E-business Innovative Marketing Strategy

Published Date: 02 Mar 2018

Chapter One: Introduction

1.1 Background

The term E-business is today's popular form of business by using old business models with the interaction of technology and gaining the most out of customer value and profits which is the future way of doing business. In E-business as like bubbles are bursting there is constant threats about security, but e-business is increasing to a whole new level, and will most likely keep doing so in the near future.

In the latest years Internet has proved as a very important marketing tool. By the use of the Internet the companies have developed relationships with the customers by using different systems in promotion and sales. So the inception of Internet has had effect on the way the individuals and organizations communicate around the world (Doole and Lowe, 2004). Briefly, in the last years marketing has gone online taking advantage of the market opportunities.

The estimates regarding the amount of business conducted electronically vary widely, but it is clear electronic business and electronic commerce have gained tremendous momentum worldwide over the past decade. Much media attention was given to the dot-com boom, but has since waned following the dot-com bust and economic downturn of the early 2000s. Despite the dot-com bust, it is clear many successful electronic businesses will evolve and thrive for many years, e.g., eBay and Ocado.

Nonetheless, E-business sector has become an increasingly competitive and dynamic business environment within the past decade. Consumers perceive firms having a web site as more customer-oriented, responsive, informative, high-tech, sophisticated, and likely to stay in business longer (Griffith et al., 1998). These discerning and demanding consumers have led many innovative organizations to look for appropriate marketing strategy on the internet marketplace with the aim of building better business position; on the one hand value into service offerings, satisfying and maintaining loyal customer and on the other hand effectively making strategic decisions thereby increasing the overall business performance. The ability to retain and lock-in customers in the face of competition is a major concern for online businesses, especially those that invest heavily in advertising and customer acquisition stares. However, creation of loyal and a satisfied customer base is an important determinant of marketing success. Research shows that loyal customers buy more of company’s product, they are cheaper to serve, less sensitive to price and brings in more customers by word of mouth (Reichheld, 1996). Therefore, developing, managing and maintaining loyal marketing relationship of the internet market place for instance is harmonious to how well you are marketing. Thus knowing how well you are marketing as a firm and making innovative marketing strategy to perform better in future which is required and inevitable in such a marketplace as the internet.

Obviously, decision making is essential about organization strategy to determine the future direction (Johnson & Scholes, 1997). The prime function of management is perhaps to make the right strategic decisions. According to Johnson & Scholes, (1997) strategic or long-term decisions are concerned with an organization's overall objectives. Such corporate decisions include major capital investments, sources of finance, and product and market choices. Practically, the long-term directions are affected by strategic decisions of an organisation and are generally about attempting to complete some benefit for the company. Therefore, with the range of a company’s action are likely to be affected: Does (and should) the company focus on one area of action, or does it have many? The issue of range of action is fundamental to strategic performance (Johnson & Scholes, 1997).

In marketing strategy pricing is one of the most talked about but least understood of all the key marketing levers (DiCamillo 1996). Price is also the easiest of the marketing mix variables to manipulate and can be done so very quickly (Guiltinan and Paul 1985). The proliferation of e-commerce has already had a significant impact on how and where consumers shop. It also has the potential to make dramatic changes in the way goods are priced and how purchase decisions are made. In Internet shopping the cost (in both time and money) of comparison shopping is drastically decreased and price is a major element in purchase decision. A marketing manager strategically sets pricing to achieve the company’s objective.

1.2 Rationale

In e-business innovative marketing strategy change over the life cycle of a firm (Miller and Friesen, 1984) the strategy systems emerge over time, in response to changes in strategic goals, the business environment and the size of the firm. However the question of which marketing strategy is required for achieving to a goal or an objective. In this sense what marketing e-strategy required for? Implicitly, related to the current study by evaluating marketing e-strategy one firm going to make their future crucial decisions to improve their firm’s more in online business. Needless to say, marketing strategies depend upon basis for decision making and reflect the customer's needs as well as the firm's simultaneously. Companies and researches reflects the customer's satisfaction and needs by calculating price, feature, amount, cycle time, effectiveness, output etc., of the products, services, and procedure as long as ways to calculate those things have to be present (Tapinos et al, 2005). What is new and has attracted little attention to some extent is to evaluate marketing e-strategy using decision- making variables and to see the impact on strategic decisions. This clearly shows those not only find the appropriate marketing e-strategy but in order to better control, understand, and improve what firms do and must do.

