How the internet has affected product pricing strategies
When it comes to product pricing models, many factors affect pricing decisions. These factors include the cost of the offering, the demand, the customers who it is intended for, internal and external factors, and more. However, the most critical factor that affects product pricing in today’s digital era is the internet.
The price variable of the marketing mix is described as the organization’s pricing policies used to set the prices of products and services and define the pricing models. These variables ultimately differentiate a brand from its competitors. The internet has changed the way brands create their pricing strategies.
In this blog, I will discuss the four main implications of the internet for price.
Four Implications for internet Price
The price variable of the marketing mix is arguable one of the most essential variables. We no longer live in a world where we need to purchase a product before comparing the product’s price with other distributors. However, because brands are increasingly developing multichannel strategies to reach their customers both on and offline, consumers have the easability to compare the prices of products not only across companies but across other brands.
Further, the easability to both shop online and compare pricing has allowed businesses to test how consumers respond to pricing based on demand. Online shopping has significantly benefitted marketers because the ability to test different pricing strategies enhanced the sales of a product or service. But like all things, the internet has implications that need to be considered when brands analyze the effects the internet has on pricing strategies.
There are four main implications for internet price:
- Increased price transparency
- Downward pressure on price
- Innovative Pricing approaches
- Alternative pricing structure or policies
Increased Price Transparency
Price transparency is a customer’s knowledge about pricing; the more availability of a product, the more information and knowledge a customer has on its price. Price elasticity plays a role in a product’s price because the consumer’s response to price changes provides the brand with enough data to determine how much consumers are willing to pay for a product and how much they aren’t. Comparing prices on the internet provides difficulty for marketers because they can’t easily raise prices where there is a demand. After all, consumers will find another brand to purchase a product from for cheaper.
Downward pressure on price
The next implication is downward pressure on price. Competing brands paired with price transparency are the main reason for downward pressure on price. Further, the internet drives prices down for internet-only retailers simply because they do not have the overhead that companies who offer both physical stores and online shopping opportunities. Because internet-only retailers can operate at lower pricing levels than those with both a store and online presence, this allows internet-only retailers to price their products lower. This, in turn, affects the brands with both types of retail options to have to price their products lower.
Innovative Pricing approaches
The third implication is innovative pricing approaches. The internets technological capacity has allowed brands to create new pricing options. Several different pricing mechanisms have proved to be effective online such as dynamic pricing and price testing. Dynamic pricing allows brands to update prices in real-time according to the current market conditions or customer type. For example, a brand can offer new customers a 10% discount for their first purchase. However, it is crucial for brands to evenly balance discounts for new and recurring customers as recurring customers will be unhappy if they don’t feel as though they were offered discounts similar to new customers.
Shipping fees also play a role in innovative pricing approaches because the price of shipping can have a dramatic effect on both conversion rates and profitability. We see it all the time. Picture this: a brand you like is offering a massive discount of 40% off your entire order. In excitement, you add several items you have been wanting to purchase for a while into your cart and click the “proceed to checkout” button. Once you enter your shipping information, you are stunned by the outrageous shipping cost, which is so high it appears the brand is making up for their discount by charging more in shipping. The innovation of this pricing approach, shipping fees, is that brands such as Amazon have created loyalty programs, for a price, of course, in return for free express shipping options.
Alternative pricing structure or policies
The final implication is alternative pricing structures. Thanks to the internet, brands have even more capabilities when it comes to pricing strategies. Some products, such as downloadable or digital products, don’t require in-person purchasing or even shipping fees. Think back to the days when you had to purchase Microsoft word, excel, PowerPoint, and outlook on a Disk from the store to download it on your computer. The internet has provided us the luxury of eliminating this need from our routine when we purchase a new computer because we can buy and download it directly from the comfort of our own home. The same goes for music; gone are the days we need to purchase a CD to listen to our favorite artist.
The internet has provided brands with new options such as pay per use, rental at a fixed monthly cost, leasing arrangements, and product bundling. The internet also allows brands to vary their online prices utilizing basic prices, discounts, add-ons and extra products/services, guarantees and warranties, refund policies, and order cancellation terms.
As you can see, for consumers, the internet has provided us more convenience when it comes to purchasing a product. But, for brands, the internet has required them to put in more effort when it comes to implementing a pricing strategy as it has inevitably changed the rules for setting prices. Because it is so easy for consumers to compare prices across brands via the internet, brands need to strategically set their prices to be competitive in the market. When developing pricing strategies, marketers need to consider the implications mentioned above to accurately price their product. Next time you are working on pricing a product, don’t forget to consider these implications.