price transparency, it does lead to a move towards a perfect market. The second is the
perceived value of the product. If a brand is differentiated in some way, it may be less
subject to downward pressure on price. As well as making pricing more transparent, the
Internet does lead to opportunities to differentiate in information describing products or
through added-value services. Whatever the relative importance of these factors in influ-
encing purchase decisions, it seems clear that the Internet will lead to more
Baker et al. (2000) suggest that companies should use the following three factors to
assist in pricing.
1 Precision. Each product has a price-indifference band, where varying price has little or
no impact on sales. Baker et al. (2000) report that these bands can be as wide as 17%
for branded consumer beauty products, 10% for engineered industrial components,
but less than 10% for some financial products. The authors suggest that while the cost
of undertaking a survey to calculate price indifference is very expensive in the real
world, it is more effective online. They give the example of Zilliant, a software sup-
plier that, in a price discovery exercise, reduced prices on four products by 7%. While
this increased volumes of three of those by 5–20%, this was not sufficient to warrant
the lower prices. However, for the fourth product, sales increased by 100%. It was
found that this was occurring through sales to the educational sector, so this price
reduction was just introduced for customers in that sector.
2 Adaptablity. This refers simply to the fact that it is possible to respond more quickly to
the demands of the marketplace with online pricing. For some product areas such as
ticketing it may be possible to dynamically alter prices in line with demand.
Tickets.com adjusts concert ticket prices according to demand and has been able to
achieve 45% more revenue per event as a result. The authors suggest that in this case
and for other sought-after items such as video games or luxury cars, the Internet can
actually increase the price since there it is possible to reach more people.
3 Segmentation. This refers to pricing differently for different groups of customers. This
has not traditionally been practical for B2C markets since at the point of sale, infor-
mation is not known about the customer, although it is widely practised for B2B
markets. One example of pricing by segments would be for a car manufacturer to vary
promotional pricing, so that rather than offering every purchaser discount purchasing
or cash-back, it is only offered to those for whom it is thought necessary to make the
sale. A further example is where a company can identify regular customers and fill-in
customers who only buy from the supplier when their needs can’t be met elsewhere.
In the latter case, up to 20% higher prices are levied.
What then are the options available to marketers given this downward pressure on
pricing? We will start by looking at traditional methods for pricing and how they are
affected by the Internet. Bickerton et al. (2000) identify a range of options that are avail-
able for setting pricing.
1 Cost-plus pricing. This involves adding on a profit margin based on production costs. As
we have seen above, a reduction in this margin may be required in the Internet era.
2 Target-profit pricing. This is a more sophisticated pricing method that involves looking
at the fixed and variable costs in relation to income for different sales volumes and
unit prices. Using this method the breakeven amount for different combinations can
be calculated. For e-commerce sales the variable selling cost, i.e the cost for each
transaction, is small. This means that once breakeven is achieved each sale has a large
margin. With this model differential pricing is often used in a B2B context according
to the volume of goods sold. Care needs to be taken that differential prices are not
CHAPTER 5 · THE INTERNET AND THE MARKETING MIX
evident to different customers. One company, through an error on their web site,
made prices for different customers available for all to see, with disastrous results.
3 Competition-based pricing. This approach is common online. The advent of price-compar-
ison engines such as Kelkoo (www
) for B2C consumables has increased price
competition and companies need to develop online pricing strategies that are flexible
enough to compete in the marketplace, but are still sufficient to achieve profitability in
the channel. This approach may be used for the most popular products, e.g. the Top 25
CDs, but other methods such as target-profit pricing used for other products.
4 Market-oriented pricing. Here the response to price changes by customers making up
the market are considered. This is known as ‘the elasticity of demand’. There are two
approaches. Premium pricing (or skimming the market) involves setting a higher price
than the competition to reflect the positioning of the product as a high-quality item.
