Chapter 10:
Price: The Online Value
Learning Objectives
The Internet Changes Pricing Strategies
Price can be the amount of money charged for a product or service, or the sum of
all values (money, time, energy, and psychic cost) that buyers exchange for these
products or services. Fixed price strategies suggested that one price be charged to
Buyer and Seller Perspectives
The meaning of price depends on the viewpoint of the buyer and the seller as each
party may have a differing opinion as to what constitutes a fair price.
Buyer View
Value = benefits – cost. Cost = money, time, energy, and psychic costs.
The Real Costs – Buying on the Internet can both increase and decrease
overall costs. The Internet is far from perfect, but as bandwidth increases
some of these costs will decline. Online cost savings come from
convenience, speed, self-service, one-stop shopping, integration, and
automation
Seller View
Between cost and price is profit, which is what all sellers want and need.
The seller’s perspective on pricing includes both internal and external
factors affecting pricing levels.
Internal Factors: Pricing Objectives – Profit-oriented objectives
are for profit maximization, focusing on current results, not long
term. Market-oriented objectives seek to build a customer base
that hope to lower costs and increase long-run profits.
Internet is only one sales channel and must be used in concert with
other marketing mix elements.
Internal Factors: Information Technology Affects Costs –
Information technology can be expensive, but once it is running
smoothly it can create tremendous cost efficiencies
The Internet Puts Upward Pressure on Prices – Factors in
Internet pricing includes: online customer service,
External Factors Affecting Online Pricing – The competition,
market factors, price-demand relationship, and customer behavior
affect online and offline pricing strategies.
Market Structure – Economists recognize four types of
markets presenting different pricing challenges: pure
competition, monopolistic competition, oligopolistic
competition, and pure monopoly.
Market Efficiency – Efficient market characteristics
Payment Options
Electronic money, or digital cash, is a system that uses the Internet and computers
to exchange payments electronically. Currently, technologies allow for payments
by smart chips inserted into a cell phone or mobile wallets.
Pricing Strategies
Price setting is full of contradictions. Experts believe it has become nearly as
much art as science. Marketers generally employ all traditional pricing strategies
to the online environment: fixed pricing, dynamic pricing, and barter
Fixed Pricing
Fixed pricing (also called menu pricing) is a take-it-or-leave-it pricing
strategy. Two commonly used fixed pricing strategies used online are
price leadership and promotional pricing.
Dynamic Pricing
Dynamic pricing is the strategy of offering different prices to different
customers. Unlike fixed pricing, dynamic pricing can be initiated by the
customer. The two types of dynamic pricing are segmented pricing and
negotiation.
Segmented Pricing – The firm set pricing levels for segments of
customers and uses decision-making software to determine who
gets what price.
Geographic Segment Pricing – A firm sets different prices
when selling a product in different geographic areas
Value Segment Pricing – the value segment pricing strategy
Chapter Summary
Price is the amount of money charged for a product or service. More broadly, it
covers the sum of all the values (such as money, time, energy, and psychic cost) that
buyers exchange for the benefits of having or using a good or service. Fixed price refers
to one price set for all buyers. Dynamic pricing means varying prices for individual
customers. Internet technology has prompted mass customization and a return to
dynamic pricing – especially negotiation and pricing for segments as small as a single
buyer. This is creating huge opportunities for marketers to optimize pricing strategies,
including changing them daily or more often. However, the Internet is also facilitating
price transparency, the idea that both buyers and sellers can view all competitive prices
for items sold online.
Chapter Outline
Opening Vignette: The Price of an iPhone App
Have the class read the opening vignette on The Price of an iPhone App. This
story is notable because it addresses the values of and tradeoffs between free apps
versus paid apps, both from the consumer’s and company’s point of view. Ask
I. The Internet Changes Pricing Strategies
In the narrowest sense, price is the amount of money charged for a product or
service. More broadly, price is the sum of all the values (such as money, time,
energy, and psychic cost) that buyers exchange for the benefits of having or using
a good or service
A. Fixed Pricing – one price for all
II. Buyer and Seller Perspectives
The meaning of price depends on the viewpoint of the buyer and the seller. Each
party to the exchange brings different needs and objectives that help describe a
fair price.
