1

Pricing in an Online World

指導教授 : 任立中

學生 :楊智富 88751225陳德勝 88751233鐘國彰 88751236

高哲惠 88751239陳銘驥 88751242

2

AGENDA

Concept of Mark-up RateGeneral Pricing ApproachesEmpirical Pricing ApproachesDrucker’s Pricing SinsThe power of pricingPrice sensitivity and the InternetReal-time pricingBundling

3

)1ε

ε(

= Mark-up Rate

)(p η1

P

Cp**

*

)1ε

ε( MCP*

Where,

Concept of Mark-Up Rate (I)Price Sensitivity and Price Elasticity

)( *

*

P

Cp = Contribution Margin Ratio

= - (Price Sensitivity)

= - > 1 (Price Elasticity)

C = MC (Marginal Cost)

4

)1ε

ε(MCP*

If, = 2,Mark-up Rate = 2P* = 2 MC

Concept of Mark-Up Rate (II)

Pure Monopoly Industry

5

If, >> 1, Mark-up Rate 1P* = MC

Concept of Mark-Up Rate (III)

Pure Competitive Industry

)1ε

ε(MCP*

6

General Pricing Approaches

Approach Pricing

1. Cost-Based Cost-plus pricing (Mark-up) Target profit pricing (Break-even analysis)

2. Buyer-based Perceived-value pricing (Demandbackward)

Value pricing (Everyday low pricing vs.High-low pricing)

3. Competition-based Going-rate pricing (Based on competitor’sprice or industrial average price)

Sealed-bid pricing (Cost and competitor’sprice)

(Source: “Principles of Marketing” --- Kotler & Armstrong)

7

Empirical Pricing Approach

Cost Mark-up Method Pursue Bigger Market Share

Target Profit Pricing

**

Q

ProfitTotalCostP

8

New-Product Pricing

Premium Price Good-ValuePrice

OverchargingPrice

Economy Price

High Low

High

Low

Pricing

Qu

alit

y

9

Patent-Protection / Leading Product Pricing

Pricing TypicalCompany

1. Market-Skimming INTEL

2. Market-Penetration DELL

10

Product Mix Pricing

Pricing Typical Company1. Product line Kodak’s Films

2. Optional-Product GM’s Automobiles

3. Captive-Product Nintendo’s Game Station andCartridge

4. Two-Part Telephone Company

5. Product-bundle Travel Agent

11

Drucker’s Pricing Sins

Pricing Sin Reason1. The Worship of Premium Pricing

Companies try too hard to hold onto high profit margins with small sales

2. Skim Pricing of New Products

Companies serve the most desirable segment first and forget to adapt to the main stream

3. Cost-Driven Pricing Cost is internal to the firm, but value is the only thing the customer cares about

12

The Power of Pricing (I)

1. Proper pricing must reflect changes brought about by the Internet2. Pricing is Tightly Linked to Profitability

(The High Leverage of Proper Pricing)

13

Price Sensitivity & the Internet (I)(Price Sensitivity and Online Information)

Common Perception

Internet always raiseconsumer price sensitivity

Some Companies Can Get Higher Price /Profit

14

Price Sensitivity & the Internet (II)(The Effects of Price Sensitivity on Internet)

Effect Price Sensitivity Willingness toPay

Company /Service

Unique Value Lower Higher Oracle: ConsultingSubstituteAwareness

Higher Lower Price Watch: Informationintermediary

TotalExpenditure

Higher(Larger Parts)

Lower Healthcare:www.prefix.com/Diabetic.htm

Shared Cost Higher(Decider =Payer)

Lower Hyatt Hotel:Amenities vs.Price

Price-Quality Lower(Well-know brand )

Higher Charles SchwabVs. Ameritrade

Inventory Lower Lower Multimedia Software

15

ORACLE.com

16

PriceWatch.com

17

Prefix.com

18

Setting Prices is Difficult if: Don’t know their demand curves Different customers pay different prices Customers buy multiple products that are linked to each other

Under Rapidly Changing Conditions: Can’t figure out price elasticity

Solution ?

