For a business, one of the most important decisions is pricing. This is something that has important consequences for the ‘bottom line’ and should be given just as much attention as all the other key decisions they must make. As soon as a customer learns the price of a product, they instantly get a first impression which may be vital to their eventual decision to buy or not. The innovation that is the internet has had major effects on the pricing policies and the profitability of companies.
The first question to ask is whether or not the internet has had the effect of increasing or decreasing prices. Building an internet store has a low entry cost as it is relatively cheap to set up a website. Operational costs are also reduced as there is no need to rent physical space. Consequently, a large number of internet stores have been set up and this has increased the overall market competition. Having the internet makes it easy for sellers to compare prices and as everybody will want to set the best price and this should have the effect of driving prices down. However it also makes it easy for sellers to collude on prices to keep them as high as possible. The net effect is that prices are reduced in some areas but are higher in others. Although internet stores may offer lower prices than conventional outlets for certain products, this does not necessarily mean that they should decrease their prices.
There are a number of services which conventional stores can offer which internet stores cannot. Some products are better evaluated through a physical presence such as food and clothes and we can also never underestimate the value of convenience. I believe that the ability to collect an item immediately is definitely worth something. Another service which the internet cannot really offer is retail assistance which is becoming more critical in ensuring that customers leave a store full satisfied (Lal, 1999). Reputation is significant and generally, known and trusted stores can command higher prices so therefore the pricing policies of high streets stores may not be affected a great deal by the internet.
Setting the right (optimal) price is extremely difficult to do and often takes considerable market knowledge, particularly with new products and also testing of different pricing options (www.knowthis.com). With the internet, price changes are easy to make and this means that the optimum price could change at any time. An example here is with airline ticket prices, which change dynamically in order to attempt to set the best price to beat the competition.
One method of letting the customers decide the optimal price is to hold auctions. The internet has made it much easier to sell through auctions. ‘Virtual Marketplaces’ such as Ebay (the clear market leader in online auctions) holds timed, public sales driven by bids, with items sold to the highest bidder. People can set up their own companies on Ebay and hope to make larger profits using the auction system as people may fall to the ‘winner’s curse’ – that is people become over-excited in the heat of the moment and overbid to win. Websites such as Ebay have had major adverse effects on the antiques industry. In one US antiques store, business had declined by about 35% since the end of 2004 and shop traffic dropped 15-18% during that time (www.thebizpress.com). Besides the antiques industry, the internet has been the worst enemy for a number of other businesses.
It can destroy entire market sectors (www.wikinvest.com) and a number of existing businesses which once thrived have been seriously damaged by the internet. For example, in the travel industry, the internet has devastated the profitability of travel agents as there is now very little that they can offer. Airlines and hotels can do business directly with customers as people can now check for best airline prices and book their own flights and hotel rooms without the need for a travel agent, which should save money for the customer.
Another industry which has been rocked by the internet is the music and video store industry. Buying music cds from internet stores is often cheaper than buying from conventional outlets which gave the industry their first blow. However as the market for digital music has grown and usage of digital music players has gained widespread adoption; the industry has taken a further hit as customers have turned to downloading their music online from places such as the iTunes store. This has a particular advantage for the customer as instead of buying an album, they can now save money by only choosing to buy only the songs they desire. As a result of this, music store stalwarts such as Tower Records have gone out of business but now exist as an online music store. Virgin Megastores has also had to embrace the new technology and have now incorporated digital music as part of their online business.
Piracy is a further issue which has increased exponentially since the internet’s mainstream arrival and perhaps no industry has been hit harder than the music industry. As a result of this, some rather bizarre pricing policies have been made by companies. For example, Radiohead adopted a policy of letting the customer pay what they wanted for an album, and a website called Amie Street have adopted a demand based pricing approach. The price of a music track starts at zero and increases as the demand for it increases (www.wikipedia.com).
Similarly, video rental stores have also faced changes due to the internet. Companies such as Blockbuster Video have struggled for some time as the internet has allowed for a home delivery video rental service but they have now added this kind of service to their business. However the future is still uncertain for this industry as video-on-demand is becoming more widely available (www.wikinvest.com).
In conclusion, the internet has been a major advance in commerce but in some industries, it has caused severe disruption. This has been particularly apparent in the music and video stores industry as well as the antiques and travel market sectors. On the whole, customers are probably benefitting from the internet as pricing information for products is easier to find and compare. Everyday, an increasing number of people are buying products from the internet, but conventional outlets should not be overly worried as they can still offer services which online stores cannot, and for some people, this may always be worth paying a small premium for.