In this research there are two different cases virtual company; one is basically auction store eBay and another grocery store Ocado. The main reason to select different category companies because both are doing e-business and through this research it’s going to be defining their marketing e-strategies and implementing in the market are approximately same. That’s why this study evaluates two different category virtual stores and compares their marketing e-strategies. Therefore this study goes beyond just required marketing strategy using the internet as a market place but is a bold attempt to evaluate e-strategy using decision making variables and to see the impact on strategic decisions.

1.3 Significant of the Research

The marketing discipline has been showing to different changes and powerful challenges into the business stadium with the induction and dispersion of the online phenomenon. Constantly since this new multimedia surroundings of exchange appeared, many research have been performed about how it will influence the nature and prospect of marketing activities. This research is an attempt to categorize and summarize the literature about online marketing and enlighten the study routes that will contribute to the development of the discipline.

In reality, most firms will need to plan marketing strategies for both traditional or place aspects of the business, and the fast developing electronic or space dimensions of the business (Rayport &; Sviokla, 1994). Both approaches need to be co-ordinated in a cost effective manner whilst providing the customer with an effective and integrated solution. Some research has reported that the early adopters of e-business show a trend towards cost reductions and administrative efficiencies from e-procurement and self service applications used by customers and employees.

By contrast, more mature users focus on strategic advantage and generate this through an evolutionary model of organisational change (Ash and Burn, 2005). Researchers have also recognised the importance of the extension of e-commerce use to small and medium sized businesses in order to realise improvements in efficiency and effectiveness (Hauge et. al, 2004)

Managers need to contemplate their strategic approach to the electronic business opportunity in terms of both internal and external considerations at a particular point in time. Based on recent research (Perrott, 2002), this paper proposes a tentative framework that will assist managers to determine their organisation’s strategic positioning in the electronic arena.

1.4 Aims & Objectives

Aim

To identify what might be appropriate marketing strategies for this new era e-business.

Objectives

• To review literature on current developments in online marketing strategies.

• Identify the e-strategies of the cases eBay and Ocado.

• Review the strengths & weaknesses of e-strategies.

• Identify immediate competition and implications for the cases eBay and Ocado.

• How do customers react to the marketing e-strategies?

1.5 Purpose and Research Questions

The purpose of this thesis is to define required innovative marketing strategy of virtual stores using decision-making associated variables sternly to evaluate the impact on strategic marketing decisions.

There are many issues connected to this research problem, but we will only focus on certain aspects and a complete picture will therefore not be provided. The research questions we intend to answer are:

RQ1. What are the objectives for online marketing?

RQ2. How can the online product offer be described?

RQ3. How can the online pricing strategy be described?

RQ4. How is the Web site used as a communication, promotion medium, distribution and transaction medium?

RQ5. What influential innovative marketing e-strategy evaluation variables or indicators are associated with strategic marketing decisions in the online marketplace?

1.6 Scope and Limitations

This research will show the continuing progress in digitization and networking that is manifested in the rapid spread of the internet, information about product attributes, marketing strategy and especially in pricing process – which has long been considered a concomitant part of any article placed on the market – is now distributed independently from the product itself.

The growth in digitization has significantly increased a company’s freedom to both combine and diversify products, thereby enabling them to easily produce and offer a wide variety of product versions to their customers. Moreover, progress in networking has substantially increased the speed at which various product-related information can be distributed. At the same time, it has considerably expanded the range over which such information can be disseminated.

This research identifies the major scope and content of the studies about Internet marketing and displays the current state of the discipline. It also enlightens the main avenues or niche routes for future research by clarifying under investigated or unsettled areas. The framework of this review can serve as a skeleton explaining the accumulated state of knowledge about Internet marketing and can be a useful starting point for studies aiming to expand the views about this area further.

The current research has been limited and concentrated on required innovative marketing strategy up to company-level eBay and Ocado. The research is focused on evaluating virtual store marketing strategy for strategic decisions. Consequently, plethora of researchers have measured marketing strategy from diverse perspectives such as the financial perspective, process and supplier’s perspective, employee’s perspective innovation and development perspective.

• The current study mainly focuses on the customer’s perspective.

• The primary focus was on the online marketplace industry where the business model is emerging and fast spreading. Further the focal point will be on business to consumers (B2C). The companies studied involve UK firms providing service to UK users. The firms studied are eBay and Ocado.

• The study was limited to customers or users within London, city in UK.

1.7 Signposting of the Study

Chapter One: Introduction

In order to improve a product or services to satisfy a need of a customer, once have to be able to improve or change it to meet their needs. In order to improve or change it, there is the need to know what the customer desire or want. In order to know and understand it, once have to be required innovative marketing strategy in online market. This first chapter will present the background and rationale behind innovative marketing e-strategy especially in pricing and the impact on strategic decisions in the online marketplace. Further this section will present the issue regarding marketing e-strategy which will lead to the purpose of this study.

