2. Digital Pricing
• So what’s the problem?
– You have to produce a digital marketing strategy poster
– You have to create a market segmentation exercise
– You have to describe a typical digital customer voyage
– You have to produce a digital customer experience
– You have to discuss user experience
3. Digital Pricing
• So what do you need to learn?
– What the economics of digital pricing are
– What decisions in digital retail pricing have to be made
– How basic and dynamic digital pricing strategies work
– How advanced pricing strategies work
– How a digital business should respond to price-cutting at a
strategic level
– How the digital pricing process works
– How digital pricing works at each of the four stages of the
electronic customer relationship
4. The Effects of the 2 “I”s on Digital Pricing
Individualisation Interactivity
DIGITAL PRICING
Customer redevelops parts
of the product to meet
personal needs and wants
Organizations provide
targeted,
individualized, customized
products
Stickiness as customers
invest
time and effort to personalize
Allows a larger buying and selling community
Facilitates dynamic pricing strategies
Allows prices to be changed easily
Allows consumers to easily check prices
Easier to understand and measure
consumers’ reactions to price promotions
Easier to receive customer feedback on
price, understand customers’ willingness
to pay, and implement price-discrimination
strategies
5. Key Digital Pricing Strategies
RETAIL PRICE
DECISIONS
BASIC PRICING
STRATEGIES
DYNAMIC
PRICING
STRATEGIES
ADVANCED
PRICING
STRATEGIES
Cyclical Promotional
Pricing (Hi-Lo)
Everyday Low Pricing
Retail/Outlet Pricing
Cost Plus
Brand Pricing
Promotions
English Auctions
Reverse-Price English
Auctions
Dutch Auctions
First-Price
Sealed-Bid Auctions
Reverse First-Price
Sealed-Bid Auctions
Exchanges
Volume Discount Pricing
Two-Part Pricing
Bundling
Price Discrimination
Over Time
Frenzy Pricing
Three Categories of Price
Discrimination
8. Key Variables affecting Curve Slope &
Position
Demand curves made of many inputs plot
customers’ aggregated willingness to buy at
each possible price point
PRICE
QUANTITY
Price Price
Substitutes
Complementaries
Income
Market Size
Taste
Substitutes
Complementaries
Income
Market Size
Taste
9. Demand Curve Inputs
• Price
– Price decreases, demand increases from market
• Substitutes
– Close substitutes negatively affect chargeable price
• Complementaries
– Their price affects digital product’s demand as much as its own price
• Income
– Demand linked to consumer income
• Market Size
– Growth in market positively affects demand
• Taste
– Customer preference positively drives demand
10. Demand Curve Slopes & Degrees of
Flexibility
• The slope of the demand curve determines an
organisation’s flexibility in setting a price
No Pricing Flexibility Complete Pricing Flexibility
Quantity
Price
Quantity
(a) (b)
11. Industry Demand Curves
• Certain industries are more inclined toward one
extreme type of demand curve than the other
• Luxury
– Goods that buyers will purchase regardless of price
because there are no acceptable substitutes
• Commodity
– Goods that are homogenous and have available substitutes
12. Using Demand Curves to Set Price
• Optimal pricing strategy is to choose the point
on the demand curve where marginal cost is
equal to marginal revenue
• Marginal Cost
– Cost associated with producing one additional
product/service
• Marginal Revenue
– Positive/negative amount created when price is
changed by one increment
14. Cyclical Promo (HiLo) vs. Every Day Low
Pricing vs. Retail/Outlet
• HiLo
– High prices most of the time
– Occasional low prices (Often lower than EDLP)
• EDLP
– ED prices set low (lower than HiLo high price)
– Occasionally prices are discounted
• R/O
– Regular rarely discounted prices in main retail
– Discounts at “outlets”
15. HOW DO BASIC AND DYNAMIC DIGITAL
PRICING STRATEGIES WORK?
16. Basic Digital Pricing Strategies
• Cost-Plus
– Add a fixed mark-up to the total cost of item
• Target Profit Growth
– Fixed profit target: better margins through price increase
or higher volumes through price decrease
• Target Return Price
– Fixed return on capital achieved through price change
• Brand Pricing
– Build a brand to charge a premium price
• Promotional Price
– Regular discounting
17. Promotional Low Price Costing
• Organisations often discount:
• Trial
– Induce customers to experience benefits of new product/service
• Rapid Acceptance
– Set low price as first mover advantage to stuff competition
• Switching Costs
– Where switching is expensive, low lost induces customers
• Loss Leaders
– Low prices in famous names/staples/seasonals leads to sales in higher
margin product/service
18. Fairness in Pricing
• Matching the customer’s internally generated
reference price with selected price
• Key components of reference price
– Past prices, substitutes, context
• When to under-price
– Market clearing price is higher than reference price,
financial relationship between buyer & seller
• Where fairness counts
– Ongoing relationship between buyer & seller, where seller
has significant power
19. Digital Dynamic Pricing
• Digital Economy allows for frequent &
proactive price adjustment
• Prices can be easily changed
• Buyers and sellers can interact and negotiate
prices
20. Digital Dynamic Pricing
• Auctions
– English
– Reverse-Price English (C2B invitation to tender)
– Dutch (price drops until bought)
• Price cannot be influenced upwards, price starts higher than
market value to claim profit
– First-Price Sealed Bid
• Exchanges
– Commodity owners meet to exchange goods
– Host receives commission
22. Price Discrimination
Charging different prices based on willingness to pay
First Degree — Charge consumers exactly
what they are willing to pay for product –
haggling)
Second Degree — Charge consumers
exactly what they are willing to pay for
first unit of good as well as additional
units – e.g. volume pricing
Third Degree — Divide customers into
distinct segments, charging different prices
to different segments
23. Volume Discount vs. Two-Part Pricing
• Strategies used to charge consumers what they are
willing to pay for each additional item purchased
• Volume Discount
– Decreases the purchase price of an item as the quantity
purchased increases
• Often associated with minimum purchases in fixed period
• Two-Part
– Charges a one-time fixed fee and an associated variable
charge for each purchased item
• Often associated with subscription fee models and zero-cost of
production
24. Two-Part Pricing Implementation
• Need to understand each individual
customer’s price curve
• Need to determine optimal number of
products to sell to each customer
• Need to calculate how much customer is
willing to pay for product and set fixed &
variable prices to encourage them to purchase
optimal number
25. Bundling
• Packaging several items together under one
price
• Pure Bundling
– Packaging together complementaries which are
only offered as part of a bundle
• Mixed Bundling
– Offering items as either component pieces or as a
bundle which discounts each item
26. HOW SHOULD A DIGITAL BUSINESS
RESPOND TO PRICE-CUTTING AT A
STRATEGIC LEVEL?