Penetration pricing is when a price is set below the competitors’ prices to either stimu-
late demand or increase penetration. This approach was commonly used by dot-com
companies to acquire customers. The difficulty with this approach is that if customers
are price-sensitive then the low price has to be sustained – otherwise customers may
change to a rival supplier. This has happened with online banks – some customers
regularly move to reduce costs of overdrafts for example. Alternatively if a customer is
concerned by other aspects such as service quality it may be necessary to create a large
price differential in order to encourage the customer to change supplier.
Kotler (1997) suggests that in the face of price cuts from competitors in a market, a
company has the following choices which can be applied to e-commerce:
(a) Maintain the price (assuming that e-commerce-derived sales are unlikely to decrease
greatly with price since other factors such as customer service are equally or more
(b) Reduce the price (to avoid losing market share).
(c) Raise perceived quality or differentiate product further by adding-value services.
(d) Introduce new lower-priced product lines.
3 New pricing approaches (including auctions)
Figure 5.10 summarises different pricing mechanisms. While many of these were avail-
able before the advent of the Internet and are not new, the Internet has made some
models more tenable. In particular, the volume of users makes traditional or forward
auctions (B2C) and reverse auctions (B2B) more tenable – these have become more
widely used than previously. Emiliani (2001) reviews the implications of B2B reverse
auctions in detail, and Mini Case Study 5.2 provides an example. To understand auc-
tions it is important to distinguish between offers and bids. An offer is a commitment
for a trader to sell under certain conditions such as a minimum price. A bid is made by a
trader to buy under the conditions of the bid such as a commitment to purchase at a
A further approach, not indicated in Figure 5.10, is aggregated buying. This approach
was promoted by LetsBuyit.com, but the business model did not prove viable – the cost
of creating awareness for the brand and explaining the concept was not offset by the
revenue from each transaction.
Pitt et al. (2001) suggest that when developing a pricing strategy, the options will be
limited by relative strengths of the seller and buyer. Where the buyer is powerful then
reverse auctions are possible. Major car manufacturers fall into this category. See also
Mini Case Study 5.2. Where the seller is more powerful then a negotiation may be more
likely where the seller can counter-offer. Nextag.com provides such a service.
Item purchased by
highest bid made in
Item purchased from
in bidding period.
A commitment by a
trader to sellunder
A commitment by a
trader to purchase
A form of customer
union where buyers
collectively purchase a
number of items at the
same price and receive
a volume discount.
Marn (2000) suggests that the Internet can be used to test new pricing policies. For
example, if a company wants to know the sales impact of a 3 per cent price increase, it
can try this on every 50th visitor to the site and compare the buy rates.
The Internet introduces new opportunities for dynamic pricing, for example, new cus-
tomers could be automatically given discounted purchases for the first three items. Care
has to be taken with differential pricing since established customers will be unhappy if
significant discounts are given to new customers. Amazon trialled such a discounting
scheme in 2000 and it received negative press and had to be withdrawn when people
found out that their friends or colleagues had paid less. If the scheme had been a clear
introductory promotion this problem may not have arisen.
CHAPTER 5 · THE INTERNET AND THE MARKETING MIX
Figure 5.10 Alternative pricing mechanisms
Prices can be updated
in real time according
to the type of customer
or current market
4 Alternative pricing structure or policies
Different types of pricing may be possible on the Internet, particularly for digital, down-
loadable products. Software and music have traditionally been sold for a continuous
right to use. The Internet offers new options such as payment per use, rental at a fixed
cost per month or a lease arrangement. Bundling options may also be more possible. The
use of applications service providers (ASPs) to deliver service such as web site traffic
monitoring also gives new methods of volume pricing. Web analytics companies such as
) and Webtrends (www
) charge in
price bands based on the number of visitors to the purchaser’s site.
Further pricing options which could be varied online include:
add-ons and extra products and services
guarantees and warranties
order cancellation terms.