Chapter Two: Literature Review

This chapter provides relevant existing theories and models of marketing e-strategy specially pricing in the online market place as well as a model modified by the author. The working model builds upon the presented theories and is used as a foundation for the following analysis.

Chapter Three: Research Methodology & Strategy

In this chapter, the research methodology & strategy is presented. The research approach that has been adopted in order to answer the research questions and to meet the purpose is described and motivated. The research methods used in this work are as well described and discussed.

Chapter Four: Empirical Analysis

In this chapter the results of both the qualitative and quantitative research are presented. The results will follow the outline of the working model. A brief companie's overview are also presented.

Chapter Five: Analysis

In this chapter the analysis and discussion of the empirical data will be presented. The analysis is assessed through the two major issues in the study along with the working model.

Chapter Six: Conclusion

This chapter includes the conclusions of the research as well as reflections for recommendations, a discussion of the limitations and suggestions for further studies.

Chapter Two: Literature Review

2.1 Online Marketing Objectives

Online marketing can be described as a system for selling products and services to target audiences who use the Internet and commercial online services by utilizing online tools and services in a strategic manner consistent with the company’s overall marketing program (Janal, 1997, p. 39). Before going online, the company needs to have a marketing plan that is consistent with the goals and objectives set by the company. It is necessary to decide what the company wants to accomplish by going online (Janal, 1997). Pitt, Berthon and Watson (1996) point out that the objectives for marketing through Web sites vary depending on the company, but that many organizations do not even have clear and quantified objectives for being present on the WWW. Companies must divert from the thinking that even a bad Web site is better than none at all, because without clear objectives it will be hard to make appropriate marketing strategy through the Web site’s effectiveness.

The Web site can be characterized as something of a mix between personal selling and advertising and can move the customer through the six phases of the buying process: need recognition, information processing, develop specifications, search and evaluation, purchase and post-purchase evaluation. By attracting Internet surfers, establish contact with interested surfers, transform some of the interested surfers into interactive customers and keep these customers interactive, the Web site is acting as a mean to push the customer through the buying process. Converting surfers into customers can be considered a six-stage conversion process. The efficiency of the Web site in reaching the marketing communication objectives set for it, as well as in taking the surfer through the six stages of the conversion process, is shown in Table 2.1. (Pitt, Berthon & Watson, 1996)

Even though most companies wish their Web site to generate direct response orders and thereby set marketing communication objectives, there are many other objectives that can be achieved by marketing online (Mathiesen, 1995):

• Generate direct response orders.

• Increase brand awareness or corporate image.

• Gather information about customer preferences to help guide future product development.

• Improve customer service.

• Test consumer response to discounts or other special offers.

• Build a list of prospects for future promotions.

• Find business partners, dealers, or franchisees for company’s products.

• Recruit talent members, employees, subscribers, etc.

Table 2.1: A Model of the Conversion Process on the Web

*An overall average Web site efficiency index, which can be thought of as a summary of the entire process.

Source: Adapted from Pitt, Berthon & Watson, 1996, p. 8

According to Janal (1997), the Internet is the world’s most efficient marketing tool and helps companies disseminate sales and marketing messages, create one-to-one relationships, educate prospects and support existing customers on a worldwide scale. The Internet provides the possibility to deal with customers worldwide that have pre-selected a specific company. Firms can use the Internet to generate revenues by increasing sales to existing customers and by attracting new customers (Peterson, Balasubramanian & Bronnenberg, 1997). The Internet is an important marketing tool because the market prefers the decentralized, open-access environment presented by the WWW for E-commerce (Hoffman & Novak, 1996b).

The Internet possesses unique features making it appropriate for creating close customer relationships (Honeycutt, Flaherty & Benassi, 1998). Janal (1997) proposes that the flexible publishing platforms of the Internet and commercial online services gives the marketer the possibility to establish relationships with the consumers. The relationships are created through online sales, support and service. On the Internet, the customers and the company are interacting with each other and this gives a very intimate selling situation (Janal, 1997).

However, no physical intimidation exists between buyer and seller and no middle parties may interrupt the communication process (Samli, Wills & Herbig, 1997). Quelch and Klein (1996), as well as Sanden (1998) claim that the Internet is not constrained by either location or time. For the millions of individuals connected to the Internet, traditional limitations of time and distance no longer apply. The computer in Sweden or Hong Kong is just as close are the office next door. Messages can be sent to thousands of potential customers simultaneously with one keystroke (Cronin, 1994). Furthermore, the Web site is completely accessible, since it can be read 24 hours a day, 365 days per year (Samli, Wills & Herbig, 1997).

