Consumers are more concerned about the quality and conviviality than about prices

April 3, 2001
Many business-models on the Internet assumed that transactional costs on the Internet were so low that it would allow them to sell their products at the lowest possible price, thus helping them to establish loyalty quickly as customers would find discount prices appealing.

As of today, most of these pioneers have either disappeared or else have had to modify their economic policy at great lengths.

Indeed, low prices are not quite enough to establish customer loyalty and the marketing expenses that are required to establish an ebrand have often proved themselves to be much higher than what could be gained through lower transactional costs.

McKinsey just published an interesting study about it, bringing out the pros and cons of the Internet dynamic pricing.

Its first point is about the categories of users themselves.

At a time when everyone gives us its own consumer segmentation, here is another one:

This new consumer segmentation is distributed as follow:

- Simplifiers: 29%.

- Bargainers: 8%.

- Routiners: 15%.

- Surfers: 8%.

- Sportsters: 4%.

- Connectors: 36%.

Simplifiers (29%) would represent, according to McKinsey, the consumers who are more concerned about the quality and conviviality that can be found from end-to-end than about prices as such.

Connectors (36%) would be the consumers who mainly use the Internet to get in touch with their friends and family. As for them, they usually buy online the same brands as they buy offline.

And finally come the Bargainers, or Bargain hunters, who would only represent 8% of the Internet users, according to McKinsey. It appears that only a very small minority of consumers would be ready to surf the Internet for hours on end to find the best possible prices and this goes against what has been said up to now.

To support its statements, McKinsey also adds that most online buyers purchase at the first site they visit. This would be the case for:

- 89% of purchases made on online bookshops.

- 84% of purchases made on online toyshops.

- 81% of purchases made on online music shops.

- 76% of made on online electronic shops.

McKinsey finishes its demonstration by saying that between 1997 and 1999, market leaders Amazon.com and BarnesandNoble.com raised online book prices by 7 and 8 percent, respectively. And yet, at the same time, their discount competitor Books-a-Million lowered prices by as much as 30…percent.

Despite setting up higher online prices, these two market leaders still managed to increase their market share and now own 87% of the whole US online book market share between them.

According to McKinsey, what companies should do is try and identify which is the pricing indifference band for each product.

This pricing indifference band would be around 17% for a branded consumer product, in the beauty industry for instance.

This is precisely for this kind of use that the Internet proves itself to be a powerful tool as it helps to set prices cleverly.

McKinsey also mentions the experience that was conducted by FairMarket, which regularly runs tests in order to determine how information around price can affect consumers' choice. Some other solutions can also be found, such as testing a price every 50th customer.

This proves how the Internet is an adaptable tool; it gives opportunities in real time, which can be used to find out which is the pricing indifference band for a given product. These offline approaches prove way cheaper than what can be gained from them.

You should also bear in mind the fact that the Internet allows you to modify your prices instantly: there is no need for you to have the whole catalogue reprinted.

A site such as Tickets.com would have been able to increase its margins by at least 45 percent had it been able to adjust concert ticket prices based on supply and demand.

And finally, McKinsey advises websites to segment customers in order to find out which would be the best dynamic price setting strategy they should use.

It does prove very difficult to differentiate prices according to your customers in traditional stores, other than through reductions and discount cards. On the contrary, computers make it possible to do almost anything online.

This is how a site will be able to adapt its prices according to its customers' buying histories, and this time the product indifference band will then be determined according to the product but also according to the customer himself.

This is how, once a customer's segment is identified, it is then possible to offer a segment-specific price or promotion immediately.

But we should remain cautious with this type of approach, as everyone still remembers what happened to Amazon.com when it tried to set up dynamic prices for DVDs: the site had to put an end to the offer real fast as it provoked a general outcry among its customers.

One thing is for sure: it has become necessary to analyse the way consumers surf and make purchases online as it now represents strong bases that will allow eCommerce to keep on expanding in a positive way. This is the reason why I decided to create BVA TFC research with the BVA institute in order to give eCommerce websites the tools they lacked up till now to analyse consumers' behaviour.

Source : Sudy Internet Pricing - McKinsey & Company