Pricing - Dynamic Pricing

Although traditional pricing schemes are used online, e-commerce allows for exciting scenarios not found offline. One unique advantage the Internet offers is the ability to customize prices to individual consumers or business customers based on their purchase histories. This price segmentation approach is made possible through the power of databases. Based on customer data, companies are able to offer better deals to their best customers, or to strategically price items that are similar to those purchased in the past.

In many ways, the Internet shifts the balance of price-setting power. As Business Horizons explained, "The Net enables customers to become both price takers and price makers, and for firms to gain both buying advantages (by buying at good prices from their suppliers) and earn commissions on customer trades (by allowing and facilitating customers to trade with each other). IT, and in particular the Web, have made variable pricing an option for many firms, which now have the opportunity to change and disseminate prices as often as desired. Prices can be set with a single transaction or multiple interactions."

Variable, dynamic pricing is a key characteristic of e-commerce pricing, allowing for prices that change or fluctuate due to different variables, conditions, and situations. Being able to manage dynamic pricing strategies is a key ability for companies wishing to succeed in the world of e-commerce, according to professors at the University of California-Irvine Graduate School of Management. The forces of supply and demand are leading variables that dictate pricing. They cause some e-tailers to continually analyze supply and demand information and adjust prices accordingly. When demand for products or services increases, savvy e-tailers respond quickly by increasing their prices. Likewise, when demand begins to fall they adjust prices downward to stimulate more purchases.

In mid-2001, InfoWorld announced that IBM, Compaq, Hewlett-Packard, and Dell were all looking into dynamic pricing approaches for their e-commerce operations. Different factors were involved in each company's strategy. For Dell, the price of computer memory chips and processors was an influencing factor, while IBM's approach involved product life cycle and demand. Hewlett-Packard referred to its approach as "contextual pricing," as the number of total items being purchased as part of special promotions would affect what customers paid overall. As a consultant pointed out in the article, dynamic pricing must be handled carefully. Such approaches have been known to cause problems for companies if consumers feel as though they have not received a fair deal.

Some dynamic pricing scenarios are value-based, involving situations in which customers pay what they think a product or service is worth. Priceline.com is an excellent example of value-based pricing. From airline tickets, rental cars, and hotel rooms to long distance phone service, new automobiles, and even mortgages, buyers used Priceline.com to get deals they might not have ben able to obtain through traditional means. At Priceline.com, consumers were able to make offers for different goods and services in one of four categories (travel, personal finance, automotive, and telecommunications), which they guaranteed with a credit card. The company then attempted to find sellers willing to honor the offer. In order to make things work, buyers were required to allow a degree of flexibility concerning things like brand names, features, and time frames.

Although the concept behind Priceline.com was popular with consumers, its success has been somewhat limited for a number of reasons. After its initial launch, Priceline.com founded a licensee called Web-House and attempted to apply the name-your-price model to other product categories like groceries and gasoline. However, the new endeavor failed because of customer service problems, which attracted considerable media attention. The company's stock price suffered badly, several key executives left the organization, the Connecticut Better Business Bureau removed Priceline.com as a member in good standing, and it was investigated by that state's attorney general. Priceline.com later was reinstated as a member of the Connecticut Better Business Bureau after it improved its customer service and named consumer advocate and former New York State Attorney General Robert Abrams as an advisor. This goes to show that low pricing alone isn't always enough to guarantee success; customer service also is a critical facet of e-commerce.

Are one pair of blue jeans worth $46,532? They were to Levi Strauss & Co., which purchased a rare vintage pair for that price on online auction site eBay. Online auctions are another form of dynamic, value-based pricing. Founded in 1995, consumers and business across the world congregate on eBay to buy and sell just about every imaginable kind of product and service. In late 2001, 29.7 million users were registered on eBay. Additionally, Media Metrix ranked the auction as the Internet's most popular shopping site, in terms of total user minutes. On eBay, users had the ability to buy items at fixed prices, as well as via a traditional auction format. In 2000 alone, more than $5 billion worth of merchandise was traded on the site.

eBay wasn't the only online auction in the early 2000s. More specialized, business-oriented auctions involving high-priced items also existed. Additionally, reverse auctions also were an option. These involved buyers indicating what they were looking for and how much they were willing to pay. Auctions like these were useful to companies that needed to get rid of excess inventories. Instead of selling off such inventories at deep discounts to third party re-sellers, auctions provided them with a way to leverage the real value of their inventories by reaching interested parties directly in a cost-effective way.

One example of a specialized online business auction was IronPlanet, where interested parties bought and sold used heavy equipment. Unlike eBay, IronPlanet's auctions were not continuous; it held events at specific dates and times. In mid-2001, one of IronPlanet's auctions involved 37 pieces of equipment being sold for more than $1.8 million. Including the sales from that auction, IronPlanet had sold more than $17.4 million worth of used equipment since its first auction in April 2000.