The Web site can be used to create customized sales presentations affecting several senses and appealing to logic and benefits. Consumers can pick the sales presentation and information they want (Janal, 1997). By using a variety of Internet resources, the company can create a customer-oriented environment while obtaining information about customers’ specific interests, responses to new product offerings and feedback on the company’s performance. Additionally, the Internet offers the possibility for online ordering and delivery. Customers logging on to the Internet can continue to receive enhanced support services through the network. (Cronin, 1994)

The Internet provides quick feedback on the effectiveness of marketing activities, enabling performance-based marketing (Burke, 1997). Marketers can test both new product concepts and advertising copy over the Internet for instant feedback. In addition, the Internet permits new types of measurement tools, such as online surveys, bulletin boards, e-mail marketing lists, customer identification systems, advertising measurement and Web visitor tracking. (Quelch & Klein, 1996)

The fact that the Internet is neither time- nor location-bound can have a major impact on costs. Customers do much of the work that would normally be handled by office-clerks or human tellers (Sheth & Sisodia, 1999). According to Sandén (1998), the Internet increases the company’s efficiency. By publishing information on the WWW, the sales process can be improved and thus, the productivity rises considerably. In addition, the time spent to process orders is lowered dramatically. Less errors and facilitated processing has led to substantial time-savings. The automation of various administrative tasks is another reason for the increased efficiency and the possibility to serve a vast amount of customers effectively (Sheth & Sisodia, 1999). Administration costs related to paper-based processes such as postage, printing, and handling, will be reduced. (ibm.com)

The WWW is the least expensive printing press and offers the seller an unlimited amount of space to describe and demonstrate the product range. Add to this the low rent compared to storefront, and it is clear that selling online means low cost of entry (Hoffman & Novak, 1996; Janal, 1997). Jäger and Winberg (1996) underline the cost-effectiveness of the WWW by claiming that the costs are independent of the number of people exposed to the message, as well as how much information that is to be presented. They compare the WWW to a printed catalogue, where the costs are very much depending on these factors. It is proposed that performing direct marketing through the Internet may be one-fourth less costly than through traditional channels. The great segmentation possibilities and the low cost for creating differentiated messages on the WWW are also mentioned. As a conclusion, Jäger and Winberg (1996) point out that the cost-effectiveness for presenting messages on the WWW is depending on whether the target group is on the Web. The success of the campaign in relation to the costs of executing it must also be considered in order to evaluate the cost-effectiveness. By marketing online, the company gains competitive advantages compared to companies who are not online. The Internet also reduces the issues of company size, since consumers only care that they find the product needed at the right price. (Janal, 1997; Sandén, 1998; Sheth & Sisodia, 1999)

2.2 The Online Product Offer

According to Brännback (1997), the focus in marketing automatically changes from physical to informational when uses the Internet. In the traditional marketplace, the idea of the product is physical or tangible and occasionally accompanied by intangible features or services. On the Web site, a picture or description of its features will replace the physical product, and thus, the product becomes informational rather than tangible.

Not all products are suitable for online marketing. Peterson, Balasubramanian & Bronnenberg (1997) categorize products and services along three dimensions that are relevant when discussing the product’s suitability for online marketing. The dimensions are: value proposition, degree of differentiation, and cost and frequency of purchase. Concerning the first dimension, goods can either be low-cost, frequently purchased goods, or high-cost, infrequently purchased goods. The product is more likely to fit internet-based marketing if it is infrequently purchased and expensive. Goods can be classified along the second dimension according to whether they are tangible and physical, or intangible and service related. Online marketing is particularly well suited for certain types of intangible or service related goods. The third dimension reflects to what extent the product is differentiable or not. The Internet is an effective segmentation tool when it comes to products or services that can be subject to differentiation. Peterson, Balasubramanian and Bronnenberg (1997) illustrate the product and service classification grid presented below. (Table 2.2)

Table 2.2: Product and Service Classification Grid

Source: Peterson, Balasubramanian & Bronnenberg, 1997, p. 337

According to Cunningham (1998), the product suitability for the target market is always an important issue, whether marketing by conventional means or via the Internet. However, when going online, there are certain aspects specific to the new business environment on the Internet. The factors that affect the product suitability in international marketplaces in general, as well as when conducting E-commerce are presented below. (Table 2.3)

Table 2.3: Factors Affecting Product Suitability in Internet Marketplaces

Source: Cunningham, 1998, p. 23

Wyckoff (1997) argue that media has directed its attention towards online merchants selling books, wine and computers, but that the real winners when it comes to e-commerce are intangibles like travel and ticketing services, software, entertainment and financial services. These types of products can not be physically examined and therefore conventional commerce has no advantage over the E-commerce.

