Web offers biggest prize in product pricing game

July 6, 1998

BY MICHAEL KRAUSS

The 90's are about Pricing, and nobody knows that better than Internet marketers.

Why is pricing such a big deal in the 90's? Ask the brand manager of Kellogg's Corn Flakes in Battle Creek, Mich. As boxes of cereal pushed toward $5 per package a few years back, they watched branded goods take the heat from private label offerings as consumers questioned the value of all that advertising they were buying off supermarket shelves.

Meanwhile, in category after categories from soft drinks to cell phones, competitors are pulverizing one another in market share slug fests. And, hypercompetition is the devil that besets many a CEO today. (For serious marketers who want to understand these trends, pick up Richard D'Aveni's, Hypercompetition and Adrian Slywotsky's Value Migration).

Yet as the competitive gets tougher, no one is more on the cutting edge of pricing strategy and value capture than digital marketers.

Look at the early entrants, Jim Barksdale and Marc Andreesen of Mountain View, Calif.-based Netscape Communications Corp. They revolutionized software pricing by initially giving their Internet browser away to gain market share and an installed base. Before bumping into Gates & Company, their $14-per-share IPO leaped to $75 per share on the first day of trading back in 1995. With the help of the Department of Justice and some Silicon Valley lobbyists, Netscape's pricing strategy may yet pay off in spades.

Last year, Sterling, VA.-based America Online Inc. brought us flat-feel on-line access. Like every other AOL user, I tried to flame Steve Case by e-mail when the new pricing went into effect. Suddenly, demand skyrocketed, service outages were legion, and AOL was unprepared.

Frustrated that I couldn't flame Case, I did the next best thing. I called Jim Coates the technology columnist at the Chicago Tribune, to vent about AOL's awful execution of a brilliant strategy. Coates, always a gentleman, said to watch Bob Pittman, who had come over to AOL from the cable TV industry.

Coates was right. Pittman got the company in order, and AOL's stock rocketed from around $11 per share in October 1996 to just over $96 per share in May 1998. Not bad for a new pricing strategy.

Look around today at the partnership programs of Jerry Yang and David Filo at Santa Clara, Calif.-based Yahoo! Inc.; their Merchant Partners efforts yielded almost 25% of revenues last quarter. Keep an eye on New York-based Barnes & Noble Superstores Inc. affiliate program. These organizations and many like them-including Amazon.com, and 1-800-FLOWERS-are taking off on something stock brokers and investment bankers learned a long time ago: Take a small piece of a lot of larger transactions and grow rich.

Remember the '80s best seller and movie, The Bonfire of the Vanities? In it, Tom Wolfe's protagonist, investment banker and self-proclaimed "Master of the Universe" Sherman McCoy tries to explain what he does for a living to his daughter.

Stumbling to describe what a bond salesman does, his wife intervenes and explains the investment banking value model that was vilified in the '80s. She says: "Just imagine that a bond is a slice of cake. You didn't bake the cake, but every time you hand somebody a slice of the cake a tiny bit comes off, like a little crumb, and you can keep that crumb."

In the '90s, electronic transactions, not bonds, generate the wealth. The crumbs are a percentage of the electronic sale. At this rate, electronic commerce could be more lucrative than investment banking in the new millenium.

If you're really transaction-minded, visit some of the Internet auction sites (such as Ebay.com, Onsale.com or eworldauction.com). Here entrepreneurs earn fees for making markets for all sorts of goods and services, from old books to samurai swords.

Is it any wonder that before the current government contretemps, Bill Gates and Redmond, Wash.-based Microsoft Corp. were blocked from purchasing Mountain View, Calif.-based Intuit Inc.? The banking industry's worst nightmare was Gates collecting tolls for financial transactions on the Internet highway. Let's retitle Bill Gates the Crumb Collector in Chief.

So, if pricing is the way marketers harvest value, Internet marketers are once again warp-speeding ahead of the pack. A recent Business Week article proclaimed that Atlanta-based Coca-Cola Co. Inc. is reflecting on situational pricing, mechanisms for charging more for Coke on a hot sunny day than on a cool one. Does anyone really expect to pay a premium price for a Coke on a hot day at the beach vs. a cool one at an amusement park? Seems to me I keep paying less for that liter of cola at the local supermarket each week, and I only buy Diet Coke when it's on deal.

Packaged goods marketers appear lost in the dust when it comes to innovative pricing experiments and unusual mechanisms to capture value.

To my way of thinking, the '50s were about producing mass quantities of product. Organizations from Detroit's General Motors Corp. to Minneapolis' General Mills Inc. used command and control management, learned in the Second World War, to mass- produce cars and cake mixes.

The '60s belonged to positioning and promotion as mass advertising and the house of Cincinnati's Procter & Gamble came into its own.

The '70s and '80s strike me as the era of place and distribution, the mantra of mass customization and markets of one. The prospects of data mining and segmentation are this period's watchwords.

But, now as the '90s draw to a close, we are demassifying. Technology is enabling us to gain information about the prices of products and services quickly and inexpensively. Soon you'll be able to shop the Web with your electronic agent or "bot" and see who has the best deal for theater tickets, airline travel, home gas and electric service and that new car.

Technology marketers helping to level the competitive playing field know what's ahead. They know that harvesting value is going to be the big challenge for business. Gaining a reasonable portion of the economic value delivered by your product or service will be a battle, no longer a given. It will be the main task at hand.

Maybe that's why a few weeks back, George Bell, the 41-year-old CEO of Redwood City, Calif.-based Excite Inc. awoke to a surprising, unexpected, and irritating hostile takeover bid by Zapata, Inc. Who is Zapata, Inc? Well among other things, they make casings for sausages? What did they want with Excite?

Well, have you ever tried to raise the price on sausage casings? Good luck to that brand manager.

Michael Krauss is a Principal with OmniTech® Consulting Group in Chicago. He has held management positions in both packaged goods and technology marketing and he coaches and lectures on new product development and internet technology.

Michael Krauss is a partner with Diamond Technology Partners in Chicago.
He can be reached at news@ama.org.