The influence of the Internet on

Pricing and Distribution

MARK 430
After this class you will be able to….

 Discuss the buyer’s and sellers views of

pricing
 Identify the main fixed and dynamic pricing
strategies for selling online
 Understand how the Internet has affected
distribution channels
 Buyers and sellers views of
pricing
 The meaning of price depends on the
viewpoint of the buyer and seller.
 Each party to the exchange brings different
needs and objectives that help describe a fair
price.
 If buyer and seller can’t agree on a fair price,
then there is no sale
 Buyer perspective on price
 Buyers define value as benefits minus cost
 Costs to the buyer
 Money – what is the real cost? How is it
calculated; what does it include (shipping, taxes,
duties, gift wrap)
 Time – finding what you want, waiting for it to
arrive, slow web sites
 Energy – Web = self service, so no-one to help in
research and locating an item
 Psychic costs – frustration, lack of trust of web
commerce, lack of confidence in on-line service
delivery etc
 Seller perspective on price
 Sellers concerned with profitability – but there
is some freedom to set price at a level that
will draw buyers away from competing offers
 Profit lies between cost and price
 Affected by both internal and external factors
 External factors:
 Market structure and type of competition
 Market efficiency
Internal factors affecting price for sellers
 Depends on pricing objectives (eg. volume; building
market share; high profits; matching competition)
 Factors that push prices upwards –
 cost of distribution
 commissions to affiliates
 site development
 customer acquisition costs

 Factors that depress prices –

 Order processing – self service
 Just-in-time inventory
 Overhead (physical vs. online store)
 Customer service costs lower
 Printing and mailing costs
 Digital product distribution costs
 Going from free to paid service
 Big issue now is persuading people to pay for
something they used to get for “free”
 Some strategies
 Provide basic service at no cost, with upgraded or
enhanced service being charged for
 Yahoo Mail
 Business 2.0 magazine
 e-Cards
 Price comparisons by customer
 Software agents visit web servers and collect pricing
information, and / or merchants provide a data stream to
the site
 Many of these sites accept payment for “premium” listings
 Bidfind
 www.MySimon.com

 Froogle – merchants provide a data stream to Google (no

paid placement)

 Has the effect of decreasing price differences

 competitors have easy access to prices
 more difficult to maintain position as a price leader in the Internet
world
 Pricing strategies
 Fixed pricing (similar to offline pricing
strategy)
 Price leadership
 Promotional pricing

 Dynamic pricing (Internet-enabled pricing)

 Auctions
 Segmented pricing (geographic or based on
customer profile)
 Pricing Strategies: FIXED PRICING
 Occurs when sellers set the price, and buyers
must take it or leave it
 Everyone pays the same
 This strategy is very common in retailing

 2 types of fixed price strategy are

 Price leadership
 Promotional pricing
 Fixed pricing: Price leadership
 A price leader is most often, but not always, the lowest-priced
product entry in a particular category. The price leader is the
one that sets the price levels for the market. Others follow the
leader with comparative pricing (usually higher).

 Walmart is an example of a “low price” price leader that uses

technology to leverage its costs and maintain profitability

 An online company such as www.Buy.com consistently offers

lower prices. It sells below market value and subsidizes price
cutting with advertising on its web site.
 Very hard to maintain price leadership and remain profitable as
the lowest price
 Can you think of industry examples where the price leaders have higher
prices?
 How do they succeed?
 What does this mean for the internet market? How could you be a higher-
priced price leader?
 Fixed pricing: Promotional pricing
 This strategy used to encourage a first
purchase, encourage repeat business, and
close a sale

 Promotions tend to carry an expiry date –

creates a sense of urgency

 Price promotions can be highly targeted using

email and on web sites that use clickstream
analysis (then it becomes dynamic)
 Pricing strategies: DYNAMIC PRICING
 Dynamic pricing is fluid pricing
 Dynamic pricing is one of the most significant
contributions the Internet has made to pricing
strategy.

