Baye et al. (2007) recommend that online retailers should ask the following questions when reviewing their strategy for pricing online:

1. How many competitors are there at a point in time?

   They suggest a product’s markup should be increased when number of rivals falls and decreased when its markup when the number of rivals increases. They also recommend that since the identity of competitors online will differ from traditional offline rivals it is important to include key online competitors.

2. What is the position in the product lifecycle.

   A product’s markup should be decreased over its life cycle or when new versions are introduced.

3. What is the price-sensitivity or elasticity of a product?

   They suggest continuously experimenting to learn changes in the price sensitivity of a product

4. What level is pricing set?

   The optimal markup factor should be applied at the product rather than category or firm level based on price testing at the product level. They also note the variation of conversion rates and clickthrough fees from paid search engines and aggregators at the category or product level which makes it important to have micro-management of pricing.

5. Are rivals monitoring my price?

   Be unpredictable if rivals are watching. Exploit “blind spots” if rivals are not watching.

6. Are we stuck in the middle?

   A middle pricing point is sub-optimal particularly if prices can be set to target the lowest point in the market.

Online pricing strategy refernce

Summary from:

Baye, M., Gatti, J., Kattuman, P. and Morgan, J, (2007) Dashboard for Online Pricing. The California Management Review, Fall 2007, 50, No 1, 202-216.

Available from Harvard Business Review.