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Part 2 (this page): [Collective] [Placement] [Mass Customised] [Conclusion]
Part 1 (previous page):
[Auctions]
[Trading Exchanges]
[Price Matching]
Collective buying utilises the power of volume orders to gain a price reduction.
It is a technique that has been used by clubs for many years. Club members
agree to purchase a particular item and then the club buyer seeks a supplier
who is willing to sell at a discount. Some suppliers actively promote this
method and in effect the club becomes their distribution and promoting agent.
Once again the Internet has taken this to a new level.
PriceLine.com
PriceLine has a simple consumer proposition - "name your price" . They formulate offers for generic goods (e.g. a weekend stay in Paris) for which they seek a number of suppliers. Individual consumers then set their own price that they guarantee by a credit or debit card. They also agree to hold their offers open for a specified period of time during which suppliers respond via Priceline. Priceline say that by having consumers be flexible to actual brand, then suppliers can respond in a flexible way on price without disrupting their own existing distribution channels or retail pricing structures. Whilst PriceLine has expanded into many categories (see PriceLine screen shot), the bulk of its revenue is from airline ticket sales. This is a cut throat business where they are vulnerable to low cost airlines like Go and EasyJet as well as cut backs in economy seats (e.g. British Airways). In late 2000, PriceLine was launched in the UK but by early 2001, with the fall of the dot.coms, Priceline US announced the closure of its groceries, petrol and secondhand goods categories. By then PriceLine's own capitalisation value reduced from $17 billion to just $1 billion.
Placement is a form of promotion utilised by suppliers especially those supplying supermarkets. Studies have shown that customers are more likely to purchase goods if they are displayed in particular locations. The end of an aisle shelves gain the most positive response and items placed on eye-level shelves are also likely to sell well. Such has become the power of retailers over suppliers, that the retailers are now demanding payment from their suppliers to have goods displayed in these prominent positions. In effect the suppliers are bidding for placement and the buyers are maximising their profits and/or reducing their prices to attract more customers.
Mass Customisation is suppliers' response to two types of demand by customers that have become prevalent today. First, customers are demanding lower price and more for less. This reflects a natural reaction of a society that for decades has been flooded with supplier promotions exhorting people to acquire, to use and to advertise their material possessions and lifestyles. Up until now this second demand has been met by automation and globalisation, the latter providing access to low cost countries and high volumes / low unit cost through access to wider markets. The downside is that suppliers are delivering products and services that exhibit almost identical features and looks - today one has to look at the badge and the name on the back of a automobile to tell what particular model it is.
The second demand is almost a reaction to this consequence. It is a demand for products and services that meet the customer's particular and unique requirements. This may be a requirement for particular set of features, or for the way a product looks, the way it is delivered and serviced, or simply because the customer wishes to display to the world that they are different, demanding and able to have what they want. Meeting this second demand would normally raise costs and therefore prices and to a certain degree there is latitude to do this - customers will value a personalised product or service.
Mass Customisation is a supplier's response that meets both these demands. It produces customised products and services at mass production costs. It requires the customer to specify their particular requirements and in return the supplier quotes a price that is specific to that requirement. By varying their requirements, customers are able to make a value decision. In the "instant" world in which we live, the supplier usually needs to use information technology be able to instantly quote a price. To maximise profitability and still capture the sale, means assessing customer's life-time value.
As power shift to consumers so pricing reflects the consumer's valuation and demands. Sometimes this is expressed by individuals as in auctions and price matching and other times through collective bargaining. Sometimes it is exercised through traditional face-to-face encounters in the retail outlet or at the customer's office, and at other times through the new electronic mediums like the internet. Information technology, such as through the capture and analysis of data from loyalty cards, is of course also deployed by suppliers to predict their life time values. We shall see in the next section how leading suppliers are now trying to understand customer's intimate personal characteristics such as their deep needs and wants, and their attitudes as a predictor of their buying behaviour.
Race to the Bottom
Before moving on you may like to view this interesting McKinsey report about setting prices in deregulated markets but also containing lessons for other markets with new aggressive entrants. The report contains a model for setting optimal prices.
"Often the incumbents misinterpret or ignore four key factors that should
influence their pricing strategies: competitors' prices, switching rates,
customer value, and cost to serve".
The Race to the Bottom, The McKinsey Quarterly, 2001 Number 3.
You will need to register to gain access to this report.
[Auctions] [Trading Exchanges] [Price Matching]
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