New pricing approaches including auctions

Figure 5.10 summarises different pricing mechanisms. While many of these were available 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 auctions it is important to distinguish between offers and bids. An offer is a commitment for a trader to sell under certain conditions such as a minimum price. A bid is 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.

Figure 5.10 Alternative pricing mechanisms

Marn (2000) suggests that the Internet can be used to test new pricing policies. For example, if a company wants to know the sales impact of a 3 per cent price increase, it can try this on every 50th visitor to the site and compare the buy rates.

The Internet introduces new opportunities for dynamic pricing, for example, new customers could be automatically given discounted purchases for the first three items. Care has to be taken with differential pricing since established customers will be unhappy if significant discounts are given to new customers. Amazon trialled such a discounting scheme in 2000 and it received negative press and had to be withdrawn when people found out that their friends or colleagues had paid less. If the scheme had been a clear introductory promotion this problem may not have arisen.

Dynamic pricing

Prices can be updated in real time according to the type of customer or current market conditions.

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