Transcript [Pricing Electronic Services] Lecture 1

[Pricing Electronic Services]
Lecture 1
[Judith Molka-Danielsen]
[email protected]
http://home.himolde.no/~molka/
Harstad/harstad.htm
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Dell’s Front
Page
Online Orders
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Consumer
Page
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Small
Business
Page
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Big
Business
Page
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Overview
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•
•
•
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Participants in the market
Pricing Forces
Model of consumers
Model of products
Pricing on the Web
– effect of market forces on pricing
– pricing models
Participants
Who participates in determining price?
• Porter Forces (power of players)
New Entrants
Suppliers
Industry
competitors
Intensity of Rivalry
Substitutes
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Buyers
Participants
Suppliers
Who participates in determining price?
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Supplier Oriented Electronic Marketplace
• B2B: Dell, Intel, Cisco, IBM – 90% of their sales to
business buyers.
• They need different services for business buyers
(repeat buyers, order large quantities).
• End customer buyers or small businesses must
search and compare suppliers and products,
searching at e-stores or e-malls to find the best
offer.
• Buyer owned shopping carts with stored buyer
preference and can be integrated with business
buyers order system.
• Computer reseller Ingram Micro (www.ingram.com)
has proprietary auction sites for regular buyers to
get surplus discounts.
Example of Supplier-Oriented Market Place
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Participants
Buyers
Who participates in determining price?
Buyers Oriented Electronic Marketplace
• B2B: Boeing Inc. is a powerful buyer. They purchases
thousands of items on the Internet.
• These strong buyers prefer to open electronic markets on
their own servers or to use electronic intermediary services.
• They can invite potential suppliers to bid on announced RFQs
(Request for Quotations).
• Software agents can be used to participate in automatic
bidding processes online.
• As an intermediary, Boeing’s PART links airlines with 300 key
suppliers of Boeing’s maintenance parts.
• General Electric TPN Post has its own auction bidding site to
other buyers so they can post their own RFQs.
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Example of Buyer Oriented Marketplace
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Example: GE’s use of an Electronic Intermediary Service.
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Example of Benefits for an Intermediary Electronic
Marketplace Service
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Factors for determining/setting price:
• Price directly effects the firms revenue.
• Businesses try to maximize the firms surplus while
consumers try to maximize their consumer surplus.
• Businesses would like to set price (need power).
• Consumers try to buy a product when prices are low.
welfare
loss
p'
S
CS
price
PS
p"
D
quantity
demanded
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q
q'
supply restriction
q
q
price restriction
q"
Other Factors for setting price:
• Businesses (decision makers) can set
prices with other goals than profit
maximization in mind. They might try to
 gain larger market share
 cooperate with competitors
 focus on improving brand recognition over
short term profits
 set low prices on new products to penetrate
the market before competitors
 use discounts, rebates, and price bundling
techniques
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Other Factors for setting price:
• Customers (decision makers) can make
purchase decisions with other goals than
price in mind. Their decisions are based on:
 product and information availability
 the cost of searching for the product
 the power of the buyer (small customers
have little power to set prices).
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Pricing Forces:
• Customers have tools to help them reduce search
costs, give customers more information and give
them choice (power) to shop around.
 search engines (Yahoo!, Excite, Lycos)
 site services (opinions of experts and peers)
 chat rooms, bulletin boards
 intelligent agents (to compare products)
• Businesses respond to increased customer power
by innovation of products. This can lead to
imitations, oversupply, and more customer choice,
and also to the cycle of price competition speeding
up.
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Model of Customers
• Model 1. All customers are not equal. (80-20 Rule,
80% of your revenues comes from 20% of your
customers.) Low value customers take longer to
repay investments.
• Example: Frequent Flyer programs. C group is less loyal, do
not use service often, buy on price. B group still price
sensitive. A group have high value to the firm, use service
often, loyal customers (not shop around on price). A+
customers are highest value to firm and are given special
treatment.
High customer value
5%
15%
30%
Low
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50%
A+
A
B
C
Model of Products
• Axis: Exchange between participants. At one
extreme it is voluntary (trading stocks on the
exchange, fair and mutual benefits) and at the
other it is forced (at least one party does not want
the trade, theft).
• A market is efficient if price is the only information
needed to make the exchange. Maximum market
efficiency (100%) is where the trading maximizes
the gains of buyers and sellers (refer: 1st welfare
chart).
• Between extremes is the range of marketing
effectiveness.
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Model of Products
• Between extremes is the range of marketing
effectiveness.
Market forces
theft by force
theft by fraud
seduction-initial
resistance
products and
service
commodities
Corporate strategy
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trades on a stock
exchange
Range of
marketing
effectiveness
Range of market effectiveness
• Seduction can imply that consumers resist at first,
but then may enjoy the product after marketers
have enticed them to switch to it.
• Products and services can be in large variety, with
differentiated characteristics and quality. Products
that are easily substituted are commodities. But
these also can be differentiated by brand name,
packaging, and attached services.
