In 1998, VC-backed online DVD retailers had slashed prices to as
much as 50 percent below retail. Not good news for 28-year-old Jeff
Rix, who started DVDEmpire.com in 1995 in Warrendale,
Pennsylvania--long before the price wars--with just $6,000 and a
business model that called for pricing just 20 percent below
retail. Online DVD retailers, including Rix's 42-person
company, were buying DVDs for no more than 35 percent off retail.
"The [other companies] were losing money on every
transaction," Rix says.
Rix couldn't go as low as his competitors and live, but
cutting profits almost to the bone, he reduced prices to 30 percent
off retail. That made him one of the highest-priced DVD retailers,
but by concentrating on service and surfing the surge in DVD sales,
he kept growing despite the markdowns by deep-pocketed companies
like Amazon.com, DVD Express and Reel.com.
In the end, he triumphed. One morning in 2000, Reel.com stopped
selling DVDs direct, and then DVD Express shut down.
"Then," Reed recalls, "everyone raised their
prices." Today, Rix has raised prices back to 20 percent off
retail, but that now makes him one of the lowest-cost online DVD
sellers.
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Even today, entrepreneurs constantly find themselves in
positions where they'd like to play with prices. One technique
causing a bit of an e-commerce controversy is variable pricing.
This tactic, also called dynamic pricing, has long been accepted in
retail stores, says Larry Compeau, associate professor of marketing
at Clarkson University in Potsdam, New York. Even within a chain,
prices are often higher in affluent neighborhoods, he says. But
it's different online. In 2000, Amazon.com refunded customers
who said they were charged differently for identical products
depending on what Internet service provider or what Web browsers
they used.
Amazon denied using pricing based on demographics and says it
has ended what it called "pricing tests." But the
reaction put customized online pricing on thin ice. Changing prices
based on customers' ethnicity is already considered unethical;
charging different prices to different B2B customers is usually
illegal. Technology allows online customers to spot customized
pricing, and their complaints will be heard, Compeau warns.
"At some point, the government will have to get involved and
say this is a legal practice, or it's not," he says.
Surcharges are another pricing tool. Last summer, some
businesses used energy surcharges to counter surging electricity
costs. Such add-ons let businesses raise prices while putting the
blame on someone else--in this case, energy suppliers. However, the
practice put off many customers. In California, reaction was so
negative that some businesses began advertising "No
Surcharge" to lure customers.
Surcharges do have uses, though. Because you can add or remove
them without actually changing prices, they allow you to test new
market positions without committing yourself.
Online price comparison also plays a role, but how much of one?
"Some [consumers] won't bother," Compeau says.
"They'll just go to their favorite site and buy.
Entrepreneurs are quick to think they have to be competitively
priced, but they may not have to." Service, selection and
customer relationships are still important and, in many cases, more
important than pricing.
Entrepreneurs should focus on value more than price, says Thomas
Winninger, a Minneapolis marketing consultant and author of
Full Price: Competing On Value in the New
Economy (Dearborn). You can change value by adding or
removing features, warranties and other products and services
without touching the price, he says. You can also change prices to
attract customers while changing value to maintain profit
margins-especially important in today's economy. "Any time
you reduce price, you're taking from the bottom line,"
says Winninger. "You can't afford that right
now."
Rather than just dropping prices, position yourself as a partner
as opposed to a mere vendor. For example, says Winninger, if you
sell chainsaws, throw in a pair of protective goggles. When money
is hard to borrow, offer zero-interest financing. In an uncertain
world, being seen as an ally is more important than being seen as a
bargain, Winninger maintains. "The customer is not out there
trying to beat people up for prices," he says. "They just
want to feel that whoever is selling is helping [them]."
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