Internet purchases are almost blind, since the customers have no opportunity to test the product before buying it. When selling a product or service online, the customer and the seller rarely speak to each other prior to the placement of the order, and therefore the customer is putting a lot of trust in the seller. Truthfulness and service are expected to a higher degree when purchasing online. In addition, Internet customers are accustomed to obtaining information immediately and therefore expect the same high-speed service for the products they buy. (Jones, 1997)

Online selling can cut product support costs, since support techniques, such as frequently asked questions (FAQ’s), are able to answer most routine questions without human intervention. The FAQ’s have to be updated regularly to give customers fresh information. Other tools that can be used to aid marketers in providing product support are: e-mail and email boxes, and mailbots that answer common questions. To improve customer satisfaction, it is essential to have online service centres open 24 hours a day (Janal, 1997). Providing product support when selling online is important, if the company wish to maintain a good reputation and promote the company internationally. For businesses selling tangible products, handling product support online may be more difficult than for businesses offering intangible products. (Jones, 1997)

To be able to provide complete and relevant product information is crucial in order to satisfy the customer’s needs and make the product offer attractive. Even though various types of product support can be provided on the Internet, the lack of the human factor will always be an issue. Many companies selling online do so in order to replace expensive human labour with computerized assistants, but this is at the expense of product support. The Internet shop has no human agent to clarify or interpret product information, respond to specific questions or help in solving specific customer problems directly. (Burke, 1997)

The Internet enables companies to adapt their products to local needs and preferences more easily and inexpensively. In addition, niche products should be able to find the necessary critical mass of consumers’ worldwide (Quelch & Klein, 1996; Wyckoff, 1997). According to Kiely (1996), companies that market niche products will gain from the interactive selling situation provided by the WWW. This because technology makes it possible to communicate quality and brand information more easily.

2.3 Web Marketing Strategy

When any organization realizes the benefits of Internet marketing then it is needed for the company for developing well-planned and appropriate structured approach for internet marketing. In Internet marketing for managing online channels company will face a lot of risks when they use ad-hoc approach and do not use strategic approach. Some common problems that have seen in companies are:

1. If the responsibilities for many different activities in online marketing are not clear.

2. Company do not set any specific objective for online marketing;

3. Company allocate the budget which is not sufficient for online services which is underestimating customer demand and then competitors companies get potential market share by providing better online services;

4. When in online marketing different parts of the company experiment by using different suppliers or tools do not gaining economies of scale then company budget become wasted;

5. Until online is showed as just another way of market, without reviewing opportunities for improving offer and differentiating online services, new internet value propositions are not developed for customers.

6. If online marketing results are not measured or reviewed adequately, then for improving effectiveness actions cannot be taken by company.

7. For poor integration e-communications company use an experimental rather than planned approach between online and offline marketing communications.

The integration of an internet marketing strategy into business and marketing strategies represents a significant challenge for many organisations, in part because they may have traditionally considered the internet in isolation and in part because of the profound implications of the internet for change at an industry level and within organisations. The challenges of Internet marketing strategy highlighted by E-consultancy (2005) research. The E-consultancy (2005) research involved companies e-commerce managers which companies’ have online business – suppose Bradford and Bingley, Barclays, and Lloyds TSB for financial services; MyTravel and Tui for travel; The Carphone Warehouse, O₂, and Orange for mobile phones; and BCA for direct marking. To gain sufficient resource for Internet marketing what main challenges were which were asked to respondents and these highlighted the issues. E-consultancy (2005) surveyed and showed that around one third did not have a plan. Following figure is astonishing low because advanced E-commerce companies involved only.

Source: E-consultancy (2005)

Challenges included:

• Achieving buy-in and budget reliable with spectators media utilization and value generated;

• Contradiction of vendor ship and tensions between online marketing team and usual marketing team suppose IT and finance/senior management;

• Harmonization with different channels in combination with groups administration marketing curriculum to another place in the business;

• Overseeing and incorporating customer records about characteristics and performance collected online;

• Gaining integrated information / analysis / achievement all over the business;

• Organizing the professional online group and incorporating into the company by altering accountabilities to another place in the company;

• In-sourcing vs. outsourcing internet marketing strategy, i.e. Explore, affiliate, email marketing, PR;

• Human resources recruitment and retention

In following figure suggested a process for increasing and executing an internet marketing which is based of plan definition in a broad range of organization. This figure indicates the main performance and their reliance which are involved for creation of a distinctive online marketing.