• Marketing works best in the Range of marketing
effectiveness. Parties are not equal in power. There
can be information asymmetries. Marketers make
promises to encourage the exchange.
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Combining the models
• Goal of the business should be to move
customers up the pyramid in Model 1 and to
move products and services into the zone of
seduction in Model 2 (where prices are high).
• Competitive forces in the market (product
competition and increased customer power) will
tend to
 force the customer into lower value groups
(they can switch) in Model 1,
 moves products and services to
commodities (technology advances makes
it simple and easy to reproduce products,
prices go down as with cheap PCs).
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Web Market Forces: that help the customer
• Technology enables customer search. Searching
costs in time and money can be reduced. Tools are:
search engine, directories, comparison sites,
intelligent agents
• Customers make prices. Usually customers take
prices. On-line auctions allow customers to choose
their price. Priceline.com allows customers to say the
price they want to pay, and comes back if they can
find an item that matches the customers bid. Then
Priceline.com receives the difference in the
customers bid and the item-price for the product or
service that they found.
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Web Market Forces: that help the customer
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• Transaction costs are reduced. costs of conducting a
transaction in the market. These costs can be included in
the firms price of a product or service. Types
– Search costs - finding buyers and sellers. Search
engines help to reduce search costs.
– Information costs - learning about products. Web
catalogs, chat rooms, bboards, inform about products.
– Bargaining costs - transact, communicate, negotiate
the sale. On-line bidding systems can negotiate price,
and reduce time needed to reach agreement.
– Decision costs - deciding between supplier, product.
Comparison sites help.
– Policing costs - monitoring the transaction against
cheating. On-line banking allows customers to check
balance. Electronic receipts.
– Enforcement costs -enforcing contractual rights. Legal
proceedings and reimbursements. Chat lines can
publicize brand reputations.
Web Market Forces: That help the business
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• They want to differentiate products and move
customers up the pyramid.
• Differentiated prices, all the time. Mass
customization is possible. Businesses can make
products that are customized and cheap,
automated and personal. But because they can
make the product different for every customer,
they can also charge different prices to every
customer. (My Yahoo!, Pointcast news)
• Use technology to de-menu pricing. It use to take
a long time to change a product's shelf price. The
price change had to filter down from supplier,
distributor, retailer, to salesperson. Changes at
each stage had implementation costs. With
extranets this can be done with little costs and little
time.
Web Market Forces: That help the business
• Creating customer switching barriers. Sellers can
collect very detailed data on customers. They can
make their products match the buyer very closely,
personally. If the business can bring the customer
exactly what they want, the customer will not want
to switch on price alone, (because it costs the
customer to search and learn about another
product).
• Customers might be willing to pay more. They may
expect to pay less on-line, but they can save in
transactions costs (including time) and so they
might pay more.
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Web Market Forces: That help the business
• Differentiate by staging experiences.
Differentiation before was by enhancing quality,
adding features, and building brand identification,
and on customer service. When products are
more alike, they must be made to appear
different. The Web allows for many different stage
experiences. (personal experiences, esthetic
differences, entertainment differences,
educational differences, etc.)
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Web Market Forces: That help the business
• Total purchase cost. Purchase price of an item is
only one part of the total cost. Other costs:
searching, shipping, holding. Reducing the other
costs will reduce the total cost of the product.
 T= total costs = P + O
 P= purchase price
 O= other costs (include opportunity costs that is time and
money that could have been spent on something else).
 w= Web (web product)
 s= store (traditional product)
 Consumers will purchase on the Web when: Tw<Ts
 Consumers will pay (d)= Pw - Ps where (d)<Os - Ow
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• Firms should reduce customers Os, to raise Pw
just below where Tw=Ts. If sellers can reduce Total
Costs they can raise their web prices (Pw) over
their store prices (Ps).
Web Market Forces: That help the business
• Establish electronic exchanges. Barter or trade
goods when prices are low.
• Maximize revenue not price. Airlines perform yield
management. They have complex pricing
schemes that are hard for customers to compare.
Web sites can sell tickets on slow-to-fill flights or
ready-to-leave flights. If the flights are not filled
that is missed revenue. Customers can also have
options (rights but not obligations) to sell tickets at
the last minute.
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Web Market Forces: That help the business
• Reduce buyer's risk. Customers may be willing to pay
a higher price if they can lower their risk in the
transaction. Consider a used car dealer. The dealer
(is an intermediary) can buy cars at physical auctions
or at On-line auto auctions. With on-line auctions, the
dealers can have virtual lots of cars. The dealer sells
the car to an end customer before they buy it. The
dealer avoids risk.
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A Summary of Web Market Forces
• Bargaining power of buyers and suppliers differs.
• Web empowers traditionally weak buyers to search
and collect information used in decision making.
• Marketing effectiveness based on different products
and services also differ.
• Businesses have motivation to differentiate on price.
• Web empowers businesses to create diverse pricing
models.
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