The place element of the marketing mix refers to how the product is distributed to cus-
tomers. Typically, for offline channels, the aim of Place is to maximise the reach of
distribution to achieve widespread availability of products while minimising the costs of
inventory, transport and storage. In an online context, thanks to ease of navigating from
one site to another through the humble hyperlink, the scope of ‘Place’ is less clear since
Place also relates to Promotion and Partnerships. Take the example of a retailer of mobile
phones. For this retailer to reach its potential audience to sell and distribute its product,
Healthcare company GlaxoSmithKline (GSK) started using online reverse auctions in 2000 to drive down
the price of its supplies. For example, it bought supplies of a basic solvent for a price 15 per cent lower
than the day’s spot price in the commodity market, and Queree (2000) reported that on other purchases
of highly specified solvents and chemicals, SmithKline Beecham (prior to formation of GSK) regularly
beat its own historic pricing by between 7 and 25 per cent. She says:
FreeMarkets, the company that manages the SmithKline Beecham auctions, quotes examples of
savings achieved by other clients in these virtual marketplaces: 42 per cent on orders for printed
circuit boards, 41 per cent on labels, 24 per cent on commercial machinings and so on.
The reverse auction process starts with a particularly detailed Request for Proposals (RFP) from which
suppliers ask to take part, and then selected suppliers are invited to take part in the auction. Once the
bidding starts, the participants see every bid, but not the names of the bidders. In the final stages of the
auction, each last bid extends the bidding time by one more minute. One auction scheduled for 2 hours
ran for 4 hours and 20 minutes and attracted more than 700 bids!
Mini Case Study 5.2
GlaxoSmithKline reduces prices through reverse
The element of the
marketing mix that
products to customers
in line with demand
and minimising cost of
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it has to think beyond its own web site to third-party web sites where it can promote its
services. Successful retailers are those that maximise their representation or visibility on
third-party sites which are used by their target audiences. These third-party sites will
include search engines, online portals about mobile phones and product comparison
sites. When thinking about representation on third-party sites, it is useful to think of the
long-tail concept (Anderson, 2004) referenced in Figure 5.4. Across all Internet sites,
there are a small number of sites including portals such as Google, MSN and Yahoo!
which are very popular (the head which may theoretically account for 80% of the
volume of visitors) and a much larger number of sites that are less popular individually,
but still collectively important. Similarly within a category of sites, such as automotive,
there will be a few very popular sites, and then many niche sites which are collectively
important in volume and may be more effective at reaching a niche target audience.
When considering Place and Promotion, it is important to target both the head and the
tail to maximise reach and to attract quality visitors to the destination site.
The main implications of the Internet for the Place aspect of the mix, which we will
review in this section, are:
1 place of purchase;
2 new channel structures;
3 channel conflicts;
4 virtual organisations.
1 Place of purchase
Although the concept of place may seem peculiar for what is a global medium that tran-
scends geographical boundaries, nevertheless, marketers still have several options for
managing the place of purchase. Allen and Fjermestad (2001) argue that the Internet has the
greatest implications for place in the marketing mix since the Internet has a global reach.
The framework of Berryman et al. (1998), introduced in Chapter 2, is a simple frame-
work for reviewing different places of promotion and/or distribution and purchase.
However, McDonald and Wilson (2002) introduce two additional locations for purchase
which are useful (Table 5.2):
(A) Seller-controlled sites are those that are the main site of the supplier company and are
(B) Seller-oriented sites are controlled by third parties and are representing the seller rather
than providing a full range of options.
(C)Neutral sites are independent evaluator intermediaries that enable price and product
comparison and will result in the purchase being fulfilled on the target site.
(D)Buyer-oriented sites are controlled by third parties on behalf of the buyer.
