Leaving Money on the Table
Pricing as a strategy is not new, of course. Airlines and hotels began perfecting the art of yield management three decades ago. The goal: to fill as many seats and rooms as possible while charging the highest prices the market would bear. Airlines long ago developed sophisticated software programs to predict demand and set prices, resulting in as many different price points per flight as passengers. But now, thanks to the Internet, the state of the art is changing prices on the fly in response to real-time customer data being captured.
Still, strategic pricing is a relatively untested concept outside the airline, financial and retail industries. In a survey of its members by the Professional Pricing Society, 30 percent of respondents said they priced new products by mirroring their nearest competitors, and another 22 percent set new-product prices to recover costs and tack on a profit. Only 18 percent said they did customer research to determine the value of the product or service to potential customers. And when it comes to Internet pricing, 40 percent said they simply mimic the pricing of their offline sales channels, and 28 percent responded that they don't have an Internet strategy at all.
Why so many laggards? Part of the reason is that the dot-coms, initially not under much pressure to make a profit, ignored their potential for strategic pricingand offered few lessons on how to do interactive pricing well. There was an early assumption among many early e-tailers that they had to compete on pricea preoccupation that led to some famously brutal price wars and directly brought about the demise of many Internet pioneers, says McKinsey's Zawada. Many Internet companies pursued tactics that were ultimately self-defeating, including competing on unsustainably low prices, setting identical prices across all customer groups and failing to change prices in response to changing demand, even though that would have been easy. The result: E-tailers spent marketing dollars in ways that had little direct bearing on profitability. Many e-tailers failed while Americans increased online spending 66 percent in 2000, to $44.5 billion, according to a recent report by the Boston Consulting Group. Adds McKinsey's Zawada: "A lot of that was because they did not use their two-way information power with customers to price strategically."
The lesson? Interactivity is squandered for many companies unless they also use it to manipulate price. And when it comes to pricing, there is much more wiggle room than one may think. In a recent study, Erik Brynjolfsson, codirector of the Center for eBusiness@MIT and professor of management science at the university, found that prices for books and CDs could vary as much as 47 percent across Internet retailers. "Price isn't necessarily the most important thing to online shoppers," he says.
Further, while it's easy to compare prices online with so-called shop-bots and other Web-based technologies, few consumers now take advantage of themfewer than 5 percent of Internet households in a recent McKinsey study. Amazon.com Inc., for example, rarely offers the lowest price for books or music, yet is the number-one online retailer in those categories.
The key, according to pricing experts, lies in integrating online and offline channels. Zawada notes that people used to think about e-commerce as being separate from their business, and many spun off their online operations. But today, it's all about clicks and bricks. "The value is in viewing this as multichannel. Companies should use the online insight they gain for offline pricing," he says. Companies should use the Internet as a "testbed" and "roll the learning across the channels," Zawada says.