At the beginning of the online era, many pundits—including The Economist—concluded that the online retail industry was an unpromising one for firms seeking competitive advantage: The explosive growth of the Internet promises a new age of perfectly competitive markets. With perfect information about prices and products at their fingertips, consumers can quickly and easily find the best deals. In this brave new world, retailers’ profit margins will be competed away, as they are all forced to price at cost.1 Things have not quite turned out the way the The Economist predicted. Prices have not been driven to marginal cost—indeed, the “law of one price” does not hold in online markets.2 Moreover, major players with identifiable brands and pricing power over consumers, such as Amazon, have emerged from the sea of competitors in both U.S. and European online markets. What innovations in pricing strategy are required for a firm to be successful in an e-retail market? This article uses insights gleaned from five cases studies of pricing in online markets to highlight several innovative pricing strategies for e-retailers. The cases are drawn from the experiences of online retailers at the price comparison site, Kelkoo. A subsidiary of Yahoo!, Kelkoo boasts over 4 million visits per month from consumers within the UK alone, and price listings by over 4,000 retailers, including more than 40 of the 50 largest Internet retailers in the UK. It is the largest price comparison site in all of Europe. Based on the lessons drawn from the cases, we offer a “dashboard” for online pricing—a set of tools for assessing (and possibly reshaping) pricing strategies in the highly dynamic online environment. While our focus is on innovative pricing strategies for online markets, the prerequisites for competitive advantage in offline markets are still operative in online space.3 Brand recognition, firm reputation, and store location (placement on the screen) are important to a successful online business. However there are unique features of online markets that necessitate innovations relative to traditional offline markets, and it is important to assess how these features impact successful online pricing strategies. The online marketplace differs from physical markets in a number of significant respects. One of the most important differences is the ease with which online consumers and rival retailers may access comparative information about seller characteristics and prices.4 The fact that search engines, shopbots, and price comparison sites provide both consumers and firms with a wealth of information—merely at the cost of a click—is a two-edged sword. While consumer access to price information tends to sharpen price competition, firms’ access to this information creates opportunities for innovative pricing strategies that are not generally feasible (or even necessary) in offline markets. Online customers often search at the product level rather than by store. By the time a consumer is ready to make a purchase, she will likely have compared a variety of attributes, including prices, at alternative e-retail outlets. This fundamentally changes the nature of competition faced by e-retailers, who increasingly compete at the individual product level rather than across broad product categories. Consumers are much more selective in online markets. Accordingly, specialization in the provision of niche products, where competition may be weaker, can be a profitable strategy in online markets. Thus, in contrast to offline markets, pricing and yield management strategies in online markets must be product specific. For offline firms looking to tap into online markets, a fundamental rethinking of time-honored pricing policies—such as applying the same markup to similar products sold at the store—is required. The timing and tailoring of prices to specific models of products is the key to successful pricing in online markets. In online markets, it is technically feasible—even strategically desirable—to frequently change the prices of individual products. With the tempo of price changes by competitors being measured in days rather than weeks, price management requires a dashboard to monitor and respond to the dynamic nature of online markets.
To summarize, online markets are considerably more fluid than their offline counterparts because consumers are increasingly searching for specific models of products. Additionally, the number of rivals selling a particular product—and their prices—change almost daily. Further adding to the dynamics, for many products sold online the pace of technological change translates into dramatically shortened product life cycles. A one-size-fits-all pricing policy, prescribed from on high, is unlikely to yield satisfactory results in online markets. Successful e-retailers use a variety of innovative, dynamic, and product-specific pricing strategies.
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