•What is the relationship between price and demand?  Why is it important for a firm to price at the point at which marginal revenue is equal to marginal cost?

•Why should a firm consider fairness when pricing its goods?

•How has the Internet enhanced opportunities for dynamic pricing strategies?

•Why would a firm want to implement a price-discrimination strategy?

•What is the difference between static and dynamic markets?  Why must a firm consider its pricing strategies within the context of a dynamic market?

                                              

The Economics of Pricing

Key variables  of basic demand-curve pricing:

•Price

•Substitute Offerings/ Prices

•Complementary Offerings/ Prices

•Income

•Market Size

•Taste

•Marginal Revenue

•Marginal Cost

 

Basic Pricing Strategies

•Cost Plus

•Target Profit Growth

•Target-Return Pricing

•Prestige Pricing

•Price as a Sign of Quality

•Cyclical Promotional Pricing (Hi-Lo)

•Everyday Low Pricing

•Fairness in Pricing

•Promotional Low-Cost Pricing

 

Dynamic Pricing Strategies

•Dynamic Pricing is one of the most significant contributions the Internet and the 2Is have made to pricing strategy.

•The Internet has enhanced dynamic pricing in two ways:

–Decreased Menu Costs

–Interactivity

 

Auction Types

•English Auctions

–Reverse-Price English Auction

•Dutch Auctions

•First Price Sealed-Bid Auctions

•Reverse First Price Sealed-Bid Auctions

•Group Buying

•Exchanges

 

Advanced Pricing Strategies

•Price Discrimination

–first-degree, second-degree and third-degree

•Volume Discount Pricing

•Two-Part Pricing

•Bundling

•Price Discrimination Over Time

•Frenzy Pricing

 

Strategic Responses to Competitor Price Cuts

®Enhance the Value Proposition

®Battle

®Cross-Parry Attack

®Targeted Response

®Fighter Brands

®Justify the Price Differential

 

Pricing Process

®Set pricing goal

®Differentiate value relative to substitute products

®Strategically select target customer segments

®Strategic pricing/ competitor reaction

®Select a pricing structure and price point

 

Pricing and Market Making on the Internet

(Dolan & Moon, HBS Case 9-500-065)

 

     •The Internet will create downward pressure on prices:

     •Potential buyers can speedily search the net

     •Low consumer search costs will lead to greater price competition.

The Internet will create downward pressure on prices:

 

     •The same technology that reduces customer search costs also:

  •Facilitates buyer acquisition of quality information

     •Enables suppliers to update price dynamically in response to observed demand

     •Allows sellers to create meaningful markets for potential buyers with price being the outcome of the auction process

     •Permits prospective buyers to specify in detail the product’s requirements and put fulfilment out to bid to an organized market of potential sellers.

 In an Internet era the challenge is not only setting the price for  knowledgeable consumers; but, also, how to select the most advantageous combination of market making mechanisms via which to transact exchange.

 

Type 1: The Set Price Mechanism

 

 

     •Take it or leave it price involves horizontal interactions between buyers and sellers.

     •Low transaction costs.

     •Sense of fairness.

     •In traditional retail markets, buyer ignorance is a source of profits, but in an Internet world search costs are low and search agents are increasing.

     •Internet examples, Amazon, etoys.com, Compare.net, R U Sure, NECX.

     •Internet has created set of companies that sell product below costs, e.g.,

               Buy.com (but ?)

 

Type 1: The Set Price Mechanism

(Con’t)

 

     •Others, like Amazon, do not offer the lowest price, but leverage other

       dynamics such as:

     •Branding and trust – most on-line transactions are not instantaneous and consumers have fear of being ripped-off

     •The shopping experience – superior product information and search tools.

     •Lock-in – activities that increase customer switching (customize customer interactions).

     •Dynamic pricing – low menu costs and increased customer information.

 

Type II: The Buyer/Seller Negotiated Price Mechanism

    •One-to-one vertical negotiations takes place around the world, from the fruit markets in Taipei, to car dealers in the NYC; however, they have some disadvantages:

     •It takes longer than fixed price exchanges to complete.

     •Price tends to dominate over features.

     •For negotiations to be effective, the customer contact person must have some degree of pricing authority.

 The Internet provides an efficient mechanism that mitigates each of these problems.

  •Start with a specific price: NexTag.com gives listing of products and allows the customer to counteroffer. Advantages of the process are that negotiations can be done with multiple sellers at once and the customer is always in    control.

     •Another alternative is Hagglezone for real time negotiations and    entertainment.

     •Buying-power based negotiations

 •Product aggregators, get volume discounts, sites like Accompany.