Business Horizons
March, 2001

Pricing Strategy and the Net.
Author/s: Leyland F. Pitt

Yet in the real world of marketing, there is ample evidence of the bounded rationality of marketing decision makers who seem to set prices with factors other than profit maximization in mind. Pricing strategy sometimes focuses on gaining market share; at other times it concentrates on competitors by seeking either to cooperate with or to destroy them. Often pricing is about brand or product image, as marketers seek to enhance the status of a brand by concentrating on its position in the mind of the customer, rather than on volume. Likewise, real-world customers are as emotional as they are rational and purchase brands for the status and experiences they confer, rather than merely on the utility they provide.

Searching is not without sacrifice in terms of money and time.

More sophisticated tools, such as intelligent agents, will seek out the lowest prices and even negotiate for lower ones.

Intelligent agents--software that will search, shop, and compare prices and features--give the Net shopper further buying power and choice. They cut buyers' search costs across standard online storefronts, specialized online retailers, and online megastores, and can transform a diverse set of offerings into an economically efficient market.

The search phase of the consumer decision-making process, which can be expensive and time-consuming in the real world, is reduced in terms of both time and expense in the virtual.

As Dickson's (1992) theory of competitive rationality predicts, an abundance of choice leads to customer sophistication--customers become smarter and exercise this choice by shopping around, comparing prices, and seeking the greatest value more assertively.

Online auctions

Eg: Customers control transactions. Caterpillar uses its Web site to invite bids on parts from preapproved suppliers, who bid online over a specified period. The contract is awarded to the lowest bidder. Negotiation time is reduced and the average savings on purchases is 6 percent. In this way, the customer has taken almost total control of the transaction, for suppliers find it difficult to compete on anything but price. There is little opportunity to differentiate products, engage in personal selling, or add service, as traditional marketing strategy would have suppliers do.

Differentiate pricing all the time. mass customization

The same product or service can have different values for different customers. Airlines know that the Friday afternoon seat is more valuable to business travelers, and charge them accordingly. The Net should allow the ultimate in price differentiation by customizing the interaction with the customer. The price can also be differentiated to the ultimate extent that no two customers pay the same price.

Be much better at differentiation

Marketers make a big mistake by assuming that customers will expect and want to pay less on the Web than they do in conventional channels. Indeed, managers in many industries have a long record of assuming that customers underestimate the value of a product or service, and would typically pay less for it if given the chance.

Maximize revenue, not price. Many managers overlook a basic economic opportunity: that in many instances it is better to maximize revenue rather than price.

Consider total purchase cost. The purchase price is one element of the total cost of acquisition. Searching, shipping, and holding costs, for instance, can contribute substantially to the acquisition cost of some products. In circumstances in which Web-based purchasing enables a customer to reduce the total cost of a purchase, the customer may be willing to pay more than through a traditional channel.

However, the potential of the Net to weaken monopsonies should not be underestimated.

A firm must first decide how it interacts with each class of customers

Firms wishing to avoid intense price competition need to invest in learning about their customers so they can successfully differentiate their products. This implies building and maintaining a customer database that has extensive data on each customer's preferences and buying behavior. It also means building e-commerce applications that support one-to-one marketing, with each customer potentially visiting an individualized Web site.

Marketers have always viewed price as one of the instruments of policy in the marketing mix--a variable that, theoretically at least, can be manipulated and controlled according to circumstances in the business environment and the nature of the target market. In practice, however, many pricing decisions are not taken by marketers, and are based more on such issues as cost and competition than on any notion of customer demand.

* All text in red indicates quotes taken from the full text article.