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Is the Price Right? Pricing Strategies for Internet Businesses by: Simit Patel You may have the greatest product/service in the world, but you won't get anywhere if it isn't priced properly. In this article, we'll explore various pricing strategies so that you can find the one that is best for your business. Generally speaking, there are three primary pricing strategies Internet firms employ: POPS, CAPS, and VAPS. Each strategy is explored below. If properly implemented, these strategies can help firms under price their competitors while being just as profitable. Physical Object Pricing Strategy (POPS). This pricing model works well if you are selling a physical good that needs to be shipped to your customer. For instance, merchants like Amazon.com and Wal-Mart fall into this category. In order for such firms to determine their prices, they need to start with a base level of what it costs them to produce and deliver one additional unit (this number is known as the marginal cost). For instance, Wal-Mart sells microwave ovens. What does it cost them to produce an additional microwave oven? What does it cost them to buy it from their supplier, put it in their store, get the customer to come to the store, and execute a transaction with their customer? To determine their final price, firms should add a percentage increase to the marginal cost. This percentage increase is known as the operating profit margin. To find out what percent they should use, they should look for similar firms, and try to price accordingly. Amazon, for instance, has an operating profit margin of 6% at the time of this writing. Competing retailers should look to have a similar operating profit margin -- preferably lower if they are able to. KEY IDEA: Firms that can develop the most efficient business processes will be able to minimize their cost, which in turn will allow them to keep prices low while still retaining attractive margins. This will allow them to offer lower prices but still enjoy the same level of profitability. Cost of Acquisition Pricing Strategy (CAPS). POPS works very well if your primary cost is the cost of the actual good that you are delivering. But firms that are selling a product/service where the primary cost is marketing-based -- meaning the costs associated with getting visitors to your site -- may benefit from utilizing CAPS to determine their final price. CAPS involves firms answering two key questions: 1. What will cost it to get people to my site? 2. What percentage of my site visitors will make a purchase? The answer to question #'1
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