A. Buyer View – buyers defined: value = benefits – costs
1. The Real Costs – The Internet is far from perfect, but as
bandwidth increases, technology evolves, and firms develop
better online strategies, some costs will decline. Online cost
savings come from:
a. Convenience – it is open 24 x 7 x 365
b. Speed – download times may not be acceptable to
2. Buyer Control – the power has shifted from sellers to buyers.
a. Reverse auctions allows buyers to set prices and
sellers to decide to accept or not
“The winner’s curse” is very much evident in eBay. Winners of
auctions are caught up in the excitement and competition and end
B. Seller View – Sellers view price as the amount of money they receive
from buyers. All sellers want/need to make a profit. Seller views are
affected internally and externally.
1. Internal Factors: Pricing Objectives
a. Profit-oriented objective
i. Pricing is set for current profit maximization
ii. Focus’s on short term success
b. Market-oriented objective
i. Goal is to build a larger customer base
iii. Pay less attention to demand
2. Internal Factors: Marketing Mix Strategy
a. Successful companies use an integrated and
3. Internal Factors: Information Technology Affect Costs –
Information technologies can be expensive, but should
ultimately create tremendous cost efficiencies.
a. The Internet Puts Upward Pressure on Prices
iii. Affiliate programs
iv. Site development and maintenance
b. The Internet Puts Downward Pressure on Prices
i. Order processing – self service
ii. Just-in-time inventory
iii. Overhead
4. External Factors Affecting Online Pricing – competition,
market factors, price-demand relationship, and customer
behavior all affect online and offline pricing strategies
a. Market Structure – four types of markets
i. Pure competition
If price transparency results in a completely efficient market,
sellers will have no control over online prices.
b. Market Efficiency – the Internet is an ideal test
ground for efficient markets
i. Is the Internet an Efficient Market? Contributing
factors include:
2) Flash sales
4) Reverse auctions
6) Venture capital
8) Frequent price changes
9) Smaller price change increments
ii. Is the Net an Inefficient Market? Contributing
factors include:
2) Differentiation
4) Delivery options
6) Differentiation
8) Second-generation shopping agents
III. Payment Options
Electronic money, also called e-money or digital cash, is a system that uses the
Internet and computers to exchange payments electronically
A. Payment by Smart Chip
1. MZOOP
2. Mobile Wallets
3. Paypal
a. Currently the industry standard
b. Allows purchases via credit card or bank debit
IV. Pricing Strategies
Price setting is full of contradictions and has become as much art as science. If
prices are too high, sales may decline, if prices are too low profits will suffer.
Pricing is the easiest part of the marketing mix, but because it has the biggest
impact on the bottom line can be the most difficult decision for marketers to make.
Buyer value perceptions vary between rational and emotional, and consumers
react differently. In general, marketers can employ all traditional pricing
strategies.
A. Fixed Pricing – “menu pricing.” Everyone pays the same price,
commonly used by many brick-and-mortar firms. Two common fixed
price strategies are:
1. Price leadership
a. Lowest priced product in a particular category
2. Promotional pricing
3. Freemium pricing
a. Free versions of products
B. Dynamic Pricing – offering different prices to different customers.
Airlines are a classic example of dynamic pricing. Unlike fixed
pricing, dynamic pricing can be initiated by the seller of the buyer.
Two types:
1. Segmented Pricing – firms use decision rules to determine who
pays what price.
a. Segments may be many or one
b. Pricing according to customer behavior segments is
becoming more common
c. Firms use cookie files to experiment with customer
specific offers and prices to motivate transactions
d. Is only appropriate when the market is segmentable.
e. Geographic Segment Pricing
2. Negotiated Pricing and Auctions – prices are set more than
once in a back-and-forth discussion
a. A major difference form the all other pricing
strategies
C. Renting Software – Companies developing software sometimes decide
to rent rather than sell to increase usage.