Price smarter on the Net

Companies generally set prices on the Internet in two ways. Many start-ups offer untenably low prices in a rush to capture first-mover advantage. Many incumbents simply charge the same prices on-line as they do off-line. Either way, companies are missing a big opportunity. The fundamental value of the Internet lies not in lowering prices or making them consistent but in optimizing them. The Net lets companies optimize prices in three ways. First, it lets them set and announce prices with greater precision. Different prices can be tested easily, and customers' responses can be collected instantly. Second, because it's so easy to change prices on the Internet, companies can adjust prices in response to even small fluctuations in market conditions, customer demand, or competitors' behavior. Third, companies can use the clickstream data and purchase histories that it collects through the Internet to segment customers quickly. Then it can offer segment-specific prices or promotions immediately.