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?

Price

• Inverse relationship between price and quantity.
• As a product price decreases/ decreases, demand will increase/ decrease.

Substitute Offerings/ Prices

• Both the types of substitute goods and their prices affect the product demand curve.
• If there are close substitutes, the product has limited maneuverability in terms of pricing.

Complementary Offerings/ Prices

• The prices of complementary goods affect a product’s demand curve.
• If the price of the complementary good decreases/ increases, then demand for the product will increase/ decrease.

Income

• Income is positively correlated with demand. As income rise, so does product demand.

Market Size

• As market size increases, so does product demand.

Taste

• Regardless of market size, price, income, substitute and complementary products, consumers must have the desire to purchase the product.
• The latitude that a firm has to price its product is dependent on the slope of its demand curve. The steeper the curve, the more power firms have in pricing.

Marginal Revenue

• Is the additional (or negative) revenue reaped from lowering or increasing the product price by increments.

Marginal Cost

• Is the cost associated with producing an additional good.
• Marginal cost curve is often U-shaped – as more goods are produced, firms often experience increasing returns to scale.

Why should a firm consider fairness when pricing its goods?

As a general rule, firms should avoid competitive price cutting that could lead to a price war.

Fairness in Pricing

• Consumer often think about pricing in terms of how fair the price is.
• Three factors are taken into consideration:

1.Past prices

2.Close-substitute prices

3.Context (purchase environment)

How has the Internet enhanced opportunities for dynamic pricing strategies?

Interactivity – The Internet makes it easy and much less costly for buyers and sellers around the world to interact and negotiate.

Menu costs are the costs associated with changing the price of a good.

In a store or a mail order catalog, there are costs associated with changing costs, but on the Internet, this is easy and virtually costless.

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

First-degree Price Discrimination

• Involves getting consumers to pay exactly what they are willing to pay for an item.
• Implies that in order to charge each consumer exactly what they are willing to pay, firms must know what each consumer’s demand curve is – which is unrealistic.
• What is more realistic is for the merchant to ascertain more information from consumers to gauge what they are willing to pay.

Second-degree Price Discrimination

• Firm is trying to ascertain how much consumers are willing to pay not only for the first unit of a good, but for each additional good.

Third-degree Price Discrimination

• Most common type of price discrimination.
• Involves classifying consumers by category according to their willingness to pay.
• E.g. price discrimination by age at theatres and airline pricing.

How is product defined?

Can be defined as both tangible goods and intangible services generally created for the purpose of transaction.

How do Interactivity and Individual (the 2Is) impact product?

The 2Is allow a company to learn more about its customer, personalize a product to meet customer preferences, and offer CRM tools to provide more value for customers and cut costs for product sellers.

Websites which require customers to register to use the site have access to numerous tools to interact with the user as an individual.

•Once the user has registered, the site can recognize an individual customer both on the first and return visits.

•Using log files, a site can track a specific individual’s clickstream, i.e.where they go on a site, length of time spent, actual sequence of page views etc.•Based on such data, sellers greatly increase their ability to develop products based on their customers’ interests and preferences, especially in developing augmented products.•The Internet has also changed market research – today, syndicated reports can be found, assessed, and downloaded in a matter of minutes.. These reports are highly customizable and inexpensive relative to traditional research.

What are key marketing levers for product?

Customer Service Programs, Postsales Support

(Two primary benefits: can be used as a lever to provide a relevant basis for establishing an ongoing dialogue with the customer and enable an annuity stream which can be considerable )

Customer Care (Internet has enabled a radical shift from the traditional complaint management to customer care. / The Internet facilitates customer interaction, greatly reduces time to resolution and reduces costs)

Customer Relationship Management (The entire concept of CRM is to recognize individual customers, understand their value, apply sales and marketing resources that are in line with their value, and then let the customer train the enterprise in terms of how they would like to interact and receive their products and services.