(E) Buyer-controlled sites usually involve either procurement posting on buyer-company
sites or on those of intermediaries that have been set up in such a way that it is the
buyer that initiates the market-making. This can occur through procurement post-
ing, whereby a purchaser specifies what he or she wishes to purchase, this request
being sent by e-mail to suppliers registered on the system and then offers are
awaited. Aggregators are groups of purchasers who combine to purchase in bulk and
thus benefit from a lower purchase cost.
Evans and Wurster (1999) have argued that there are three aspects of ‘navigational
advantage’ that are key to achieving competitive advantage online. These three, which
all relate to the Place elements of the mix, are:
CHAPTER 5 · THE INTERNET AND THE MARKETING MIX
Reach. Evans and Wurster say: ‘It [Reach] means, simply, how many customers a busi-
ness can connect with and how many products it can offer to those customers’. Reach
can be increased by moving from a single site to representation with a large number of
different intermediaries. Allen and Fjermestad (2001) suggest that niche suppliers can
readily reach a much wider market due to search-engine marketing (Chapter 8). Evans
and Wurster also suggest that reach refers to the range of products and services that can
be offered since this will increase the number of people the company can appeal to.
Richness. This is the depth or detail of information which is both collected about the
customer and provided to the customer. The latter is related to the richness of product
information and how well it can be personalised to be relevant to the individual needs.
Affiliation. This refers to whose interest the selling organisation represents – consumers
or suppliers – and stresses the importance of forming the right partnerships. This par-
ticularly applies to retailers. The authors suggest that successful online retailers will
provide customers who provide them with the richest information on comparing com-
petitive products. They suggest this tilts the balance in favour of the customer.
Providing a local site, with or without a language-specific version, is referred to as locali-
sation. A site may need to support customers from a range of countries with:
different product needs;
Localisation will address all these issues. It may be that products will be similar in dif-
ferent countries and localisation will simply involve converting the web site to suit
another country. However, in order to be effective, this often needs more than transla-
tion, since different promotion concepts may be needed for different countries.
Examples of localised sites include Durex, B2C, and Gestetner, B2B. Note that each com-
pany prioritises different countries according to the size of the market, and this priority
then governs the amount of work it puts into localisation.
Table 5.2 Different places for cyberspace representation
Place of purchase
Examples of sites
Vendor sites, i.e. home site of organisation selling products,
Intermediaries controlled by third parties to the seller such
as distributors and agents, e.g. Opodo (www
represents the main air carriers
Intermediaries not controlled by buyer’s industry, e.g. EC21
Product-specific search engines, e.g. CNET
Comparison sites, e.g. uSwitch (www
Auction space, e.g. eBay (www
Intermediaries controlled by buyers, e.g. the remaining parts
of the Covisint network of motor manufacturers
Purchasing agents and aggregators
Web site procurement posting on company’s own site, e.g.
GE Trading Process Network (www
Tailoring of web site
individual countries or
2 New channel structures
New channel structures enabled by the Internet have been described in detail in
Chapters 2 and 4. The main types of phenomena that companies need to develop strate-
gies for are:
(a) Distintermediation. Is there an option for selling direct? Selling direct can lead to the
channel conflicts mentioned in the next section. When assessing this option there
will be a number of barriers and facilitators to this change. Research by Mols (2001)
in the banking sector in Denmark suggests that important factors are senior manage-
ment support, a willingness to accept some cannibalisation of existing channels and
perceived customer benefits.
(b) Reintermediation. The new intermediaries created through reintermediation described
by Sarkar et al. (1996) should be evaluated for suitability for partnering with for affili-
ate arrangements. The intermediaries receive a commission on each sale resulting
from a referral from their site.
(c)Countermediation. Should the organisation partner with another independent interme-
diary, or set up its own independent intermediary? For example, a group of European
airlines have joined forces to form Opodo (www
) which is intended to
counter independent companies such as Lastminute.com (www
) in offering discount fares.
The distribution channel will also be affected. For instance, grocery retailers have had
to identify the best strategy for picking customers’ goods prior to home delivery.
