Cenk Koçaş & Jonathan D. Bohlmann
Executive Summary
Price promotion strategies among retailers often exhibit a surprising variety in prices. Even for Internet sellers of undifferentiated homogenous goods, such as books and music CDs, retailers charge widely different prices, especially among the many small retailers. For example, pricing data for Internet booksellers reveal that some small retailers deeply discount to attract price-comparison switchers, whereas other small retailers forgo the switchers and price high to play their loyal niche of customers. This study presents theoretical and empirical analyses that address these varied pricing strategies. The authors offer a new pricing perspective based on switcher segmentation. Differences among retailers in the size of their loyal customers drive many prior studies on price promotion strategy. However, the pricing model in the current study shows that switcher segments, in which different switchers compare prices at different retailers, are at least as critical as the retailer-specific loyalties. Specifically, the authors find that a retailer’s pricing strategy is driven by the ratio of the size of switcher segments for which the retailer competes to its loyal segment size. The relative switcher-to-loyal ratios among retailers explain when a firm is more or less inclined to discount deeply or frequently. Thus, it is possible to identify when a small retailer finds it optimal to price high, despite having few loyal customers, or to discount and go for the switchers. Empirically, the authors study Internet book retailer data and the purchase behaviors of 100,000 Internet panelists. The analyses of approximately 400,000 daily book prices confirm the model’s predictions for retailer pricing strategies. The results emphasize how a retailer’s switcher-to-loyal ratio is a critical measure of price promotion activity. The importance of switcher segmentation suggests that managers should carefully measure switching behavior in devising pricing strategies. The retailer’s value to the switcher and the likelihood of acquiring a switcher customer are both important, but so is the switcher’s segment membership. For example, a midsized retailer can benefit from targeting its switcher-acquisition activities toward its larger rival, given the more shallow discounts involved. A small retailer can sometimes benefit from strategically limiting its access to switchers to soften price competition and gain higher profits. Therefore, aggressively pursuing switchers is not always optimal. When most switchers widely compare prices, a larger retailer should offer few shallow discounts because other firms will more aggressively discount. Although the empirical results are specific to Internet retailers, the pricing theory is more general to retailer or brand pricing competition.
Biography
Cenk Koçaş is Associate Professor of Marketing in the School of Management at Sabancı University, Istanbul. His previous position was in the Department of Marketing and Supply Chain Management, with a joint appointment in the Information Systems Group, in the Eli Broad School of Management at Michigan State University. His research interests are game theoretical models of price promotions; stochastic service systems; and application of theory from economics, marketing, and operations research in e-commerce and information systems research. He obtained a BS in Industrial Engineering and an MBA from Boğaziçi University, Istanbul, and a PhD in Management from the Krannert Graduate School of Management, Purdue University. His work has appeared in journals, such as International Journal of Electronic Commerce, International Journal of Industrial Organization, and Journal of Management Information Systems.
Jonathan D. Bohlmann is Associate Professor of Marketing at North Carolina State University. He previously served on the faculties at Purdue University and Michigan State University. He holds a PhD in Marketing Science from the Massachusetts Institute of Technology’s Sloan School of Management. His current research investigates purchase behavior on the Internet, product innovation and development, and the many challenges of new product adoption applied to group decision settings. His previous publications have appeared in Marketing Science, Management Science, Journal of Marketing Research, and International Journal of Research in Marketing, among other journals. He received an MBA from Texas Christian University and a BS and an MS in Aerospace Engineering from Purdue University.
Journal of Marketing, Vol. 72, No. 3, May 2008
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