evident to different customers. One company, through an error on their web site,
made prices for different customers available for all to see, with disastrous results.
3 Competition-based pricing. This approach is common online. The advent of price-compar-
ison engines such as Kelkoo (www.kelkoo.com) for B2C consumables has increased price
competition and companies need to develop online pricing strategies that are flexible
enough to compete in the marketplace, but are still sufficient to achieve profitability in
the channel. This approach may be used for the most popular products, e.g. the Top 25
CDs, but other methods such as target-profit pricing used for other products.
4 Market-oriented pricing. Here the response to price changes by customers making up
the market are considered. This is known as ‘the elasticity of demand’. There are two
approaches. Premium pricing(or skimming the market) involves setting a higher price
than the competition to reflect the positioning of the product as a high-quality item.
Penetration pricingis when a price is set below the competitors’ prices to either stimu-
late demand or increase penetration. This approach was commonly used by dot-com
companies to acquire customers. The difficulty with this approach is that if customers
are price-sensitive then the low price has to be sustained – otherwise customers may
change to a rival supplier. This has happened with online banks – some customers
regularly move to reduce costs of overdrafts for example. Alternatively if a customer is
concerned by other aspects such as service quality it may be necessary to create a large
price differential in order to encourage the customer to change supplier.Kotler (1997) suggests that in the face of price cuts from competitors in a market, a
company has the following choices which can be applied to e-commerce:(a) Maintain the price (assuming that e-commerce-derived sales are unlikely to decrease
greatly with price since other factors such as customer service are equally or more
important).
(b) Reduce the price (to avoid losing market share).
(c) Raise perceived quality or differentiate product further by adding-value services.
(d) Introduce new lower-priced product lines.3 New pricing approaches (including auctions)
Figure 5.10 summarises different pricing mechanisms. While many of these were avail-
able before the advent of the Internet and are not new, the Internet has made some
models more tenable. In particular, the volume of users makes traditional or forward
auctions(B2C) and reverse auctions(B2B) more tenable – these have become more
widely used than previously. Emiliani (2001) reviews the implications of B2B reverse
auctions in detail, and Mini Case Study 5.2 provides an example. To understand auc-
tions it is important to distinguish between offers and bids. An offeris a commitment
for a trader to sell under certain conditions such as a minimum price. A bidis made by a
trader to buy under the conditions of the bid such as a commitment to purchase at a
particular price.
A further approach, not indicated in Figure 5.10, is aggregated buying. This approach
was promoted by LetsBuyit.com, but the business model did not prove viable – the cost
of creating awareness for the brand and explaining the concept was not offset by the
revenue from each transaction.
Pitt et al. (2001) suggest that when developing a pricing strategy, the options will be
limited by relative strengths of the seller and buyer. Where the buyer is powerful then
reverse auctions are possible. Major car manufacturers fall into this category. See also
Mini Case Study 5.2. Where the seller is more powerful then a negotiation may be more
likely where the seller can counter-offer. Nextag.com provides such a service.PRICEForward auctions
Item purchased by
highest bid made in
bidding period.
Reverse auctions
Item purchased from
lowest-bidding supplier
in bidding period.
Offer
A commitment by a
trader to sellunder
certain conditions.
Bid
A commitment by a
trader to purchase
under certain
conditions.
Aggregated buying
A form of customer
union where buyers
collectively purchase a
number of items at the
same price and receive
a volume discount.