2.4 The Online Pricing Strategy

Pricing on the Internet has attracted much research attention (e.g., Bakos 1997; Baye and Morgan 2001, 2004; Brynjolfsson and Smith 2000; Clemons, Hann and Hitt 2002; Degeratu, Rangaswamy and Wu 2000; Erevelles, Rolland and Srinivasan 2001; Ratchford, Pan and Shankar 2003; Shankar, Rangaswamy and Pusateri 2001; Smith, Bailey and Brynjolfsson 2000; Smith and Brynjolfsson 2001). In general, developing pricing strategies for online selling is no more complex than doing it in other environments. However, the impact of price transparency is of major concern to companies that are selling online. Once a price is shown on the Web site, it will be visible in all markets worldwide and it is therefore hard to justify price differences in different markets. (Cunningham, 1998)

According to Peterson, Balasubramanian & Bronnenberg (1997), Internet-related marketing can lead to intense price-competition if the products or services are too standardized and difficult to differentiate. On the Internet, buyers and sellers can gain access to almost complete information on prices. Internet users can easily track down the cheapest price or have software tools do this for them (Hagel & Armstrong, 1997). The fact that customers can search for the lowest price will generate downward pressure on prices, which is believed to lead to general price deflation (oecd.org). In a normal marketplace, companies acting under such conditions would most likely set prices according to marginal costs and make sure that no company can make positive profits because of price competition. However, when marketing online, all companies are depending on each other and interacting and such destructive pricing behaviour would thus negatively affect the company (Peterson, Balasubramanian & Bronnenberg, 1997). According to Sandén (1998), price transparency has a impact on the price structure, but it does not necessarily lead to lower or more levelled prices.

Quelch and Klein (1996) state that advances in Web browsers will facilitate rapid, frequent price changes and levels of price differentiation in a more refined way than alternative, traditional media. On the Internet, prices can be customized even at the level of the individual customer. This customization of information and price is instantaneous across borders. Customers online can easily and rapidly check and compare prices between different companies and quickly become aware of price discrimination. If a visitor is classified as a price-sensitive shopper, he or she may be offered a lower price compared to someone less price-sensitive. On the other hand, Quelch and Klein (1996) also suggest that due to smart agents and software programs can uncover different prices, the price discrimination will be combated. As a result, an increased standardization of prices will occur.

Companies can use the Internet to experiment with different price levels to test how price affects sales volume (Hagel & Armstrong, 1997). The Internet has made it possible for companies to collect detailed data about the buying habits and preferences of customers, and this even goes as far as checking their spending limits. As a result, the price of the product can be specifically tailored and the marketplace becomes more efficient. (Cortese & Stepanek, 1998)

Bill Gates has predicted that in the future, the web sites will have the capacity to recognize individual consumers, remember what they paid for products previously and charge the consumers a customized price based on that information. (Woolley, 1998)

Companies using a high-price strategy are probably the most affected when marketing online. To be able to keep the high prices, the companies must be ready to justify the price differential by effectively communicating the product advantages and benefits (Hagel & Armstrong, 1997). Since consumers that visit the company Web site can easily compare prices and features to other offers, some high-margin products could drop in price. A strong brand name may not be sufficient to charge a high price and some branded products may even become substitutes to each other. (Cortese & Stepanek, 1998)

2.5 Dynamic Pricing Strategies

Kannan and Kopalle (2001) provide taxonomy for e-commerce dynamic pricing strategies. They describe three high-level categories: posted price, auction pricing, and bundle pricing. Posted price includes both dynamic price updating and the use of e-coupons. Dynamic price updating simply involves the periodic update of a posted, fixed, and non-negotiable price. The Internet permits these updates to happen more frequently and at less cost than in traditional markets. E-coupons are electronic coupons that reduce posted prices and can vary over time and across customers. Auction pricing includes traditional auctions (e.g., eBay) as well as reverse auctions (e.g., Priceline) and exchange pricing (e.g., financial and commodity markets). Bundle pricing has two variations. The first is a volume discount, which could be earned by an individual consumer purchasing a large quantity or by a group of consumers bundling their demand and buying together. The second variation involves changes in price for an item dependent on what other items are purchased. All of these dynamic pricing schemes are important to the future of electronic markets, but this research is focused on dynamic posted price updating. As Pedersen (2000) notes, the Internet facilitates dynamic posted pricing by decreasing menu costs—the cost associated with changing prices. Virtual stores can change their price in one place for customers worldwide. Cortese (1998) makes the same assertion, noting that streamlined networks can reduce menu cost and time to nearly zero, even for companies with large product lines.

