The price variableof the marketing mix refers to an organisation’s pricing policies which
are used to define pricing modelsand, of course, to set prices for products and services.
The Internet has dramatic implications for pricing in many sectors and there is a lot of
literature in this area. Baker et al. (2000) noted two approaches that have been com-
monly adopted for pricing on the Internet: start-up companies have tended to use low
prices to gain a customer base, while many existing companies have transferred their
existing prices to the web. Other existing companies have used differential pricing with
lower prices for some of their products online. This has been the approach followed by
online electrical retailers such as Comet (www.comet.co.uk). The Pricing element mix
will often relate to the Product element since online pricing depends on the range of
products offered. Extending the product range may allow these products to be dis-
counted online. Some organisations have launched new products online which have a
lower Price element, for example banks have launched ‘eSavings’ products where higher
interest rates are offered to online customers. Often these agreements are dependent on
the customer servicing their account online, which helps reduce the cost-base of the
bank. This then relates to the service elements of the mix since service has to be deliv-
ered online. Although much of the discussion in this chapter refers to reducing prices
online, it should be remembered that offering very low prices implies reducing the level
of customer service available. While this may be acceptable for managing a bank
account it may not be acceptable for customers of a retailer who have poor support and
a bad experience may stop them using the service again. Remember that Amazon, one of
the most successful online companies, established its brand through being known for its
range of products and quality of service rather than having the lowest prices.
The main implications of the Internet for the price aspect of the mix, which we will
review in this section, are:1 increased price transparency and its implications on differential pricing;
2 downward pressure on price (including commoditisation);
3 new pricing approaches (including dynamic pricing and auctions);
4 alternative pricing structure or policies.1 Increased price transparency
Quelch and Klein (1996) describe two contradictory effects of the Internet on price that
are related to price transparency. First, a supplier can use the technology for differential
pricing, for example, for customers in different countries. However, if precautions are
not taken about price, the customers may be able to quickly find out about the price dis-
crimination and they will object to it.
Pricing online has to take into account the concept of price elasticity of demand. This
is a measure of consumer behaviour based on economic theory that indicates the change
in demand for a product or service in response to changes in price. Price elasticity of
demand is determined by the price of the product, availability of alternative goods from
alternative suppliers and consumer income. A product is said to be ‘elastic’ (or respon-
sive to price changes) if a small change in price increases or reduces the demand
substantially. A product is ‘inelastic’ if a large change in price is accompanied by a small
amount of change in demand.Price
Price
Price variable
The element of the
marketing mix that
involves defining
product prices and
pricing models.
Pricing models
Describe the form of
payment such as
outright purchase,
auction, rental, volume
purchases and credit
terms.
Price transparency
Customer knowledge
about pricing increases
due to increased
availability of pricing
information.
Differential pricing
Identical products are
priced differently for
different types of
customers, markets or
buying situations.
Price elasticity of
demand
Measure of consumer
behaviour that
indicates the change in
demand for a product
or service in response
to changes in price.