopes
consumers will pay a premium for the
sense of luxury associated with owning
BrandBrand Pricing Strategy
• Decreased menu costs: pricing can be
changed easily via the Internet.
• Interactivity: It’s easy for buyers and
sellers to interact and agree to pricing
• Adjusting pricing to market demands can
happen in hours, not months or years.
• With the Internet, DYNAMICDYNAMIC pricing
becomes a reality...
InternetInternet on Pricing
• Pricing is NOT set in stone; it’s FLUID.
– Few MENU costs, the actual cost associated
with changing prices.
– The Internet makes it EASY for buyers and
sellers all over the world to negotiate prices.
• Auctions become a key pricing strategy
on the Internet.
By using the information gathered from
customers (from where they live to what
they buy to how much they have spent on
past purchases) dynamic pricing allows
companies to adjust the prices of identical
goods to correspond to a customer’s
willingness to pay.
IS THIS GOOD OR BAD?IS THIS GOOD OR BAD?
• Charge customers a different price for the same
• Is it okay to offer discounts to students?
Children? Seniors? What about volume
discounts to frequent users/purchasers,
Government employees, corporate rates,
special rates through online/offline travel rates,
calling the hotel directly…
Price DiscriminationPrice Discrimination
• Offering pricing based on bundles of products.
• Easy to implement for firms.
• Mix-match complimentary products.
• The bundle price is less than the sum total of all
the stand-alone product prices.
• Cable company TRIPLE PLAYs.
• Web hosting and email service.
• Toothbrush & toothpaste.
• English (ascending/oral) open auctions:
competing potential buyers keep raising their
prices until only ONE buyer is left.
• Reverse-Price auctions: firms submit an
RFP/RFQ to initiate a supply auction. The firm
that provides the lowest bid to provide the
products/services is selected.
• Dutch auctions: based on selling tulips in the
Netherlands, the auctioneer sets a high price,
then comes down until a buyer agrees to the
– On eBay the auctioneer sells multiple units of the
• First price select bid auctions: sellers offer a
good for potential buyers to consider. Each
bidder can submit one sealed price bid fort he
product by a pre-determined time.
If you wanted to bid on
something online, where
would you go FIRST?