27. What Motivates Price Cutting?
• A tactic used to gain market share
• Motives
– Trouble
• Desperate attempt to raise cash, or signal to
competitors an interest in being acquired
– Industry Leader
• Show of strength to indicate organisation is doing well
enough to withstand the lower prices
– Displeasure
• To punish a competitor for a change in its strategy
28. Responding to Price Cuts
ENHANCE VALUE
PROPOSITION
BATTLE
JUSTIFY PRICE
DIFFERENTIAL
GENERAL
PRICE CUT
TARGETED
PRICE CUT
CROSS
PARRY
FIGHTER
BRAND
Enhancing the basic product with additional
features such as extended warranties, additional
services and the inclusion of ancillary products,
but maintaining the price so that total customer
value increases
Communicating the differential benefits offered
by the organisation that justify a higher price
than the competition
Match the competitors
cut as an aggressive
show of strength
Focused efforts toward
competitor’s primary
geography or product
Discounts offered only
to vulnerable customers
New products developed
to appeal to vulnerable
customers
30. What to do and not to do
• Don’t discount unless you have to.
• Offer options! Some people will want basic functionality while others will
want super-functionality.
• Some segments will value your product more than others. Try to price
accordingly.
• Customers do not like companies to charge different prices in different
channels for the same product without proper justification.
• Many organisations have been burned by changing prices only to be met
by a full-fledged price war by outraged competitors.
• Brand strength or adding extra features (e.g., free upgrades) may temper
the need to discount price.
• Goodwill is important in maintaining relationships, but think about
whether you are giving up too much in terms of price. Customers may
remain loyal even if you don’t offer them the 10 percent discount
31. The Digital Pricing Pentagon
DETERMINE
SELLING
STRATEGY
SET PRICING
GOALS
DIGITAL
PRICING
PROCESS
Develop Pricing
Segmentation
Establish
Product
Value
Challenge
Pricing
Mindset
Estimate
Competitor
Reaction
Test Final
Market
Equilibrium
32. Strategic Segmentation: Expanding &
Increasing
Expanding the customer
“sweet-spot” through
versioning
Increasing customer density
through price
discrimination
ORIGINAL
TARGET
MARKET
Expanded
Target Market
Price
discrimination
increases
density
33. Estimate Competitor Response
• Avoid setting a price that leads to a price war
• Set potential prices
– Use scenario planning
– Must be real prices you could charge
• Guess what competitor reaction would be to each
one
– Will they aggressively react, minimally react or accept?
• Estimate your final price and hypothesize
competitors’ final price points
34. Test Final Market Equilibrium
• Final price and
volume points give
your estimated
demand curve
PRICE
QUANTITY
Hi
Medium
Low
Hi Medium Low
Derived from
estimated market
shares
35. Digital Pricing Strategy Framework
RETAIL PRICE
DECISION
HiLo EDLP R/O
Select Digital Pricing Strategy
No Pricing
Flexibility
Corporate
Mandate
High Initial
Demand
Correlated
Demand
Dynamic
Pricing
Price as
Marketing
Strategy
Price at
market
Target return
pricing
Target profit
return
Fairness
pricing
Bundling
Frenzy
Price
discrimination
over time
Bundling
Volume
Discount
Two-Part
English,
Reverse &
Dutch
First-price
sealed-bid
Reverse first-
price sealed-
bid
Group buying
Electronic
exchange
Prestige
Sign of
Quality
Promotional
36. HOW DOES DIGITAL PRICING WORK AT
EACH OF THE FOUR STAGES OF THE
ELECTRONIC CUSTOMER
RELATIONSHIP?
38. What We’ve Covered Today
– We’ve looked at what the economics of digital pricing are
– We’ve seen what decisions in digital retail pricing have to be made
– We’ve looked at how basic and dynamic digital pricing strategies work
– We’ve looked at how advanced pricing strategies work
– We’ve explored how a digital business should respond to price-cutting
at a strategic level
– We’ve investigated how the digital pricing process works
– We’ve seen how digital pricing works at each of the four stages of the
electronic customer relationship
