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Making an Online Pricing Strategy Work
How does a company develop and execute an online pricing strategy that fully exploits the opportunities afforded by improved pricing precision, adaptability, and segmentation? We've identified three important steps.
Identify degrees of freedom consistent with strategy and brand. Companies must choose e-pricing approaches that do not inadvertently conflict with key strategic objectives, core business principles, or brand image. For instance, online price sensitivity research might suggest that lowering the price for a new product would increase sales profitably, but the price cut wouldn't make sense if a company was trying to position the item as a premium product over the long term. Similarly, a retailer might not be comfortable pursuing a strategy in which widely different prices were offered to different consumers if that was perceived to violate an image of consistency and trustworthiness. But a bank might decide to offer substantially different prices to different customer segments online because consumers understand and accept that more profitable, more loyal, more loyal, more wealthy customers justifiably receive better interest rates on loans.
Build appropriate technological capabilities. Pursuing the right technology for optimal e-pricing does not necessarily require huge systems investments. Rudimentary tracking and testing initiatives can form a strong foundation for more sophisticated systems, if required later on. Other inexpensive tools include price-tracking software to monitor competitors' prices and online surveys to track overall customer price perception.
Ideally, companies should use an array of techniques to inform their pricing strategies by monitoring and responding to the behavior of customers, markets, and competitors. They can:
- Test pricing precision, adaptability, and segmentation online. Many companies have considered these three modes of e-pricing conservatively because they're locked into an offline mindset in which mistakes take a long time to correct. The Internet invites a more dynamic approach in which it's easy to conduct limited tests of alternative prices and pricing structures. These tests can indicate not only at what level to set prices but also which other variables will need to change and how often. A financial services company, for example, may realize tremendous value by changing interest rates hourly, a tactic that would require a highly automated price analysis system. But an industrial manufacturer may find that moving from annual to bimonthly price changes is sufficient. That approach would obviously require less-sophisticated systems to track the peaks and valleys of supply and demand.
- Develop early indicators of customer price perception. The Internet grants companies a unique opportunity to get a better handle on customers' price perceptions and pricing indifference bands. One consumer electronics retailer, for example, used a simple online survey to help decide how to respond to a proliferation of competitors offering the same products at or below cost. To the managers' surprise, only 5% of respondents cited lower prices as their primary reason for buying from a competitor. That insight led to the decision not to engage in a price war—a move that proved correct. Within months, several pure-play rivals had either gone out of business or announced price increases. Regular surveys can give managers early signals of potential problems or opportunities.
Companies can also track the "book-to-look" ratio as an indicator of customer perception. It's possible to monitor customers' behavior all along the purchasing process, comparing how many people visit a site with how many view and configure a product, check the price, or make a purchase. If the ratio rises above a set threshold, the time may be right for a price increase; alternatively, if it falls, it may be time for a targeted, short-term price promotion.
- Identify supply and demand imbalances. To take full advantage of the Internet's flexibility, companies need to spot the shifts in suppy and demand that could trigger profitable price changes. Many companies already collect this information for operational purposes, but it's rarely passed along to the pricing group quickly enough to be useful. There is a need for greater coordination to allow pricing and marketing managers to identify these opportunities.
Create an entrepreneurial pricing group. Few pricing organizations are set up to exploit the full potential of e-pricing. This is especially true of incumbent players that have only started to sell online; their online and offline pricing strategies usually look exactly the same. Start-up e-businesses often suffer from a related problem for a different reason—they have never developed any sort of pricing capabilities in the first place.
| To improve online pricing, companies need to replace traditional pricing groups with a new, entrepreneurial pricing organization that is more strategic. |
To improve online pricing, companies need to replace traditional pricing groups with a new, entrepreneurial pricing organization that is more strategic. It probably should sit at a higher level of the organization than pricing groups generally do, too, so that it has the authority to experiment constantly, to change prices, and to adapt quickly to shifting circumstances. This group will be more analytical, more streamlined, faster, and more flexible. It will be staffed by people who are comfortable with the latest analytical tools and technologies. They will become expert at feeding the information they gather back to the company's offline channels so that those, too, can become more responsive. We don't know of any pricing organization that does all these things correctly today—but we do know of a few companies that are beginning to move in the right direction.
As pure Internet plays and traditional companies' e-ventures struggle to become profitable, improved pricing represents a large and as-yet-untapped opportunity. By taking full advantage of the unique possibilities afforded by the Internet to set prices with precision, adapt to changing circumstances quickly, and segment customers accurately, companies can get their pricing right. It's one of the ultimate keys to e-business success.