Loyalty Programs and Privileges (Purpose is to recognize and reward a company’s best customers by providing additional services in appreciation of their loyalty. This in turn can increase a customer’s perceived value. )

Availability of Complementary Products (This assures the buyer of the basic product that has additional functionality, tools or other enhancements are available or will be available in the future thereby improving the potential value of the basic product. )

Upgrades (Upgrades have been effectively used to develop long-term customer relationships and offer the customer a better value proposition. / Important guidelines to note are that upgrades should be meaningful and relevant to the customer base, interface of upgrade should be similar to old product with no high learning curve to overcome and be upward compatible.)

Enabling Community (An active community around a product deepens the relationship between the product and the individuals in that community and can offer long-term, loyal and high-margin customers to a company. )

Additional Functionality (There are a number of enhanced functionalities that a website can use to augment a basic product and drive additional benefits to its visitors. Two general types: low-tech and broadband-enabled.

•Low-tech includes facilitated comparison shopping, product selection guides, live personal assistance or product demonstrations.

•The nascent stage of the Internet, slow connections and processing speeds are currently hindering the advancement of broadband applications such as simulcasting, web-conferencing, and streaming video capabilities.

Fulfillment Capabilities (The Internet allows for greatly increased fulfillment capabilities as a result of the 2Is. E.g. a customer can be given the choice of multiple shipping addresses for one shopping session. )

What does the overall product development process look like?

Customer needs, Production needs and capabilities, Research and Development, Competitors and Marketplace Forces

How can companies manage their product portfolio?

New product development, Enhancements and line extensions of current products and services, Development of existing products, Support of current products and services

How does marketing research fit within the product development process?

Test Marketing – Small-scale experiment in which a new product is introduced and supported by a clearly defined marketing mix.

How can a customer-centric approach to product development create strategic advantages? When a company delivers on its promise to produce a customer-designed product, long-term customer commitment is deepened.

How can products enable a customer relationship?

Deploying the product development levers that are appropriate for the existing relationship and

Emphasizing the elements of the value proposition that are most relevant at a given stage of the relationship.

10/22/08

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 fulfillment 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.

Type III: Auctions and Exchanges

•Three types of auctions based on competition across buyers and/or sellers producing prices that can be highly variable across transactions:

•(a) Classic auctions – competition across buyers lead to price

•(b) Reverse auctions – competition across sellers lead to price

•(c) Exchanges – multiple buyers and sellers interact to set price.

Classic Auctions IIIa

•Basic demand aggregation model that functions to deliver the best price for

sellers, given the market demand the seller has been able to assemble.

•Types of auctions include: C-2-C (eBay-like); B-2-C (Egghead); B-2-B (Tradeout). Related items of trust, community and relationships. Barriers of entry are relatively low, but success breeds success.

The Internet increases the economic efficiency associated with auction models. More specifically:

•The Internet lowers the search costs for sellers looking for buyers (transforms niche market segments into mainstream segments).

•The Internet lowers the cost associated with making inventory available to buyers immediately (bypass liquidation broker fees).

•For buyers, the Internet lowers the cost associated with accessing hard-to-find items (auctions aggregate supply for buyers).

•The interactive nature of the Internet facilitates the creation of a buyer community (eBay is actually the creation of something that could not have been done in the real world).

Classic Auction IIIb

•The buyer is more proactive and specifies what it is that will be purchased; then, supplier’s bid indicates the price of fulfilling that demand.

•Reverse auctions have been the main tool in B-2-B. RFP and RFQ are generated and transmitted to qualified buyers for bid. B-2-B examples include Freemarkets and CommerceOne,

•B-2-C auctions of Type IIb are less well developed, but some are forming like “imandi” where individuals put out a RFQ for a product or service.

Buyers remain anonymous to sellers and can choose to follow-up via e-mail.

•The Priceline-type variant: In many ways the service represents a sacrifice of consumer power in favor of solving a vendor’s problem of selling off excess capacity.