Varian (1980) develops a model for dynamic pricing designed to mimic price behaviour in markets where items are periodically put on sale. He proposes a market model for both informed and uninformed consumers. Informed shoppers compare prices and buy at the lowest available price. Uninformed shoppers merely pick one retailer and purchase blindly. The pricing model he suggests has sellers drawing prices at random from a price density function. The seller who sets the lowest price in the market gets the business of all informed customers and the uninformed customers who choose him. Other sellers are limited to selling to only those uninformed customers who choose them. Varian makes a series of mathematical propositions about this model and concludes that sellers may find it in their interest to randomize prices in the interest of price discriminating between informed and uninformed customers. The Varian model is not a dynamic pricing strategy, but is useful for modelling the behaviour of sellers who change their prices. Deck and Wilson (2003) simulate a market where there is a mix of informed and uninformed buyers. They, however, go a step beyond Varian (1980) by utilizing three types of buyers. One is uninformed, but there are two levels of informed—those who shop at two sellers and those who shop at all sellers. The level of comparison shopping is fixed throughout the study. They also utilize different pricing strategies from the randomized model proposed by Varian—they focus on undercutting, low-price matching, and trigger pricing. The undercut strategy simply involves setting a price for the next period that is lower than the lowest price observed in the prior period. Low-price matching involves querying currently available prices in the market and setting a price equal to the current minimum. A seller employs a trigger strategy by setting a current price along with a trigger value and associated potential new price. If the lowest price observed in the market is less than or equal to the trigger, a change to the new price is made.

Deck and Wilson (2003) carry out an experiment with computerized buyers and human subject sellers to investigate the strategies described above. A manual strategy where the subjects were free to set prices at their own discretion is also studied—a simulation where this was the only available strategy is used as the baseline treatment. Other treatments give subjects a choice between manual pricing and pricing utilizing one of the automated strategies. Throughout the experiment, sellers receive feedback in the form of competitors’ prices. Four findings are described:

1. When sellers are allowed to set prices manually, the resulting distribution of prices is very similar to the theoretical Nash equilibrium, but with lower profits

2. Subject sellers use automated pricing strategies more often than they use manual pricing.

3. The undercut algorithm leads to median prices equivalent to the baseline. The low-price matching algorithm increases median prices above baseline. Trigger pricing leads to median market prices below those of the baseline.

4. Greater commitment to low-price matching shifts prices closer to the joint profit-maximizing outcome.

It is important to note that while Deck and Wilson (2003) make several conclusions in terms of the strategies studied, the data collected were not purely a result of the strategy employed. The data were also a result of decisions made by the human subjects—decisions of whether to adopt strategies and how to parameterize them. For each strategy treatment human decision makers had the option of employing the designated strategy or utilizing the baseline, non-algorithmic pricing method (i.e., manual pricing). The strategies were not universally adopted by subjects. In fact, the average adoption rate was as low as 62.5% (for low price matching) and as high as 81% (for trigger). Consequently, the competition for each strategy studied was variable (i.e., the low price match subjects competed with manual pricing more often than the trigger subjects did). Stricter control on seller behaviour would allow for stronger conclusions about the relative performance of the pricing strategies. Deck and Wilson (2002) also study varying implementations of a low-price match (LPM) strategy. Similar to the study above, they simulate a marketplace with computerized buyers and human subject sellers. Their study is a 2x2 factorial experiment where one factor is LPM vs. no LPM and the other factor is the level of customer search. For the no LPM condition, all four sellers submit a schedule of prices on which they prescribe prices depending on how many sellers a buyer had visited prior to inquiring about their price. The LPM treatment gives sellers the option of utilizing the no LPM price setting method or employing an LPM strategy. LPM consists of setting a price to be used if the seller is visited first. If they are not first, their price is set equal to the lowest of the prices that buyer has already observed. The customer search factor is used to manipulate the level of informed vs. uninformed consumers. For the low condition, 61% of buyers visit a single seller, while visiting two, three, or four sellers are equally likely at 13% each. For the high condition, the probabilities for visiting one, two, three, or four sellers are equal at 25%.

Deck and Wilson (2002) report the following three findings:

1. High search leads to lower prices than low search for one-seller buyers. Low price matching leads to higher prices for four-seller buyers (regardless of high vs. low search)

2. Price matching leads to less discriminatory pricing for high search. With or without matching, different buyer types receive considerably different prices in the low treatment

3. Price matching increases seller profits in the high treatment, but has no effect in the low case.

Because sellers are given visibility to past activities of their potential buyers, the LPM strategy can be used to price discriminate between informed and uniformed buyers. Because the human subjects were given the option of choosing LPM, the results of the Deck and Wilson (2002) study have the same shortcomings as the 2003 study described above. Deck and Wilson (2002) do not report adoption rates as in the 2003 work. Additionally, the strategies used in the 2002 study make significant assumptions about the capability of sellers to have visibility into the history of prospective buyers.