The first question to ask is whether or not the internet has had the effect of increasing or decreasing prices. Building an internet store has a low entry cost as it is relatively cheap to set up a website. Operational costs are also reduced as there is no need to rent physical space. Consequently, a large number of internet stores have been set up and this has increased the overall market competition. Having the internet makes it easy for sellers to compare prices and as everybody will want to set the best price and this should have the effect of driving prices down. However it also makes it easy for sellers to collude on prices to keep them as high as possible. The net effect is that prices are reduced in some areas but are higher in others. Although internet stores may offer lower prices than conventional outlets for certain products, this does not necessarily mean that they should decrease their prices.
There are a number of services which conventional stores can offer which internet stores cannot. Some products are better evaluated through a physical presence such as food and clothes and we can also never underestimate the value of convenience. I believe that the ability to collect an item immediately is definitely worth something. Another service which the internet cannot really offer is retail assistance which is becoming more critical in ensuring that customers leave a store full satisfied (Lal, 1999). Reputation is significant and generally, known and trusted stores can command higher prices so therefore the pricing policies of high streets stores may not be affected a great deal by the internet.
Setting the right (optimal) price is extremely difficult to do and often takes considerable market knowledge, particularly with new products and also testing of different pricing options (www.knowthis.com). With the internet, price changes are easy to make and this means that the optimum price could change at any time. An example here is with airline ticket prices, which change dynamically in order to attempt to set the best price to beat the competition.
One method of letting the customers decide the optimal price is to hold auctions. The internet has made it much easier to sell through auctions. ‘Virtual Marketplaces’ such as Ebay (the clear market leader in online auctions) holds timed, public sales driven by bids, with items sold to the highest bidder. People can set up their own companies on Ebay and hope to make larger profits using the auction system as people may fall to the ‘winner’s curse’ – that is people become over-excited in the heat of the moment and overbid to win. Websites such as Ebay have had major adverse effects on the antiques industry. In one US antiques store, business had declined by about 35% since the end of 2004 and shop traffic dropped 15-18% during that time (www.thebizpress.com). Besides the antiques industry, the internet has been the worst enemy for a number of other businesses.
It can destroy entire market sectors (www.wikinvest.com) and a number of existing businesses which once thrived have been seriously damaged by the internet. For example, in the travel industry, the internet has devastated the profitability of travel agents as there is now very little that they can offer. Airlines and hotels can do business directly with customers as people can now check for best airline prices and book their own flights and hotel rooms without the need for a travel agent, which should save money for the customer.
Another industry which has been rocked by the internet is the music and video store industry. Buying music cds from internet stores is often cheaper than buying from conventional outlets which gave the industry their first blow. However as the market for digital music has grown and usage of digital music players has gained widespread adoption; the industry has taken a further hit as customers have turned to downloading their music online from places such as the iTunes store. This has a particular advantage for the customer as instead of buying an album, they can now save money by only choosing to buy only the songs they desire. As a result of this, music store stalwarts such as Tower Records have gone out of business but now exist as an online music store. Virgin Megastores has also had to embrace the new technology and have now incorporated digital music as part of their online business.
Piracy is a further issue which has increased exponentially since the internet’s mainstream arrival and perhaps no industry has been hit harder than the music industry. As a result of this, some rather bizarre pricing policies have been made by companies. For example, Radiohead adopted a policy of letting the customer pay what they wanted for an album, and a website called Amie Street have adopted a demand based pricing approach. The price of a music track starts at zero and increases as the demand for it increases (www.wikipedia.com).
Similarly, video rental stores have also faced changes due to the internet. Companies such as Blockbuster Video have struggled for some time as the internet has allowed for a home delivery video rental service but they have now added this kind of service to their business. However the future is still uncertain for this industry as video-on-demand is becoming more widely available (www.wikinvest.com).
In conclusion, the internet has been a major advance in commerce but in some industries, it has caused severe disruption. This has been particularly apparent in the music and video stores industry as well as the antiques and travel market sectors. On the whole, customers are probably benefitting from the internet as pricing information for products is easier to find and compare. Everyday, an increasing number of people are buying products from the internet, but conventional outlets should not be overly worried as they can still offer services which online stores cannot, and for some people, this may always be worth paying a small premium for.
References
Pricing Decisions, available at: http://www.knowthis.com/tutorials/principles-of-marketing/pricing-decisions/3.htm [accessed 29 December 2008]
The Internet Impact, available at: http://www.wikinvest.com/concept/The_Internet_Impact [accessed 29 December 2008]
Lal, R, 1999, When and How is the Internet Likely to Decrease Price Competition, Marketing Science, Vol 18, No. 4, pp485-503
Antiques Shops Struggle in the Web Era, available at: http://www.thebizpress.com/news/stories/BP_News_Local_D_bp0108_focus-antiques.e12ad2.html [accessed 30 December 2008]
Wikipedia - Amie Street, available at: http://en.wikipedia.org/wiki/Amie_Street [accessed 30 December 2008]
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