•By requiring customers to be flexible with regard to brand, sellers and/or product features, sellers are able to generate incremental revenues without disrupting their existing distribution channels or retail pricing structure.

Classic Auction IIIc

•IIIc exchanges are electronic marketplaces where a group of buyers and a group of sellers interact to trade and set prices for transactions.

•The general purpose of exchanges is for each product to dynamically update a list of offers to buy and offers to sell. These buys and sells are matched through the market making process.

•A major advantage of these exchanges, e.g., Fast Parts, ESteel, ChemConnect, is that they bring together buyers and sellers on a global scale.

Summary

•The Internet has changed the way many markets are organized and consequently the mechanisms via which price is set.

•Markets are now more efficient, i.e., they cut the ignorance premium, and different forms of market mechanisms will operate, but we can not unequivocally say that price will go down.

•The Internet can increase prices for time sensitive commodities in inefficient markets, e.g., airlines.

•The Internet can also be a price boom for differentiated commodities; it allows suppliers to provide more requested consumer information.

•However, the Internet can be a disaster for those with a commodity selling mentality.

Server Log, Coded Page, and Panel Date

· Server log: record kept at the server level that records each file requested from a website; server log files are created by the server that houses the web site. Each time a browser requests a file in order to build a web page, it generates an entry in the server request log.

· Panel Data: the process for using panel data to generate site effectiveness data is the same as using panels in the general marketing research process. The first step is to recruit a statistically representative panel of internet users who agree to participate in the data collection. Specialized software is downloaded onto the participant’s computer to record the click stream data. The software is polled at regular intervals to upload the data. First, the source of the data is unambiguous, which it often it not with server logs. Second, a person who uses the internet from both home and work is two separate people according to server logs, but carefully planned and maintained panel data can overcome this issue. Third, the measurement firm can collect demographic and behavioral data from panel households that can be useful in reporting and analytics.

· Coded pages: the use of coded pages is a new method of collecting data, on the “browser (user’s) side” of the information transaction instead of on the “server side” The tag part of the page that is requested by the served to the user’s browser. The file then sends data back to the server. Working with cookies, the tag can send back detailed information about the visitor’s activity on the page. One the surface, the data are the same as those collected by a server log. Data collected by tags has several advantages over server log data: the data may be more accurate, data collected by web bugs has smaller storage requirements because it stores only relevant data, and when data are collected in this manner, it permits real-time processing and viewing of site metrics.

Similarities

· Used for recording activities in a web site

Differences

· Server Logs record information on the server side while Coded Data collects information from the browser side

· Coded Pages are more useful than server logs because the user’s IP address may change during the session, causing the server log to, in effect, record different visitors instead of the same visitor

· When using Coded pages, data collected by Web bugs has smaller storage requirements because it stores only relevant data, not all the site operating data stored by server logs.

• With Coded pages, when data are collected in this manner, it permits real-time processing and viewing of site metrics. Server log data, on the other hand, must be transferred to a separate analytics system for batch processing. It can be made available quickly, but not in real time.

· With Panel Data, the source of the data is unambiguous, which it often is not with server logs a person who uses the Internet from both home and work is two separate people according to server logs, but carefully planned and maintained panel data can overcome this issue

· The measurement firm can collect demographic and behavioral data from panel households that can be very useful in reporting and analytics. Because server logs identify most users by dynamic IP addresses, it is not possible to use much third-party data to enhance it.