Options include in-store picking (selection of items on customer orders) and regional
picking centres. The former is proving more cost-effective.
3 Channel conflicts
A significant threat arising from the introduction of an Internet channel is that while
disintermediation gives a company the opportunity to sell direct and increase profitabil-
ity on products, it can also threaten distribution arrangements with existing partners.
Such channel conflicts are described by Frazier (1999), and need to be carefully man-
aged. Frazier (1999) identifies some situations when the Internet should only be used as
a communications channel. This is particularly the case where manufacturers offer an
exclusive, or highly selective, distribution approach. To take an example, a company
manufacturing expensive watches costing thousands of pounds will not in the past have
sold direct, but will have used a wholesaler to distribute watches via retailers. If this
CHAPTER 5 · THE INTERNET AND THE MARKETING MIX
Place of purchase on the Internet
To illustrate the concept of representation and reach on the Internet.
For the same sector as you selected in Activity 5.2, find out which company has the best
reach in terms of numbers of links from other sites. Go to a search engine such as Google and
use the advanced search to find the number of sites that link to that site. Alternatively use the
syntax: link:URL in the search box.
wholesaler is a major player in watch distribution, then it is powerful, and will react
against the watch manufacturer selling direct. The wholesaler may even refuse to act as
distributor and may threaten to distribute only a competitor’s watches, which are not
available over the Internet. Furthermore, direct sales may damage the product’s brand or
change its price positioning.
Further channel conflicts involve other stakeholders including sales representatives
and customers. Sales representatives may see the Internet as a direct threat to their liveli-
hood. In some cases such as Avon cosmetics and Enyclopaedia Britannica this has
proved to be the case, with this sales model being partly or completely replaced by the
Internet. For many B2B purchases, sales representatives remain an essential method of
reaching the customer to support them in the purchase decision. Here, following train-
ing of sales staff, the Internet can be used as a sales support and customer education
tool. Customers who do not use the online channels may also respond negatively if
lower prices are available to their online counterparts. This is less serious than other
types of channel conflict.
To assess channel conflicts it is necessary to consider the different forms of channel
the Internet can take. These are:
1 a communication channel only;
2 a distribution channel to intermediaries;
3 a direct sales channel to customers;
4 any combination of the above.
To avoid channel conflicts, the appropriate combination of channels must be arrived
at. For example, Frazier (1999) notes that using the Internet as a direct sales channel
may not be wise when a product’s price varies considerably across global markets. In the
watch manufacturer example, it may be best to use the Internet as a communication
Internet channel strategy will, of course, depend on the existing arrangements for the
market. If a geographical market is new and there are no existing agents or distributors,
there is unlikely to be channel conflict in that there is a choice of distribution through
the Internet only or appointments of new agents to support Internet sales, or a combina-
tion of the two. Often SMEs will attempt to use the Internet to sell products without
appointing agents, but this strategy will only be possible for retail products that need
limited pre-sales and after-sales support. For higher-value products such as engineering
equipment, which will require skilled sales staff to support the sale and after-sales servic-
ing, agents will have to be appointed.
For existing geographical markets in which a company already has a mechanism for
distribution in the form of agents and distributors, the situation is more complex, and
there is the threat of channel conflict. The strategic options that are available when an
existing reseller arrangement is in place have been described by Kumar (1999):
1 No Internet sales. Neither the company nor any of its resellers makes sales over the
Internet. This will be the option to follow when a company, or its resellers, feel that
the number of buyers has not reached the critical mass thought to warrant the invest-
ment in an online sales capability.
2 Internet sales by reseller only. A reseller who is selling products from many companies
may have sufficient aggregated demand (through selling products for other compa-
nies) to justify the expenditure of setting up online sales. The manufacturer may also
not have the infrastructure to fulfil orders direct to customers without further invest-
ment, whereas the reseller will be set up for this already. In this case it is unlikely that
a manufacturer would want to block sales via the Internet channel.
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