Uniquely among the marketing mix variables, price directly affects the firm's revenue. Thus, the setting of prices is a critical issue facing managers. Traditional economic theory argues that decision-makers are rational, and that managers will set prices to maximize the firm's surplus. Consumers are similarly rational and will seek to maximize their surplus by purchasing more of a product or service at lower prices than they will when prices are higher. Prices in markets that approach a form of pure competition are set by a confluence of supply and demand, and firms attempt to price goods and services so that marginal revenues equal marginal costs. Yet, in the real world of marketing, there is ample evidence of the bounded rationality of marketing decision-makers who seem to set prices with things other than profit maximization in mind. Pricing strategy sometimes focuses on market share objectives, while at other times it concentrates on competitors by either seeking to cooperate with or destroy them. Frequently, pricing is about brand or product image, as marketers seek to enhance the status of a brand by concentrating on its position in the mind of the customer, rather than on volume. Likewise, customers are in reality as emotional as they are rational, and purchase brands for the status and experiences that they confer, rather than merely on the utility that they provide.
From a marketing perspective, managers have tended to employ a range of pricing strategies to attain various organizational objectives. Most marketing textbooks describe the pricing of new products as high on launch and then the lowering of these prices at a later stage in order to skim the cream off the market. Or, firms attach low prices to new products right from the beginning of the life cycle, in order to ward off competition and penetrate the market. Managers have also resorted to pricing tactics such as discounting and rebates, price bundling, and psychological or odd-number pricing in order to appeal to customers. While theory suggests that customers are rational, the reality of most markets has meant that this rationality is bounded by such issues as product and information availability, the cost of search, and the inability of small customers to dictate price in any way to large suppliers. The advent of a new medium will change--is in fact already changing--the issue of price for both suppliers and customers in a way that is unprecedented. While the Internet, and its multimedia platform, the Web, have been seen by most marketers to be primarily about promotion and marketing communication, the effects that they will have on pricing will in all likelihood be far more profound.
In this chapter, we explore the impact that the Web will have on both the pricing decisions that managers make, and the pricing experiences that customers will encounter. For comfortable marketers, the Web may have the most unsettling pricing implications they have yet encountered; for the adventurous, it will offer hitherto undreamed-of opportunities. For many customers, the Web will bring the freedom of the price-maker, rather than the previously entrenched servitude of the price-taker. We introduce a scheme for considering the forces that determine a customer's value to the firm, and the nature of exchange. We use this scheme to enable the identification of forces that will affect pricing on the Web, and then suggest strategies that managers can exploit.
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