Measuring Metrics

Internet Traffic Measuring Metrics:

· hits: the number of files requested

· impressions: the number of times and ad banner is requested by a browser

· page views or deliveries: the number of times a web page is requested

· sessions: the amount of activity on a site during a specified period

· click-through: the number of times visitors come to the site by clicking on an ad

Audience Measuring Metrics::

· visitors: the number of people who visit the site

• total (includes multiple visits) or unique (different people) during a specified time frame

• unidentified (anonymous) or identified (registered or customer)

· unduplicated audience: the visitors that are unique to a web site

· behavior on the site

• number of page views

• session time

• path through the site

• shopping cart abandonment

• entry page (many visitors do not enter through the home page)

Campaign Measuring Metrics

· by communication channel: e-mail, mail, online banner, and so forth

· by offer: promotion offered (free shipping versus 25% off)

· search effectiveness by keyword

The Nature of Consumer Adoption Process

· The customer adoption process is generally accepted conceptualization of the stages a consumer goes through when confronted with a new product or service.

· According to the adoption process, the consumer must first become aware of the product, then develop an interest in it, perform some pre-purchase evaluation, and then try the product, either as a consequence of a purchase or of a marketer-sponsored promotion or incentive.

Diffusion of Innovations

· Diffusion process is a communications model and as such it consists of four elements: the innovation, communication channels, time, and social system within which the innovation is spreading

· The Consumer Adoption Process explains consumer behavior and how consumers adapt to a product, while the diffusion of innovations describes the life of a product over time.

Pervasive Computing

· Pervasive computing implies that a single person has access to myriad computing devices to assist in performing all sorts of daily tasks.

· Pervasive computing aims to enable people to accomplish an increasing number of personal and professional transactions using a new class of intelligent and portable devices. It gives people convenient access to relevant information stored on powerful networks, allowing them to easily take action anywhere, anytime.

· There, new intelligent appliances or “smart devices” are embedded with micro-processors that allow users to plug into intelligent networks and gain direct, simple and secure access to both relevant information and services. These devices are as simple to use as calculators, telephones or kitchen toasters.

Changes Likely to Bring about in the way marketer approach the Internet

· Marketers have to seize the opportunities presented by the changing technological environment and develop new products and services that successfully take advantage of it such as RFID.

Strategic Drivers of Wireless Adoption

· Context: providing necessary information when and where the customer needs or wants it

o Localization: location of the user can be identified and information specific to that location can be provided (GPS, Tracking Device)

o Personalization: the customer can select not only the type of information desired but also the frequency of information provision (consumer may select specific stocks and specific price levels at which he or she wishes to be notified.)

· Time sensitive: because screens are small and storage in limited, information must be provided at the time appropriate to the customer, not convenient for the marketer (As a customer passes a store in a shopping mall, he or she may be willing to receive a coupon for a purchase in that store, which can be saved or retained on the screen until the customer shows it when checking out the purchase.)

· High value: The coupon will have to have a reasonable value in order to make it welcome in the wireless context

· Voice activation: there are many situations in which it is not safe to use the keyboard (voice activation)

· One-click payment mechanisms: a system is which payment is easily and securely authorized and billed to a single account because consumers are not going to be willing to enter credit card information on mobile keyboards and may be uncomfortable with the idea of their credit card data being transmitted wirelessly

· Security: users must be assured that data transmissions are secure, and authentication services must be provided in a way that is suitable for the devices (smart cards that can be inserted or taken out)

· Privacy: providers of content and services will have to be sensitive to download times, lack of storage, and the fact that users are paying for airtime- They must not abuse technological capabilities like geographic locational services.

· Expanded permission marketing: marketers will have to extend the concept of permission marketing beyond simple opt-in scenarios. They must find out what kind of information consumers are willing to receive, how often they are willing to receive transmissions, and where they are willing to receive it

Knowledge Management and Marketing Applications

· Marketers are interested in a narrower set of activates that focus on integrating front-and back-office services and delivering information to customer service personnel and decision makers when and where they need it.

· They are connected about customer experience and realize they must deliver it seamlessly through multiple channels at times and places demanded by the customer. This requires marshaling all the resources of the enterprise to create usable knowledge from the multiple types of customer data and the expertise of best workers.

· Knowledge management in marketing enable human agents to do their work better, faster, and in a way that provided maximum customer satisfaction, and creates automated systems that perform at least as well as the most skilled human agent

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