Transcript Pricing Online – A McKinsey Study

Pricing Online
Getting Prices Right on the Web
Pricing Strategy
…critical marketing mix variable
actually produces revenue
shortest term marketing mix variable
Pricing Strategy
Pricing Objectives
survival
profit maximization
revenue maximization
Hybrid model
Pricing Strategy
Cost Based Pricing
cost plus, markup pricing
Demand Based Pricing
skimming, penetration
Competition Based Pricing
customary pricing
price-leader approach
Premium approach
Theory:
Reference Pricing and Price Anchors
• Every product has a price range, within which
changes have little impact on consumer
behavior.
For example:
• Prices for well-known brand-name consumer
health and beauty products can be raised as
much as 17 % without a change in consumer
reaction. NOT SENSITIVE/LOW ELASTICTY
• Range in which price variations acceptable for
certain financial services is less than 1 %.
SENSITIVE/HIGH ELASTICTY
Consumer Demand – Price
Elasticity
• Conduct periodic price “experiments” to
gauge how price sensitivities are changing
over time.
– Offline?
– Online?
Exercise
• Study carefully the pricing strategy of:
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Amazon (limit to books)
Netflix Canada
Holt Renfrew
Rogers Wireless
Futureshop
• Then write the rationale for their pricing strategy in a
single short paragraph.
Key Questions for Setting Price
• Do you sell a commoditized
product/service or not?
• Price vs. quality differentiation?
• Do you have a strong store brand?
• Service leader?
• Penetrate or skim?
• Bundle strategy?
• Do you have a new or exclusive product?
Internet as Advantage?:
• Price testing can quickly reveal how pricing affects sales
at virtually no cost.
For example:
• A merchant could charge every 50th customer a higher
or lower price and track the results over time.
• Merchants can also change prices instantly enabling
sellers to benefit from short-term changes in customer
demand and market supply.
• E-tailers may develop the data and technology to enable
segmented pricing, which targets shoppers depending
upon their buying history.
The Big Smackdown:
•
Why is pricing such a challenge in online
markets?
– Product or category (price sensitivity??)
– PLC
– # of competitors
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When should a product/service be free?
How do you define value if the product is free?
The Big Smackdown:
• Strategic Consideration:
– What is “strategic” about frequent price changes
online?
– Is it good enough to be second lowest offer?
– What are network effects?
• and indirect network effects?
– What can be the economic outcome of strong and
positive indirect network effects?
• What are the implications of such a strategic opportunity?
• Excursion on Network Product Theory
Key Differences Online: Fluidity of
the Market
• ease with which online consumers and rival
retailers may access comparative information
about seller characteristics and prices
• customers often search at the product level
rather than by store or category
– Implication?
• Consumers are more selective in online markets
• Frequent price changes feasible
Commodity Pricing: Study from
2000
Microsoft FrontPage 2000
Price
Compared to
buy.com
CompSource
$146.26
+19.9%
CDW
$135.40
+11.0%
PCStop.com
$131.56
+7.9%
MicroWarehouse
$129.95
+6.5%
Page Computer
$129.28
+6.0%
Dell
$127.95
+4.9%
PC Zone
$124.97
+2.5%
Amazon.com
$121.99
--
buy.com
$121.95
--
PC Mall
$121.89
--
PCWonders.com
$118.89
-2.5%
Still relevant:
• Brand recognition
• Firm reputation
• Store location (placement on the screen)
Baye and Gupta
• “online retail industry is an unpromising
one for firms seeking competitive
advantage”
• What innovations in pricing strategy are
required for a firm to be successful in fluid
e-retail markets?
5 Innovations
• Use price experimentation to learn about your
Customers’ Price Sensitivity/Price Elasticity
• Quickly adjust price based on stage of PLC
(price sensitivities)
• Quickly adjust price based on number of
competitors
• Stay Unpredictable
• Use Hit-and-Run Pricing to Gain a Temporary
Advantage without Triggering a Price War
Conclusion on Pricing
• Product-specific pricing
• Dynamic/erratic pricing can be strategic
• Shortened PLC means higher price
sensitivity = requires quicker modulation
• Free may have value – network effects in
two-sided markets!
• Online pricing often the domain of lower
management levels but when doing
business online that may be a problem.
Conclusion
• Managerial Challenges:
– Best e-businesses set up small functional marketing
groups charged with the task of constantly
monitoring opportunities to adjust prices based on
market changes and customer behavior.
– Group members should hold an entrepreneurial view
of pricing.
– Group should be empowered to set short- to
medium-term pricing strategy and implement it.
Network Products in Networked
Markets
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The last decade has witnessed a shift from a focus on the value created by
a single product to an examination of the value created by networks of
products (product ecosystems or NETWORKED PRODUCT).
Network products emerge at the intersection of three types of networks:
– User network
– Complements network
– Producer network
Key Claims:
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•
Any or all of these networks add value or enhance the attractiveness of the
associated focal product.
Consumers allocate resources among competing products based on the
perceived value added by any or all of these networks.
The Networked Product:
Complements network
Services that permit consumption
Focal Product
User network
Other consumers
Producer network
Other companies producing the same or
similar product or service
Linux as Networked Product:
Complements network
•Application developers
•Maintenance and Repair
•Service Companies
Ex.: Linux
Operating System
User network
number of other
companies that are using
Linux (moderated by size,
reputation, industry, etc. of
these companies)
Producer network
Other companies producing the same or
similar product or service
Remember:
• If you are dealing with a focal product that is a
networked product
– Consumers allocate resources not only based on the
objective and perceived quality of the focal product
but based on the perceived value added to the
focal product by the networks it has.
– Marketing of a networked product therefore is no
longer limited to developing a marketing mix and a
strategic position for the focal product. Rather,
marketing needs to support network strength as
well.
Examples?
Complements network
Services that permit consumption
Focal Product
User network
Other consumers
Producer network
iPhone
Toyota Prius
Other companies producing the same or
similar product or service
Your Task
• Analyze them as Networked Products.
• Suggest 3 marketing strategies based on
your analysis.
• Back