Indrajit Sinha

<article-ideainbrief class="article-ideainbrief">
 <h4 class="ideainbrief-title">The Idea in Brief</h4>
 <div class="ideainbrief-contents">
 Does the Internet have you rhapsodizing about your company’s new opportunities? Beware: beneath the euphoria lies a sobering reality. The abundance of free, easy-to-get information on the Internet poses a serious threat for businesses: cost transparency. Buyers can see your costs and coolly compare product reviews and ratings—then determine whether your prices are acceptable. This can devastate your company’s ability to brand its products and extract premium prices.
 On the Web, customers reign supreme. But so can your company—with a powerful blend of innovative products and services, product bundling, and creative pricing.
 The Idea in Practice
 <h2>Why Cost Transparency is Bad</h2>
 <ul>
 <li>It deprives you of high margins.</li>
 </ul>
 Example:&nbsp; 
 When MCI and Sprint undercut AT&amp;T’s rates, AT&amp;T initially maintained its customary fees, citing its superior service. But customers had new information: all service providers’ long-distance calling costs were lower than they had previously realized. They defected to discount providers. 
 <ul>
 <li>It turns products and services into commodities.</li>
 </ul>
 Example:&nbsp; 
 On-line stock-trading companies like E*Trade all provide nearly the same information and services—for rock-bottom commissions. People now see stock trading as a commodity and distrust high commissions charged by established firms such as Merrill Lynch. 
 <ul>
 <li>It weakens customer loyalty to brands.</li>
 </ul>
 Example:&nbsp; 
 When Procter &amp; Gamble resorted to sales promotions during the 1980s, customers concluded that the lower prices more fairly reflected the company’s costs. When P&amp;G ended its promotions, customers abandoned them for private labels. 
 <ul>
 <li>It creates perceptions of price unfairness. For instance, when high-quality, low-priced Japanese cars flooded the U.S. market in the 1970s, buyers decided that Detroit had been overcharging for lower-quality autos. Many people still reject U.S. models.</li>
 </ul>
 <h2>How to Combat Cost Transparency</h2>
 <ul>
 <li>Innovate! The best way to counteract cost transparency is to create new and distinctive products that improve customers’ lives. Better products and services will always command higher prices.</li>
 </ul>
 Example:&nbsp; 
 Yahoo! has maintained its lead over other on-line portals by offering an ever-improving catalog of features, including well-organized, updated links and free Web-based e-mail service. 
 <ul>
 <li>“Price lining.” This offers the same products or services at various price points to meet different customers’ needs. For example, America Online offers U.S. customers five rates that vary according to subscriber usage.</li>
 </ul>
 <ul>
 <li>“Smart” pricing. Vary prices from market to market, depending on market conditions and differences in how customers value the product. For instance, to charge prices in different markets, Staples.com makes customers enter zip codes before viewing prices—and earns higher profits as a result.</li>
 </ul>
 <ul>
 <li>“Bundle” products with other goods and services. This keeps buyers from seeing the cost of individual items in the bundle, and focuses them on benefits of the whole package.</li>
 </ul>
 Example:&nbsp; 
 Gateway bundles its Internet services and computers to combat plunging computer prices.
 </div>
</article-ideainbrief>There is a Euphoria in many quarters these days about the possibilities offered by e-commerce. Consumers see lower prices and easy shopping; investors imagine cashing in on Internet IPOs; and start-ups hope that their business model will be the one that transforms their industry. Beneath all the excitement, however, lies a sobering reality: the Internet represents the biggest threat thus far to a company’s ability to brand its products, extract price premiums from buyers, and generate high profit margins.

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Cost Transparency:&nbsp;The Net&rsquo;s Real Threat to Prices and Brands

The vast sea of information about prices, competitors, and features that is readily available on the Internet helps buyers “see through” the costs of products and services. That’s bad news for manufacturers and retailers, but there are ways to fight back.

Cost Transparency: The Net’s Real Threat to Prices and Brands

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