 Decreased “menu” costs on the web - changing

prices is easy (no costs of changing price tags,
catalogs etc)

 Interactivity - buyers and sellers from all around

the world can interact and negotiate prices
 Dynamic pricing: Auctions
 Variety of auction types
 “English” auction - such as e-Bay where the price
starts low and is then driven up
 “Dutch” auction - the auctioneer announces a high
price for the product, then gradually reduces it until
a buyer will accept it
 e-Bay has a variant of this, where a seller has multiples of the
same product to sell
 First-Price sealed bid auction (purchaser does not
know the amount of the other bids)
 Priceline is an example of this type of auction
 Priceline “Name Your Own Price”
Auction Process

Priceline
Priceline checks
checks ifif
any
any ofof its
its
participating
participating
Consumer
Consumer submits
submits Checks
Checks airline’s
airline’s Priceline
Priceline accepts
accepts
airlines
airlines areare willing
willing
non-refundable
non-refundable bid
bid seat
seat availability
availability or
or rejects
rejects bid
bid
to
to offer
offer roundtrip
roundtrip
flight
flight at
at bid
bid price
price
or
or lower
lower
 Pricing Strategies: Dynamic Pricing
 Dynamic pricing is also the strategy of
offering different prices to different customers
 Optimizes inventory management
 Segments customers by product use or other
variables (eg. frequent or infrequent purchasers)
 Web-based technology and database marketing
have made this strategy much easier to implement

 What advantages does this provide a marketer when trying to

manage product levels and market segment positioning?
(Discuss)
Dynamic pricing: Segmented pricing
 Where the company sells goods or services at two or
more prices,based on segment differentiation
 automatically generates a different price depending
on a number of pre-set variables or decision rules
 The Internet gives the ability to recognize a
consumer, then customize prices, segmenting
sometimes to a segment of one
 eg. anyone who has previously purchased 10 items gets a
discount
 May use your IP address to offer a product at an introductory
price – eg. Telus offer to students from Malaspina IP
address
 May use behavioural cue: eg. if you abandon your shopping
cart
 Use with care – customers may get upset
Segmented pricing: geographic segments
 A company sets different prices when selling
a product in different geographic areas
 Uses IP address of user to guess at their
location
 Prices can then be related to circumstances
in different countries – local competition,
economic conditions etc
 Computers, CDs etc. are usually priced
differently according to geography
 The Internet as a distribution
channel
 Distribution determines how the customer
actually receives a product or service (also
often called fulfillment)
 A distribution channel is a group of
interdependent firms that work together to
transfer product from producer to consumer

Producers >>Intermediaries>>Consumers
 The effect of the Internet on servicing
customers across multiple distribution
channels
 Adds another communication channel between
buyers and sellers
 Facilitates real-time communication so firms can have
closer ties with customers and suppliers - improved
market responsiveness
 Customer access and service are now 24/7/52
 Increases customer convenience and reduces time
spent on shopping
(PERHAPS an opportunity to INCREASE MARGIN due to
perceived added value?)
 Increase in the power of consumers - we are now SO
demanding
 Some Impacts on Distribution
 Evolution from traditional mail order to on-line selling
eg. Land’s End
 Traditional firms with large investments in offline retail
have been reluctant to fully engage in online
commerce eg. WalMart
 Traditional retail firms have experienced “channel
conflict”, cannibalization issues. eg. LeviStrauss
 Completely new business models based on digital
distribution methods
 Internet becomes a direct substitute for an offline
distribution channel eg. online banking
 Disintermediation
 Cutting out the “middle person”

 Initially it was thought that because of the

move toward self service on the web, we
would move toward a position where the
distribution channel was shorter

 This hasn’t happened to the extent predicted

– new kinds of intermediaries on the Internet
 Intermediaries add customer value in various ways
Market Information Monitoring sales trends, inventory levels,
competitive behavior
Promotional Effort Banner ads, sales promotions, traditional
advertising support, personal selling
Transactional Activities Bargaining on price and terms, order
processing, credit, inventory and
assortments
Storage and Warehousing, transportation to buyer,
Transportation sorting and packaging into desired forms

Facilitation Activities Credit card processing, invoicing, shipping

confirmations
Installation and Service Technical support, customer service lines,
warranty work, repair, spare parts, etc.
 Logistics functions of the distribution
channel
 Include physical distribution activities such as
transportation, inventory storage, and product
aggregation.

 Physical distribution
 Most products sold online are still distributed
through conventional channels
 But any product that can be digitized can be
delivered over the Internet (newspapers,
magazines, music, software, books, TV, movies
etc)
 Online distribution costs are significantly lower
 Logistics challenges
 The “last mile problem” – cost and logistics of
delivering small amount of goods to individual
customers

 Solutions:
 Smart boxes (for a fee!)
 Retail aggregator model – items can be shipped to
a local convenience store or service station
 Specialized e-shop pick-up points

 Returns: reverse logistics

Some industries that are undergoing
rapid change due to Internet forces
 Recorded Music industry
 Video/DVD rental industry
 Newspaper and magazine publishing
 Banking
 Textbook publishing

 Forces for change:

 Digitizable product
 Self service
 Direct to consumer shift
 Thank You
 Next Week….
How the Internet offers products and Branding…