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One-to-One Pricing in the New Economy

One-to-One Pricing 
in the New Economy

For most businesses, pricing has long been relatively static and undifferentiated, a quiet backwater in the marketing mix. But as the new economy rapidly replaces the old, pricing – thanks to ever-expanding electronic commerce technology – is becoming one of the most dynamic and important links in the value chain for outperforming the competition.

As we conduct our consulting engagements in e-commerce strategy in a variety of industries, we are seeing a new, broad-based trend. Economists, B-school professors and business people have historically focused on pricing from the seller’s viewpoint. But now as price information becomes more readily available to buyers, they are gaining considerable leverage in the purchasing equation.  For example, buyers – with only the basic technology to get on the Internet – can literally shop the globe for the best price.

Here is a brief overview of how some forward-thinking sellers and buyers are beginning to use e-commerce enabled pricing to their advantage.

Sellers Add New Tools

Sellers want to charge different customers different prices for identical or similar products. In a perfect sellers’ market a producer charges each customer the maximum the customer will pay. In the absence of an individual customer’s information, a producer might separate consumers into groups according to different demand curves and price appropriately. When it is impossible to even differentiate among customer groups, a seller, at best, engages in block pricing by charging different prices for different quantities of the same goods.

Electronic commerce allows sellers to get closer to a perfect selling environment, to easily capture information about each customer and to price appropriately. The one-to-one interaction with a customer via the Internet allows the producer to customize pricing for each buyer with little risk of undermining the profit potential of other customers.

Multiple prices allow sellers to capture consumers’ surplus (the shaded area), which is significantly reduced.  Electronic commerce has magnified differential pricing with some sellers setting customized prices.

Several small software firms have developed technology that enables Internet-based merchants to identify and track visitors. Based on previous and current behavior patterns, the software can allow the seller to instantly target the buyer with special offers and customized prices. For example, a visitor that spends considerable time comparing products without making a purchase may be offered a lower price. Technology allows real-time marketing and real-time pricing that is personalized for the customer.

Virtual Vineyards, an on-line wine merchant, sends special E-mails to price sensitive buyers. The E-mail contains customized offers and provides a unique Internet address that the user must click through to be eligible for the discount. Unless the consumer uses the secret Web address, he or she will pay full price. Other on-line merchants are adopting this approach by E-mailing special deals to customers.

Examples of other powerful, if less perfect, pricing practices abound on the Internet. Producers have designed their products and services with different characteristics in order to provide distinct offerings, which are then priced accordingly.  The ability to use a dynamic connection through the Internet allows vendors to communicate with customers in an ideal manner.

E*TRADE has been particularly adept at providing separate levels of services for different types of customers. At the most basic level, users can simply register as a Member. Members receive access to free real-time quotes, business news, stock charts and other basic financial information. The next level is E*TRADE Accounts. Account holders use the company as an electronic broker and pay transaction fees for trading activity. Account holders receive access to additional research tools, including subscriptions to financial news services.  The company has established a third level of service called Power E*TRADE where active traders receive additional free tools, faster order entry and priority customer service. A fourth level, Power E*TRADE Platinum, gives very active traders access to real-time market maker quotes, breaking news, streaming quotes and IPOs.

Buyers are Gaining Leverage

Computer literate buyers are using new technologies to add better price information to their purchasing decisions. Additionally, they are gaining new bargaining power; sellers need to understand and respond to these changes.

On-line procurement is rapidly growing in acceptance, yet it has not penetrated a substantial number of corporations. Many firms still use inefficient and expensive systems that rely on large amounts of paperwork and human resources. Perhaps the best example of smart buying is General Electric’s Trading Process Network (TPN).

GE created TPN in order to coordinate the procurement of products and services from 1,400 suppliers. Over $1 billion of business is conducted via the electronic network. TPN is fundamentally a “reverse-auction” system which rewards the lowest bidder. Software allows GE’s purchasing managers to specify the companies that are allowed to make offers. Direct competition between suppliers is created and high bidders are quickly eliminated.

The service has dramatically cut the time and expense of the procurement process. In addition, the increase in direct competition has resulted in a 5% to 20% decrease in the costs of goods purchased by GE. Through its bargaining power, GE has squeezed the producer surplus that suppliers had previously enjoyed. TPN allows GE to purchase goods that are closer to marginal cost.

Moreover, price shopping via the Internet is spreading rapidly. Free Markets OnLine, an independent venture based on the TPN system, contracts with buyers to create reverse-auction markets for large purchase orders. In addition to improving the quality of goods, the system will reduce prices by an average of 15% to 20%.

Several small companies, such as Ariba Technologies, Commerce One and Trilogy, have developed procurement software that features similar capabilities. Using a Web-based model, purchasing managers can access the system through the corporate Intranet. Buyers are able to automate the procurement process and receive the lowest price possible from suppliers.

Companies can also build value for themselves by allowing consumers to prescribe pricing terms to their advantage. Priceline.com has created a business model that relies on a “reverse-bid” system. The company allows consumers to “name your own price” for a product or service, such as airline tickets, hotel rooms, cars and mortgages. Suppliers can then decide if they are willing to accept the buyer’s terms.

Another example of increasing buyer leverage is the growth in intelligent shopping agents. Customers can easily and quickly compare the price of a product across different on-line vendors using the Internet.  In the physical world, comparison shopping can be difficult and time consuming. The virtual world allows (and perhaps encourages) buyers to seek products and services offering the best value proposition.

Through applications such as reverse-bid systems and intelligent shopping agents, consumers in the new economy will gain bargaining power and will be able to reduce producer surplus levels.

Creating New Strategies

The new economy requires new thinking by business managers. Pricing issues are gaining importance, as innovative technologies and a networked society change the way transactions take place. Pricing strategies are increasingly becoming a differentiating factor among competitors.

Easton can work with you to develop winning strategies for the new economy. By blending new e-commerce techniques with your traditional channels, we can help your company become a more powerful buyer and seller. We can help identify market segments and develop pricing tactics that maximize the value of those customers.

Please contact us if you would like to discuss how we can use our electronic commerce experience to help you prosper in the new economy.

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Easton Consultants. All rights reserved.

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