Both the LPM and no LPM treatments assume that the seller knows which competitors have already been visited by the buyer before making a pricing decision. While the Internet enables a wealth of information sharing, the extent to which current or future technology can support that assumption is debatable. Dasgupta and Smith (2003) also examine a seller strategy that attempts to price discriminate between buyers. They simulate a repeat buying market where 25% of the buyers shop at only one seller while the other 75% shop at all sellers. Buyers are repeat buyers of some consumable commodity and can be uniquely identified by the seller. The sellers set prices using an algorithm that seeks to determine which kind of buyer is requesting a price based on the historical behaviour of that buyer. Buyers determined to be comparison shoppers are offered a price determined by a model optimizer (MO) algorithm. The MO uses a set of weighted historical price and profit data points to estimate (via nonlinear regression) the price that would maximize profits. A higher price can be charged to those buyers who are assumed to not be comparison shoppers. That optimum price is determined by attempting to learn the distribution of buyer valuations.

The sellers are all trying to gain the largest market share, but do not have information about competitors’ prices or the extent to which buyers are informed. Dasgupta and Smith find that seller profits can be improved by 15-20% by utilizing this tiered pricing strategy. DiMicco et al. (2003) introduce a Java-based simulation tool called Learning Curve. It is designed to allow sellers to investigate agent-based marketplaces and evaluate the relative effectiveness of dynamic pricing strategies. Their study is different from those above in that it focuses on perishable good markets where supplies and their time horizon of availability are finite. They focus on two seller strategies—Goal-Directed (GD) and Derivative Follower (DF)—both of which require no assumptions about or knowledge of the buyer population. The GD strategy strives to sell all inventories by the last day of the market, but not before. The DF strategy experiments with incremental price changes by examining changes in profits after a change occurs. If an increase (decrease) in price results in greater profits, the price is increased (decreased) again. If profits decline, the next change is a decrease (increase) in price. DiMicco et al. (2003) studied the performance of these two strategies under both monopolistic and competitive conditions. As an overall conclusion, they state that both strategies performed quite well, despite their lack of knowledge of the buyer population. The GD strategy is generally successful in reaching its stated goal, but at the expense of drastically over and undershooting the buyer valuation curve early and late in the market. The DF strategy is successful in consistently selling at the highest price possible on a given day, but its performance is sensitive to the timing of peaks in demand. They also note that the complexion of the buyer population with respect to comparison shopping can impact price patterns—i.e., when the market is extremely price sensitive (100% comparison shoppers), adaptive strategies can easily breakdown into price wars. Kephart et al. (2000) examine a broad range of topics, all of which are related to agents that dynamically price goods or services. They first investigate an online bookselling market, where five sellers compete for business. They employ various combinations of pricing strategies and examine the resultant price patterns. The strategies examined are game-theoretic (GT), my-optimal (MY), and derivative-follower (DF). The GT strategy involves the determination of a price density function that can be computed when given the number of sellers, the valuation distribution of the buyers, and the comparison shopping complexion of the market (i.e., what portion of the market shops at 1, 2, … ,n sellers). The MY strategy requires the same market knowledge as GT, with the additional need to know current prices of all other sellers. The MY strategy uses that knowledge to calculate the value that will maximize profits, up until the moment that another seller changes its price. The DF strategy, as discussed above, requires no knowledge of competitors or buyers in the market.

Kutschinski et al. (2003) study an interesting and broad range of pricing strategies with a robust simulation model. Their results and conclusions, however, seem rather limited in their ability to guide the decisions of managers who make pricing decisions. In one study they examine the impact of varying levels of comparison shopping behaviour, but they do not compare performance of multiple strategies. In simulations involving multiple strategies, the focus of their conclusions is more on qualitative aspects of price dynamics than on relative quantitative performance of pricing strategies. The research seeks to make pricing strategy comparisons across varying comparison shopping levels that will aid decision making for pricing managers.

Zacharia et al. (2000) studies an agent-based service marketplace where both price and seller reputation are factored into a buyer’s utility. Buyers evaluate sellers not only by price but by reputation. Also, their needs have varying levels of importance. They incorporate a utility function that leads to a willingness to spend more for (relatively) important problems but allows the tradeoffs of quality for price in the case of (relatively) unimportant needs. Zacharia et al. (2000) run si