(Why Simple Pricing Approaches Fail ? )Price Sensitivity & the Internet (III)

19

Real-Time Pricing (I)

AuctionsRental MarketsYield Management

20

Real-Time Pricing (II)Online Auctions ( Christie’s Web)

Evolving toward OnlineAuction

Physical AuctionEnabler

Absentee BiddingAllowed

Consignment SellingWith Online Purchase

English Auctions•Most common•Rising prices

Dutch Auctions•Good for multiple items•Especially perishable goods

Fully Online Auctions

Figure 11.11

eBay.com, OnSale.com, FirstAuction.com

American Clock (flower importer), Dutch flower market

21

ebay.com

22

TheAmericanClock.com

23

CHRISTIEs.com

24

FCC.com

25

Real-Time Pricing (III)

Benefit Reason

1. In-depth Information In-depth information is available tobidders

2. Communication Confused bidders can call or e-mailfor more information

3. Bidder Anywhere Participants can join in fromanywhere on the planet

4. Expand the Number of bidder

Raises the price paid and theprofitability of the auction

Online Auctions ( Benefit)

26

Real-Time Pricing (I)

AuctionsRental MarketsYield Management

27

Real-Time Pricing (IV)

Benefit Reason1. Immediate Needs The rental market serves

customers’ immediate needs

2. More Efficiency More efficient because the buyerpays a fee for each use rather thanpaying a large lump sum forunlimited use

Online Rental Markets (Benefits)

28

Real-Time Pricing (V)Online Rental Markets (Barriers)

Barrier Reason1. Credibility Both buyers and sellers must trust

the broker

2. Micro- transactions

The lack of willingness of sellers touse micro-transactions

29

IBM.com

30

Real-Time Pricing (I)

AuctionsRental MarketsYield Management

31

Real-Time Pricing (V)

Yield managementYield management is the matching of price and available capacity

Price Available Capacity

Yield Management

32

Real-Time Pricing (VI)Yield Management (Requirement)

Requirement Key Success Factor

1. Fixed and perishable capacity

The good must lose 100% of its valueat a specific point in time.

The industry should face high fixedcosts.

2. Customer base with Identifiable segments:

Give price sensitive customers a breakwithout causing a loss of customerswilling to pay full price

3. Demand uncertainty +information technology

Tracking is necessary to ensure properyield management (made easier byusing company web sites)

33

Bundling (I)

Bundling works particularly well onlineBundling is the combination of products into

larger packagesA single fee gives users access to entire product offering--- AOL

What is Bundling ?

34

DealTime.com

35

PlacesToStay.com

36

Bundling (Demand Side)

Bundling (II)

Willingness to payConsumer Type

1995Chevrolet

1995ThunderBird

Bundle

Consumer 1:Own Chevrolet

$30 $20 $50

Consumer 2:Own ThunderBird

$18 $35 $53

Total Revenue:Priced Individually

$36 $40

Willingness to payConsumer Type

1995Chevrolet

1995ThunderBird

Bundle

Consumer 1:Own Chevrolet

$30 $40 $70

Consumer 2:Own ThunderBird

$18 $35 $53

Total Revenue:Priced Individually

$36 $70

Negative Correlation:Bundled Revenue=$100Has real opportunity to raise profits

Positive Correlation:

Bundled Revenue=$106

(Source: “Price Theory and Application” --- B. Peter Pashigian)

37

Bundling (III)On-Line Bundling (Supply Side)

Guideline Condition

1. Margin SpreadBundling

Bundle items thathave a highcontribution marginratio

Creates incentive forincreasing volume

2. AggregationBundling

Target the bundletoward the averagecustomer

Increases customerdemand for the

bundled good

38

20 M

agaz

ine

2 M

agaz

ine

1 M

agaz

ine

Consumer Variationsfor Bundle

The BundleDemand Curve

Bundling Works Well When the

Bundle is Viewed More Similarly than

Individual Items

Figure 11.16

Bundling (IV)

39

Thanks

指導教授 : 任立中

學生 :楊智富 88751225陳德勝 88751233鐘國彰 88751236

高哲惠 88751239陳銘驥 88751242